CONVERGYS CORP CVG
December 28, 2010 - 4:02pm EST by
bank999
2010 2011
Price: 13.27 EPS $1.04 $1.18
Shares Out. (in M): 122 P/E 12.8x 10.4x
Market Cap (in $M): 1,617 P/FCF 8.8x 9.0x
Net Debt (in $M): 37 EBIT 136 166
TEV ($): 1,654 TEV/EBIT 12.0x 10.0x

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Description

  

Synopsis

Convergys, a global call center and billing services provider, provides a collection of improving businesses trading at a significant discount to intrinsic value which we estimate at $30 per share.  New management, which created significant shareholder value at Alltel, should unlock this value through margin improvement, asset sales, and a more reasonable capital structure.  Moreover, downside is limited as one is buying at 8.8x free cash flow today - before giving any credit for the changes new management can achieve or an improving business environment. 

8.8Business Description

Convergys Corporation is a business process outsourcing (BPO) provider that was spun out of Cincinnati Bell in 1999. Convergys is essentially two different businesses, consisting of the customer management group (CMG) and the information management group (IMG). The company sold its Human Resource Management business in 2Q10. The two remaining divisions provide call center outsourcing services (CMG) and billing software and services (IMG), respectively. CMG represents 85% of revenue, while IMG comprises slightly more than 15%. Nearly half of Convergys' 75,000 employees work in offshore locations, mainly in India and the Philippines, with the company's headquarters in Cincinnati, Ohio. CVG also owns a 33.8% interest in the local AT&T Wireless subsidiary in the Cincinnati/Northern Kentucky region and a 45% interest in a local cell tower operator in the same region. 

Why Opportunity exists

CVG has gone through some rough sledding the last couple of years.  Besides being disproportionately distracted by an unprofitable HR BPO unit, they have faced challenges in both their call center and billing franchises.  The call center business, while reasonably diversified, faces cyclical exposure and has come under pressure this year as call volumes have softened, particularly in their key communications vertical.  Fewer product activations and apparently better network service have led to fewer customer calls.  They have also suffered, to a lesser extent, from a reduction in call volumes at their financial services customers as credit card activations and mortgage activity have declined.  Two years ago, they acquired Intervoice, a $200mm revenue company, to bolster their technology platform and service offerings.  The integration has been slow to materialize, and margins have been impacted with increased SG&A.

Customer Management Group:

 

2005

2006

2007

2008

Q1A

Q2A

Q3A

Q4A

2009

Q1A

Q2A

Q3A

Revenue

1,641.5
1,803.1
1,866.1
1,954.8

516.9

494.6

491.6

483.6

1,986.7

463.6

446.1

462.9

% Growth

3.0%

9.8%

3.5%

4.8%

8.6%

5.5%

1.7%

-8.2%

1.6%

-10.3%

-9.8%

-5.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

564.3

622.7

622

635.4

194.8

186.8

186.4

178

746

185.7

169.5

173.2

% GM

34.4%

34.5%

33.3%

32.5%

37.7%

37.8%

37.9%

36.8%

37.5%

40.1%

38.0%

37.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT

168.1

208.9

178.1

106.6

40.3

36.9

37.0

27.6

141.8

33.8

23.3

31.3

% Margin

10.2%

11.6%

9.5%

5.5%

7.8%

7.5%

7.5%

5.7%

7.1%

7.3%

5.2%

6.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

247.5

278.3

236.7

172.3

59

55.5

55.8

45.7

216.0

52.5

42.6

49.8

% Margin

15.1%

15.4%

12.7%

8.8%

11.4%

11.2%

11.4%

9.4%

10.9%

11.3%

9.5%

10.8%

 

The billing business has been forced to resize itself after losing two large programs (Sprint and AT&T).  The Sprint loss was somewhat unique in that after the Nextel merger, the incoming CEO (from Nextel) decided to keep Nextel's billing software instead of Sprint's.  You could make the argument that this wasn't a true, competitive loss. 

Information Management Group:

 

2005

2006

2007

2008

Q1A

Q2A

Q3A

Q4A

2009

Q1A

Q2A

Q3A

Revenue

778.1

775.3

723

571.5

107.6

115.1

99.2

112.4

434.3

82.4

78

81.9

% Growth

4.0%

-0.4%

-6.7%

-21.0%

-34.1%

-28.6%

-25.7%

-1.1%

-24.0%

-23.4%

-32.2%

-17.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

377.9

355.2

340.3

267.1

50.1

58.0

48.3

57.1

213.5

38.2

38.3

40.2

% GM

48.6%

45.8%

47.1%

46.7%

46.6%

50.4%

48.7%

50.8%

49.2%

46.4%

49.1%

49.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT

145.1

125.3

135.6

106.1

12.5

17.0

8.9

17.0

55.4

6.9

9.4

11.3

% Margin

18.6%

16.2%

18.8%

18.6%

11.6%

14.8%

9.0%

15.1%

12.8%

8.4%

12.1%

13.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

185.4

165.8

171.7

141.3

19.4

24.1

15.5

22.6

81.6

11.5

13.8

15.4

% Margin

23.8%

21.4%

23.7%

24.7%

18.0%

20.9%

15.6%

20.1%

18.8%

14.0%

17.7%

18.8%

 

Margins in both segments have dipped below their long-run and peer averages.  We believe the company never lost its "Bell" mentality after being spun out of Cincinnati Bell and morphed into a sleeping giant when times were good.

Finally, we believe CVG has somewhat of hidden asset in its wireless interests which are not consolidated in the income statement, but generated significant and steady free cash flow.

New Management

Earlier this year, the Company replaced long-time company man CEO, David Dougherty with board member, Jeff Fox.  Fox is the first outsider to run CVG.  Fox had joined the board a year earlier as part of JANA Capital's attempt to shake things up after accumulating an approximate 14% stake.  Previously Fox had been at Alltel since 1996, most recently serving as COO.  Consequently, he knew CVG very well having been a customer care and billing customer and having served on the board.  Of equal importance, he had purchased a significant amount of stock on the open market before becoming CEO (and he has recently purchased more on the open market).  Everything we have heard suggests he is a smart, aggressive, hungry CEO who can be expected to cut costs.  Contrast this with the previous management who supported a staid, "Bell-like" atmosphere at the company, and one can see a potential opportunity.  After initially signing a one-year contract, Fox has extended under an "at-will" agreement and will receive the lion's share of his comp in stock.  His family still lives in Arkansas, and we believe that he knows the playbook for success at CVG - improve margins, refocus the company on gaining greater share with current customers, dispose assets, use the balance sheet and potentially sell the company.  Fox was the #2 at Alltel before getting his shot to be the #1 at Convergys.  He wants to show success here as part of an ambition to be a CEO at an even larger company. 

