CSG Systems International Reports Results for Third Quarter 2011

Tuesday, November 1, 2011 4:00 pm EDT

Dateline:

ENGLEWOOD, Colo.

Public Company Information:

NASDAQ:
CSGS
"We are making progress in the business as we continue the transformation of our company to a global leader in business-enabling solutions"

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 September 30, 2011.

Key Financial Highlights:

  • Third quarter 2011 results:
    • Total revenues were $182.8 million.
    • Non-GAAP operating income was $33.3 million, or 18.2% of total revenues and GAAP operating income was $22.8 million, or 12.5% of total revenues.
    • Non-GAAP earnings per diluted share (EPS) was $0.58. GAAP EPS was $0.32.
    • Cash flows from operations for the quarter were $30.3 million.
    • During the quarter, CSG repurchased approximately 578,000 shares of its common stock for $7.7 million (weighted-average price of $13.25 per share) under its stock repurchase program.
    • In addition, CSG’s two largest clients—Comcast and DISH Network—purchased the Interactivate solution, a message broker that enables real-time interactions with subscribers. Interactivate is part of the Total Service Mediation product suite obtained with the Intec Telecom acquisition on November 30, 2010.

“We are making progress in the business as we continue the transformation of our company to a global leader in business-enabling solutions,” Peter Kalan, president and chief executive officer for CSG Systems, said. “This transformation involves looking at our combined value proposition and identifying new ways to leverage and expand our products and domain expertise.

“We are early in this process, but believe the investments we are making are contributing to even stronger relationships with the leading communications service providers in the world,” Kalan added. “Our clients have been very receptive to the actions that we have taken and we are making solid progress on integrating and selling our company’s entire product suite to the leading providers of communications services in the world.”

Financial Overview (unaudited)

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

  Quarter Ended September 30,   Nine Months Ended September 30,

 

2011

 

 

2010

 

Percent
Change

 

2011

 

 

2010

 

Percent
Change

Revenues $ 182,753 $ 133,691 37% $ 547,157 $ 395,300 38%
Non-GAAP Results:
Operating Income $ 33,315 $ 31,223 7% $ 99,044 $ 89,210 11%
Operating Income Margin 18.2% 23.4% - 18.1% 22.6% -
EPS $ 0.58 $ 0.59 (2)% $ 1.61 $ 1.60 -
GAAP Results:
Operating Income $ 22,767 $ 22,522 1% $ 69,242 $ 53,681 29%
Operating Income Margin 12.5% 16.8% - 12.7% 13.6% -
EPS $ 0.32 $ 0.35 (9)% $ 0.93 $ 0.72 29%
 

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 third quarter of 2011 were $182.8 million, a 37% increase when compared to revenues of $133.7 million for the third quarter of 2010, with the increase attributed to the inclusion of the financial results from Intec Telecom in 2011, which was acquired on November 30, 2010. Revenues for the second quarter of 2011 were $181.3 million.

Non-GAAP Results: Non-GAAP operating income for the third quarter of 2011 was $33.3 million, or 18.2% of total revenues, which compares to $31.2 million, or 23.4%, for the same period in 2010. The 18% non-GAAP operating margin is consistent with the company’s expectations as it reflects the lower margin profile of Intec’s global software and services business. Non-GAAP operating income for the second quarter of 2011 was $32.7 million, or 18.0%.

Non-GAAP EPS for the third quarter of 2011 was $0.58, compared to non-GAAP EPS of $0.59 for the third quarter of 2010. Non-GAAP EPS for the second quarter of 2011 was $0.49.

GAAP Results: GAAP operating income for the third quarter of 2011 was $22.8 million, or 12.5% of total revenues, compared to $22.5 million, or 16.8%, for the same period in 2010.

