CSG Systems International Reports Results for Second Quarter 2012

Tuesday, August 7, 2012 4:00 pm EDT

Dateline:

ENGLEWOOD, Colo.

Public Company Information:

NASDAQ:
CSGS
"We had another solid quarter of execution and a strong start to the first half of the year"

ENGLEWOOD, Colo.--(BUSINESS WIRE)--CSG Systems International, Inc. (Nasdaq: CSGS), a global provider of software- and services-based business support solutions that help clients generate revenue and maximize customer relationships, today reported results for the quarter ended June 30, 2012.

Key Financial Highlights:

  • Second quarter 2012 results:
  • Total revenues were $183.9 million.
  • Non-GAAP operating income was $33.1 million, or 18.0% of total revenues and GAAP operating income was $23.7 million, or 12.9% of total revenues.
  • Non-GAAP earnings per diluted share (EPS) was $0.56. GAAP EPS was $0.37.
  • Cash flows from operations for the quarter were $36.6 million.
  • During the quarter, CSG repurchased approximately 345,000 shares of its common stock for $5.4 million (weighted-average price of $15.76 per share) under its stock repurchase program.
  • On July 13, 2012, CSG acquired Ascade, an independent Swedish software company who provides market-leading trading and routing software solutions to telecommunications companies globally. The total cost of the acquisition was approximately $19 million, excluding transaction fees, and was paid in cash from CSG’s existing cash resources.

“We had another solid quarter of execution and a strong start to the first half of the year,” Peter Kalan, chief executive officer and president of CSG Systems said. “In addition to our solid financial performance, we continued to get deeper into our clients’ businesses by finding new ways to help them be successful and more efficient in their operations. Our investment in our people and our clients’ businesses has positioned us as a trusted partner during these challenging times and we believe will pay dividends in the long-run. Helping our clients do more with less and be even more competitive is a driving focus of our employees.”

Financial Overview (unaudited)

(in thousands, except per share amounts and percentages):

     
Quarter Ended June 30, Six Months Ended June 30,
 

 

2012

     

 

2011

   

Percent
Change

 

 

2012

     

 

2011

   

Percent
Change

Revenues $ 183,851 $ 181,312 1% $ 368,858 $ 364,404 1%
Non-GAAP Results:
Operating Income $ 33,135 $ 32,711 1% $ 71,446 $ 65,729 9%
Operating Income Margin 18.0% 18.0% - 19.4% 18.0% -
EPS $ 0.56 $ 0.49 14% $ 1.16 $ 1.03 13%
GAAP Results:
Operating Income $ 23,745 $ 22,371 6% $ 52,697 $ 46,475 13%
Operating Income Margin 12.9% 12.3% - 14.3% 12.8% -
EPS $ 0.37 $ 0.27 37% $ 0.73 $ 0.62 18%
 

For additional information and reconciliations regarding CSG’s use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG’s website at www.csgi.com.

Results of Operations

Revenues: Total revenues for the second quarter of 2012 were $183.9 million, a 1% increase when compared to revenues of $181.3 million for the second quarter of 2011, and a 1% decrease when compared to $185.0 million for the first quarter of 2012.

Non-GAAP Results: Non-GAAP operating income for the second quarter of 2012 was $33.1 million, or 18.0% of total revenues, relatively consistent with $32.7 million, or 18.0%, for the second quarter of 2011. Non-GAAP operating income for the first quarter of 2012 was $38.3 million, or 20.7% of total revenues. The sequential quarterly decrease in operating income and operating income margin is mainly due to the expected increase in employee and data processing costs.

Non-GAAP EPS for the second quarter of 2012 was $0.56, compared to non-GAAP EPS of $0.49 for the second quarter of 2011, and $0.60 for the first quarter of 2012. Non-GAAP EPS for the second quarter of 2012 includes a $0.04 per diluted share benefit as a result of a lower than expected effective income tax rate due to new state tax legislation.

GAAP Results: GAAP operating income for the second quarter of 2012 was $23.7 million, or 12.9% of total revenues, compared to $22.4 million, or 12.3%, for the same period in 2011.

GAAP EPS for the second quarter of 2012 was $0.37, compared to $0.27 for the second quarter of 2011.