It's likely that his initial one-year term gave investors pause, but our conversations with him have given us comfort that he is tackling the issues with a long-term perspective and is not looking for a quick exit.  He holds options on 300K shares that vest over a 5-year period, and approximately $3mm of his $5mm comp targeted for next year is under the company's Long Term Incentive Plan which typically vests over a 3-year period.  We also do not think that investors have had a chance to get to know him.  Besides the public earnings calls, Fox has limited his exposure fairly tightly, choosing instead to focus on internal execution.  Once investors get to hear his vision and kick the tires so to speak, we suspect there will be broader support for the stock.

Thesis

Convergys represents a classic sum-of-the-parts investment with new management and an activist holder with board representation poised to unlock value.  We believe that each of the three main assets (CMG, IMG and the Cellular Partnership) valued independently yield much greater value than the current market cap indicates.

Our sense is that the customer care business is commonly perceived as a poor-quality, commodity type business.  While there is some element of that in play, our calls with customers and competitors indicate that the business is somewhere a few notches above.  Convergys is a top-tier customer service provider - on that point many industry players agree.  They are the second largest in the industry, they have an extensive global network of call centers, and their service level is held in esteem by both customers and competitors. 

While some of CVG's wounds have been self inflicted, the entire customer care industry has struggled as volumes have declined due to the economy. (Apparently, customers do not call their wireless company to complain about their service as often when they are behind on their bill.) We believe that there are a few opportunities within CMG that Wall Street is not currently focused on. We think that CVG's customers are now looking to consolidate vendors and that there is an opportunity for them to take market share from their smaller competitors in the years ahead.  Two key points came through in all of our research calls:  customers will not take business away from vendors meeting their requirements, and managed process solutions are becoming more important in winning new business.  On both points, Convergys performs very well.  We have gotten the sense that they have won share or maintained share with many of their important customers.  At their largest customer, AT&T, we believe that Convergys is their top outsourcing vendor and has performed at a level higher than even AT&T's internal operations.  Managed processes encompass your basic back-office work (e.g. A/R or A/P processing), and more and more clients are looking for these solutions from their customer service partners.  This type of work is more highly integrated with the customer and serves to increase the stickiness of those relationships.  We believe that CVG's expertise in this area combined with their high level of execution should enable them to win more share with their current customer base.

We also believe that the company had morphed into a sleeping giant when volumes were growing.  Looking at the chart below, CMG appears to be overspending on SG&A.  Over the last four years, SG&A costs as a % of sales have increased from 18.6% to as high as 27.5% in 1Q10.  They also lag peers such as Teleperfomance (#1 global competitor), Teletech, Startek and APAC.

Customer Management Group:

 

2005

2006

2007

2008

Q1A

Q2A

Q3A

Q4A

2009

Q1A

Q2A

Q3A

Revenue

1,641.5
,1803.1
1,866.1
1,954.8

516.9

494.6

491.6

483.6

1,986.7

463.6

446.1

462.9

% Growth

3.0%

9.8%

3.5%

4.8%

8.6%

5.5%

1.7%

-8.2%

1.6%

-10.3%

-9.8%

-5.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

SG&A

308.2

335.8

380.7

454.7

130.4

125.3

125.1

127.0

507.8

127.7

122.2

119.2

% Margin

18.8%

18.6%

20.4%

23.3%

25.2%

25.3%

25.4%

26.3%

25.6%

27.5%

27.4%

25.8%

 

Some of this is justified as the company spends more on managed service infrastructure, but some is bloat from their Intervoice acquisition and the previous corporate culture.  Former executives consistently told us that the previous CEO ran the company with a "Bell-like" mentality.  He was a "nice guy" and wasn't interested in holding people accountable.  Their sales organization was focused more on winning new customers than growing their existing relationships.  We believe Fox is transforming the company into a much more customer centric organization.  He has already converted the business from a sales rep model to an account management model.  Additional cost-cutting efforts appear to be bearing fruit as well.  Absolute SG&A spend came down sequentially in 3Q10 despite a 4% increase in revenue.

Improving call volumes should also help boost margins going forward.  The company bases their short-term agent staffing levels in large part on client forecasts of call volumes.  During the early part of 2010, those forecasts proved to be too optimistic and were ratcheted down in the 2nd quarter.  Capacity utilization suffered and most in the industry were caught off-guard.  We believe the 2nd quarter was a trough in terms of call volumes.  All evidence suggests volumes have since improved, and indeed, one competitor told us that Q3 and Q4 saw increased booking levels across the industry.  This will translate into revenues in 1H 2011.  We believe that CMG will have relatively easy comps in 1H and are projecting modest growth of 3.7% for the full year 2011.

Convergys's Information Management Group is another business that is of higher quality than may appear given the recent history.  Our checks indicate that nobody actually wants to switch billing platforms.  These are highly integrated systems that run mission critical functions.  Convergys has the reputation of providing quality service, if more limited in scope.  Their competitors, Amdocs especially, have broadened their portfolio of solutions to encompass more BPO services.  We do not believe there is a structural shift moving away from niche players like CVG, but instead believe IMG has been on the wrong end of industry consolidation.  According to the company, AT&T has acquired a number of their customers and subsequently converted their billing systems away from Convergys.  I mentioned the Sprint/Nextel merger earlier.  On the positive side, the company has indicated that the Sprint and AT&T related client migrations have ended.  They have also developed a new billing system for smart-grid application which could provide nice upside going forward in a new customer vertical.  So far they have signed Duke Energy as a customer.  While growth in this segment would be nice, we are satisfied that the declines appear to have stabilized and they have resized their cost base.  We expect margins to improve going forward.  Additionally, they have recently announced a number of new client wins which is encouraging.  The unit had been up for sale, but Fox has taken it off the market and refocused efforts on growing revenue at the business.  We believe that ultimately this unit gets sold or spun off.

The cellular partnership consists primarily of AT&T Wireless's subsidiary in the Cincinnati region.  The tower stake is not significant.  The cash flow from this investment has been pretty consistent over the last two years corresponding not only to AT&T's success, but also to the significant investment made in the asset in prior years.  Operating in the Cincinnati region provides both positives and negatives.  On the one hand, the area is more competitive due to the presence of Cincinnati Bell Wireless.  On the other hand, CBW is a weak competitor who has underinvested in their network and focused more on pre-paid subscribers.  Additionally, Cincinnati is home to a number of Fortune 500 companies (Kroger, Macy's, P&G, CVG), so data plan penetration from business use is higher and more stable.  Our checks with suppliers in the region suggest that AT&T has not executed particularly well in the region.  Their distribution network was very subpar with little retail presence.  That is changing as they invest more in distribution, providing upside with the partnership. 