GAAP EPS for the third quarter of 2011 was $0.32, compared to $0.35 for the third quarter of 2010. GAAP EPS for the third quarter of 2011, when compared to GAAP EPS for the third quarter of 2010 was impacted by the following items:

  • the $4.8 million of amortization of acquired intangible assets related to the Intec acquisition, which negatively impacted GAAP EPS by $0.08 per diluted share; and
  • restructuring charges of $1.7 million, which negatively impacted GAAP EPS by $0.03 per diluted share.

Additionally, GAAP EPS for the third quarter of 2010 was impacted by the following items, for which there were no comparable amounts in the third quarter of 2011:

  • the data center transition expenses of $1.8 million, which negatively impacted GAAP EPS by $0.04 per diluted share;
  • the Intec acquisition-related charges of $2.6 million, which negatively impacted GAAP EPS by $0.05 per diluted share; and
  • the loss on the repurchase of convertible debt securities of $1.7 million, which negatively impacted GAAP EPS by $0.03 per diluted share.

Balance Sheet and Cash Flows

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

 

September 30,
2011

 

June 30,
2011

 

December 31,
2010

Cash, cash equivalents, and short-term investments $ 138,599 $ 134,350 $ 215,550
Net billed trade accounts receivable 157,276 166,436 155,005
Total long-term debt:
Par value $ 342,500 $ 346,000 $ 410,149
Unamortized OID   (31,435)   (32,593)   (35,462)
Net debt carrying amount $ 311,065 $ 313,407 $ 374,687
 

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

 

September 30,
2011 (1)

 

June 30,
2011 (2)

 

September 30,
2010

Cash Flows from Operating Activities:
Operations $ 34,549 $ 21,753 $ 27,305
Changes in operating assets and liabilities   (4,239)   (21,040)   (8,805)
Net cash provided by operating activities $ 30,310 $ 713 $ 18,500
Cash Flows from Investing Activities:
Purchases of property and equipment $ (8,554) $ (6,811) $ (2,339)
 
  (1)   During the current quarter, CSG made a $4.4 million payment for deferred tax liabilities that became due as a result of the retirement of certain of CSG’s convertible debt securities during 2011, thus negatively impacting the changes in operating assets and liabilities portion of CSG’s cash flows from operating activities by this amount.
 
(2) During the second quarter of 2011, the changes in operating assets and liabilities were negatively impacted by unexpected changes in working capital, primarily as a result of the timing of payments from a significant client which were received after quarter end.
 

2011 Financial Guidance

A summary of CSG’s financial guidance for the full year 2011 is as follows:

Revenues   $730 - $750 million
Non-GAAP EPS $2.08 - $2.18
GAAP EPS from continuing operations $1.17 - $1.26
Adjusted EBITDA $172 - $176 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 November 1, 2011, at 5:00 p.m. ET, to discuss CSG's third 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 (800) 762-8779 and ask the operator for the CSG International conference call and Liz Bauer, chairperson.

Additional Information

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

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 continued 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; 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 share and per share amounts)

 

September 30,
2011

December 31,
2010

ASSETS

Current assets:
Cash and cash equivalents $ 124,160 $ 197,858
Short-term investments   14,439   17,692
Total cash, cash equivalents, and short-term investments 138,599 215,550
Trade accounts receivable-
Billed, net of allowance of $2,472 and $1,837 157,276 155,005
Unbilled and other 36,205 30,803
Deferred income taxes 17,752 13,852
Income taxes receivable 12,214 9,043
Other current assets   18,532   17,241
Total current assets 380,578 441,494
Property and equipment, net of depreciation of $109,879 and $94,236 46,098 52,257
Software, net of amortization of $53,726 and $45,579 32,152 31,118
Goodwill 208,987 209,164
Client contracts, net of amortization of $152,931 and $133,218 102,920 116,328
Deferred income taxes 1,329 9,677
Other assets   15,430   19,660

Total assets

$ 787,494 $ 879,698

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current maturities of long-term debt, net of unamortized original issue discount of zero and $621

$

17,500

$

69,528

Client deposits 31,182 31,897
Trade accounts payable 27,140 25,381
Accrued employee compensation 32,941 53,372
Income taxes payable 2,192 2,028
Deferred revenue 42,447 56,184
Other current liabilities   20,021   32,019

