RHI - Zacks Investment Research



November 6, 2009

Research Associate: Aniruddha Ganguly

Editor: Sweta Killa, M. Fin.

Sr. Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771, x9417

111 N. Canal Street, Suite 1101 ( Chicago, IL 60606

|Convergys Corporation |(CVG - NYSE) |$10.84* |

Note: This report contains substantially new material. Subsequent reports will have changes highlighted.

Reason for Report: 3Q09 Earnings Update

Prev. Ed.: September 30; 2009; Revised Estimates (share price and broker material are as of September 16, 2009)

Brokers’ Recommendations: Neutral: 50.0% (6 firms); Positive: 41.7% (5); Negative: 8.3% (1) Prev. Ed.: 7; 3; 0

Brokers’ Target Price: $12.25 (↑ $0.50 from the last edition; 8 firms) Brokers’ Avg. Expected Return: 13.0%

*Note: Though dated November 6, 2009, share price and broker material are as of November 4, 2009.

Note: A Flash Update was done on October 27, 2009 (3Q09 Earnings Update; beats expectations)

NOTE: The tables below (Revenue, Margins, Earnings per Share, and Balance Sheet) contain less broker material than the broker material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.

Portfolio Manager Executive Summary

Convergys Corporation (CVG or the Company), headquartered in Cincinnati, Ohio, provides customer care, human resources, and billing services worldwide. The Company's solutions enable its clients to drive value from the relationships with their customers and employees.

Of the twelve firms covering the stock, five gave positive ratings, six firms provided neutral ratings, and one firm gave a negative rating. Target prices range from $9.50 (12.4% downside from the current price) to $14.00 (29.2% upside from the current price) with an average of $12.25 (13.0% upside from the current price).

Bulls: Buy or equivalent outlook (five out of twelve firms) – Target prices range from $13.00-$14.00: The firms believe CVG is well positioned to execute on its strategy of leveraging its geographic coverage and extensive customer base. According to the firms, CVG's leading position within its three core markets, expanding margins, share repurchase authorization, and attractive valuation make the shares a compelling purchase for investors. The firms believe that an improving margin outlook for Customer Management Group (CMG), slowing revenue declines, and an encouraging outlook at Information Management Group (IMG) are positives for the Company.

Cautious: Neutral or equivalent outlook (six out of twelve firms) – Target prices range from $11.00-$12.00: The firms believe that CVG has reasonable long-term prospects in its HR management business and meaningful operating advantage potential in its Customer Management business. The firms are cautious regarding economic and business softness in the US and related currency impacts associated with foreign sales, as well as cash flow fluctuations and revenue headwinds in the Customer Care division. These firms believe the keys to the stock remain revenue growth acceleration in core Customer Management and sustained 7% operating margins, maintaining double-digit margins in Information Management despite difficult revenue trends, and limited additional implementation expenses in HR Management.

Bears: Negative or equivalent outlook (one out of twelve firms) – The firm gave a target price of $9.50: The firm remains bearish until material issues with ECG (HR management) are solved and the macro competitive environment improves for CMG and IMG.

The firms believe the following additional factors should also be taken into consideration for investing in the stock:

• CVG’s customer unit provides inbound and outbound call handling for sales, marketing, and support through about 85 contact centers (and in about 35 languages).

• CVG’s customer care products are world renowned and are effective in reducing costs.

• Major competitors are Amdocs Limited (DOX), Electronic Data Systems, LLC (EDS), and International Business Machines Corporation (IBM).

• Weakening fundamentals and sluggish results from all the three business units are major concerns.

• CVG continues to focus on cost management and shifting to lower cost centers such as Philippines and India.

• The Company did not pay any dividend in FY07 and FY08, and does not expect to pay any cash dividend in the future.

General Outlook

Most of the firms believe that strong free cash flow and balance sheet developments and better-than-expected underlying margin performance will boost the stock. However, fundamentals (call center volumes, billing system demand) are expected to remain under pressure. According to the Zacks Digest model, revenue in FY09 is expected to decrease 2.9% y/y versus FY08, 0.6% y/y in FY10 versus FY09 and is expected to increase 5.4% for FY11, with a three year (2008-2011) CAGR of 0.6%. EPS is expected to decrease 7.0% in FY09 but increase 3.3% y/y in FY10 and 18.9% for FY11, with a three year CAGR of 4.5%. According to the Zacks Digest model, net cash from operations is expected to increase 34.3% y/y in FY09 but decrease 9.8% in FY10.