Balance Sheet and Cash Flows

Balance Sheet: Certain key balance sheet items as of the indicated dates are as follows (in thousands):

    June 30,

2012

    March 31,

2012

    December 31,

2011

Cash, cash equivalents, and short-term investments $ 196,062 $ 188,555 $ 158,830
Net billed trade accounts receivable 163,392 170,909 179,804
Total long-term debt:
Par value $ 323,000 $ 333,000 $ 340,000
Unamortized OID   (27,827)   (29,053)   (30,256)
Net debt carrying amount $ 295,173 $ 303,947 $ 309,744
 

Cash Flows: Certain key operating cash flow items for the indicated quarters then ended are as follows (in thousands):

    June 30,

2012

    March 31,

2012 (1)

    June 30,

2011 (2)

Cash Flows from Operating Activities:
Operations $ 29,898 $ 28,890 $ 21,753
Changes in operating assets and liabilities   6,681   19,299   (21,040)
Net cash provided by operating activities $ 36,579 $ 48,189 $ 713
Cash Flows from Investing Activities:
Purchases of property and equipment $ (11,232) $ (2,318) $ (6,811)
Cash Flows from Financing Activities:

Repurchase of common stock under stock repurchase
  program

$

(5,438)

$

(5,190)

$

-

Payments on long-term debt (10,000) (7,000) (2,500)
(1)   Cash flows from operating activities for the quarter ended March 31, 2012 were positively impacted by the changes in working capital primarily as a result of the timing of income tax payments.
(2) Cash flows from operating activities for the quarter ended June 30, 2011 were negatively impacted by an increase in accounts receivable primarily due to the timing of client payments that were received after quarter end.
 

2012 Financial Guidance

CSG’s financial guidance for the full year 2012 has been revised primarily to include the financial impacts of our strong performance, a lower full year effective tax rate and the acquisition of Ascade, which closed on July 13, 2012. A summary of this guidance and expected improvement in operating performance for the year is as follows:

Revenues     $722 - $747 million
Non-GAAP EPS $2.00 - $2.15
GAAP EPS from continuing operations $1.10 - $1.21
Adjusted EBITDA $166 - $173 million
 

For additional information and reconciliations regarding CSG’s use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG’s website at www.csgi.com.

Conference Call

CSG will host a one-hour conference call on August 7, 2012, at 5:00 p.m. ET, to discuss CSG's second quarter results. The call will be carried live and archived on the Internet. A link to the conference call is available at www.csgi.com. In addition, to reach the conference by phone, dial (877) 941-9205 and ask the operator for the CSG International conference call and Liz Bauer, chairperson.

Additional Information

For information about CSG, please visit CSG’s web site at www.csgi.com. Additional information can be found in the Investor Relations section of the web site.

About CSG International

CSG Systems International, Inc. (NASDAQ: CSGS) is a market-leading business support solutions and services company serving the majority of the top 100 global communications service providers, including leaders in fixed, mobile and next-generation networks such as AT&T, Comcast, DISH Network, France Telecom, MasterCard, Orange, T-Mobile, Telefonica, Time Warner Cable, Vodafone, Vivo and Verizon. With over 25 years of experience and expertise in voice, video, data and content services, CSG International offers a broad portfolio of licensed and Software-as-a-Service (SaaS)-based products and solutions that help clients compete more effectively, improve business operations and deliver a more impactful customer experience across a variety of touch points. For more information, visit our website at www.csgi.com.

Forward-Looking Statements

This news release contains forward-looking statements as defined under the Securities Act of 1933, as amended, that are based on assumptions about a number of important factors and involve risks and uncertainties that could cause actual results to differ materially from what appears in this news release. Some of these key factors include, but are not limited to the following items:

  • CSG derives approximately forty percent of its revenues from its three largest clients;
  • Continued market acceptance of CSG’s products and services;
  • CSG's ability to continuously develop and enhance products in a timely, cost-effective, technically advanced and competitive manner;
  • CSG's ability to deliver its solutions in a timely fashion within budget, particularly large and complex software implementations;
  • CSG’s dependency on the global telecommunications industry, and in particular, the North American telecommunications industry;
  • CSG’s ability to meet its financial expectations as a result of increased dependency on software sales, which are subject to greater volatility;
  • Increasing competition in CSG’s market from companies of greater size and with broader presence in the communications sector;
  • CSG’s ability to successfully integrate and manage acquired businesses or assets to achieve expected strategic, operating and financial goals;
  • CSG’s ability to protect its intellectual property rights;
  • CSG’s ability to maintain a reliable, secure computing environment;
  • CSG’s ability to conduct business in the international marketplace;
  • CSG’s ability to comply with applicable U.S. and International laws and regulations; and
  • Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates.