Total current liabilities

  173,423   270,409
Non-current liabilities:
Long-term debt, net of unamortized original issue discount of $31,435 and $34,841 293,565 305,159
Deferred revenue 7,942 16,103
Income taxes payable 2,820 954
Deferred income taxes 26,227 33,247
Other non-current liabilities   17,958   16,748
Total non-current liabilities   348,512   372,211
Total liabilities   521,935   642,620
Stockholders’ equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; zero shares issued and outstanding

-

-

Common stock, par value $.01 per share; 100,000,000 shares authorized; 34,079,251 shares and 34,120,789 shares outstanding

646

641

Additional paid-in capital 446,818 439,712

Treasury stock, at cost, 30,535,019 and 29,956,808 shares

(712,625) (704,963)
Accumulated other comprehensive income (loss):
Unrealized gain on short-term investments, net of tax 2 4
Unrecognized pension plan losses and prior service costs, net of tax (893) (897)
Unrealized loss on change in fair value of interest rate swaps, net of tax (713) -
Cumulative translation adjustments (377) 868
Accumulated earnings   532,701   501,713
Total stockholders’ equity   265,559   237,078
Total liabilities and stockholders’ equity $ 787,494 $ 879,698
 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

   
Quarter Ended Nine Months Ended
September 30,

2011

  September 30,

2010

September 30,

2011

  September 30,

2010

Revenues:
Processing and related services $ 131,099 $ 124,984 $ 391,590 $ 368,393
Software, maintenance and services   51,654   8,707   155,567   26,907
Total revenues   182,753   133,691   547,157   395,300
 
Cost of revenues (exclusive of depreciation, shown separately below):
Processing and related services 62,167 61,675 184,228 197,604
Software, maintenance and services   30,821   6,120   90,400   18,000
Total cost of revenues 92,988 67,795 274,628 215,604
Other operating expenses:
Research and development 27,921 19,113 84,479 56,615
Selling, general and administrative 31,011 19,396 96,876 52,608
Depreciation 6,404 4,865 18,924 16,578
Restructuring charges   1,662   -   3,008   214
Total operating expenses   159,986   111,169   477,915   341,619
Operating income   22,767   22,522   69,242   53,681
Other income (expense):
Interest expense (4,175) (1,562) (12,841) (4,739)
Amortization of original issue discount (1,158) (1,462) (4,027) (5,447)
Loss on repurchase of convertible debt securities - (1,683) - (12,635)
Interest and investment income, net 186 157 595 524
Other, net   2,151   13   863   17
Total other   (2,996)   (4,537)   (15,410)   (22,280)
Income before income taxes 19,771 17,985 53,832 31,401
Income tax provision   (9,292)   (6,295)   (22,844)   (7,181)

Net income

$ 10,479 $ 11,690 $ 30,988 $ 24,220
 
Weighted-average shares outstanding – Basic:

Common stock

32,765 32,365 32,747 32,573
Participating restricted stock   141   464   210   579
Total   32,906   32,829   32,957   33,152
 
Weighted-average shares outstanding – Diluted:
Common stock 32,887 32,625 32,937 32,834
Participating restricted stock   141   464   210   579
Total   33,028   33,089   33,147   33,413
 
Earnings per common share:
Basic $ 0.32 $ 0.36 $ 0.94 $ 0.73
Diluted 0.32 0.35 0.93 0.72
 
  Nine Months Ended

September 30,
2011

 

September 30,
2010

Cash flows from operating activities:

Net income $ 30,988 $ 24,220

Adjustments to reconcile net income to net cash provided by operating activities -

Depreciation 18,924 16,578
Amortization 31,599 12,963
Amortization of original issue discount 4,027 5,447
Gain on short-term investments and other (46) (112)
Loss on repurchase of convertible debt securities - 12,635
Deferred income taxes 1,637 (160)
Excess tax benefit of stock-based compensation awards (824) (1,138)
Stock-based employee compensation   9,684   9,300