November 4, 2009

Recent Events

On October 27, 2009, CVG announced 3Q09 earnings. Highlights are as follows:

• Total revenue increased 13.2% y/y to $765.0 million from $676.2 million in 3Q08

• 3Q09 EPS was $0.27 versus $0.29 in 3Q08

• CVG expects 4Q09 revenue in the range of $650.0 million to $670.0 million

• 4Q09 adjusted earnings to be more than $0.30

On October 13, 2009, CVG announced the final results and settlement of its offer to exchange up to $125,000,000 aggregate principal amount of its new 5.75% Junior Subordinated Convertible Debentures due 2029 for up to $122,549,019 aggregate principal amount of its outstanding 4.875% Senior Notes.

On September 15, 2009, CVG announced that the Company and DUK have entered into an agreement to provide billing and customer management solution to support the rapid advance of smart grid technology and enable a richer, more effective customer service experience for utility customers.

Overview

Convergys Corporation (CVG or the Company), based in Cincinnati, OH, and spun off from Cincinnati Bell in December 1998, is a global provider of telecommunications billing and customer management services. CVG has three operating divisions: Customer Management Group (CMG), Information Management Group (IMG), and Employee Care Group (ECG). CMG is the world’s largest outsourcer of customer call center management solutions with over 75,000 employees in 85 contact centers worldwide (including 20,000 employees in India and Philippines). Its services include customer service, technical support, and consulting services. IMG is one of the top three global providers of billing solutions to telecommunications providers, and Internet and cable/broadband clients. Its software products include Atlys, ICOMS, and Wizard, and can be provided in outsourced, build-operate-transfer, or support formats, served through sub-groups covering data processing, license and other, professional and consulting, and international. ECG is a leading provider of human resources outsourcing services, including payroll, health and welfare administration, and several other HR applications. The Company has been rapidly extending its client base within this developing market. CVG also owns a 45.0% equity interest in a cellular partnership with Cingular Wireless serving Southwestern Ohio and Northern Kentucky.

Key investment considerations as identified by the analysts are as follows:

|Key Positive Arguments |Key Negative Arguments |

|Leader Across Business Lines: The Company is the worldwide leader in |Economic Slowdown: CVG's businesses have been hurt by the slow spending |

|contact center outsourcing, the second largest provider of billing |of clients inside and outside the telecom customer base. |

|services, and a top-five provider of HR BPO services. |Client Concentration: CVG derives 30.0% of revenue from its top three |

|Large Contract Success: CVG has signed a number of new contracts |customers (Cingular, Direct TV, and Sprint Nextel). The reduction in work|

|including a new $1.1 billion contract with Dupont, a 10-year contract with|for Cingular and Sprint will adversely affect its results. |

|Whirlpool, and a similar-sized contract with a medical devices firm. |CMG Opportunities: Market opportunities for the CMG segment depend on |

| |several factors including competition, network coverage, and overall |

| |growth of economies within different countries, with no assurance of the |

| |market for such offerings to remain robust in each of the Company’s |

| |service areas. |

Further information on the Company is available at its website: .

The Company’s fiscal references coincide with the calendar year.

November 4, 2009

Revenue

According to the Zacks Digest model, 3Q09 total revenue, excluding deferred revenue was $659.1 million, down 2.5% y/y and 3.5% q/q from $676.2 million in 3Q08 and $682.7 million in 2Q09.

According to the press release, revenue was $765.0 million, including accelerated recognition of deferred implementation revenue of $106.0 million from one large HR Management contract.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

|Total Revenue ($ in million) |

|Positive |41.7%↑ |

|Neutral |50.0%↓ |

|Negative |8.3%↓ |

|Avg. Target Price |$12.25↑ |

|Median Target Price |$12.50↑ |

|Digest High |$14.00↑ |

|Digest Low |$9.50 |

|Upside from Current Target Price |13.0% |

|Maximum Upside from Current Target Price |29.2% |

|Minimum downside from Current Target Price |12.4% |

|No. of Analysts with Target Price/Total |8/12 |

Most of the firms used P/E multiples to compute their target prices. The firm (Wedbush) with the lowest target price used DCF analysis, whereas the firm (Citgroup) with the highest target price used P/E multiple for the same.

