October 28, 2008 / 12:57 PM / 10 years ago

CORRECTED - CORRECTED-UPDATE 3-Convergys posts Q3 loss, sees weak Q4; shares

(Corrects last paragraph to show the company is headquartered in Cincinnati, Ohio, not Cambridge, Massachusetts)

* Q4 EPS, revenue forecast miss expectations

* Shares fall 31 pct, their biggest intra-day pct drop

* CEO: Costs of outsourcing rising, clients delay projects

* Q3 EPS $0.29 beats estimates (Recasts, adds analyst comments, updates share movement)

By Sayantani Ghosh

BANGALORE, Oct 28 (Reuters) - Convergys Corp CVG.N shares saw their biggest-ever percentage drop after the call-center operator posted a quarterly loss as it wrote down charges related to HR management contracts and guided fourth-quarter results below estimates.

The company’s expected profitability from some large HR contracts were significantly less during the quarter, forcing it to write off a portion of implementation costs.

Convergys incurred a pretax write down of deferred charges related to contracts worth $272.9 million, a bulk of which was due to asset impairment.

The overall cost to implement and deliver these outsourcing contracts have risen, Chief Executive Dave Dougherty said in a conference call with analysts.

“This is due to a number of factors including the complexity of global implementations and also actions taken by our clients that have contributed to project delays,” he said.

The Street expects additional one-time write offs in the fourth quarter or early 2009, Kaufman Brothers analyst Karl Keirstead said by phone.

Excluding the charge, Convergys, which runs customer call centers and handles billing for other businesses, posted a profit of 29 cents a share that topped analysts’ expectations of 25 cents a share, according to Reuters Estimates.

The company closed its acquisition of voice automation software provider Intervoice in the quarter, and said it expects more than $200 million in revenue from Intervoice in 2009.

Keirstead said the company is facing execution challenges, which combined with the recession and its large debt load due to the Intervoice acquisition, led to low Street confidence for 2009.


Analysts say the worst is yet to come for the IT services industry, which has cut contractors and frozen hiring as customers postpone short-term projects.

Convergys said its fourth-quarter profit outlook of 20 cents a share included a tax rate of about 45 percent. Without the third-quarter charge, the effective tax rate in the fourth quarter would be about 25 percent.

The company also said though it expected fourth-quarter cash flow to be stronger than last quarter’s $3.7 million, it would not meet expectations for 2008.

The company had earlier forecast free cash flow of more than $100 million for the second-half of 2008.

It posted a third-quarter net loss of $140 million, $1.15 a share, compared with a profit of $41.8 million, 30 cents a share, a year earlier.

Revenue fell about 4 percent in the quarter, as the information management business took a hit as it lost clients in North America.

The revenue growth at its call center unit, excluding $14 million from Intervoice acquisition, was only about 1 percent.

Shares of the Cincinnati, Ohio-based company fell as much as 31 percent to $6.82 in midday trade, making them one of the biggest losers on the New York Stock Exchange. (Reporting by Sayantani Ghosh in Bangalore; Editing by Amitha Rajan and Saumyadeb Chakrabarty)

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