Subtotal

95,989 79,733
Changes in operating assets and liabilities:
Trade accounts and other receivables, net (9,019) (5,470)
Other current and non-current assets 574 (3,966)
Income taxes payable/receivable (949) (6,987)
Trade accounts payable and accrued liabilities (31,096) 10,810
Deferred revenue   (26,365)   115
Net cash provided by operating activities   29,134   74,235
Cash flows from investing activities:
Purchases of property and equipment (19,615) (9,858)
Purchases of short-term investments (31,903) (61,888)
Proceeds from sale/maturity of short-term investments 35,200 81,900
Purchase of foreign currency hedge - (5,673)
Acquisition of businesses, net of cash acquired - (3,264)
Acquisition of and investments in client contracts (6,713) (3,610)
Change in restricted cash for Intec acquisition   -   (130,000)

Net cash used in investing activities

  (23,031)   (132,393)
Cash flows from financing activities:
Proceeds from issuance of common stock 1,158 1,046
Repurchase of common stock (11,881) (33,942)
Payments on acquired equipment financing (1,357) (837)
Proceeds from long-term debt - 150,000
Payments of deferred financing costs (205) (6,541)
Payments on long-term debt (67,649) (148,846)
Excess tax benefit of stock-based compensation awards   824   1,138
Net cash used in financing activities   (79,110)   (37,982)
Effect of exchange rate fluctuations on cash   (691)   -
Net decrease in cash and cash equivalents (73,698) (96,140)
Cash and cash equivalents, beginning of period   197,858   163,489
Cash and cash equivalents, end of period $ 124,160 $ 67,349
 
 
Supplemental disclosures of cash flow information:
Net cash paid during the period for -
Interest $ 11,739 $ 3,781
Income taxes 22,542 14,331
 

EXHIBIT 1
CSG SYSTEMS INTERNATIONAL, INC.
SUPPLEMENTAL REVENUE ANALYSIS

CSG Systems International completed its acquisition of Intec Telecom Systems on November 30, 2010. Therefore, CSG included Intec’s financial results for one month in its fourth quarter and full year results ended December 31, 2010, and for a full three months in its first, second, and third quarters ended March 31, 2011, June 30, 2011, and September 30, 2011.

By integrating Intec’s significantly higher global revenue base, CSG increased its geographic revenue diversification and decreased its customer concentration, as noted in the tables below:

Revenues by Geography

 

Quarter Ended
September 30,
2011

 

Quarter Ended
June 30,
2011

 

Quarter Ended
March 31,
2011

 

Year Ended
December 31,
2010

Americas 85% 86% 86% 98%
Europe, Middle East and Africa 10% 10% 10% 2%
Asia Pacific 5% 4% 4% <1%
Total Revenues 100% 100% 100% 100%
 

Revenues by Significant Customers: 10% or more of Revenues

                       

Quarter Ended
September 30,
2011

 

Quarter Ended
June 30,
2011

 

Quarter Ended
March 31,
2011

 

Year Ended
December 31,
2010

Comcast 20% 18% 19% 24%
DISH 12% 12% 13% 18%
Time Warner 10% 11% <10% 12%
Charter <10% <10% <10% 10%
 

Customer Accounts (in thousands, at end of period)

   

September 30,
2011

 

June 30,
2011

 

March 31,
2011

 

December 31,
2010

Cable and Satellite Customer Accounts 48,730 48,860 49,081 48,913
 

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

Data center transition expenses (1) X X
Intec acquisition-related charges (1) X X
Restructuring charges X X
Stock-based compensation X X
Amortization of acquired intangible assets X X
Amortization of original issue discount (“OID”) - X
Gain/loss on repurchase of convertible debt securities - X
Unusual income tax matters - X
 
  (1)   The data center transition project and the Intec acquisition were completed in 2010, and thus, there are no anticipated costs for either of these items in 2011.
 