Customer Management Group:

 

Q1A

Q2A

Q3A

Q4E

2010E

Q1E

Q2E

Q3E

Q4E

2011E

Revenue

463.6

446.1

462.9

464.0

1,836.6

484.3

462.1

478.1

479.4

1,903.9

% Growth

-10.3%

-9.8%

-5.8%

-4.1%

-7.6%

4.5%

3.6%

3.3%

3.3%

3.7%

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

185.7

169.5

173.2

171.7

700.1

181.6

173.3

179.3

179.8

714.0

% GM

40.1%

38.0%

37.4%

37.0%

38.1%

37.5%

37.5%

37.5%

37.5%

37.5%

 

 

 

 

 

 

 

 

 

 

 

EBIT

33.8

23.3

31.3

28.6

117.0

36.7

34.0

36.0

36.1

142.8

% Margin

7.3%

5.2%

6.8%

6.2%

6.4%

7.6%

7.3%

7.5%

7.5%

7.5%

 

 

 

 

 

 

 

 

 

 

 

EBITDA

52.5

42.6

49.8

47.3

192.2

55.5

52.8

54.8

54.9

218.0

% Margin

11.3%

9.5%

10.8%

10.2%

10.5%

11.5%

11.4%

11.5%

11.5%

11.4%

 

Information Management Group:

 

Q1A

Q2A

Q3A

Q4E

2010E

Q1E

Q2E

Q3E

Q4E

2011E

Revenue

82.4

78

81.9

107.1

349.4

82.1

78.8

83.4

110.0

354.3

% Growth

-23.4%

-32.2%

-17.4%

-4.7%

-19.6%

-0.4%

1.0%

1.9%

2.7%

1.4%

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

38.2

38.3

40.2

52.6

169.3

40.2

38.6

40.9

53.9

173.6

% GM

46.4%

49.1%

49.1%

49.0%

49.0%

49.0%

49.0%

49.0%

49.0%

49.0%

 

 

 

 

 

 

 

 

 

 

 

EBIT

6.9

9.4

11.3

16.5

44.1

11.1

10.1

11.5

19.6

52.4

% Margin

8.4%

12.1%

13.8%

15.4%

12.6%

13.5%

12.8%

13.8%

17.8%

14.8%

 

 

 

 

 

 

 

 

 

 

 

EBITDA

11.5

13.8

15.4

21.1

61.8

15.5

14.5

15.9

24.0

70.1

% Margin

14.0%

17.7%

18.8%

19.7%

17.7%

18.9%

18.4%

19.1%

21.9%

19.8%

 

Sum-of-Parts Valuation

         
             
       

2011E
Cash Flow

Multiple

Value

Cellular Partnerships (1)

   

$35.6

10.0x

355.9

             
       

Projected 2011 EBITDA

Multiple

Value

IMG (2)

     

$70.1

7.0x

490.4

             

Subtotal value (1+2)

         

846.3

             

Total Current Enterprise Value

       

$1,694.7

Implied Value for CMG

         

$848.4

CMG Projected 2011 EBITDA

       

$218.0

Implied Multiple for CMG

       

3.9x

 

 

There are a number of avenues for CVG to create value.  The analysis above breaks apart the company based on reasonable projections.  We think 3.9x EBITDA undervalues the base call center business on an absolute and relative basis (peers trade at 6-7x). There have also been a number of transactions in the space proving a willingness to pay for these businesses:

  • Thomas Lee and Quadrangle bought West Corp for 6.3x EBITDA in Oct 2006
  • Sykes bought ICT Group for 8.1x EBITDA in Oct 2009
  • Xerox paid 7.8x EBITDA for Affiliated Customer Services in July 2009
  • Convergys paid 10.5x EBITDA for Intervoice in July 2008

 If Fox is successful in refocusing the company, CVG has an opportunity to grow margins meaningfully in both segments.  Returning SG&A to comparable peer levels in 2012 would yield an incremental $131mm in EBITDA (assuming 3% revenue growth). 

   

Projected 2012 EBITDA

Multiple

Value

CMG

 

$331.4

6.5x

$2,154.2

IMG

 

$88.9

7.0x

$622.1

 

The cellular partnership also provides opportunity for meaningful earnings power expansion.  Currently, AT&T has 20% market share in the Cincinnati region compared to 29% nationally.  CBW has been losing share and focusing more attention on their cloud business, so AT&T should continue to gain share and expand margins to closer to national levels.  Assuming they can get to 25% market share, we think the partnership interest alone is worth over $5.40 per share.

Cincinnati Wireless Market Opportunity:

 

YTD

         

9/30/2010

AT&T National ARPU (monthly)

 

$49.91

           

Company pegged their potential market at 5mm subs.

           

Total Market Opportunity

   

$2,994.6

2009 Partnership Revenue

   

$594.7

Current Market Share

   

19.9%

           

Target Market Share

     

25.0%

Implied Partnership Revenue Opportunity

$748.7

National EBIT Margin

   

27.0%

EBIT Potential

     

$202.1

CVG's stake

     

$68.7

per share value @10x

   

$5.46

 

Putting all of this together (and backing out the current debt) yields an intrinsic value of $27 per share. 

   

Projected 2012 EBITDA

Multiple

Value

CMG

 

$331.4

6.5x

$2,154.2

IMG

 

$88.9

7.0x

$622.1

   


Cash Flow

Multiple

Value

Cellular Partnerships

 

$68.7

10.0x

$687.3

         

Total Enterprise Value

     

$3,463.5

Less Current Debt

     

-$36.9

Implied Equity Value

     

$3,426.6

Equity Value per share

     

$27.22

 

CVG's B/S also looks underutilized as net leverage stands at 0.3x LTM EBITDA (includes cash flow from cell partnerships).  It has operated in the past at 1x which could provide approximately $264mm in buyback capacity.  Assuming such a buyback at the current stock price would reduce the share count by 19.8mm shares.  Accounting for the proforma debt, one reaches an intrinsic value of $30 per share.

Risks

  • CVG has a fairly high degree of customer concentration. AT&T alone represents 22% of total revenue, and their three largest customers (incl DirectTV and Comcast) comprise 37.5% of total revenue. IMG's history shows what can happen when you lose large, global accounts as customers. Our conversations with AT&T and Comcast, however, give us confidence in the health of their relationship with CVG.
  • CVG, along with most outsourcers, has some degree of currency risk. They operate centers in Canada, India and the Philippines and take on costs in those relative currencies, while most of their revenues are denominated in USD. They attempt to hedge their exposure as much as possible.

