Handcuffed by what company leaders called short-term challenges, Convergys reported second quarter earnings today and promptly lost 10% of its share price.

Revenue was up for the quarter, climbing 2% from $691.8 million in last year’s second quarter to $707 million, but earnings were less than analysts expected and $0.28 per share at $38.8 million.

Convergys’ diverse service portfolio kept it on an even keel as its Information Management Group continue to weather declining revenues, a trend the company expects to continue into next year, while its Customer Care business grew for the sixth consecutive quarter and its employee care business grew by 25%. Offsetting both of these were improvements in cost management in the IMG, which earned the group its best operating margins in more than five years, and unexpected implementation costs in the Employee Care business (primarily related to a single Human Resources Business Process Outsourcing contract.)

Dave Dougherty, president and CEO of Convergys, said that over all it has been a solid first half for the company with earnings a nickel better than this point last year and reaching the halfway point in achieving its guidance for 2007.

He said one of the company’s short-term challenges is dealing with unanticipated costs implementing the large HR BPO contract. The additional costs are the result of implementation and cost overruns. “We are working closely with customers to address project challenges for which we share responsibility,” Dougherty said. “We have our hands around this issue and are taking steps to maintain tight controls. We are driving for a resolution.”

He added that this contract and all of the company’s HR BPO contracts are expected to be profitable for their contract terms.

CFO Earl Shanks explained further. “Both Convergys and the client underestimated the time, cost and complexity of completing this global implementation. The requirements and blueprinting process has taken longer than either the client or we expected. Policy and process standardization was not driven into the organization as aggressively as initially anticipated. As a result, the project schedule is longer and the implementation costs are higher than originally planned. Fault lies with both sides.”

Overall, Customer Care revenues of $460.6 million were up 3% over last year, thanks in part to revenue increases from several clients in the communication vertical market segment. Information Management revenues of $183.4 million were down $12.0 million, or 6 % from last year. Convergys is still recovering from the loss of two North American telecom clients. However, Dougherty stressed that the company continues to manage one of two remaining Cingular billing platforms.

Convergys also announced that it has repurchased 1 million shares at a cost of $25.3 million for an average price of $25.25 per share during the quarter and signed global HR BPO contracts with Johnson & Johnson and Starbucks.

“I am proud of the way the Convergys team has been able to right-size and refocus this business. We are determined to preserve double-digit operating margins through a tough transition period,” Dougherty said.