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:

  • The data center transition expenses 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 Intec acquisition-related charges relate to certain direct and incremental expenses related to the acquisition of Intec, and thus, are not considered reflective of CSG’s recurring core business operating results. These charges include expenses related to the following: (i) restructuring; (ii) investment banking, legal, accounting, and other professional services; and (iii) costs primarily related to the settlement of foreign currency hedging instruments associated with the funding of the Intec acquisition. 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.
  • 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.
  • 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 the intangible assets (e.g., software, client relationships, etc.) acquired, 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.
  • Gains and losses related to the repurchase of CSG’s convertible debt securities are not considered reflective of CSG’s recurring core business operating results. The exclusion of these gains and losses 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.
  • 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, taxes, depreciation, amortization, stock-based compensation, foreign currency transaction adjustments, and unusual items, such as the data center transition expenses, restructuring charges, and Intec acquisition-related 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
September 30, 2011

Quarter Ended
September 30, 2010

Amounts

 

% of
Revenues

Amounts

 

% of
Revenues

GAAP operating income $ 22,767 12.5% $ 22,522 16.8%
Data center transition expenses - - 1,825 1.4%
Intec acquisition-related charges - - 2,601 2.0%
Restructuring charges 1,662 0.9% - -
Stock-based compensation 3,155 1.7% 3,116 2.3%
Amortization of acquired intangible assets   5,731 3.1%   1,159 0.9%
Non-GAAP operating income $ 33,315 18.2% $ 31,223 23.4%
 
 

 

Nine Months Ended
September 30, 2011

Nine Months Ended
September 30, 2010

Amounts

% of
Revenues

Amounts

% of
Revenues

GAAP operating income $ 69,242 12.7% $ 53,681 13.6%
Data center transition expenses - - 20,142 5.1%
Intec acquisition-related charges - - 2,601 0.7%
Restructuring charges 3,008 0.5% - -
Stock-based compensation 9,684 1.8% 9,300 2.3%
Amortization of acquired intangible assets   17,110 3.1%   3,486 0.9%
Non-GAAP operating income $ 99,044 18.1% $ 89,210 22.6%
 

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
September 30, 2011

Quarter Ended
September 30, 2010

Pretax
Amount (2)

 

Per Diluted
Share
Impact (3)

Pretax
Amount (2)

 

Per Diluted
Share
Impact (4)

GAAP income before income taxes $ 19,771 $ 0.32 $ 17,985 $ 0.35
Data center transition expenses - - 1,825 0.04
Intec acquisition-related charges - - 2,601 0.05
Restructuring charges 1,662 0.04 - -
Stock-based compensation 3,155 0.07 3,116 0.06
Amortization of acquired intangible assets 5,731 0.13 1,159 0.03
Amortization of OID 1,158 0.02 1,462 0.03
Loss on repurchase of convertible debt securities   -   -   1,683   0.03
Non-GAAP income before income taxes $ 31,477 $ 0.58 $ 29,831 $ 0.59
 
 

 

Nine Months Ended
September 30, 2011

Nine Months Ended
September 30, 2010

Pretax

Amount (2)

Per Diluted
Share
Impact (3)

Pretax

Amount (2)

Per Diluted
Share
Impact (4)

GAAP income before income taxes $ 53,832 $ 0.93 $ 31,401 $ 0.72
One-time adjustments to income tax reserves (5) - - - (0.13)
Data center transition expenses - - 20,142 0.38
Intec acquisition-related charges - - 2,601 0.05
Restructuring charges 3,008 0.06 - -
Stock-based compensation 9,684 0.20 9,300 0.17
Amortization of acquired intangible assets 17,110 0.34 3,486 0.07
Amortization of OID 4,027 0.08 5,447 0.10
Loss on repurchase of convertible debt securities   -   -   12,635   0.24
Non-GAAP income before income taxes $ 87,661 $ 1.61 $ 85,012 $ 1.60
   
(2) 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.
 
