CSG Systems International Reports Record Fourth Quarter and Full Year Revenues

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ENGLEWOOD, Colo.--()--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 and full year ended December 31, 2012.

Key Financial Highlights:

  • Fourth quarter 2012 results:

    • Total revenues were $198.0 million.

    • Non-GAAP operating income was $33.0 million, or 16.7% of total revenues and GAAP operating income was $22.1 million, or 11.2% of total revenues.

    • Non-GAAP earnings per diluted share (EPS) was $0.67, which includes an unexpected benefit of $0.13 as a result of a lower than previously anticipated effective income tax rate. GAAP EPS was $0.48.
  • Full year 2012 results:
  • Total revenues were $756.9 million.
  • Non-GAAP operating income was $135.5 million, or 17.9% of total revenues and GAAP operating income was $96.6 million, or 12.8% of total revenues.
  • Non-GAAP earnings per diluted share (EPS) was $2.33, which includes an unexpected benefit of $0.13 as a result of a lower than previously anticipated effective income tax rate. GAAP EPS was $1.51.
  • Cash flows from operations for the quarter were $19.1 million, and $127.5 million for the year ended December 31, 2012.

"We enter 2013 in a position of strength as a result of the actions we have taken over the past several years," said Peter Kalan, chief executive officer and president of CSG Systems International, Inc. "We have a solid base of over 500 clients worldwide that depend upon us to help them execute upon their business plans. We have invested in our people, our products and our clients to ensure that they are successful. We have demonstrated our ability to manage our costs in a difficult and challenging business environment. And finally, we have a solid business model that is based on highly visible, recurring revenues, resulting in strong cash flows."

Financial Overview (unaudited)

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

    Quarter Ended December 31,   Year Ended December 31,
   

 

2012

 

 

2011

 

Percent
Change

 

 

2012

 

 

2011

 

Percent
Change

Revenues

  $ 198,007     $ 187,574     6 %   $ 756,866     $ 734,731     3 %
Non-GAAP Results:                        
Operating Income   $ 33,018     $ 39,987     (17 )%   $ 135,535     $ 139,031     (3 )%
Operating Income Margin     16.7 %     21.3 %   -       17.9 %     18.9 %   -  
EPS   $ 0.67     $ 0.64     5 %   $ 2.33     $ 2.25     4 %
GAAP Results:                        
Operating Income   $ 22,149     $ 27,043     (18 )%   $ 96,574     $ 96,285     0 %
Operating Income Margin     11.2 %     14.4 %   -       12.8 %     13.1 %   -  
EPS   $ 0.48     $ 0.35     37 %   $ 1.51     $ 1.28     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 fourth quarter of 2012 were $198.0 million, a 6% increase when compared to revenues of $187.6 million for the fourth quarter of 2011, and a 4% increase when compared to $190.0 million for the third quarter of 2012. Total revenues for the full year 2012 were $756.9 million, a 3% increase when compared to revenues of $734.7 million for full year 2011. The year-over-year revenue increases can be primarily attributed to increased revenues from various ancillary services and software sales during the current quarter and year and from the revenues generated from the Ascade business that CSG acquired in mid-July 2012, while the sequential quarterly increase is due primarily to a strong fourth quarter of software sales.

Non-GAAP Results: Non-GAAP operating income for the fourth quarter of 2012 was $33.0 million, or 16.7% of total revenues, compared to $40.0 million, or 21.3%, for the fourth quarter of 2011. Non-GAAP operating income for the third quarter of 2012 was $31.1 million, or 16.4% of total revenues. Non-GAAP operating income for the full year 2012 was $135.5, or 17.9% of total revenues, which compares to $139.0 million, or 18.9%, for the full year 2011. The year-over-year decreases in operating income and operating income margin is mainly due to the expected increases in data processing and employee-related costs. The sequential quarterly increase in operating income and operating income margin reflects the higher sequential revenues, mainly associated with the strong software sales.

Non-GAAP EPS for the fourth quarter of 2012 was $0.67, compared to non-GAAP EPS of $0.64 for the fourth quarter of 2011, and $0.50 for the third quarter of 2012. Non-GAAP EPS for the full year 2012 was $2.33, compared to non-GAAP EPS of $2.25 for the full year 2011. Both the fourth quarter and full year of 2012 non-GAAP EPS include an unexpected benefit of $0.13 as a result of a lower than previously anticipated effective income tax rate for 2012. The year-over-year improvement in the 2012 full year non-GAAP EPS performance relates mainly to a lower effective income rate between years.

