Convergys Corporation Announces First Quarter EPS Increased 18 Percent

Editor’s Note: Convergys Corporation is the parent of Encore Receivables Management of Olathe, KS.

Convergys Corporation (NYSE: CVG), a global leader in providing customer care, human resources, and billing services, announced today its financial results for the first quarter of 2006.

HIGHLIGHTS

• Convergys’ first quarter GAAP EPS increased to $0.26, up from $0.22 in the prior year.
• Convergys’ operating income increased 19 percent versus prior year to $62.0 million.
• Customer Care improved its operating margin to 10.6 percent from 9.4 percent in the prior year.
• Employee Care improved operating results by 45 percent and grew revenue by 47 percent compared to the prior year.
• For 2006, Convergys is increasing its GAAP EPS guidance from at least $1.07 to at least $1.09 per share.

Revenues of $675.3 million were up 6 percent compared to the first quarter of 2005 reflecting growth from both Customer Care and Employee Care. Excluding the impact from Cingular, revenues were up 13 percent from the prior year. Operating income increased 19 percent to $62.0 million compared with $51.9 million in the prior year. Revenue growth and cost savings from 2005 initiatives at both Customer Care and Employee Care drove the improvement in results. Net income increased 18 percent to $36.7 million or $0.26 per diluted share versus $31.2 million or $0.22 per diluted share in the prior year. Excluding non-cash stock compensation expense, diluted EPS was $0.29.

“We delivered strong operating results, exceeding our guidance in the first quarter, and we raised our guidance for the full year,” said Jim Orr, Chairman and CEO of Convergys. “Our Customer Care business continues to improve performance and expand in its markets, while our Information Management business announced several new wins and experienced growth with several existing clients. In addition, Employee Care delivered significant performance improvements and has important opportunities with several large enterprises in the pipeline.”

Operating Performance by Segment

Customer Care
Customer Care’s revenues of $434.0 million were up 5 percent compared to prior year. Increased revenues from several existing clients in the Communication, Technology, and “Other” verticals more than offset a year-over-year decline in Cingular revenue. Customer Care’s operating income and operating margin were $46.2 million and 10.6 percent, respectively, compared with $38.8 and 9.4 percent in the prior year. This improvement reflects increases from both revenue growth and operational efficiencies. Higher operating expenses caused by the impact of a weakened U.S. versus Canadian dollar partially offset these items.

Information Management
Information Management’s revenues were relatively flat at $188.8 million compared to $189.8 million in the same period last year. Information Management’s operating income of $31.5 million was down 6 percent compared to prior year. Operating income margin of 16.7 percent was down 90 basis points from the prior year. The decrease from last year was primarily due to changes in the revenue mix from data processing to professional and consulting, partially offset by operational improvements.

Employee Care
Employee Care’s revenues of $52.5 million were up 47 percent compared to $35.6 million in the same period last year. Increased revenues resulted from both existing clients and two recently implemented clients. Employee Care’s operating loss improved significantly compared to prior year. Operating loss was down 45 percent to $9.6 million compared to an operating loss of $17.3 million in the prior year. Improvements resulted from progress implementing client programs and cost reductions initiated in 2005.

Other Items

• Convergys incurred $6.3 million in non-cash stock compensation expense during the quarter. This includes approximately $1 million incurred resulting from the adoption of SFAS No. 123R, “Accounting for Stock-Based Compensation,” beginning January 1, 2006. During the first quarter of 2005, Convergys recorded $3.6 million of non-cash stock compensation expense.
• The cellular partnerships contributed pre-tax equity earnings of $1.4 million during the quarter. This compares to $3.8 million during the same period last year.
• Free cash flow was $33.7 million.
• Day’s sales outstanding (DSO) of accounts receivables declined to 69 days at March 31, 2006, which is the lowest quarter-end level since March 2002. DSO was 72 days at December 31, 2005.
• During the fourth quarter, Convergys repurchased 448,400 shares at a cost of $7.7 million and an average price of $17.05 per share.

Financial Guidance