(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 an overall estimated effective income rate for non-GAAP purposes of approximately 39% for the quarter and nine months ended September 30, 2011; and (ii) the weighted-average diluted shares outstanding of 33.0 million and 33.1 million, respectively, for the quarter and nine months ended September 30, 2011.
 
(4) These items (excluding the one-time adjustments to income tax reserves discussed in Note 5 below) 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 resulted in an overall estimated effective income tax rate for non-GAAP purposes of approximately 35% and 37%, respectively, for the quarter and nine months ended September 30, 2010; and (ii) the weighted-average diluted shares outstanding of 33.1 million and 33.4 million, respectively, for the quarter and nine months ended September 30, 2010.
 
(5) For the nine months ended September 30, 2010, CSG’s GAAP income tax expense included an approximately $4 million income tax benefit related to the completion of the IRS examination of CSG’s Federal income tax returns for fiscal years 2006, 2007, and 2008. Under current accounting rules, CSG was required to establish income tax reserves related to the uncertainty in the realization of certain tax credits and incentives over the last several years. Upon successful completion of the IRS examination which validated CSG’s filing position, favorable adjustments to these income tax reserves were necessary. The impact of the one-time tax benefit related to the adjustments to these income tax reserves is not considered reflective of CSG’s normal income tax expense. As a result, for purposes of calculating its non-GAAP EPS for the nine months ended September 30, 2010, CSG has excluded the income tax benefit related to the one-time adjustments to income tax reserves.
 

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
September 30,

Nine Months Ended
September 30,

2011   2010 2011   2010
GAAP operating income $ 22,767 $ 22,522 $ 69,242 $ 53,681
Data center transition expenses - 1,825 - 20,142
Intec acquisition-related charges - 2,601 - 2,601

Restructuring charges

1,662 - 3,008 -
Depreciation (excluding data center transition expenses) 6,404 4,865 18,924 14,564
Amortization of acquired intangible assets (7) 5,731 1,159 17,110 3,486
Amortization of other intangible assets (7) 3,921 3,303 12,218 8,915
Stock-based compensation   3,155   3,116   9,684   9,300
Adjusted EBITDA $ 43,640 $ 39,391 $ 130,186 $ 112,689
Adjusted EBITDA as a percentage of revenues   24%   29%   24%   29%
 
 

 

Quarter Ended
September 30,

Nine Months Ended
September 30,

2011 2010 2011 2010
Net income $ 10,479 $ 11,690 $ 30,988 $ 24,220
Interest expense (6) 4,175 1,562 12,841 4,739
Amortization of OID 1,158 1,462 4,027 5,447
Interest and investment income and other, net (2,337) (170) (1,458) (541)
Income tax provision 9,292 6,295 22,844 7,181
Depreciation (excluding data center transition expenses) 6,404 4,865 18,924 14,564
Amortization of acquired intangible assets (7) 5,731 1,159 17,110 3,486
Amortization of other intangible assets (7) 3,921 3,303 12,218 8,915
Stock-based compensation 3,155 3,116 9,684 9,300
Data center transition expenses - 1,825 - 20,142
Intec acquisition-related charges - 2,601 - 2,601
Restructuring charges 1,662 - 3,008 -
Loss on repurchase of convertible debt securities   -   1,683   -   12,635
Adjusted EBITDA $ 43,640 $ 39,391 $ 130,186 $ 112,689
 
 

 

Quarter Ended
September 30,

Nine Months Ended
September 30,

2011 2010 2011 2010
Cash flows from operating activities $ 30, 310 $ 18,500 $ 29,134 $ 74,235
Income tax provision 9,292 6,295 22,844 7,181
Changes in operating assets and liabilities, and deferred taxes

1,258

8,921

65,218

5,658

Data center transition expenses, net of depreciation - 1,825 - 18,128
Intec acquisition-related charges - 2,601 - 2,601
Restructuring charges 1,662 - 3,008 -
Interest expense (6) 4,175 1,562 12,841 4,739
Interest and investment income and other, net (2,337) (170) (1,458) (541)
Other   (720)   (143)   (1,401)   688
Adjusted EBITDA $ 43,640 $ 39,391 $ 130,186 $ 112,689
   
(6) Interest expense includes amortization of deferred financing costs as provided in Note 7 below.
 