GAAP Results: GAAP operating income for the fourth quarter of 2012 was $22.1 million, or 11.2% of total revenues, compared to $27.0 million, or 14.4%, for the same period in 2011. GAAP operating income for the full year 2012 was $96.6 million, or 12.8% of total revenues, compared to $96.3 million, or 13.1%, for the full year 2011.

GAAP EPS for the fourth quarter of 2012 was $0.48, compared to $0.35 for the fourth quarter of 2011. GAAP EPS for the full year 2012 was $1.51, compared to $1.28 for the full year 2011.

Balance Sheet and Cash Flows

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

   

December 31,
2012

 

September 30,
2012

 

December 31,
2011

Cash, cash equivalents, and short-term investments (1)   $ 169,321     $ 184,769     $ 158,830  
Net billed trade accounts receivable     191,943       174,137       179,804  
Total long-term debt (1):            
Par value   $ 300,000     $ 318,000     $ 340,000  
Unamortized OID     (25,302 )     (26,576 )     (30,256 )
Net debt carrying amount   $ 274,698     $ 291,424     $ 309,744  

     (1)

  The sequential decrease in cash and short-term investments in the fourth quarter of 2012 is primarily due to an $18 million debt payment made in November 2012 in conjunction with CSG's debt refinancing.
     

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

   

Quarter Ended
December 31,

 

Year Ended
December 31,

    2012   2011   2012   2011
Cash Flows from Operating Activities:                
Operations   $ 34,921     $ 34,348     $ 126,317     $ 130,337  
Changes in operating assets and liabilities     (15,866 )     (2,523 )     1,160       (69,378 )
Net cash provided by operating activities (2)   $ 19,055     $ 31,825     $ 127,477     $ 60,959  
Cash Flows from Investing Activities:                
Purchases of property and equipment   $ (12,733 )   $ (2,582 )   $ (33,221 )   $ (22,197 )
Cash Flows from Financing Activities:                

Repurchase of common stock under stock repurchase program

 

$

-

   

$

(2,268

)

 

$

(13,349

)

 

$

(9,930

)

Net proceeds from/(payments on) long-term debt     (18,000 )     (2,500 )     (40,000 )     (70,149 )

    (2)

  Cash flows from operating activities for the year ended December 31, 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 and 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 approximately $8 million of Intec acquisition-related expenses, which were accrued expenses as of December 31, 2010; and (iii) $6 million payment of deferred income tax liabilities that became due in 2011 as a result of the repurchase of our 2004 Convertible Debt Securities.
     

2013 Financial Guidance

   
Revenues   $755 - $775 million
Non-GAAP EPS   $2.23 - $2.33
GAAP EPS from continuing operations   $1.59 - $1.70
Adjusted EBITDA   $162 - $167 million
     

CSG is currently in negotiations with one of its largest customers for a longer-term renewal of the current contract that expires at the end of February. The above current financial guidance assumes no material change in the revenue earned from this customer during 2013 pursuant to the terms of the existing agreement; as it is impossible to predict with certainty at this time what impact, if any, the terms of a longer-term contract extension will have on CSG's 2013 results of operations. When this contract is extended in the future, CSG will determine what updates may be necessary to the above guidance.

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 February 5, 2013, at 5:00 p.m. ET, to discuss CSG's fourth quarter and year end 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) 941-0844 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)

 
   

December 31,
2012

 

December 31,
2011

ASSETS

       
Current assets:        
Cash and cash equivalents   $ 136,473     $ 146,733  
Short-term investments     32,848       12,097  
Total cash, cash equivalents, and short-term investments     169,321       158,830  
Trade accounts receivable:        
Billed, net of allowance of $3,147 and $2,421     191,943       179,804  
Unbilled and other     33,859       30,981  
Deferred income taxes     22,244       19,982  
Income taxes receivable     6,469       4,139  
Other current assets     17,099       16,224  
Total current assets     440,935       409,960  
Non-current assets:        
Property and equipment, net of depreciation of $120,643 and $116,125     39,429       41,154  
Software, net of amortization of $68,513 and $56,521     36,729       29,966  
Goodwill     233,365       220,013  
Client contracts, net of amortization of $184,763 and $159,225     76,388       98,403  
Deferred income taxes     2,596       1,008  
Income taxes receivable     1,292       -  
Other assets     16,207       14,393  
Total non-current assets     406,006       404,937  

