Convergys 4Q 2008 earnings release

1. Fourth Quarter 2008 Earnings Presentation
January 27, 2009

2. Forward-Looking Statements and Non-GAAP Measures
This presentations contains “forward-looking statements,” - that is, statements relating to future, not past, events.
Forward-looking statements by their nature address matters that are, to different degrees, uncertain. For us,
particular uncertainties that could adversely or positively affect our future results include: the behavior of financial
markets, including fluctuations in interest or exchange rates; continued volatility and further deterioration of the
capital markets; the impact of regulation and regulatory, investigative and legal actions; strategic actions, including
acquisitions and dispositions; future integration of acquired businesses; future financial performance of major
industries which we serve; the loss of a significant client or significant business from a client; difficulties in
completing a contract or implementing its provisions; and numerous other matters of national, regional and global
scale, including those of the political, economic, business and competitive nature. These uncertainties may cause
our actual future results to be materially different than those expressed in our forward-looking statements. Please
refer to Convergys’ most recent news releases and filings with the SEC for additional information including risk
factors. We do not undertake to update our forward-looking statements as a result of new information or future
events or developments.
This presentation also includes non-GAAP financial measures including free cash flow. These non-GAAP measures
should not be construed as being more important than comparable GAAP measures. Convergys’ management
believes free cash flow provides the users of the financial statements with a more comprehensive understanding of
the Company’s underlying performance. A reconciliation of these non-GAAP measures is available on the
Convergys website at www.convergys.com
Today’s presentation is intended to be reviewed in connection with Convergys’ fourth quarter 2008 earnings call.
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3. Agenda
Operating Results
Financial Review
Business Outlook
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4. Financial Summary – Q4’08
• Revenue: $704 million
– down 1% Y/Y, up 4% Q/Q
– guidance was $725 – 745 million
• EPS guidance excluded goodwill and restructuring charges
– charges impact $0.54
– GAAP EPS loss $0.24
– guidance was ~$0.20
• Free cash flow: $99 million
– solid cash flow Information Mgmt. and Customer Management
– 9-day reduction in DSO
– guidance was free cash flow > $30 million
• Cash balance: $240 million
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5. STRATEGY
Focus on Relationship Management Approach
• Strengthen relationships between clients and their
customers
– improved customer experience
– lower client costs
• Offer full range of interaction channels and capabilities
– agent-assisted
– technology
– consulting
• Intelligently match transactions to channels
– segment transactions by value and complexity
– cost-effectively direct customers to best channel
Relationship management leader
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6. CUSTOMER MANAGEMENT
Focal Point - Relationship Management Strategy
Q4’08 Progress
Customer Management
• Largest segment
Revenues ($M)
• Sequential progress $527
$483
$474
– Q/Q revenue up 9%
– Q/Q margin up 50 bps
• Intervoice acquisition
contributing
• Year-over-year impacts
– $9 million restructuring
Q4'07 Q3'08 Q4'08
– 180 bps foreign exchange
Margin
7.5% 4.8% 5.3%
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7. CUSTOMER MANAGEMENT
Continuing Sequential Live Agent Improvement
– billable hours up slightly
• Live agent revenue up – offset by changing geographic mix
– increases in communications market
– turnover and absenteeism
• Key factors driving – facility utilization
improvement in operations – pricing
– service quality
– average handle time
• Gaining competitive strength – first call resolution
by improving client metrics – sales conversion rates
– client satisfaction
– closed underperforming centers in ‘08
• Managing delivery capacity – growth in Philippines
to meet demand – expanding into Latin America
– investing in home agent platform
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8. CUSTOMER MANAGEMENT
Comprehensive Relationship Technologies Suite
• Achieving Intervoice acquisition targets
– integration on track
– realizing cost synergies
– incremental revenue and operating income
• Relationship technologies strategy
– flexible delivery modes (license and services, or hosted)
– offer high margin, standalone modules
– deploy technologies into existing live agent operations
• Benefits
– better agent performance
– competitive differentiation
– cost advantages
– client entanglement
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9. CUSTOMER MANAGEMENT
Continuing Demand in Q4’08
Live Agent Automated Care
• Pipeline and win rate • Demand for technology to
remained constant drive out cost
• $78 million new program • Increased number of large
2009 revenue contracted deals
Numerous cross-sell opportunities
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10. INFORMATION MANAGEMENT
Facing Industry Slowdown
• Revenues and operating income decline
• Carrier investments curtailed
• Competing effectively in a challenging environment
– breadth of solution offerings
– winning new business
– managing costs to preserve profitability
• Business separation unlikely in the near term
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11. HR MANAGEMENT
Taking Actions to Improve Earnings and Cash Flow
• Achieved key go-live milestones
– completed key portions of 2 remaining implementations
– passed peak quarterly implementation spend
• Exploring with clients alternatives for future phases
– partnering
– modifying timing, approach, and/or scope
• Driving further efficiencies and cost savings
– additional automation
– standardization
– leveraging offshore assets
• No new client contracts with implementation risk