This list is not exhaustive and readers are encouraged to review the additional risks and important factors described in CSG's reports on Forms 10-K and 10-Q and other filings made with the SEC.

       

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands, except per share amounts)

 

June 30,
2012

December 31,
2011

ASSETS

Current assets:
Cash and cash equivalents $ 175,963 $ 146,733
Short-term investments   20,099   12,097
Total cash, cash equivalents, and short-term investments 196,062 158,830
Trade accounts receivable-
Billed, net of allowance of $2,802 and $2,421 163,392 179,804
Unbilled and other 28,683 30,981
Deferred income taxes 19,675 19,982
Income taxes receivable 4,800 4,139
Other current assets   20,139   16,224
Total current assets 432,751 409,960
Property and equipment, net of depreciation of $125,029 and $116,125 37,741 41,154
Software, net of amortization of $62,602 and $56,521 28,638 29,966
Goodwill 219,933 220,013
Client contracts, net of amortization of $172,700 and $159,225 88,100 98,403
Deferred income taxes 2,320 1,008
Other assets   13,345   14,393

Total assets

$ 822,828 $ 814,897

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current maturities of long-term debt $ 18,000 $ 27,000

Client deposits

30,818 30,523
Trade accounts payable 30,450 27,198
Accrued employee compensation 39,881 42,005
Income taxes payable 4,777 2,334
Deferred revenue 57,958 44,824
Other current liabilities   19,915   23,501
Total current liabilities   201,799   197,385
Non-current liabilities:
Long-term debt, net of unamortized original issue discount of $27,827 and $30,256 277,173 282,744
Deferred revenue 8,012 8,631
Income taxes payable 4,278 4,114
Deferred income taxes 23,194 28,188
Other non-current liabilities   17,689   19,121
Total non-current liabilities   330,346   342,798
Total liabilities   532,145   540,183
Stockholders’ equity:

Preferred stock, par value $.01 per share; 10,000 shares authorized;
  zero shares issued and outstanding

-

-

Common stock, par value $.01 per share; 100,000 shares authorized;
  33,790 shares and 33,822 shares outstanding

652

645

Additional paid-in capital 453,879 449,376
Treasury stock, at cost, 31,380 and 30,707 shares (6 (725,521) (714,893)
Accumulated other comprehensive income (loss):
Unrealized gain on short-term investments, net of tax 1 1
Unrecognized pension plan losses and prior service costs, net of tax (1,803) (1,794)
Unrealized loss on change in fair value of interest rate swaps, net of tax (716) (618)
Cumulative foreign currency translation adjustments (3,480) (1,998)
Accumulated earnings   567,671   543,995
Total stockholders’ equity   290,683   274,714
Total liabilities and stockholders’ equity $ 822,828 $ 814,897
 
       

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 
Quarter Ended Six Months Ended
June 30,

2012

    June 30,

2011

June 30,

2012

    June 30,

2011

Revenues:
Processing and related services $ 133,362 $ 129,113 $ 269,676 $ 260,491
Software, maintenance and services   50,489   52,199   99,182   103,913
Total revenues   183,851   181,312   368,858   364,404
 
Cost of revenues (exclusive of depreciation, shown separately below):
Processing and related services 62,334 60,802 124,294 122,061
Software, maintenance and services   30,186   30,074   58,195   59,579
Total cost of revenues 92,520 90,876 182,489 181,640
Other operating expenses:
Research and development 27,794 27,920 55,716 56,558
Selling, general and administrative 33,799 32,526 65,424 65,865
Depreciation 5,874 6,273 11,711 12,520
Restructuring charges   119   1,346   821   1,346
Total operating expenses   160,106   158,941   316,161   317,929
Operating income   23,745   22,371   52,697   46,475
Other income (expense):
Interest expense (4,106) (4,325) (8,258) (8,666)
Amortization of original issue discount (1,226) (1,420) (2,429) (2,869)
Interest and investment income, net 152 175 372 409
Other, net   277   (985)   72   (1,288)
Total other   (4,903)   (6,555)   (10,243)   (12,414)
Income before income taxes 18,842 15,816 42,454 34,061
Income tax provision   (6,972)   (6,801)   (18,778)   (13,552)
Net income $ 11,870 $ 9,015 $ 23,676 $ 20,509
 
