Convergys Earnings Call Insights: Management Changes, Capacity

On Wednesday, Convergys Corporation (NYSE:CVG) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Management Changes

Eric Boyer – Wells Fargo: First, let me congratulate Jeff, Earl and the team for the job you guys have done with getting the Company back on track. And then congratulate Andrea and Andre on their new roles there. First, Jeff can you talk a bit about the timing on the management changes? You have a lot of capital to deploy and a pretty uncertain economy. Can you walk us through the decision to make the changes now?

Jeffrey H. Fox – President and CEO: Yes, first of all, Eric, thanks your comments for the team. The thought process is, we’ve been working on simplifying this business now since I joined. I mean I had the luxury of being both the customer before I joined the Board and then a Board member for a year. And I feel like that Andrea and Andre and the entire operating team have made just great progress in terms of focusing their investments and getting us in a position to invest in and grow organically and inorganically. And so the timing of the management change is really a very – has been planned, it’s been talked about, it’s something we have been working on for a long time. And so now you need to remember that I’m going to be here end of Q4 and then I’m going to be Executive Chairman and, frankly, I am a pretty significant stockholder. And so the thought is Andre and the team are doing a great job for our customers, investing our capital, determining our choices, and I’m going to stay very involved not only through this year but into next year on how we deploy and think strategically about the significant capital position we have.

Eric Boyer – Wells Fargo: And then could you give…

Jeffrey H. Fox – President and CEO: It’s going to be a process. It’s not – this is not a hard cut and I felt like to finish the simplification it was really important for Andrea and Andre to be in the position to do the operational movement over the next several quarter.

Eric Boyer – Wells Fargo: Okay, and could you give us a better sense for the financial criteria you are setting up for future acquisitions?

Jeffrey H. Fox – President and CEO: Yeah, I think we’ve continued to be very focused on – first of all I am proud to be initiating a quarterly dividend, right, I think that’s a real statement to have. We think about being shareholder friendly and frankly returning capital that we generate operationally. Our criteria for acquisitions is always going to start with do we add value to the target and it’s going to then go to do we think the price is a reasonable price and always recognizing that we have been and we’ll continue to look at our own stock as a viable alternative for use of capital.

Eric Boyer – Wells Fargo: Any guidelines as far the accretion timing, anything like that?

Jeffrey H. Fox – President and CEO: It’s going to be asset by asset. Again, I feel very strongly. Andrea and I and Andre and Earl I think we all share the same discipline about making sure that when we deploy strategic capital it’s an asset we feel like has high upside and high manageability because we add some value to the target. The price will be a function of what the components and characteristics and opportunity looks like.

Capacity

Matthew McCormack – BGB Securities: I certainly want to reiterate Eric’s comments regarding the team. So first question on the comments regarding being capacity constrained I guess in the quarter and a few quarters to come, is there any way to quantify the revenue that is being lost, so to speak, and how quickly do you think you can ramp up capacity to take that excess demand?

Earl C. Shanks – CFO: So Matt, I think the reality is it’s always hard to tell kind of what revenue is there and isn’t there. I think what we found is that we have smaller blocks of available capacity today than we would have had a year ago. So when we’re looking to sell new business, it’s frankly sometimes harder to sell the new business because we have smaller blocks. We’ve been reasonably successful at selling some of that to our existing clients and so we feel pretty good about that. As we indicated, we’re being reasonably aggressive about adding capacity, particularly offshore, in the business, but that takes a couple to a few quarters to really come online, so that’s why we’ve characterized the year the way we have, and obviously we would expect that some of that capacity will be online as we come into 2013.

Matthew McCormack – BGB Securities: Then clearly strong growth with your top three clients and, as you said, 14 as the top 20. Where are you seeing I guess weakness and is it – would you characterize that as more Company-specific or are there any industries that seem to struggle in this economy?

Jeffrey H. Fox – President and CEO: So we had a pretty good quarter. So I think Andrea and the team have done a great job in terms of focusing on our churn, and so I think that, I mean, there are specific clients where there’s volume drops, there’s always going to be that. There are some programs that are running off, but net-net that’s a pretty darn good quarter and frankly a good year last year. Andrea would please add.

Andrea J. Ayers – President and COO, Customer Management: Matt, it’s Andrea. I think that Jeff is right, the investments in account management we’re seeing paying off, and we’re seeing that in our retention numbers which we’re pleased about. Where we’re investing more going forward is the technology vertical, the financial services vertical. We want more there; we want more in healthcare. Frankly, we want more with all of our clients and verticals. But we’re very focused on technology and financial services and increasing our penetration of those two verticals at this point.

Matthew McCormack – BGB Securities: Then just my last question, now that it is a pure call center BPO provider, I guess what do you think that the long-term sustainable both growth rate and margins of this business should be?

Jeffrey H. Fox – President and CEO: I’m going to ask Earl because Earl has been talking to you guys about that for a long time. I don’t think anything is really changed about those expectations.

Earl C. Shanks – CFO: Yeah, I mean I think, Matt, we’ve talked about the business being starting with a GDP baseline and then being additive depending on what’s happening both with the outsourcing trend and the overall trend and number of calls et cetera. I think when you get done with it; you end up with normalized numbers that are in the mid single-digits some place. You know as well as I do, it’s very hard to perceive what’s actually going on in the broader market because there is really no great data out there. Certainly, we’re pretty pleased this quarter about how we think we did in terms of overall growth rates, but in terms of – as compared to the market, but it’s a little hard to tell exactly what the market is doing. We would put it in the category though likely mid single-digits.

Jeffrey H. Fox – President and CEO: Yeah, and if I just might add a little bit of color, the way we think about the business, and this is the broad we, we are investing in analytics, home agent, offshore, improvements in our global operating model, and account management. So, we are investing in things that we think increase the long-term earning power of the business, period. And so, at any point in time, we will be either maxing out or not on the actual earning power in place. Right now we feel like we are in a good investment cycle where we’re investing forward for things that continue to allow us to grow our bottom line and top line over the next couple of years. And that’s how we’re thinking about it. So that’ why I used the term invest so much in my written or prepared remarks. We are investing in this business.