Total assets

  $ 846,941     $ 814,897  
         

LIABILITIES AND STOCKHOLDERS' EQUITY

       
Current liabilities:        
Current maturities of long-term debt   $ 15,000     $ 27,000  
Client deposits     33,807       30,523  
Trade accounts payable     30,473       27,198  
Accrued employee compensation     61,083       42,005  
Income taxes payable     2,116       2,334  
Deferred revenue     47,691       44,824  
Other current liabilities     21,562       23,501  
Total current liabilities     211,732       197,385  
Non-current liabilities:        
Long-term debt, net of unamortized original issue discount of $25,302 and $30,256     259,698       282,744  
Deferred revenue     6,504       8,631  
Income taxes payable     1,168       4,114  
Deferred income taxes     21,674       28,188  
Other non-current liabilities     19,526       19,121  
Total non-current liabilities     308,570       342,798  
Total liabilities     520,302       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; 33,734 shares and 33,822 shares outstanding    

653

     

645

 
Additional paid-in capital     461,497       449,376  

Treasury stock, at cost, 31,530 and 30,707 shares

    (728,243 )     (714,893 )
Accumulated other comprehensive income (loss):        
Unrealized gain on short-term investments, net of tax     3       1  
Unrecognized pension plan losses and prior service costs, net of tax     (1,761 )     (1,794 )
Unrealized loss on change in fair value of interest rate swaps, net of tax     (658 )     (618 )
Cumulative foreign currency translation adjustments     2,274       (1,998 )
Accumulated earnings     592,874       543,995  
Total stockholders' equity     326,639       274,714  
Total liabilities and stockholders' equity   $ 846,941     $ 814,897  
                 
 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 
    Quarter Ended   Year Ended
   

December 31,
2012

 

December 31,
2011

 

December 31,
2012

 

December 31,
2011

Revenues:                
Processing and related services   $ 135,980     $ 133,076     $ 544,649     $ 524,666  
Software, maintenance and services     62,027       54,498       212,217       210,065  
Total revenues     198,007       187,574       756,866       734,731  
                 
Cost of revenues (exclusive of depreciation, shown separately below):                
Processing and related services     66,501       60,548       258,380       244,776  
Software, maintenance and services     34,415       30,474       125,436       120,874  
Total cost of revenues     100,916       91,022       383,816       365,650  
Other operating expenses:                
Research and development     28,696       26,663       112,938       111,142  
Selling, general and administrative     39,396       31,470       138,783       128,346  
Depreciation     5,202       6,511       22,286       25,435  
Restructuring charges     1,648       4,865       2,469       7,873  
Total operating expenses     175,858       160,531       660,292       638,446  
Operating income     22,149       27,043       96,574       96,285  
Other income (expense):                
Interest expense     (3,647 )     (4,185 )     (15,983 )     (17,026 )
Amortization of original issue discount     (1,274 )     (1,179 )     (4,954 )     (5,206 )
Interest and investment income, net     220       169       855       764  
Other, net     208       292       732       1,155  
Total other     (4,493 )     (4,903 )     (19,350 )     (20,313 )
Income before income taxes     17,656       22,140       77,224       75,972  
Income tax provision     (1,866 )     (10,846 )     (28,345 )     (33,690 )
Net income   $ 15,790     $ 11,294     $ 48,879     $ 42,282  
                 
Weighted-average shares outstanding – Basic:                

Common stock

    32,002       32,257       32,142       32,624  
Participating restricted stock     -       127       17       189  
Total     32,002       32,384       32,159       32,813  
                 
Weighted-average shares outstanding – Diluted:                
Common stock     32,568       32,520       32,459       32,833  
Participating restricted stock     -       127       17       189  
Total     32,568       32,647       32,476       33,022  
                 
Earnings per common share:                
Basic   $ 0.49     $ 0.35     $ 1.52     $ 1.29  
Diluted     0.48       0.35       1.51       1.28  
                                 
 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 
    Year Ended
   

December 31,
2012

 

December 31,
2011

Cash flows from operating activities:

       
Net income   $ 48,879     $ 42,282  

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

       
Depreciation     22,286       25,435  
Amortization     44,178       42,173  
Amortization of original issue discount     4,954       5,206  
Impairment of client contract     3,783       -  
Gain on short-term investments and other     (72 )     (60 )
Deferred income taxes     (10,707 )     3,977  
Excess tax benefit of stock-based compensation awards     (415 )     (828 )
Stock-based employee compensation     13,431       12,152  

