Convergys Corporation CVG
September 11, 2001 - 1:14pm EST by
2001 2002
Price: 26.60 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 4,550 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Convergys Corporation (CVG) is a global leader in providing outsourced, integrated billing and customer care services in the following industries: telecommunications, cable, broadband, satellite broadcasting, Internet services, technology and financial services.

Convergys began in May, 1998 as a wholly owned subsidiary of Cincinnati Bell Inc. An IPO was done in August, 1998 and the spin-off was completed in December, 1998.

Convergys has two operating units, IMG and CMG. The Information Management Group (IMG) develops software for providing outsourced billing and information services. The Customer Management Group (CMG) provides outsourced marketing and customer support services.

IMG processes the billing for approximately 37% of U.S. wireless subscribers. IMG's wireless billing customers include AT&T Wireless, Sprint PCS, Verizon, ALLTEL, SBC Communications, Cincinnati Bell Wireless, Houston Cellular and Telesp Celular (Brazil). U.S. cable clients served by IMG include Time Warner, Cox Communications, Comcast, AT&T Broadband and Insight. International cable clients served by IMG include Telewest, NTO, ONO, Chorus, Deutsche Telekom, KabelNet, TeleKabel, PTK, Ondigital, Telstra, Cablemas, Tevel and SkyTel.

IMG is a scale-type business. A lot of upfront costs are necessary to initially build the billing software. Now that the billing software has been developed it can be leveraged across many customers. Contracts for IMG services tend to be multi-year and IMG's operating income margins have averaged 20.6% during the last three years.

CMG provides a full range of customer management services for companies that include AT&T, DIRECTV, American Express, Sprint PCS, Ameritech, Microsoft and Procter & Gamble. CMG also provides technical support services to leading technology companies such as Microsoft, Dell, Hewlett-Packard, Nortel, Prodigy and Compaq.

The CMG business is somewhat capital intensive. To provide CMG services requires investment in call centers and training people. The CMG business also tends to mirror the economy. The recent downturn in the U.S. economy has reduced the need for CMG services from companies in the financial industry and communications industry. CMG operating margins have averaged 8.3% during the last three years.

International Expansion
One of Convergys' goals is to expand their international business and to help with that goal they acquired a UK based company named Geneva in April, 2001. Geneva provides billing for the communications, e-commerce, utilities, and on-line services industries. It is encouraging that on September 6, 2001 it was announced Geneva won the billing business for Austrian mobile operator ONE.

Convergys doesn't lack competition. IMG competitors include: ALLTEL, Amdocs, CSG Systems, DST Systems, Portal Software, SEMA Group. CMG competitors include: APAC Teleservices, SITEL Corp., Sykes International, TeleTech Holdings, West Teleservices.

On September 7, 2001 Convergys provided EPS guidance of $1.24-1.27 for 2001. They predict CMG revenue will be flat with 2000 and IMG's revenue will be up 16-18% over 2000. I feel this is a good opportunity to purchase Convergys. With IMG providing good growth, the stability of having long-term contracts, and good operating margins, when the economy perks up CMG will provide a boost to Convergys's earnings. I believe Convergys can grow their top and bottom lines by 15% over the next five years.


IMG business should benefit from the increase in wireless subscribers and international growth.

CMG business should benefit by the September 10, 2001 announcement that Convergys received an "Intent to Award" from the State of Florida to provide human resources, benefits and payroll services to the state's 120,000 government employees. Other states may pursue a similar outsourcing approach.
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