April Showers May Not Yet Bring May HRO Flowers

I listened earlier today to Convergys’ 1Q10 earnings call and the new CEO, Jeff Fox, felt the company would meet its existing 2010 projections for earnings of $0.95 to $1.10 earnings per share (EPS) and free cash flow of more than $150 million. The firm did change revenue projections to $2.1 billion to $2.2 billion, largely due to lower expected revenues in the Customer Management segment due to continued lower volume-based revenues, but stated that managing cost in alignment with revenues remains a main focus that will support meeting EPS projections, as well as help increase margins from the current non-GAAP 7.5 percent to a projection of ~10 percent.

Little was mentioned of the pending NorthgateArinso purchase of its HR Management segment, other than it was now considered a discontinued service line, and that the sale was expected to close in the second quarter as projected.

New deals are occurring with new and existing customers, with an expected contribution of $67 million to 2010 revenues from new business coming on line. The new revenues are like nourishing showers, but a return of current client volumes is also needed to generate revenue growth.

Convergys projects that the second half of 2010 will show more signs of growth and recovery. This matches what most HRO venders were projecting for 2010, so some patience is needed to feel comfortable that the recovery is fully underway, looks sustainable and will “bloom” later in the year.

One of the questions facing Convergys is how much of the reductions in existing client revenues will bounce back and where are the losses  more structural and not likely to return. Of course, this a key question not only for Convergys, but also for the HRO industry and the larger economy.  There are green shoots emerging, but it is still unclear what kind of crop they will yield.

Convergys expressed confidence that it was not losing share with its clients, but rather that its clients’ own activities were reduced, in turn reducing the needs for outsourcing support.  When your business is supporting the business of others, you are subject to the vagaries of their industries and their abilities to weather storms and return to growth!

There are other forces to consider as well. Clients are always looking for ways to lower expenses, and not just from lower pricing; they look for lower cost channels, technology displacement of higher cost human contact and improved quality to reduce the need for a contact in the first place. Service providers need to continually innovate to maintain and grow revenues with their existing client base.

Which service providers have not only weathered the storm, but also have a new crop of cost effective service enhancements ready for an early harvest, positioning them as preferred partners in growth?

Linda Merritt, Research Director, HRO, NelsonHall

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