Subtotal

    126,317       130,337  
Changes in operating assets and liabilities:        
Trade accounts and other receivables, net     (9,481 )     (31,552 )
Other current and non-current assets     (1,715 )     3,210  
Income taxes payable/receivable     (6,543 )     7,573  
Trade accounts payable and accrued liabilities     18,474       (20,074 )
Deferred revenue     425       (28,535 )
Net cash provided by operating activities     127,477       60,959  
Cash flows from investing activities:        
Purchases of property and equipment     (33,221 )     (22,197 )
Purchases of short-term investments     (62,742 )     (37,798 )
Proceeds from sale/maturity of short-term investments     42,063       43,450  
Acquisition of business, net of cash acquired     (19,085 )     -  
Acquisition of and investments in client contracts     (4,629 )     (9,133 )
Net cash used in investing activities     (77,614 )     (25,678 )
Cash flows from financing activities:        
Proceeds from issuance of common stock     1,896       1,486  
Repurchase of common stock     (16,558 )     (14,365 )
Payments on acquired equipment financing     (1,698 )     (1,587 )
Proceeds from long-term debt     150,000       -  
Payments on long-term debt     (190,000 )     (70,149 )
Payments of deferred financing costs     (2,450 )     (205 )
Excess tax benefit of stock-based compensation awards     415       828  
Net cash used in financing activities     (58,395 )     (83,992 )
Effect of exchange rate fluctuations on cash     (1,728 )     (2,414 )
Net decrease in cash and cash equivalents     (10,260 )     (51,125 )
Cash and cash equivalents, beginning of period     146,733       197,858  
Cash and cash equivalents, end of period   $ 136,473     $ 146,733  
         
         
Supplemental disclosures of cash flow information:        
Net cash paid during the period for -        
Interest   $ 13,124     $ 13,921  
Income taxes     43,379       22,836  
                 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

 

Revenues by Geography

 
   

Quarter Ended
December 31, 2012

 

Quarter Ended
September 30, 2012

 

Quarter Ended
December 31, 2011

Americas   83 %   87 %   85 %
Europe, Middle East and Africa   11 %   9 %   10 %
Asia Pacific   6 %   4 %   5 %
Total Revenues   100 %   100 %   100 %
             

Revenues by Significant Customers: 10% or more of Revenues

 
   

Quarter Ended
December 31, 2012

 

Quarter Ended
September 30, 2012

 

Quarter Ended
December 31, 2011

Comcast   19 %   21 %   19 %
DISH   13 %   13 %   13 %
Time Warner   11 %   10 %   10 %
             

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

 
   

December 31,
2012

 

September 30,
2012

 

December 31,
2011

Cable/Satellite Customer Accounts   48,870     49,224     48,837  
                   

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, 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, 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
December 31, 2012

 

Quarter Ended
December 31, 2011

   

Amounts

 

% of
Revenues

 

Amounts

 

% of
Revenues

GAAP operating income   $ 22,149   11.2 %   $ 27,043   14.4 %
Restructuring charges     1,648   0.8 %     4,865   2.6 %
Stock-based compensation     3,441   1.8 %     2,468   1.3 %
Amortization of acquired intangible assets     5,780   2.9 %     5,611   3.0 %
Non-GAAP operating income   $ 33,018   16.7 %   $ 39,987   21.3 %
         
   

Year Ended
December 31, 2012

 

Year Ended
December 31, 2011

   

Amounts

 

% of
Revenues

 

Amounts

 

% of
Revenues

GAAP operating income   $ 96,574   12.8 %   $ 96,285   13.1 %
Restructuring charges     2,469   0.3 %     7,873   1.1 %
Ascade acquisition-related charges     344   0.0 %     -   -  
Stock-based compensation     13,431   1.8 %     12,152   1.6 %
Amortization of acquired intangible assets     22,717   3.0 %     22,721   3.1 %
Non-GAAP operating income   $ 135,535   17.9 %   $ 139,031   18.9 %
                         

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
December 31, 2012

 

Quarter Ended
December 31, 2011

   

Pretax
Amount (1)

 

Per Diluted
Share
Impact (2)

 

Pretax
Amount (1)

 

Per Diluted
Share
Impact (3)