(7) Amortization on the cash flows statement is made up of the following items for the indicated periods (in thousands):
 
   

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

2011   2010 2011   2010
Amortization of acquired intangible assets $ 5,731 $ 1,159 $ 17,110 $ 3,486
Amortization of other intangible assets 3,921 3,303 12,218 8,915
Amortization of deferred financing costs   732   216   2,271   562
Total amortization $ 10,384 $ 4,678 $ 31,599 $ 12,963
 

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

September 30,

Nine Months Ended

September 30,

2011   2010 2011   2010
Cash flows from operating activities $ 30,310 $ 18,500 $ 29,134 $ 74,235
Purchases of property and equipment   (8,554)   (2,339)   (19,615)   (9,858)
Non-GAAP free cash flow $ 21,756 $ 16,161 $ 9,519 $ 64,377
 

Non-GAAP Financial Measures – 2011 Financial Guidance

Non-GAAP Operating Income:

The reconciliation of GAAP operating income margin to non-GAAP operating income margin, as included in CSG’s 2011 full year financial guidance, is as follows:

 
2011

Guidance

GAAP operating income margin 13%
Restructuring charges (8) -
Stock-based compensation (9) 2%
Amortization of acquired intangible assets (10) 3%
Non-GAAP operating income margin (“approximately 18%”) 18%
   
(8) This represents the pretax impact of restructuring charges of $3 million on CSG’s operating income margin as a percentage of the midpoint of 2011 revenue guidance.
 
(9) 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 2011 revenue guidance.
 
(10) This represents the pretax impact of amortization of acquired intangible assets expenses of an estimated $23 million on CSG’s operating income margin as a percentage of the midpoint of 2011 revenue guidance.
 

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2011 full year financial guidance is as follows:

 
2011 Guidance Range (11)
Low Range   High Range
GAAP EPS $ 1.17 $ 1.26
Restructuring (12) 0.07 0.07
Stock-based compensation (13) 0.27 0.27
Amortization of acquired intangible assets (14) 0.47 0.48
Amortization of OID (15)   0.10   0.10

Non-GAAP EPS

$ 2.08 $ 2.18
   
(11) 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, resulting in an estimated effective income rate for non-GAAP purposes of approximately 39%; and (ii) the estimated weighted-average diluted shares outstanding of 33.2 million.
 
(12) This represents the after-tax impact on a per diluted share basis of the full year restructuring charges of approximately $3 million.
 
(13) 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.
 
(14) 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 $23 million.
 
(15) 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 2011 full year financial guidance at the mid-point (in thousands):

 
2011
GAAP operating income $ 93,000
Restructuring charges 3,000
Depreciation 26,000
Amortization of acquired intangible assets 23,000
Amortization of other intangible assets 16,000
Stock-based compensation   13,000
Adjusted EBITDA $ 174,000
Adjusted EBITDA as a percentage of revenues   24%
 
 
2011
Net income $ 41,000
Interest expense 17,000
Amortization of OID 5,000
Interest and investment income and other, net (2,000)
Income tax provision 32,000
Restructuring charges 3,000
Depreciation 26,000
Amortization acquired of intangible assets 23,000
Amortization of other intangible assets 16,000
Stock-based compensation   13,000
Adjusted EBITDA $ 174,000
 
 
2011
Cash flows from operating activities $ 65,000
Income tax provision 32,000
Changes in operating assets and liabilities and deferred taxes 61,000
Restructuring charges 3,000
Interest expense 17,000
Interest and investment income and other, net   (4,000)
Adjusted EBITDA $ 174,000
 

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):

 
2011
Cash flows from operating activities $ 65,000
Purchases of property and equipment   (25,000)
Non-GAAP free cash flow $ 40,000

Contact:

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