Convergys opened 2013 on a soft note as first quarter revenue came in modestly lower compared to last year– $494 million versus $498 million in the first quarter of 2012. Headwinds from legacy Interactive Voice Response platform migrations and declines in call volumes from a large telecom client negatively affected growth during the quarter.
As we noted in our earlier commentary, volume decline is largely due to a shift in portfolio mix and not from competitive share loss. Based on the strength of the company’s recent live agent signings ($250 million over the last 12 months), we expect call volumes to bounce back in the coming quarters. However, in the case of IVR platform migrations, Convergys is losing out to competition in some contract renewals. It is typically difficult to maintain 100% renewals in IVR contracts and hence we aren’t unduly worried about this.
Management noted that the drag from contract losses will likely affect its top line growth by 1 percentage point in 2013. On a positive note, Convergys is witnessing increased traction for its services in the technology vertical (~10% revenue and 6.7% growth) and we believe the recent acquisition of Datacom will strengthen the company’s position in this space. Datacom adds 15 Asian languages to the company’s capabilities and about 1,000 employees to its global operations.
With large enterprises increasingly looking for service providers with a wide geographic footprint and multi-language capabilities, we view this acquisition positively. Benefiting from its recent initiatives to right-size the business, Convergys reported 40 basis points improvement in operating margin (7.4% versus 7%) during the quarter. The company managed to trim its administrative expenses
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