Weighted-average shares outstanding – Basic:

Common stock 33,070 33,084

32,194 32,866 32,293 32,738
Participating restricted stock   1   161   34   244
Total   32,195   33,027   32,327   32,982
 
Weighted-average shares outstanding – Diluted:
Common stock 32,309 33,072 32,435 32,962
Participating restricted stock   1   161   34   244
Total   32,310   33,233   32,469   33,206
 
Earnings per common share:
Basic $ 0.37 $ 0.27 $ 0.73 $ 0.62
Diluted 0.37 0.27 0.73 0.62
 
   

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

Six Months Ended
June 30,

2012

    June 30,

2011

Cash flows from operating activities:

Net income $ 23,676 $ 20,509

Adjustments to reconcile net income to net cash provided by (used in) operating
activities -

Depreciation 11,711 12,520
Amortization 21,096 21,215
Amortization of original issue discount 2,429 2,869
Gain on short-term investments and other (23) (34)
Deferred income taxes (6,342) (1,344)
Excess tax benefit of stock-based compensation awards (288) (824)
Stock-based employee compensation   6,529   6,529

Subtotal

58,788 61,440
Changes in operating assets and liabilities:
Trade accounts and other receivables, net 18,117 (17,769)
Other current and non-current assets (3,951) (2,175)
Income taxes payable/receivable 1,842 8,398
Trade accounts payable and accrued liabilities (3,196) (28,987)
Deferred revenue   13,168   (22,083)
Net cash provided by (used in) operating activities   84,768   (1,176)
Cash flows from investing activities:
Purchases of property and equipment (13,550) (11,061)
Purchases of short-term investments (24,779) (19,968)
Proceeds from sale/maturity of short-term investments 16,800 17,700
Acquisition of and investments in client contracts   (2,948)   (4,479)
Net cash used in investing activities   (24,477)   (17,808)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,007 753
Repurchase of common stock (13,541) (4,049)
Payments on acquired equipment financing (663) (834)
Payments on long-term debt (17,000) (64,149)
Payments of deferred financing costs - (205)
Excess tax benefit of stock-based compensation awards   288   824
Net cash used in financing activities   (29,909)   (67,660)
Effect of exchange rate fluctuations on cash   (1,152)   3,141
Net increase (decrease) in cash and cash equivalents 29,230 (83,503)
Cash and cash equivalents, beginning of period   146,733   197,858
Cash and cash equivalents, end of period $ 175,963 $ 114,355
 
 
Supplemental disclosures of cash flow information:
Net cash paid during the period for -
Interest $ 6,738 $ 7,233
Income taxes 23,115 6,213
 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

       

Revenues by Geography

 

Quarter Ended

Quarter Ended

Quarter Ended

June 30, 2012

March 31, 2012

June 30, 2011

Americas 88% 86% 86%
Europe, Middle East and Africa 8% 10% 10%
Asia Pacific 4% 4% 4%
Total Revenues 100% 100% 100%
 

Revenues by Significant Customers: 10% or more of Revenues

 
Quarter Ended

Quarter Ended

Quarter Ended

June 30, 2012

March 31, 2012

June 30, 2011

Comcast 19%

20%

18%

DISH 14%

13%

12%

Time Warner 10%

<10%

11%

 

ACP Customer Accounts (in thousands, at end of period)

 
June 30, March 31, June 30,
2012 2012 2011
Cable/Satellite Customer Accounts 49,171 49,228 48,860
 

EXHIBIT 2
CSG SYSTEMS INTERNATIONAL, INC.
DISCLOSURES FOR NON-GAAP FINANCIAL MEASURES

Use of Non-GAAP Financial Measures and Limitations

To supplement its condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), CSG uses non-GAAP operating income, non-GAAP EPS, non-GAAP adjusted EBITDA, and non-GAAP free cash flow. CSG believes that these non-GAAP financial measures, when reviewed in conjunction with its GAAP financial measures, provide investors with greater transparency to the information used by CSG’s management in its financial and operational decision making. CSG uses these non-GAAP financial measures for the following purposes:

  • Certain internal financial planning, reporting, and analysis;
  • Forecasting and budgeting purposes;
  • Certain management compensation incentives; and
  • Communications with CSG’s Board of Directors, stockholders, financial analysts, and investors.

These non-GAAP financial measures are provided with the intent of providing investors with the following information:

  • A more complete understanding of CSG’s underlying operational results, trends, and cash generating capabilities;
  • Consistency and comparability with CSG’s historical financial results; and
  • Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.