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12. Attacking Costs Across The Company
• Bonuses
• Salary
• Pension
• Travel
• Hiring
• Restructuring
• Facilities
• Capex
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13. Summary
• Difficult economic environment
• Sufficient liquidity
• Executing relationship management strategy
• Managing businesses to maximize cash flow
• Aggressive cost management
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14. Agenda
Operating Results
Financial Review
Business Outlook
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15. Financial Highlights – Q4’08
• Strong cash flow
• Improving Customer Management operating margins
• Cost reduction plan and restructuring
• “Go-live” in HR Management
• Solid operating performance in tough environment
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16. Goodwill Impairment and Restructuring Charges
Goodwill Impairment Restructuring Costs
• Streamlining business operations
• Determined HR Management fair
value < book value in Q3’08
• Aligning costs to future revenues
• Completed impairment analysis in • Payback in less than 1 year
Q4’08
• Resulted in Q4’08 charge: $61
million impairment
$Millions Q4’08
Customer Management $8.6
Information Mgmt. $2.8
HR Management $8.7
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17. Convergys Revenues
Quarterly Revenues
• Continuing demand in Q4’08
($M)
• Up 4% sequentially
$714 $704 • Includes impact of
$676
HRM
– Intervoice acquisition
– 3 client bankruptcies
IM
CM
4Q07 3Q08 4Q08
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18. Convergys Profitability
$Millions Q4’07 Q3’08 Q4’08
Operating income $59 $(242) $(36)
Margin 8.2% -35.8% -5.1%
Net income $45 $(140) $(30)
GAAP EPS $0.34 $(1.15) $(0.24)
- $1.44 $0.54
Impact of charges per share
• $81 million Q4’08 impact on operating income from goodwill
impairment and restructuring costs
• $65 million Q4’08 impact on net income
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19. CUSTOMER MANAGEMENT
Revenues
Q4 Summary
Customer Management • Up 11% year-over-year
Revenues ($M)
• Sequential organic growth
$527
$483
$474 INTV
• Intervoice: $49 million
• Billable hours up
• More work to Philippines
Q4'07 Q3'08 Q4'08
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20. CUSTOMER MANAGEMENT
Operating Income
$Millions Q4’07 Q3’08 Q4’08
Restructuring costs - - $9
included in
Operating income $35 $23 $28
Margin 7.5% 4.8% 5.3%
• Sequential operating income and margin improvement due to:
– Intervoice
– program ramps and increased efficiencies in live agent operations
– pay-for-performance policy
• ~$9 million year-over-year foreign exchange impact
• Investing in technology infrastructure, sales resources, consulting
• Restructuring to streamline the business
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21. INFORMATION MANAGEMENT
Revenues
Q4 Summary
Information Management • North American client
Revenues ($M)
migration
$176
• International project
$134 completions
$114
• Delayed project acceptance
• Industry slowdown
– lower subscriber growth
– delayed spending
– reductions in budgets
Q4'07 Q3'08 Q4'08
NA consolidation
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22. INFORMATION MANAGEMENT
Operating Income
$Millions Q4’07 Q3’08 Q4’08
Restructuring costs - - $3
included in
Operating income $33 $17 $12
Margin 18.8% 13.0% 10.2%
• Revenue decline drove reduced operating income in Q4’08
• FY2008 margin of 16.9%
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23. HR MANAGEMENT
Revenues
Q4 Summary
HR Management • Increases from August
Revenues ($M)
“go-live”
$64 $64
$59 • Offset by elimination of
pass-through revenues
after Q2
Q4'07 Q3'08 Q4'08
Pass-through revenue
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24. HR MANAGEMENT
Operating Income
$Millions Q4’07 Q3’08 Q4’08
Implementation, impairment and - $273 $70
restructuring costs
included in
Operating income $(6) $(280) $(70)
Margin NM NM NM
• Includes Q4’08 restructuring charge to drive
– further efficiency
– SG&A reductions
– business approach modifications
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25. Non-operating Items
$Millions Q4’07 Q3’08 Q4’08
Cellular partnership earnings $7 $8 $10
Other income $0 $10 $6
Interest expense $(4) $(6) $(9)
Total non-operating items $3 $12 $7
• Cellular Partnership contribution
– $36 million earnings and $39 million cash in full year 2008
– $ 6 million cash in Q4’08
• Tax expense on pretax loss due to nondeductible goodwill
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26. Free Cash Flow
$Millions Q4’07 Q3’08 Q4’08
Cash provided by operating
$99 $26 $127
activities
Capital expenditures, net $(24) $(22) $(28)
Free cash flow (non-GAAP) $75 $4 $99
• Factors impacting improvement in free cash flow include:
– $ 47 million A/R collection
– $ 36 million income before impairment and restructuring charges
– $ 18 million other working capital
– $(19) million deferred charges, net implementation revenues received amortization
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27. Key Balance Sheet Accounts
$Millions Q4’07 Q3’08 Q4’08
Cash and cash equivalents $120 $136 $240
Receivables - net $558 $594 $524
Debt maturing in one year $0 $8 $260
Long-term debt $259 $656 $406
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28. Agenda
Operating Results
Financial Review
Business Outlook
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29. 2009 Business Outlook
2009 Estimates
Revenue
Customer Management
HR Management
Information Management
Operating income and margin
Interest expense
Earnings per diluted share $0.90 to $1.10
Free cash flow ~$200 million
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30. Financial Summary – Q4’08
• Revenue: $704 million
– down 1% Y/Y, up 4% Q/Q
– guidance was $725 – 745 million
• EPS guidance excluded goodwill and restructuring charges
– charges impact $0.54
– GAAP EPS loss $0.24
– guidance was ~$0.20
• Free cash flow: $99 million
– solid cash flow Information Mgmt. and Customer Management
– 9-day reduction in DSO
– guidance was free cash flow > $30 million
• Cash balance: $240 million
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