Credit: Shutterstock photoW ho said the Internet would kill the need for help calls? Call-center operators are still plenty busy handling phone calls for tech support, service complaints, billing, collections and other matters.
One of them isConvergys ( CVG ), spun off from Cincinnati Bell in 1998 and now one of the largest call-center operators in the world.
It provides services to customers in telecom, media, tech, financial services and health care.
Its three largest customers areAT&T ( T ),DirecTV ( DTV ) andComcast ( CMCSA ), accounting for more than 30% of revenue in 2014.
Because calls are getting more complicated as companies roll out products and services enriched with more features, call-center operators with lots of trained employees to handle them are in demand.
Service changes that come with industry consolidations can also increase demand.
"Any type of change or bundling of service offerings increases call volumes," said Frank Atkins, an analyst with SunTrust Robinson Humphrey.
Still, Convergys' call volumes follow an industry trend of low to midsingle-digit annual growth.
"On the one hand, you have the negative impact of people more easily using the Internet to solve problems. But on the positive side you have many more services and complexity of services that drive more interactions and more phone calls," said David Koning, an analyst with Robert W. Baird.
The net result, he says, is an industry where growth mirrors economic activity, or gross domestic product growth.
"Convergys is not a glamorous stock in terms of growth rates," said Atkins. "But it can get leverage on increased margins due to scale."
Stream Deal Tips Scale
While it has been working to boost margins, Cincinnati-based Convergys scaled up considerably last year when it acquired call-center operator SGS Holdings, commonly known as Stream.
The $820 million deal, which closed in March 2014, added 40,000 employees in 22 countries, most notably in Europe, bringing Convergys' total to 125,000 in 31 countries.
Convergys is now the second largest customer management service provider worldwide in revenue, after Teleperformance, a French company. It's No. 1 in terms of U.S. clients and calls that originate in America.
"Stream is very much like Convergys in that it is a pure call-center company," Koning said. "And it brought European exposure, new clients and diversified risk."
It also brought foreign-exchange headwinds from the European business.
Some of the big U.S.-based clients that came aboard with Stream includeHewlett-Packard ( HPQ ),Microsoft (MSFT) and Dell, Koning says.
Convergys wasn't always a pure-play call-center services company. It divested noncore businesses and interests starting in 2010, including human-resources outsourcing, billing software and cell towers.
Stream added $835 million in revenue for the 10 months it was part of Convergys in 2014, bringing the total for the year to $2.86 billion, up 40% from 2013.
Stream, based near Boston, also provided a boost to Convergys' adjusted net income from continuing operations, which grew 41% in 2014 to $1.60 per share.
In the fourth quarter alone, earnings jumped 100% to 52 cents per share, lifted also by a lower than usual tax rate vs. a higher than normal tax rate from the earlier year, Koning says.
And though Q4 revenue was up 45% to $764 million vs. the prior year -- including $253 million from the Stream acquisition -- pro forma revenue was down 4%.
Half of the decline was due to foreign exchange and the loss of a longtime customer, the U.S. Postal Service, which brought call-center operations in-house.
Convergys also saw "volume fluctuations with a number of large communications clients," CEO Andrea Ayers said in a Q4 conference call on Feb. 19. Communications clients such as cable and wireless firms comprise more than 50% of revenue. On the positive side, she said, Convergys is "beginning to see volumes stabilize with some of these clients."
Convergys forecasts 2015 revenue of $2.97 billion to $3.05 billion, which factors in an expected $45 million negative impact from foreign exchange.
The forecast "implies that we will see growth in the second half of 2015," said Chief Financial Officer Andre Valentine in an industry conference on Feb. 25.
The 4% pro-forma decline in Q4 "does not turn in one quarter," he said, adding that as a "people business" it takes time to hire and train agents to handle new business.
"We have had strong new business signings. We are seeing stabilization in the communication space and some real strength in other verticals," he said. One is health care, "where we have seen explosive growth."
Meanwhile, Convergys says that it can realize more than $25 million in cost synergies from Stream. And analysts say that target looks conservative.
As first-year comparisons related to the Stream acquisition recede, earnings are seen reverting back to a slower growth path.
Cash Flow Is Strong
Analysts polled by Thomson Reuters estimate Convergys' earnings will end the year up 7% over 2014, to $1.71 per share. They see revenue growing 6% to a little more than $3 billion, and an additional 4% gain in 2016.
While normalized single-digit earnings and revenue growth may not overwhelm, Convergys generates strong free cash flow, which in 2014 totaled $208 million on an adjusted basis.
The company's adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) margin in 2014 was 12.5%, up from 12.1% in 2013 and 10.5% in 2010. Management aims for 13% by 2016.
"Our strong cash generation and healthy balance sheet continued to (allow) us to return capital to shareholders," said Ayers on the call. Convergys bought back $20 million in stock in the quarter and paid $7 million in dividends.
Through the end of February, it paid $10 million to buy back an additional 500,000 shares. Convergys stock is up 12% this year.
Sizing Up The Industry
Though two-thirds of industry-wide call-center work is still done in-house, the USPS shift in that direction counters a global trend that favors more outsourcing with fewer companies.
"Clients prefer to narrow their portfolio of vendors," Atkins said. And since Convergys "does a good job, it's unlikely they will be hit on price. Clients understand the importance of high-quality service."
Convergys says the average tenure of its top 10 clients is more than 12 years and most of its organic growth comes from existing customers.
Call volume grew with 15 of its top 20 clients, including a number of software and hardware makers, Ayers said on the call.
Most of Convergys' customers are U.S.-based. But they increasingly want to use contact centers in low-cost venues outside America.
Convergys' largest operation is in the Philippines, where 46% of its employees work. It's the largest private employer there. It also has centers in North America, India, China and elsewhere in Asia, plus a growing presence in Latin America.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
