Convergys Corporation Revenues Up on Strong Growth From the Information Management Group

CINCINNATI – Convergys Corporation (NYSE: CVG), a global leader in providing customer care, human resources, and billing services, announced today its financial results for the second quarter of 2005.

Total revenues increased 5 percent to $630.4 million compared to $601.7 million reported in the second quarter of 2004 reflecting growth from both the Customer Management and Information Management Groups. Operating income of $38.0 million was down 18 percent from $46.2 million in the prior year. The Information Management Group generated a strong improvement in operating income. This improvement was offset by $8.9 million in severance; increased costs related to expansion in CMG’s capacity, acquisitions, and the company’s branding campaign; and the negative impact of the U.S. versus Canadian exchange rate on the Customer Management Group. Excluding the severance charge, pro forma operating income of $46.9 million was slightly above prior year operating income. Net income was $25.6 million or $0.18 per diluted share compared with $28.7 million or $0.20 in the second quarter of 2004. Pro forma net income was $31.1 million or $0.22 per diluted share, excluding the impact of the severance charge.

In the second quarter, Convergys recorded a pre-tax severance charge of $8.9 million primarily related to the Customer Management Group’s initiatives to position itself better for profitable growth by streamlining its operations. These actions should be substantially complete by the end of the third quarter. When completed, Convergys expects to achieve annual savings exceeding $25 million.

“We are encouraged with the performance of our Information Management Group, reflecting our successful Infinys strategy combined with the actions taken last year to improve the cost structure of our business,” said Jim Orr, Chairman, President, and CEO of Convergys. “Although not satisfied with the recent performance of our Customer Management Group, we are confident that the plan we have adopted and the aggressive actions we are taking will deliver improvement to its operating performance similar to the accomplishments in the Information Management Group. As a result, we will see improved earnings in the upcoming quarters.”

Operating Performance by Segment

Customer Management Group (CMG) – Customer Care and Employee Care – Convergys CMG’s revenues were $429.7 million, a 3 percent increase from the second quarter of 2004, reflecting growth from both Customer Care and Employee Care. This increase was driven mainly by 2004 acquisitions of Encore Receivable Management, Finali, and DigitalThink. In addition, it reflects increased revenues from several of CMG’s financial and other industry clients, offset by reduced spending by several communications clients.

Including an $8.3 million severance charge, Convergys CMG’s second quarter 2005 operating income and operating margin were $7.1 million and 1.7 percent, respectively. This compares to prior year operating income and operating margin of $29.7 million and 7.1 percent. In addition to the severance charge, the decrease in operating margin is largely the result of increased costs related to expansion of capacity, acquisitions, and the company’s branding campaign, and higher operating expenses caused by the impact of a weakened U.S. versus Canadian dollar.

Information Management Group (IMG) – Convergys IMG’s revenues increased 9 percent to $200.7 million in the second quarter of 2005 from $183.9 million in the same period last year. Professional and consulting revenues of $72.2 million increased 63 percent compared to the prior year. The increase was broad based among many IMG clients. Data processing revenues of $84.4 million decreased 11 percent from the prior year. This decrease is due to the changing dynamics of the billing relationship with Cingular as it migrates subscribers from outsourced to managed service environments. License and other revenues of $44.1 million were slightly below the prior year.

Convergys IMG’s operating income increased 74 percent from the second quarter of 2004 to $36.4 million. Operating margin increased to 18.1 percent versus 11.4 percent in the prior year. The significant improvement in operating margin reflects both revenue growth for IMG and savings realized through the fourth quarter restructuring initiatives.

Other Items

• Convergys incurred approximately $7 million in non-cash stock compensation expense during the quarter. This includes $1.2 million incurred with the second quarter severance charge.
• The cellular partnerships contributed pre-tax equity earnings of $5.8 million. This compares to $1.7 million from the prior year.
• Interest expense was $4.9 million versus $2.0 million in the prior year resulting from a higher debt balance and higher interest rates.
• Cash flow from operations for the second quarter of 2005 was $30.9 million. Free cash flow of $4.7 million increased by $12.6 million from the prior year.
• Days sales outstanding (DSO) were 76 days at June 30, 2005. This compares to 71 days at March 31, 2005. Approximately one half of this increase was caused by the elimination of an early-payment discount option for one of our largest clients.
• During the second quarter, Convergys repurchased 2.7 million shares at a cost of $35.3 million and an average price of $13.12 per share.

Business Outlook
The following forward-looking statements reflect Convergys’ expectations as of July 20, 2005. Given the various risk factors discussed below, actual results may differ materially. The company intends to continue its practice of not updating forward-looking statements until its next quarterly results announcement, other than in publicly available statements.

Financial Guidance
For 2005, Convergys expects revenues to grow in the range of 5 percent to 7 percent, and EPS to be approximately $1.00.

For the second half of 2005, we expect CMG’s revenues to grow in the range of 9 percent to 12 percent from the first half of the year, and CMG’s operating margin to be up significantly. We also expect IMG’s revenues and operating margin to be roughly in-line with the first half of the year.

For the third quarter 2005, we expect CMG’s revenues and operating margin to be up from second quarter levels, IMG’s revenues and operating margin to be roughly comparable to first and second quarter levels, and EPS to be $0.25 to $0.27.