July 23, 2008 / 6:55 PM / in 9 years

UPDATE 2-Convergys profit tops Wall Street; cuts full-year view

(Recasts, adds comments from CEO, analyst)

By Bijoy Anandoth Koyitty

BANGALORE, July 23 (Reuters) - Call center operator Convergys (CVG.N) posted higher second-quarter profit but trimmed its full-year earnings outlook as it sees a slowdown in call volumes hurting its business, sending its shares down more than 8 percent to a new year-low.

The outlook cut came as a surprise to the market. However, an analyst said the business did deteriorate in June, which Convergys and its peers did not anticipate.

The company had in the previous quarter claimed that a slowing U.S. economy means more business to them as it would accelerate the rate of outsourcing.

However, the reverse happened because clients often cut back on spending or at least take several quarters to evaluate their outsourcing plans in a tough economic situation, Kaufman Bros Equity Research analyst Karl Keirstead said by phone.

“In general, outsourcing companies always say that a slowing economy will boost demand, although it never happens so easily, as we can see with the pressures on India-based outsourcing companies such as Infosys,” Keirstead said.

Keirstead rates Convergys stock at “hold.”

Convergys said it expects to earn $1.15 to $1.20 per share for 2008, compared with its prior view of $1.31 to $1.36.

The company said the outlook includes impact from its acquisition of an interactive voice response services earlier this month.

Cincinnati-based Convergys expects revenue for the period to be at the lower end of its previously announced range of $2.85 billion to $3.0 billion.

Analysts were expecting earnings of $1.33 a share on revenue of $2.91 billion for 2008, according to Reuters Estimates.

GROWTH PLANS

The company is planning to extend its operations into more geographical locations, Chief Executive Dave Dougherty told analysts in a conference call.

Analysts Keirstead said the company is expected to go to cheaper locations such as Philippines and Latin America, while cutting down on its call center operations in Canada and other high-cost countries.

Dougherty said the company also expects to accelerate the growth of its customer management unit in the fourth quarter mainly by expanding its relationships with existing clients.

The unit accounted for 68 percent of the company’s second-quarter revenue.

Keirstead said Convergys is straining its balance sheet by taking on too much in the customer management unit.

“I suspect any recovery will be quite muted and I am not looking for a meaningful recovery until sometime in 2009,” he said.

Earnings for the second quarter topped analysts’ estimates, helped by demand for its HR management and high-margin billing software services.

The company earned $40.5 million, or 32 cents a share, for the latest second quarter, compared with $38.8 million, or 28 cents per share, a year ago.

Revenue fell more than 2 percent to $689.5 million.

Analysts were expecting the company to earn 27 cents a share on revenue of $705.9 million for the quarter.

Shares of the company were down more than 8 percent at $12.90 in afternoon trade on the New York Stock Exchange. (Additional reporting by Saumyadeb Chakrabarty; Editing by Gopakumar Warrier)

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