Non-GAAP financial measures are not measures of performance under GAAP, and therefore should not be considered in isolation or as a substitute for GAAP financial information. Limitations with the use of non-GAAP financial measures include the following items:

  • Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles;
  • The way in which CSG calculates non-GAAP financial measures may differ from the way in which other companies calculate similar non-GAAP financial measures;
  • Non-GAAP financial measures do not include all items of income and expense that affect CSG’s operations and that are required by GAAP to be included in financial statements;
  • Certain adjustments to CSG’s non-GAAP financial measures result in the exclusion of items that are recurring and will be reflected in CSG’s financial statements in future periods; and
  • Certain charges excluded from CSG’s non-GAAP financial measures are cash expenses, and therefore do impact CSG’s cash position.

CSG compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures as a supplement only. Additionally, CSG provides specific information regarding the treatment of GAAP amounts considered in preparing the non-GAAP financial measures and reconciles each non-GAAP financial measure to the most directly comparable GAAP measure.

Non-GAAP Financial Measures: Basis of Presentation

The table below outlines the exclusions from CSG’s non-GAAP financial measures:

Non-GAAP Exclusions

 

Operating
Income

   

EPS

 
Restructuring charges X   X
Ascade acquisition-related charges X X
Stock-based compensation X X
Amortization of acquired intangible assets X X
Amortization of original issue discount (“OID”) - X
Unusual income tax matters - X
 

CSG believes that excluding certain items in calculating its non-GAAP financial measures provides meaningful supplemental information regarding CSG’s performance and these items are excluded for the following reasons:

  • Restructuring charges are infrequent expenses that result from cost reduction initiatives and/or significant changes to CSG’s business, to include such things as involuntary employee terminations, and facility consolidations and abandonments. These charges are not considered reflective of CSG’s recurring core business operating results. The exclusion of these items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.
  • The Ascade acquisition-related charges relate to certain direct and incremental expenses related to the acquisition of Ascade, and thus, are not considered reflective of CSG’s recurring core business operating results. These charges include expenses related to legal, accounting, and other professional services. The exclusion of these charges in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  • Stock-based compensation results from CSG’s issuance of its common stock to its employees under incentive compensation programs. The amount of this incentive compensation in any period is not generally linked to the level of performance by employees or CSG, but instead is more dependent on CSG’s stock price at the stock grant date, and the employee service period over which the equity awards vest. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to compensation included in CSG’s results of operations. In addition, the stock-based compensation expense is a non-cash expense, and therefore the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.
  • Amortization of acquired intangible assets is the result of business acquisitions. A portion of the purchase price in an acquisition is allocated to acquired intangible assets (e.g., software, client relationships, etc.), which are then amortized to expense over their estimated useful lives. This annual amortization expense is generally unchanged from the initial estimates, regardless of performance of the acquired business in any one period. Also, the value assigned to acquired intangible assets in a business combination is based on various estimates and valuation techniques, and does not necessarily represent the costs CSG would incur to develop such capabilities internally. Additionally, amortization of acquired intangible assets can be inconsistent in amount and frequency, and can be significantly affected by the timing and size of an acquisition. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to acquisitions included in CSG’s subsequent results of operations. In addition, the amortization of acquired intangible assets is a non-cash expense, and therefore the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.
  • The convertible debt securities OID is the result of allocating a portion of the principal balance of the debt at issuance to the equity component of the instrument, as required under current accounting rules. This OID is then amortized to interest expense over the life of the respective convertible debt instrument. The interest expense related to the amortization of the OID is a non-cash expense, and therefore the exclusion of this item allows investors to further evaluate the cash interest costs of CSG’s convertible debt securities for cash flow, liquidity, and debt service purposes.
  • Unusual items within CSG’s quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

CSG also reports non-GAAP adjusted EBITDA and non-GAAP free cash flow. Management believes non-GAAP adjusted EBITDA is a useful measure to investors in evaluating CSG’s operating performance, liquidity, debt servicing capabilities, and enterprise valuation. CSG defines adjusted EBITDA as income before interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency transaction adjustments, and unusual items, such as restructuring charges, as discussed above. Additionally, management uses non-GAAP free cash flow, among other measures, to assess its financial performance and cash generating capabilities, and believes that it is useful to investors because it shows CSG’s cash available to service debt, make strategic acquisitions and investments, repurchase its common stock, and fund ongoing operations. CSG defines non-GAAP free cash flow as net cash flows from operating activities less the purchases of property and equipment.