Catalyst

 

Catalysts

  • Analyst expectations are still very low and underestimate next year's earnings power. Half of the analysts covering the stock have it rated as either a Hold or a Sell. CVG should outperform consensus estimates for 2011.
  • A more direct route to full value recognition would be for a sale of IMG and the cellular partnerships. Possible bidders for IMG include peers in the BSS space looking to augment their position vs market leading Amdocs. Given the defensive characteristics of the business, private equity would also make sense. AT&T is the only buyer for the cellular partnership.
  • The company recently began buying back stock. Their B/S is under-levered which could enable further stock repurchases.
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    Description

      

    Synopsis

    Convergys, a global call center and billing services provider, provides a collection of improving businesses trading at a significant discount to intrinsic value which we estimate at $30 per share.  New management, which created significant shareholder value at Alltel, should unlock this value through margin improvement, asset sales, and a more reasonable capital structure.  Moreover, downside is limited as one is buying at 8.8x free cash flow today - before giving any credit for the changes new management can achieve or an improving business environment. 

    8.8Business Description

    Convergys Corporation is a business process outsourcing (BPO) provider that was spun out of Cincinnati Bell in 1999. Convergys is essentially two different businesses, consisting of the customer management group (CMG) and the information management group (IMG). The company sold its Human Resource Management business in 2Q10. The two remaining divisions provide call center outsourcing services (CMG) and billing software and services (IMG), respectively. CMG represents 85% of revenue, while IMG comprises slightly more than 15%. Nearly half of Convergys' 75,000 employees work in offshore locations, mainly in India and the Philippines, with the company's headquarters in Cincinnati, Ohio. CVG also owns a 33.8% interest in the local AT&T Wireless subsidiary in the Cincinnati/Northern Kentucky region and a 45% interest in a local cell tower operator in the same region. 

    Why Opportunity exists

    CVG has gone through some rough sledding the last couple of years.  Besides being disproportionately distracted by an unprofitable HR BPO unit, they have faced challenges in both their call center and billing franchises.  The call center business, while reasonably diversified, faces cyclical exposure and has come under pressure this year as call volumes have softened, particularly in their key communications vertical.  Fewer product activations and apparently better network service have led to fewer customer calls.  They have also suffered, to a lesser extent, from a reduction in call volumes at their financial services customers as credit card activations and mortgage activity have declined.  Two years ago, they acquired Intervoice, a $200mm revenue company, to bolster their technology platform and service offerings.  The integration has been slow to materialize, and margins have been impacted with increased SG&A.

    Customer Management Group:

     

    2005

    2006

    2007

    2008

    Q1A

    Q2A

    Q3A

    Q4A

    2009

    Q1A

    Q2A

    Q3A

    Revenue

    1,641.5
    1,803.1
    1,866.1
    1,954.8

    516.9

    494.6

    491.6

    483.6

    1,986.7

    463.6

    446.1

    462.9

    % Growth

    3.0%

    9.8%

    3.5%

    4.8%

    8.6%

    5.5%

    1.7%

    -8.2%

    1.6%

    -10.3%

    -9.8%

    -5.8%

     

     

     

     

     

     

     

     

     

     

     

     

     

    Gross Profit

    564.3

    622.7

    622

    635.4

    194.8

    186.8

    186.4

    178

    746

    185.7

    169.5

    173.2

    % GM

    34.4%

    34.5%

    33.3%

    32.5%

    37.7%

    37.8%

    37.9%

    36.8%

    37.5%

    40.1%

    38.0%

    37.4%

     

     

     

     

     

     

     

     

     

     

     

     

     

    EBIT

    168.1

    208.9

    178.1

    106.6

    40.3

    36.9

    37.0

    27.6

    141.8

    33.8

    23.3

    31.3

    % Margin

    10.2%

    11.6%

    9.5%

    5.5%

    7.8%

    7.5%

    7.5%

    5.7%

    7.1%

    7.3%

    5.2%

    6.8%

     

     

     

     

     

     

     

     

     

     

     

     

     

    EBITDA

    247.5

    278.3

    236.7

    172.3

    59

    55.5

    55.8

    45.7

    216.0

    52.5

    42.6

    49.8

    % Margin

    15.1%

    15.4%

    12.7%

    8.8%

    11.4%

    11.2%

    11.4%

    9.4%

    10.9%

    11.3%

    9.5%

    10.8%

     

    The billing business has been forced to resize itself after losing two large programs (Sprint and AT&T).  The Sprint loss was somewhat unique in that after the Nextel merger, the incoming CEO (from Nextel) decided to keep Nextel's billing software instead of Sprint's.  You could make the argument that this wasn't a true, competitive loss. 

    Information Management Group:

     

    2005

    2006

    2007

    2008

    Q1A

    Q2A

    Q3A

    Q4A

    2009

    Q1A

    Q2A

    Q3A

    Revenue

    778.1

    775.3

    723

    571.5

    107.6

    115.1

    99.2

    112.4

    434.3

    82.4

    78

    81.9

    % Growth

    4.0%

    -0.4%

    -6.7%

    -21.0%

    -34.1%

    -28.6%

    -25.7%

    -1.1%

    -24.0%

    -23.4%

    -32.2%

    -17.4%

     

     

     

     

     

     

     

     

     

     

     

     

     

    Gross Profit

    377.9

    355.2

    340.3

    267.1

    50.1

    58.0

    48.3

    57.1

    213.5

    38.2

    38.3

    40.2

    % GM

    48.6%

    45.8%

    47.1%

    46.7%

    46.6%

    50.4%

    48.7%

    50.8%

    49.2%

    46.4%

    49.1%

    49.1%

     

     

     

     

     

     

     

     

     

     

     

     

     

    EBIT

    145.1

    125.3

    135.6

    106.1

    12.5

    17.0

    8.9

    17.0

    55.4

    6.9

    9.4

    11.3

    % Margin

    18.6%

    16.2%

    18.8%

    18.6%

    11.6%

    14.8%

    9.0%

    15.1%

    12.8%

    8.4%

    12.1%

    13.8%

     

     

     

     

     

     

     

     

     

     

     

     

     

    EBITDA

    185.4

    165.8

    171.7

    141.3

    19.4

    24.1

    15.5

    22.6

    81.6

    11.5

    13.8

    15.4

    % Margin

    23.8%

    21.4%

    23.7%

    24.7%

    18.0%

    20.9%

    15.6%

    20.1%

    18.8%

    14.0%

    17.7%

    18.8%

     

    Margins in both segments have dipped below their long-run and peer averages.  We believe the company never lost its "Bell" mentality after being spun out of Cincinnati Bell and morphed into a sleeping giant when times were good.

    Finally, we believe CVG has somewhat of hidden asset in its wireless interests which are not consolidated in the income statement, but generated significant and steady free cash flow.