Risks include the loss of billing customers to competitors with broader or more focused product offerings, the timing of BPO spending environment, and further implementation delays within its employee care segment.

Metrics detailing management effectiveness are as follows:

|Metric (TTM) |Value |Industry |S&P 500 |

|Return on Assets (ROA) |-5.4% |3.7% |3.3% |

|Return on Equity (ROE) |-12.6% |5.5% |8.1% |

|Return on Invested Capital (ROIC) ((()(ROIC) |-6.6% |4.6% |4.5% |

ROA, ROE, and ROIC for the Company are well below the overall market averages (as measured by the S&P 500) of 3.3%, 8.1%, and 4.5%, respectively.

Capital Structure/Solvency/Cash Flow/Governance/Other

Balance Sheet & Cash Flow

According to the press release, at the end of 3Q09 cash flow from operating activities and free cash flow were $10 million and ($4) million, respectively, compared with $26 million and $4 million, respectively, in 3Q08. The Cellular Partnerships provided a $9 million cash distribution in 3Q09. Cash balances at the end of 3Q09 were $336.0 million versus $136.3 million in 3Q08.

For FY09, management expects free cash flow to be in the range of $165.0 million to $185.0 million, and FY09 cash dividend from Cellular Partnerships is expected to be about $40 million.

The Company did not repurchase stock during the quarter. Most of the firms believe liquidity and business investment are priorities over share repurchases in the near term.

Provided below is a summary (abstract) of balance sheet of CVG at the end of September 30, 2009, as compiled by the Zacks Digest:

|FY ends December |Value ($ in million) |y/y Growth |

|Cash and Cash Equivalent |$336.3 |146.7% |

|Accounts Receivable |$479.0 |-19.4% |

|Current Assets |$1,014.2 |9.7% |

|Property, Plant, and Equipment (Net) |$378.2 |-7.8% |

|Total Assets |$2,663.5 |-5.7% |

|Short-Term Debt |$73.9 |835.4% |

|Payable and Other Current Liabilities |$484.0 |3.7% |

|Long-Term Debt |$530.0 |-19.2% |

|Shareholders’ Equity |$1,100.9 |-11.7% |

|Total Liabilities and Shareholders’ Equity |$2,663.5 |-5.7% |

Others

On October 13, 2009, CVG announced the final results and settlement of its offer to exchange up to $125,000,000 aggregate principal amount of its new 5.75% Junior Subordinated Convertible Debentures due 2029 for up to $122,549,019 aggregate principal amount of its outstanding 4.875% Senior Notes due 2009. The Exchange Offer expired on October 6, 2009.

Upon settlement of the exchange offer, the Company issued a total of approximately $125.0 million aggregate principal amount of its new 5.75% Junior Subordinated Convertible Debentures due 2029 in exchange for the accepted 2009 Senior Notes. Following the settlement of the exchange offer, approximately $70.1 million aggregate principal amount of the 2009 Senior Notes remain outstanding.

November 4, 2009

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

November 4, 2009

Long-Term Growth

The projected average long-term growth rate is 11.0%, ranging form 8.0% (First Analysis) to 15.0% (Oppenheimer).

The firms, in general, believe the Business Software & Services sector is extremely competitive and is affected by many factors. Any unexpected increase in project implementation costs and network coverage may hamper CVG’s profitability. As the Company operates in different countries, economic volatility in these countries will also affect CVG.

Most of the firms believe that CVG is a leading provider of services across customer management, information management, and HR management lines. The Company is the worldwide leader in contact center outsourcing, the second largest provider of billing services, and a top-five provider of HR BPO services.

Management indicated it is seeing an increasing demand in the communications vertical globally and across the wireline, wireless, and broadband sectors, and thus, expects to close a number of billing contracts with large carriers over the coming months. Additionally, it stated the ECG pipeline is active with two large contracts.