Non-GAAP Financial Measures

Non-GAAP Operating Income:

The reconciliations of GAAP operating income to non-GAAP operating income for the indicated periods are as follows (in thousands, except percentages):

    Quarter Ended

June 30, 2012

    Quarter Ended

June 30, 2011

Amounts

   

% of
Revenues

Amounts

   

% of
Revenues

GAAP operating income $ 23,745 12.9% $ 22,371 12.3%
Restructuring charges 119 0.1% 1,346 0.7%
Ascade acquisition-related charges 344 0.2% - -
Stock-based compensation 3,382 1.8% 3,255 1.8%
Amortization of acquired intangible assets   5,545 3.0%   5,739 3.2%
Non-GAAP operating income $ 33,135 18.0% $ 32,711 18.0%
 
 
Six Months Ended

June 30, 2012

Six Months Ended

June 30, 2011

Amounts

% of
Revenues

Amounts

% of
Revenues

GAAP operating income $ 52,697 14.3% $ 46,475 12.8%
Restructuring charges 821 0.2% 1,346 0.3%
Ascade acquisition-related charges 344 0.1% - -
Stock-based compensation 6,529 1.8% 6,529 1.8%
Amortization of acquired intangible assets   11,055 3.0%   11,379 3.1%
Non-GAAP operating income $ 71,446 19.4% $ 65,729 18.0%
 

Non-GAAP EPS:

The reconciliations of GAAP EPS to non-GAAP EPS for the indicated periods are as follows (in thousands, except per share amounts):

       

 

Quarter Ended

June 30, 2012

Quarter Ended

June 30, 2011

Pretax
Amount (1)

   

Per Diluted
Share
Impact (2)

Pretax
Amount (1)

   

Per Diluted
Share
Impact (3)

GAAP income before income taxes $ 18,842 $ 0.37 $ 15,816 $ 0.27
Restructuring charges 119 0.00 1,346 0.02
Ascade acquisition-related charges 344 0.01 - -
Stock-based compensation 3,382 0.06 3,255 0.06
Amortization of acquired intangible assets 5,545 0.10 5,739 0.11
Amortization of OID 1,226 0.02 1,420 0.03
Non-GAAP income before income taxes $ 29,458 $ 0.56 $ 27,576 $ 0.49
 
               

 

Six Months Ended

June 30, 2012

Six Months Ended

June 30, 2011

Pretax
Amount (1)

Per Diluted
Share
Impact (2)

Pretax
Amount (1)

Per Diluted
Share
Impact (3)

GAAP income before income taxes $ 42,454 $ 0.73 $ 34,061 $ 0.62
Restructuring charges 821 0.02 1,346 0.03
Ascade acquisition-related charges 344 0.01 - -
Stock-based compensation 6,529 0.13 6,529 0.12
Amortization of acquired intangible assets 11,055 0.22 11,379 0.21
Amortization of OID   2,429   0.05   2,869   0.05
Non-GAAP income before income taxes $ 63,632 $ 1.16 $ 56,184 $ 1.03
(1)   These items (on a pretax basis) are calculated in accordance with GAAP, and are reflected as part of the results of operations in the accompanying Unaudited Condensed Consolidated Statements of Income.
(2) These items represent the estimated after-tax impact to net income on a per diluted share basis using the following: (i) the estimated income taxes related to these items, which includes the impact of the difference between GAAP and non-GAAP pretax income. This resulted in estimated effective income rates for non-GAAP purposes of 39% and 41% for the quarter and six months ended June 30, 2012, respectively; and (ii) the weighted-average diluted shares outstanding of 32.3 million and 32.5 million for the quarter and six months ended June 30, 2012, respectively.
(3) These items represent the estimated after-tax impact to net income on a per diluted share basis using the following: (i) the estimated income taxes related to these items, which includes the impact of the difference between GAAP and non-GAAP pretax income. This resulted in estimated effective income rates for non-GAAP purposes of 41% and 39% for the quarter and six months ended June 30, 2011, respectively; and (ii) the weighted-average diluted shares outstanding of 33.2 million for the quarter and six months ended June 30, 2011.
 