    New Management

    Earlier this year, the Company replaced long-time company man CEO, David Dougherty with board member, Jeff Fox.  Fox is the first outsider to run CVG.  Fox had joined the board a year earlier as part of JANA Capital's attempt to shake things up after accumulating an approximate 14% stake.  Previously Fox had been at Alltel since 1996, most recently serving as COO.  Consequently, he knew CVG very well having been a customer care and billing customer and having served on the board.  Of equal importance, he had purchased a significant amount of stock on the open market before becoming CEO (and he has recently purchased more on the open market).  Everything we have heard suggests he is a smart, aggressive, hungry CEO who can be expected to cut costs.  Contrast this with the previous management who supported a staid, "Bell-like" atmosphere at the company, and one can see a potential opportunity.  After initially signing a one-year contract, Fox has extended under an "at-will" agreement and will receive the lion's share of his comp in stock.  His family still lives in Arkansas, and we believe that he knows the playbook for success at CVG - improve margins, refocus the company on gaining greater share with current customers, dispose assets, use the balance sheet and potentially sell the company.  Fox was the #2 at Alltel before getting his shot to be the #1 at Convergys.  He wants to show success here as part of an ambition to be a CEO at an even larger company. 

    It's likely that his initial one-year term gave investors pause, but our conversations with him have given us comfort that he is tackling the issues with a long-term perspective and is not looking for a quick exit.  He holds options on 300K shares that vest over a 5-year period, and approximately $3mm of his $5mm comp targeted for next year is under the company's Long Term Incentive Plan which typically vests over a 3-year period.  We also do not think that investors have had a chance to get to know him.  Besides the public earnings calls, Fox has limited his exposure fairly tightly, choosing instead to focus on internal execution.  Once investors get to hear his vision and kick the tires so to speak, we suspect there will be broader support for the stock.

    Thesis

    Convergys represents a classic sum-of-the-parts investment with new management and an activist holder with board representation poised to unlock value.  We believe that each of the three main assets (CMG, IMG and the Cellular Partnership) valued independently yield much greater value than the current market cap indicates.

    Our sense is that the customer care business is commonly perceived as a poor-quality, commodity type business.  While there is some element of that in play, our calls with customers and competitors indicate that the business is somewhere a few notches above.  Convergys is a top-tier customer service provider - on that point many industry players agree.  They are the second largest in the industry, they have an extensive global network of call centers, and their service level is held in esteem by both customers and competitors. 

    While some of CVG's wounds have been self inflicted, the entire customer care industry has struggled as volumes have declined due to the economy. (Apparently, customers do not call their wireless company to complain about their service as often when they are behind on their bill.) We believe that there are a few opportunities within CMG that Wall Street is not currently focused on. We think that CVG's customers are now looking to consolidate vendors and that there is an opportunity for them to take market share from their smaller competitors in the years ahead.  Two key points came through in all of our research calls:  customers will not take business away from vendors meeting their requirements, and managed process solutions are becoming more important in winning new business.  On both points, Convergys performs very well.  We have gotten the sense that they have won share or maintained share with many of their important customers.  At their largest customer, AT&T, we believe that Convergys is their top outsourcing vendor and has performed at a level higher than even AT&T's internal operations.  Managed processes encompass your basic back-office work (e.g. A/R or A/P processing), and more and more clients are looking for these solutions from their customer service partners.  This type of work is more highly integrated with the customer and serves to increase the stickiness of those relationships.  We believe that CVG's expertise in this area combined with their high level of execution should enable them to win more share with their current customer base.

    We also believe that the company had morphed into a sleeping giant when volumes were growing.  Looking at the chart below, CMG appears to be overspending on SG&A.  Over the last four years, SG&A costs as a % of sales have increased from 18.6% to as high as 27.5% in 1Q10.  They also lag peers such as Teleperfomance (#1 global competitor), Teletech, Startek and APAC.

    Customer Management Group:

     

    2005

    2006

    2007

    2008

    Q1A

    Q2A

    Q3A

    Q4A

    2009

    Q1A

    Q2A

    Q3A

    Revenue

    1,641.5
    ,1803.1
    1,866.1
    1,954.8

    516.9

    494.6

    491.6

    483.6

    1,986.7

    463.6

    446.1

    462.9

    % Growth

    3.0%

    9.8%

    3.5%

    4.8%

    8.6%

    5.5%

    1.7%

    -8.2%

    1.6%

    -10.3%

    -9.8%

    -5.8%

     

     

     

     

     

     

     

     

     

     

     

     

     

    SG&A

    308.2

    335.8

    380.7

    454.7

    130.4

    125.3

    125.1

    127.0

    507.8

    127.7

    122.2

    119.2

    % Margin

    18.8%

    18.6%

    20.4%

    23.3%

    25.2%

    25.3%

    25.4%

    26.3%

    25.6%

    27.5%

    27.4%

    25.8%

     

    Some of this is justified as the company spends more on managed service infrastructure, but some is bloat from their Intervoice acquisition and the previous corporate culture.  Former executives consistently told us that the previous CEO ran the company with a "Bell-like" mentality.  He was a "nice guy" and wasn't interested in holding people accountable.  Their sales organization was focused more on winning new customers than growing their existing relationships.  We believe Fox is transforming the company into a much more customer centric organization.  He has already converted the business from a sales rep model to an account management model.  Additional cost-cutting efforts appear to be bearing fruit as well.  Absolute SG&A spend came down sequentially in 3Q10 despite a 4% increase in revenue.

    Improving call volumes should also help boost margins going forward.  The company bases their short-term agent staffing levels in large part on client forecasts of call volumes.  During the early part of 2010, those forecasts proved to be too optimistic and were ratcheted down in the 2nd quarter.  Capacity utilization suffered and most in the industry were caught off-guard.  We believe the 2nd quarter was a trough in terms of call volumes.  All evidence suggests volumes have since improved, and indeed, one competitor told us that Q3 and Q4 saw increased booking levels across the industry.  This will translate into revenues in 1H 2011.  We believe that CMG will have relatively easy comps in 1H and are projecting modest growth of 3.7% for the full year 2011.

    Convergys's Information Management Group is another business that is of higher quality than may appear given the recent history.  Our checks indicate that nobody actually wants to switch billing platforms.  These are highly integrated systems that run mission critical functions.  Convergys has the reputation of providing quality service, if more limited in scope.  Their competitors, Amdocs especially, have broadened their portfolio of solutions to encompass more BPO services.  We do not believe there is a structural shift moving away from niche players like CVG, but instead believe IMG has been on the wrong end of industry consolidation.  According to the company, AT&T has acquired a number of their customers and subsequently converted their billing systems away from Convergys.  I mentioned the Sprint/Nextel merger earlier.  On the positive side, the company has indicated that the Sprint and AT&T related client migrations have ended.  They have also developed a new billing system for smart-grid application which could provide nice upside going forward in a new customer vertical.  So far they have signed Duke Energy as a customer.  While growth in this segment would be nice, we are satisfied that the declines appear to have stabilized and they have resized their cost base.  We expect margins to improve going forward.  Additionally, they have recently announced a number of new client wins which is encouraging.  The unit had been up for sale, but Fox has taken it off the market and refocused efforts on growing revenue at the business.  We believe that ultimately this unit gets sold or spun off.

