Sunday, April 21, 2002

Convergys sets sights high

CEO sees potential for major growth when economy recovers

By Mike Boyer,
The Cincinnati Enquirer

        In the midst of a recession, a 6 percent gain in revenues and 14 percent increase in operating earnings would be a pretty good year for many corporations. But not Convergys Corp.

        “By our standards, it's slower growth than we're used to and than we want,” said James F. Orr, chairman and chief executive officer of the Cincinnati company, which will have its annual meeting Tuesday at the Aronoff Center.

        Last year, Convergys, which handles billing and customer care for companies such as AT&T, Verizon Wireless, Dell Computer and General Electric, reported net earnings of $139 million, or 80 cents a share, after restructuring and acquisition charges on revenues of $2.3 billion.

        The company has managed double-digit growth since being spun off almost four years ago from the former Cincinnati Bell Inc. But the recession and the meltdown in the telecommunications industry, which represents a major portion of its business, slowed its growth last year.

        “The economy remains challenging,” Mr. Orr said.

        "Pent-up demand'

        While most Cincinnatians don't know what Convergys does, if they have cell-phone service from companies such as Cincinnati Bell or Sprint, their bill is prepared by Convergys software. If they bought a computer from Dell or satellite-TV service from Direct TV, they've had contact with Convergys customer representatives.

        Every day, Convergys produces 1.5 million bills for its clients and handles 1.2 million customer contacts through the Web and live agents.

        And while the company won more new or renewal billing and customer-care contracts last year than ever before, its corporate clients are continuing to watch their pennies closely.

        “We're winning a big share of (the contracts being bid), but fewer are being made than in the past,” Mr. Orr said. “I'd argue that creates some pent-up demand for when the economy begins to turn around, and that offers us a significant growth opportunity.”

        Convergys' stock is down about a third from its 52-week high of $44.35, but the decline is smaller than some other stocks in the telecommunications sector, which has been hammered in the last year. For example, Broadwing Inc., created by the merger of Cincinnati Bell and IXC Communications after the Convergys spinoff, has seen its shares plummet 60 percent in the past year.

        And Convergys has performed better than some of its rivals, such as St. Louis-based Amdocs Ltd., a supplier of billing software, whose shares are down about two-thirds in the past year.

        Analysts' thumbs up

        “The big issue with Convergys is they have a lot of recurring revenues,” Hampton Adams, analyst with CIBC World Markets, said. “They have call centers employing 40,000 taking calls, and every month, they're collecting fees for that service. On the other side of the business, they're sending out millions of bills every month from companies like AT&T and Sprint.”

        Mr. Adams, who continues to recommend Convergys, said, “Their growth may slow, but it's not going away.”

        Likewise, Carla N. Cooper, analyst with Robert W. Baird & Co., who rates Convergys a “strong buy,” said: “They're one of the better-run companies in the business.”

        “As the economy recovers, their business should come back.”

        Mr. Orr, a former Procter & Gamble executive who joined Cincinnati Bell's fledgling Matrixx Marketing unit in 1988, wants to push Convergys to grow faster.

        “We do know we can grow faster on the top line if you look at the global marketplace for the type of things we do,” he said.

        Convergys thinks that it is the leading global supplier for outsourced billing and customer-care service, but also thinks it has just scratched the surface of the potential market.

        It estimates the total world market for the types of services it provides was $330 billion last year and could approach $450 billion by 2004.

        Four growth areas

        To achieve that faster growth, Convergys is focusing on four areas:

        • Tapping a bigger share of the estimated $125 billion market for outsourced customer care.

        Every day, Convergys customer service representatives such as those at its Norwood call center field telephone calls and e-mails from clients' customers with questions about a product or service.

        “Today, only about 15 percent of customer service work is done on an outsourced basis,” Mr. Orr said. “We're clearly the largest at that in the world, but 85 percent is still done in-house.”

        The economic slowdown is putting new pressure on major corporations to cut costs. Mr. Orr argues that after corporations do the obvious things such as cutting back on advertising and eliminating less-profitable operations, they're faced with tougher choices on how to improve the bottom line.