Non-GAAP Adjusted EBITDA:

CSG’s calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG’s non-GAAP adjusted EBITDA measure to net income and cash flows from operating activities are provided below for the indicated periods (in thousands):

 

    Quarter Ended

June 30,

    Six Months Ended

June 30,

  2012       2011   2012       2011
GAAP operating income $ 23,745 $ 22,371 $ 52,697 $ 46,475

Restructuring charges

119 1,346 821 1,346
Ascade acquisition-related charges 344 - 344 -
Depreciation 5,874 6,273 11,711 12,520
Amortization of acquired intangible assets (4) 5,545 5,739 11,055 11,379
Amortization of other intangible assets (4) 4,550 4,565 8,624 8,297
Stock-based compensation   3,382   3,255   6,529   6,529
Adjusted EBITDA $ 43,559 $ 43,549 $ 91,781 $ 86,546
Adjusted EBITDA as a percentage of revenues   24%   24%   25%   24%
 
       

 

Quarter Ended

June 30,

Six Months Ended

June 30,

  2012       2011   2012       2011
Net income $ 11,870 $ 9,015 $ 23,676 $ 20,509
Interest expense (5) 4,106 4,325 8,258 8,666
Amortization of OID 1,226 1,420 2,429 2,869
Interest and investment income and other, net (429) 810 (444) 879
Income tax provision 6,972 6,801 18,778 13,552
Depreciation 5,874 6,273 11,711 12,520
Amortization of acquired intangible assets (4) 5,545 5,739 11,055 11,379
Amortization of other intangible assets (4) 4,550 4,565 8,624 8,297
Stock-based compensation 3,382 3,255 6,529 6,529
Ascade acquisition-related charges 344 - 344 -
Restructuring charges   119   1,346   821   1,346
Adjusted EBITDA $ 43,559 $ 43,549 $ 91,781 $ 86,546
 
 

 

Quarter Ended

June 30,

Six Months Ended

June 30,

  2012   2011   2012   2011
Cash flows from operating activities $ 36,579 $ 713 $ 84,768 $ (1,176)
Income tax provision 6,972 6,801 18,778 13,552

Changes in operating assets and liabilities and deferred
  taxes

(3,450)

30,288

(19,638)

63,960

Interest expense (5) 4,106 4,325 8,258 8,666
Interest and investment income and other, net (429) 810 (444) 879
Ascade acquisition-related charges 344 - 344 -
Restructuring charges 119 1,346 821 1,346
Other   (682)   (734)   (1,106)   (681)
Adjusted EBITDA $ 43,559 $ 43,549 $ 91,781 $ 86,546
 

(4) Amortization on the cash flows statement is made up of the following items for the indicated periods (in thousands):

     

 

Quarter Ended

June 30,

Six Months Ended

June 30,

  2012       2011   2012       2011
Amortization of acquired intangible assets $ 5,545 $ 5,739 $ 11,055 $ 11,379
Amortization of other intangible assets 4,550 4,565 8,624 8,297
Amortization of deferred financing costs   699   765   1,417   1,539
Total amortization $ 10,794 $ 11,069 $ 21,096 $ 21,215
 

(5) Interest expense includes amortization of deferred financing costs as provided in Note 4 above.

Free Cash Flow:

CSG’s calculation of non-GAAP free cash flow and the reconciliation of CSG’s non-GAAP free cash flow measure to cash flows from operating activities are provided below for the indicated periods (in thousands):

       

 

Quarter Ended

June 30,

Six Months Ended

June 30,

  2012       2011 (6)   2012       2011 (7)
Cash flows from operating activities $ 36,579 $ 713 $ 84,768 $ (1,176)
Purchases of property and equipment   (11,232)   (6,811)   (13,550)   (11,061)
Non-GAAP free cash flow $ 25,347 $ (6,098) $ 71,218 $ (12,237)
(6)   Cash flows from operating activities for the three months ended June 30, 2011 was negatively impacted primarily by an increase in accounts receivable due to the timing of payments from a significant client that were received after quarter end.
(7) Cash flows from operating activities for the six months ended June 30, 2011 was negatively impacted by the unfavorable changes in working capital items, primarily related to the following items: (i) the change in the monthly invoice timing for DISH Network, which was included as part of its contract renewal terms in January 2011, which had a negative $20 million impact in the first quarter of 2011; (ii) the timing of payments for several items specific to the first quarter of 2011, including 2010 employee incentive bonuses and approximately $8 million of Intec acquisition-related expenses, both of which were accrued expenses as of December 31, 2010, and (iii) the increase in accounts receivable during the second quarter of 2011, as detailed in Note 6 above.
 