CVG remains focused on cutting costs and improving operating efficiencies. The Company remains committed to its long-term operating margin goals of 20% for IMG, approximately 15% for CMG, and 15% for HR management (Employee Care).

November 4, 2009

Upcoming Events

There is no significant upcoming event for the time being.

Individual Analyst Opinions

POSITIVE RATINGS (41.7%)

Brigantine – Buy ($13.00 target price) – 10/27/09: The firm reiterated a Buy rating and a $13.00 target price. INVESTMENT SUMMARY: The firm remains bullish based on the belief that BPO business is improving and the risk profile of the other two units will continue to decline, which will lead to multiple expansion over the coming quarters.

Signal Hill – Buy (no target price) – 10/28/09: The firm upgraded the stock from Hold to Buy. INVESTMENT SUMMARY: The firm is bullish based on the belief that its CMG business is set to improve much faster than initially anticipated which in turn should drive multiple expansion as well as EPS upside relative to consensus over the next several quarters.

Citigroup – Buy ($14.00 target price) – 10/27/09: The firm reiterated a Buy rating and raised the target price from $12.00 to $14.00. INVESTMENT SUMMARY: The firm believes CVG has number of catalysts that will lift the stock in next 3-6 quarters. This includes (1) debt pay-down, (ii) resolution of the second problem contract in ECG business, (iii) subsiding macro headwinds, (iv) contract signings in the billing (IMG) unit, and (v) strategic alternatives for IMG.

Oppenheimer – Outperform ($13.00 target price) – 10/27/09: The firm reiterated an Outperform rating with a target price of $13.00. INVESTMENT SUMMARY: The firm remains bullish based on the belief that CVG remains well capitalized to meet its ongoing debt obligations.

Wells Fargo Securities – Outperform ($13.00-$14.00 target price range) – 10/27/09: INVESTMENT SUMMARY: The firm believes CVG's market-leading position within its three core markets, expanding margins, aggressive share repurchases, and attractive valuation make the shares a compelling opportunity for value-oriented investors.

NEUTRAL RATINGS (50.0%)

Kaufman Bros. – Hold ($12.00 target price) – 10/27/09: The firm reiterated a Hold rating and a target price of $12.00. INVESTMENT SUMMARY: The firm prefers to remain on sidelines based on the apprehension that each of the three business units is weakening and the stock is expected to remain cheap for several more quarters.

First Analysis – Equal Weight (no target price) – 10/29/09: The firm reiterated an Equal Weight rating.

Raymond James – Market Perform (no target price) – 10/28/09: The firm reiterated a Market Perform rating. INVESTMENT SUMMARY: The firm prefers to remain on the sidelines due to limited visibility in the near term.

R W. Baird – Neutral ($12.00 target price) – 10/27/09: The firm maintained a Neutral rating and target price of $12.00. INVESTMENT SUMMARY: The firm believes the Company is fairly valued given some operating challenges.

Stifel Nicolaus – Hold (no target price) – 10/28/09: The firm maintained a Hold rating with no target price. INVESTMENT SUMMARY: The firm remains cautious due to inconsistence performance and continued weakness in IMG segment.

UnionBankSwitz. – Neutral ($11.00 target price) – 10/27/09: The firm reiterated a Neutral rating and a target price of $11.00.

NEGATIVE RATINGS (8.3%)

Wedbush – Underperform ($9.50 target price) – 10/27/09: The firm provided an Underperform rating with a target price of $9.50. INVESTMENT SUMMARY: The firm remains concerned due to ongoing issues in HR Management (HRM) and macro challenges in Customer Management (CMG) and Information Management (IMG).

COVERAGE CEASED

BMO Capital –– 06/05/09: The firm ceased coverage on the stock.

|Research Associate |Aniruddha Ganguly |

|Copy Editor |Sudipta Mukherjee |

|Content Ed. |Sweta Killa |

|No. of brokers reported/Total |12/12 |

|brokers | |

|Reason for Update |Earnings |

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Zacks Research Digest

70%

21%

2008A Segment Revenue

Revenue

Total ECG

Revenue

Total CMG

Revenue

Total IMG

10%

74%

16%

2009E Segment Revenue

Revenue

Total ECG

Revenue

Total CMG

Revenue

Total IMG

9%

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