        More companies are looking at ways to move services such as customer care to outside suppliers like Convergys, he said.

        Customer care “can be really important to business, but not be a core competency; and to, therefore, do it yourself puts you at a competitive disadvantage to someone else who is leveraging the best of the business.”

        • A second growth area is employee care, an offshoot of customer care.

        “There are changes in laws and regulations. People are changing, either the terms of their health and welfare benefits or the suppliers of those benefits,” Mr. Orr said. “There's a lot of churn in that. Companies are finding it much more costly and much more challenging to do and do well.”

        Employee care hinges on two areas where Convergys excels: computer systems and customer interaction, he said.

        Convergys has about $100 million in revenues handling employee care for companies such as GE and Lucent Technologies. But Mr. Orr estimates the market for outsourced employee care will be as large as $35 billion to $40 billion in a few years.

        “I think (our) employee care business can be a $500 million plus business in not many years for us, if we do our work well. That will be the challenge,” he said.

        Convergys is awaiting final word from Florida on a $40 million, seven-year contract to handle employee care for state workers, a contract that would be an ice-breaker for Convergys in the government market.

        • Convergys is also looking for growth in its billing business, which last year represented 40 percent of revenues, by changing the way it delivers services to customers.

        “Historically, in the information management business, we've principally signed service bureau contracts” with customers, Mr. Orr said.

        Convergys does the billing for a customer on its computer systems in either its data centers here in Cincinnati or in Orlando, Fla.

        “We do all the work for a set fee per subscriber or unit of production over a five- or 10-year period. That's a good business model. It works, and we can do it well,” Mr. Orr said.

        But only about half the U.S. wireless telephone billing is done by outside providers such as Convergys. The other half is done by the wireless companies themselves. To attack that side of the business, Convergys is looking at other delivery methods such as turn-key arrangements — in which it builds, initially operates and eventually turns over the billing center to the wireless provider. Or, it is offering portions of its software to companies looking to upgrade all or part of their systems.

        Ms. Cooper, analyst at Robert W. Baird, said that approach is being increasingly embraced by software providers who are finding it more difficult to sell entire new systems in the midst of the slow economy.

        • Convergys' fourth — and potentially largest — growth initiative is overseas.

        “Last year, 6 percent of our revenues came from outside the United States, but the worldwide market is enormous,” Mr. Orr said.

        “Cellular penetration is currently about 700 million or so (subscribers) worldwide, and it's forecast to be as much as a billion and a half in three or four years. Almost all that growth is going to come from outside the United States. So to not take advantage of that market would be a huge missed opportunity.”

        In the last couple of years, Convergys has moved aggressively to expand its international business.

        A year ago, it completed its largest acquisition, the $693 million purchase of British billing software developer Geneva Technology Ltd.

        The acquisition filled gaps in Convergys' billing platform and gave it an expanded presence in the Europe, Mrs. Cooper said.

        Two years ago, Convergys signed its first major billing agreement in Latin America, a six-year deal with Brazil's Telesp Celular S.A., South America's largest wireless provider.

        Late last year, Convergys formed a partnership with Olympus Capital Holdings Asia, an investment firm, to provide billing and customer care to broadband providers in the Far East. Mr. Orr said several deals from that partnership are in the works.

        And in December, Convergys established its first call center in India, expected to employ 1,900.

        “I'll be disappointed if our international business doesn't become a third of our revenues over the next five or six years,” Mr. Orr said.

        “Certainly, I think we ought to get a third of our revenue” from billing services from outside the United States, he said. Today international represents about 15 percent of the information management group's revenues.

        Careful on acquisitions

        Mr. Orr said Convergys, which has very little debt, is continuing to look for acquisitions that will benefit each of its strategic goals.

        “In this economic environment, a company with a strong balance sheet and cash flow is in a good position to acquire things that will accelerate growth plans,” he said. “We continue to look at that,” but he emphasized that the company would only make acquisitions that don't dilute earnings.

        The key factor that sets Convergys apart from competitors is the knowledge and expertise of its employees, he said.

        “It's a key differentiator. We're able to do some thing other companies can't do for themselves,” he said.


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