Non-GAAP Financial Measures – 2012 Financial Guidance

Non-GAAP Operating Income Margin:

The reconciliation of GAAP operating income margin to non-GAAP operating income margin, as included in CSG’s 2012 full year financial guidance, is as follows:

    2012

Guidance

GAAP operating income margin 12.5%
Restructuring charges (8) 0.1%
Ascade acquisition charges (9) 0.1%
Stock-based compensation (10) 1.8%
Amortization of acquired intangible assets (11) 3.0%
Non-GAAP operating income margin (“approximately 17.5%”) 17.5%
 
(8)   This represents the pretax impact of restructuring charges of $1.0 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.
 
(9) This represents the pretax impact of Ascade acquisition charges of $0.5 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.
 
(10) This represents the pretax impact of stock-based compensation expense of an estimated $13 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.
 
(11) This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $22 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.
 

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2012 full year financial guidance is as follows:

    2012 Guidance Range (12)
Low Range     High Range
GAAP EPS $ 1.10 $ 1.21
Restructuring charges (13) 0.01 0.01
Ascade acquisition charges (14) 0.01 0.01
Stock-based compensation (15) 0.29 0.31
Amortization of acquired intangible assets (16) 0.48 0.50
Amortization of OID (17) 0.11 0.11

Non-GAAP EPS

$ 2.00 $ 2.15
(12)   The estimated after-tax impact of these items is calculated using: (i) the estimated income taxes related to these items, which includes the impact of the difference between GAAP and non-GAAP pretax income, and the anticipated approval of R&D tax credits by the end of 2012, resulting in an estimated effective income tax rate for non-GAAP purposes of approximately 41%; and (ii) the estimated weighted-average diluted shares outstanding of 32.3 million.
 
(13) This represents the after-tax impact on a per diluted share basis of the full year restructuring charges of approximately $1 million.
 
(14) This represents the after-tax impact on a per diluted share basis of the full year Ascade acquistion charges of approximately $0.5 million.
 
(15) This represents the estimated after-tax impact on a per diluted share basis of the full year stock-based compensation expense of approximately $13 million.
 
(16) This represents the estimated after-tax impact on a per diluted share basis of the full year amortization of acquired intangible assets expense of approximately $22 million.
 
(17) This represents the estimated after-tax impact on a per diluted share basis of the full year expense related to the amortization of the OID expense for CSG’s convertible debt securities of approximately $5 million.
 

Non-GAAP Adjusted EBITDA:

CSG’s calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG’s non-GAAP adjusted EBITDA measure to net income and cash flows from operations are provided below for CSG’s 2012 full year financial guidance at the mid-point (in thousands):

      2012
GAAP operating income $ 92,000
Restructuring charges 1,000
Ascade acquisition charges 500
Depreciation 24,000
Amortization of acquired intangible assets 22,000
Amortization of other intangible assets 17,000
Stock-based compensation   13,000
Adjusted EBITDA $ 169,500
Adjusted EBITDA as a percentage of revenues   23%
   
  2012
Net income $ 37,000
Interest expense 16,000
Amortization of OID 5,000
Income tax provision 34,000
Restructuring charges 1,000
Ascade acquisition charges 500
Depreciation 24,000
Amortization of acquired of intangible assets 22,000
Amortization of other intangible assets 17,000
Stock-based compensation   13,000
Adjusted EBITDA $ 169,500
 
 
  2012
Cash flows from operating activities (midpoint of guidance) $ 125,000
Income tax provision 34,000
Changes in operating assets and liabilities and deferred taxes (6,000)
Restructuring charges 1,000
Ascade acquisition charges 500
Interest expense 16,000
Other   (1,000)
Adjusted EBITDA $ 169,500
 

Free Cash Flow:

CSG’s calculation of non-GAAP free cash flow and the reconciliation of CSG’s non-GAAP free cash flow measure to cash flows from operating activities is provided below for the indicated period (in thousands):

   
  2012
Cash flows from operating activities (midpoint of guidance) $ 125,000
Purchases of property and equipment   (30,000)
Non-GAAP free cash flow $ 95,000

Contact:

CSG Systems International, Inc.
Liz Bauer, 303-804-4065
Senior Vice President of Investor Relations & Strategic Communications
liz.bauer@csgi.com