    The cellular partnership consists primarily of AT&T Wireless's subsidiary in the Cincinnati region.  The tower stake is not significant.  The cash flow from this investment has been pretty consistent over the last two years corresponding not only to AT&T's success, but also to the significant investment made in the asset in prior years.  Operating in the Cincinnati region provides both positives and negatives.  On the one hand, the area is more competitive due to the presence of Cincinnati Bell Wireless.  On the other hand, CBW is a weak competitor who has underinvested in their network and focused more on pre-paid subscribers.  Additionally, Cincinnati is home to a number of Fortune 500 companies (Kroger, Macy's, P&G, CVG), so data plan penetration from business use is higher and more stable.  Our checks with suppliers in the region suggest that AT&T has not executed particularly well in the region.  Their distribution network was very subpar with little retail presence.  That is changing as they invest more in distribution, providing upside with the partnership. 

    Customer Management Group:

     

    Q1A

    Q2A

    Q3A

    Q4E

    2010E

    Q1E

    Q2E

    Q3E

    Q4E

    2011E

    Revenue

    463.6

    446.1

    462.9

    464.0

    1,836.6

    484.3

    462.1

    478.1

    479.4

    1,903.9

    % Growth

    -10.3%

    -9.8%

    -5.8%

    -4.1%

    -7.6%

    4.5%

    3.6%

    3.3%

    3.3%

    3.7%

     

     

     

     

     

     

     

     

     

     

     

    Gross Profit

    185.7

    169.5

    173.2

    171.7

    700.1

    181.6

    173.3

    179.3

    179.8

    714.0

    % GM

    40.1%

    38.0%

    37.4%

    37.0%

    38.1%

    37.5%

    37.5%

    37.5%

    37.5%

    37.5%

     

     

     

     

     

     

     

     

     

     

     

    EBIT

    33.8

    23.3

    31.3

    28.6

    117.0

    36.7

    34.0

    36.0

    36.1

    142.8

    % Margin

    7.3%

    5.2%

    6.8%

    6.2%

    6.4%

    7.6%

    7.3%

    7.5%

    7.5%

    7.5%

     

     

     

     

     

     

     

     

     

     

     

    EBITDA

    52.5

    42.6

    49.8

    47.3

    192.2

    55.5

    52.8

    54.8

    54.9

    218.0

    % Margin

    11.3%

    9.5%

    10.8%

    10.2%

    10.5%

    11.5%

    11.4%

    11.5%

    11.5%

    11.4%

     

    Information Management Group:

     

    Q1A

    Q2A

    Q3A

    Q4E

    2010E

    Q1E

    Q2E

    Q3E

    Q4E

    2011E

    Revenue

    82.4

    78

    81.9

    107.1

    349.4

    82.1

    78.8

    83.4

    110.0

    354.3

    % Growth

    -23.4%

    -32.2%

    -17.4%

    -4.7%

    -19.6%

    -0.4%

    1.0%

    1.9%

    2.7%

    1.4%

     

     

     

     

     

     

     

     

     

     

     

    Gross Profit

    38.2

    38.3

    40.2

    52.6

    169.3

    40.2

    38.6

    40.9

    53.9

    173.6

    % GM

    46.4%

    49.1%

    49.1%

    49.0%

    49.0%

    49.0%

    49.0%

    49.0%

    49.0%

    49.0%

     

     

     

     

     

     

     

     

     

     

     

    EBIT

    6.9

    9.4

    11.3

    16.5

    44.1

    11.1

    10.1

    11.5

    19.6

    52.4

    % Margin

    8.4%

    12.1%

    13.8%

    15.4%

    12.6%

    13.5%

    12.8%

    13.8%

    17.8%

    14.8%

     

     

     

     

     

     

     

     

     

     

     

    EBITDA

    11.5

    13.8

    15.4

    21.1

    61.8

    15.5

    14.5

    15.9

    24.0

    70.1

    % Margin

    14.0%

    17.7%

    18.8%

    19.7%

    17.7%

    18.9%

    18.4%

    19.1%

    21.9%

    19.8%

     

    Sum-of-Parts Valuation

             
                 
           

    2011E
    Cash Flow

    Multiple

    Value

    Cellular Partnerships (1)

       

    $35.6

    10.0x

    355.9

                 
           

    Projected 2011 EBITDA

    Multiple

    Value

    IMG (2)

         

    $70.1

    7.0x

    490.4

                 

    Subtotal value (1+2)

             

    846.3

                 

    Total Current Enterprise Value

           

    $1,694.7

    Implied Value for CMG

             

    $848.4

    CMG Projected 2011 EBITDA

           

    $218.0

    Implied Multiple for CMG

           

    3.9x

     

     

    There are a number of avenues for CVG to create value.  The analysis above breaks apart the company based on reasonable projections.  We think 3.9x EBITDA undervalues the base call center business on an absolute and relative basis (peers trade at 6-7x). There have also been a number of transactions in the space proving a willingness to pay for these businesses:

    • Thomas Lee and Quadrangle bought West Corp for 6.3x EBITDA in Oct 2006
    • Sykes bought ICT Group for 8.1x EBITDA in Oct 2009
    • Xerox paid 7.8x EBITDA for Affiliated Customer Services in July 2009
    • Convergys paid 10.5x EBITDA for Intervoice in July 2008

     If Fox is successful in refocusing the company, CVG has an opportunity to grow margins meaningfully in both segments.  Returning SG&A to comparable peer levels in 2012 would yield an incremental $131mm in EBITDA (assuming 3% revenue growth). 

       

    Projected 2012 EBITDA

    Multiple

    Value

    CMG

     

    $331.4

    6.5x

    $2,154.2

    IMG

     

    $88.9

    7.0x

    $622.1

     

    The cellular partnership also provides opportunity for meaningful earnings power expansion.  Currently, AT&T has 20% market share in the Cincinnati region compared to 29% nationally.  CBW has been losing share and focusing more attention on their cloud business, so AT&T should continue to gain share and expand margins to closer to national levels.  Assuming they can get to 25% market share, we think the partnership interest alone is worth over $5.40 per share.

    Cincinnati Wireless Market Opportunity:

     

    YTD

             

    9/30/2010

    AT&T National ARPU (monthly)

     

    $49.91

               

    Company pegged their potential market at 5mm subs.

               

    Total Market Opportunity

       

    $2,994.6

    2009 Partnership Revenue

       

    $594.7

    Current Market Share

       

    19.9%

               

    Target Market Share

         

    25.0%

    Implied Partnership Revenue Opportunity

    $748.7

    National EBIT Margin

       

    27.0%

    EBIT Potential

         

    $202.1

    CVG's stake

         

    $68.7

    per share value @10x

       

    $5.46

     

    Putting all of this together (and backing out the current debt) yields an intrinsic value of $27 per share. 

       

    Projected 2012 EBITDA

    Multiple

    Value

    CMG

     

    $331.4

    6.5x

    $2,154.2

    IMG

     

    $88.9

    7.0x

    $622.1

       


    Cash Flow

    Multiple

    Value

    Cellular Partnerships

     

    $68.7

    10.0x

    $687.3

             

    Total Enterprise Value

         

    $3,463.5

    Less Current Debt

         

    -$36.9

    Implied Equity Value

         

    $3,426.6

    Equity Value per share

         

    $27.22

     

    CVG's B/S also looks underutilized as net leverage stands at 0.3x LTM EBITDA (includes cash flow from cell partnerships).  It has operated in the past at 1x which could provide approximately $264mm in buyback capacity.  Assuming such a buyback at the current stock price would reduce the share count by 19.8mm shares.  Accounting for the proforma debt, one reaches an intrinsic value of $30 per share.

    Risks

    • CVG has a fairly high degree of customer concentration. AT&T alone represents 22% of total revenue, and their three largest customers (incl DirectTV and Comcast) comprise 37.5% of total revenue. IMG's history shows what can happen when you lose large, global accounts as customers. Our conversations with AT&T and Comcast, however, give us confidence in the health of their relationship with CVG.
    • CVG, along with most outsourcers, has some degree of currency risk. They operate centers in Canada, India and the Philippines and take on costs in those relative currencies, while most of their revenues are denominated in USD. They attempt to hedge their exposure as much as possible.

    Catalyst

     

    Catalysts

    • Analyst expectations are still very low and underestimate next year's earnings power. Half of the analysts covering the stock have it rated as either a Hold or a Sell. CVG should outperform consensus estimates for 2011.
    • A more direct route to full value recognition would be for a sale of IMG and the cellular partnerships. Possible bidders for IMG include peers in the BSS space looking to augment their position vs market leading Amdocs. Given the defensive characteristics of the business, private equity would also make sense. AT&T is the only buyer for the cellular partnership.
    • The company recently began buying back stock. Their B/S is under-levered which could enable further stock repurchases.

    Messages


    SubjectRE: Q
    Entry12/30/2010 11:54 AM
    Memberbank999
    They employ currency hedges, and based on their comments, those hedges can typically go out to 6 months (sometimes longer).  If the USD depreciates vs emerging market currencies, then margins could conceivably contract.  However they have these hedges, and in the past, they have been able to pass on labor price increases to their clients.
     
    In terms of margin expansion, there are a few factors in play.  We think the company's cost structure was fat.  They admitted not doing a great job with the Intervoice acquisition.  IMG had not adjusted for the post-client migration environment.  Their former CEO was not interested in making the tough decisions, so we think Fox has plenty of opportunity to cut SG&A.  They are also adjusting their capacity, closing down some of their higher cost North American centers, and shifting offshore.  Increased utilization should certainly help, but there's also natural margin improvement from the shift of business from domestic to offshore locations as those contracts are much more profitable.

    SubjectAT&T risk
    Entry01/06/2011 04:06 PM
    Memberrab
    How do you get comfortable with the AT&T risk? The 10-K reads "We do not believe that it is likely that our entire relationship with AT&T would terminate at one time; and, therefore, we are not substantially dependent on any particular contract/work order."    With AT&T already pulling a big chunk of business to go toward a managed services contract with Amdocs, aren't they likely to pull more over time?

    SubjectRE: AT&T risk
    Entry01/07/2011 08:47 AM
    Memberbank999
    The two businesses, CMG and IMG, are pretty separate.  The loss to Amdocs was within IMG and constituted all of AT&T's billing business with Convergys.  Management has stated that the migration is essentially over (small impact in Q4), so there's nothing left to lose there.  Amdocs does not compete in the customer care business.  Based on our channel checks in that industry, CVG is performing at a high level with AT&T and customers in general are looking to award more share to their best vendors.  We feel very comfortable about the relationship on the CMG side.

    SubjectAT&T Divestiture
    Entry06/03/2011 09:44 AM
    Memberrab
    Bank999,
    In your opinion, is Fox selling AT&T to streamline the company to make it more digestible for an Amdocs or someone like that?  It would sure seem like both he and Jana Partners would prefer a sooner rather than later exit strategy.  Your thoughts?

    SubjectRE: AT&T Divestiture
    Entry06/03/2011 12:40 PM
    Memberbank999
    I am not sure if he is overtly streamlining it for a sale, but I definitely think it makes it more digestible not only for a strategic buyer, but definitely for a private equity buyer.  I think PE firms did not like the wireless business despite it cash flow profile - minority interest cash flow not really leverageable and don't like not being in control. 
     
    At the very least, I would think that they sell or spin the billing business sometime over the next 12 months and continue to buy back stock and potentially investment more in the CMG business (but only if Fox thinks he has truly turned it around and put it on a path to growth)... 

    SubjectRecent M&A
    Entry06/15/2011 12:25 PM
    Memberbank999
    Just wanted to point out that in addition to selling the celluar partnerships, there have been two comparable M&A deals of late.  Telcordia being bought (comp to IMG biz) and Stream Global going private offer (comp to the CMG biz).  Effecting for the wireless sale and applying the 6.5x ebitda multiple for Telcordia sale to IMG and the 8.1 multiple for Stream offer to CMG, would yield a vlaue of $18.50 on a TTM basis and >$21 on 2012 #s...

    SubjectRE: Recent M&A
    Entry07/07/2011 08:56 AM
    Memberbank999
    Another deal in the space today.  APAC taken out by Private Equity at 8.8x TTM ebitda...

    SubjectInflection point?
    Entry08/01/2011 05:21 PM
    Memberrab
    Could Q2/11 mark the inflection point in CVG's business?  Fox has only been there about a year and things are already beginning to look better. 

    SubjectRE: Inflection point?
    Entry08/02/2011 10:00 AM
    Memberbank999
    It looks like it - first YoY growth in customer management in years.  He has done a great job on SG&A, simplifying the corporate structure and operating units, and with new business wins.  The back half should start to show some higher incremental margins.

    SubjectCVG - Enormous opportunity?
    Entry08/17/2011 11:26 AM
    Memberrab
    CVG is down close to 30% since releasing excellent results just two weeks ago.  Deals are happening in its space with a fair amount of frequency.  Is CVG down solely due to macro issues?

    SubjectRE: CVG - Enormous opportunity?
    Entry08/17/2011 08:14 PM
    Memberbank999
    SYKE - which has a completely different biz mix and is much more exposed to Europe - reported poor results...  I believe macro issues + syke have been the primary reasons the stock is down.  I think the final reason is that the new CEO of CVG chooses to spend basically zero time with Wall Street.  He hasn't exactly built a bench of prospective shareholders that know him.  In the meantime he gets paid in stock every month...

    SubjectRE: RE: CVG - Enormous opportunity?
    Entry08/18/2011 08:50 AM
    Membergocanucks97
    what do you make of Jana continuing to sell down? seems weird in the face of better fundamentals and likely sale.

    SubjectRE: RE: RE: CVG - Enormous opportunity?
    Entry08/18/2011 11:42 AM
    Memberbank999
    I have no idea.  I think you bring up the final big reason why it is down post quarter. 

    SubjectRE: RE: RE: RE: CVG - Enormous opportunity?
    Entry09/20/2011 09:13 AM
    MemberSpocksBrainX
    dumb question, but do you have any idea what the Capex rate is this year (75m?).  And more importantly, any clue what it might average in future years? 

    SubjectBlackout period all of Q3/11?
    Entry11/03/2011 10:31 AM
    Memberrab
    Was CVG impeded from buying back stock due to the AT&T transaction in Q3/11 or did anyone infer that perhaps there was something stopping them from buying back stock, such as consideration of an acquisition or maybe someone approached them about buying some/all of CVG? 
     
    Any thoughts?

    SubjectRE: Blackout period all of Q3/11?
    Entry11/07/2011 02:09 PM
    Memberbank999
    I infered that they were stopped from buying back stock - not clear why though.

    SubjectRE: RE: RE: Blackout period all of Q3/11?
    Entry11/08/2011 10:51 AM
    Memberrab
    I agree.  CVG is becoming one of my highest conviction longs.  Consider the following:
     
    • Operating performance is improving despite an uncertain macro backdrop
    • Balance sheet is stellar with significant net cash
    • Management philosophically believes that the Info division may be more valuable in someone else's hands after some improvement.
    • As a pure-play, CVG should command a much higher multiple... if not, there is always "strategic alternatives" to reconcile the disconnect.
    • Lastly, Fox gets paid in stock (literally every month).  He cares about the stock price.

     


    SubjectRE: RE: RE: RE: RE: CVG - Enormous opportunity?
    Entry11/23/2011 09:51 PM
    MemberSpocksBrainX
    answering my own question since none was forthcoming (typical for some) the company has said on several occassions that Capex of 75-80m is the norm here

    Subjectstill optimistic?
    Entry02/13/2012 09:50 AM
    MemberSpocksBrainX
    it strikes me as dull story though cheap.  factoids:
     
    *elevated CapEx in 2012 but not much revenue growth seen
    *buybacks continuing but will anyone care?
    *3% top line growth perhaps?  At most?  Management implied a few times that guidance was convervative but the top line forecast is 2% for CM, essentially flat on IM; beating guidance could be 5% growth - whoopee....!
    *elevated training and all is wonderful (and I'm sure necessary for the biz) but who cares if you don't get top line movement?
    *stock seems cheap - PCF is off the charts but with NI projected near FCF this year we are look at what - a 10% FCF yield?   When will CapEx come down?  They mentioned this a higher spending year which had me shaking my head
    *agree it still seems cheapish but management is plenty capable of a stupid acquisition (jury is out) and there ought to be a discount associated with a company like this with a checkered history, modest top line prospects at best, & uncertain CapEx budget
     
    anyone else think i won't be range-bound near 12 and 13?
     
    I'm long, so would like to be more excited about it than I am.  It was a lot more interesting in the 10 range...

    SubjectRE: still optimistic?
    Entry02/13/2012 11:35 PM
    Memberbank999
    I agree with it being range bound unless they use the balance sheet and split the businesses. I would have thought that would have happened by now and therefore agree there is heightened risk to them doing a dumb deal instead...

    SubjectRE: RE: still optimistic?
    Entry02/14/2012 10:41 PM
    MemberSpocksBrainX
    i just wish they'd skip the buyback and pay a big dividend instead....

    SubjectRE: Sale of IM business; various questions
    Entry03/22/2012 01:01 PM
    Memberbank999
    I think the price that they got for CMG was a bit lower to fair.
     
    On use of proceeds, I think the company tries to buy something in the CMG space rather than buy back a ton of stock or pay a one time special dividend.  That is one of the reasons I have become less positive on the LT thesis as mentioned in replies to some of the posts below...  I think the CEO thinks he can get a lot of leverage on acquisitions - I am not sure.  With that said, they have a ton of cash and will probably continue to buy stock moderately but they have never been super aggressive even at prices <$10.
     
    I have not spent time focused on the convert.
     
    We tried to go into quite a bit of detail in the write-up about where margins can go in the call center biz and our thoughts haven't changed.
     
    Yes, there is high customer concentration and industry concentration in the call center biz. 
     
    In terms of multiples there is a real dycotomy in the industry of multiples for those that have a european and primarily offshore focus (e.g., SYKE) and technology focus (e.g., teletech).  Multiples have come in, but most of the competitors don't have the margin oppy that CVG has and CVG has a very good domestic presence with some ok technology.
     
    Hope that helps.  The stock is still cheap, the new ceo is a good operator, and I think it works, but my tone would be way more optimistic if I thought they would return a bunch of capital to shareholders...  Unfortunately, I just don't and think a sale is way off.
     
     

    SubjectRE: RE: Sale of IM business; various questions
    Entry03/22/2012 03:04 PM
    Memberrab
    He did say that seller multiples were too high thus that would seem to reduce the risk that CVG overpays for something right now simply because they have alot of cash.  And with all of that cash on the B/S, wouldn't they be a sitting duck for an Amdocs or someone like that?

    SubjectRE: CEO
    Entry05/10/2012 12:42 PM
    Memberbank999
    I think a sale of the entire company, which I ultimately thought would happen seems off the table.  I don't think they will be aggressive on leverage or returning capital in a really big way and I do think they will look at deals. 

    SubjectCVG is incredibly discounted
    Entry05/11/2012 08:06 AM
    Memberrab
    Yes, I realize that the turnaround / simplification duo of Fox/Shanks is leaving.  But each owns a significant amount of stock and Fox will continue to serve as Exec Chairman.
     
    More importantly, the adjusted Enterprise Value of CVG at year end (based on net cash of $700mm) would be $759mm, or $6.51 per share.
     
    This implies an EV/FCF of approx 6x, an adjusted P/E of < 10x and an EV/EBITDA of < 3.5x
     
    Unless the business is much less stable than management suggests, I see a tremendous margin of safety at current prices coupled with optionality of i) accretive acquisitions with cash hoard; ii) takeout via hostile or opportunistic; iii) continued business improvement
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