GAAP income before income taxes   $ 17,656   $ 0.48   $ 22,140   $ 0.35
Restructuring charges     1,648     0.03     4,865     0.10
Stock-based compensation     3,441     0.05     2,468     0.05
Amortization of acquired intangible assets     5,780     0.09     5,611     0.12
Amortization of OID     1,274     0.02     1,179     0.02
Non-GAAP income before income taxes   $ 29,799   $ 0.67   $ 36,263   $ 0.64
         

 

 

Year Ended
December 31, 2012

 

Year Ended
December 31, 2011

   

Pretax
Amount (1)

 

Per Diluted
Share
Impact (2)

 

Pretax
Amount (1)

 

Per Diluted
Share
Impact (3)

GAAP income before income taxes   $ 77,224   $ 1.51   $ 75,972   $ 1.28
Restructuring charges     2,469     0.04     7,873     0.16
Ascade acquisition-related charges     344     0.01     -     -
Stock-based compensation     13,431     0.25     12,152     0.25
Amortization of acquired intangible assets     22,717     0.43     22,721     0.46
Amortization of OID     4,954     0.09     5,206     0.10
Non-GAAP income before income taxes   $ 121,139   $ 2.33   $ 123,924   $ 2.25
(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, and includes the benefit from the R&D and related income tax credits related to 2012 operations. This resulted in estimated effective income rates for non-GAAP purposes for the quarter and year ended December 31, 2012 of approximately 27% and 38%, respectively; and (ii) the weighted-average diluted shares outstanding for the quarter and year ended December 31, 2012 of 32.6 million and 32.5 million, 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 for the quarter and year ended December 31, 2011 of approximately 42% and 40%, respectively; and (ii) the weighted-average diluted shares outstanding for the quarter and year ended December 31, 2011 of 32.6 million and 33.0 million, respectively.
     

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
December 31,

 

Year Ended
December 31,

    2012   2011   2012   2011
GAAP operating income   $ 22,149     $ 27,043     $ 96,574     $ 96,285  

Restructuring charges

    1,648       4,865       2,469       7,873  
Ascade acquisition-related charges     -       -       344       -  
Depreciation     5,202       6,511       22,286       25,435  
Amortization of acquired intangible assets (4)     5,780       5,611       22,717       22,721  
Amortization of other intangible assets (4)     4,502       4,236       18,748       16,454  
Stock-based compensation     3,441       2,468       13,431       12,152  
Adjusted EBITDA   $ 42,722     $ 50,734     $ 176,569     $ 180,920  
Adjusted EBITDA as a percentage of revenues     22 %     27 %     23 %     25 %
         

 

 

Quarter Ended
December 31,

 

Year Ended
December 31,

    2012   2011   2012   2011
Net income   $ 15,790     $ 11,294     $ 48,879     $ 42,282  
Interest expense (5)     3,647       4,185       15,983       17,026  
Amortization of OID     1,274       1,179       4,954       5,206  
Interest and investment income and other, net     (428 )     (461 )     (1,587 )     (1,919 )
Income tax provision     1,866       10,846       28,345       33,690  
Depreciation     5,202       6,511       22,286       25,435  
Amortization of acquired intangible assets (4)     5,780       5,611       22,717       22,721  
Amortization of other intangible assets (4)     4,502       4,236       18,748       16,454  
Stock-based compensation     3,441       2,468       13,431       12,152  
Ascade acquisition-related charges     -       -       344       -  
Restructuring charges     1,648       4,865       2,469       7,873  
Adjusted EBITDA   $ 42,722     $ 50,734     $ 176,569     $ 180,920  
         

 

 

Quarter Ended
December 31,

 

Year Ended
December 31,

    2012   2011   2012   2011
Cash flows from operating activities   $ 19,055     $ 31,825     $ 127,477     $ 60,959  
Income tax provision     1,866       10,846       28,345       33,690  
Changes in operating assets and liabilities and deferred taxes    

18,784

     

183

     

9,547

     

65,401

 
Impairment of client contract     (1,283 )     -       (3,783 )     -  
Interest expense (5)     3,647       4,185       15,983       17,026  
Interest and investment income and other, net     (428 )     (461 )     (1,587 )     (1,919 )
Ascade acquisition-related charges     -       -       344       -  
Restructuring charges     1,648       4,865       2,469       7,873  
Other     (567 )     (709 )     (2,226 )     (2,110 )
Adjusted EBITDA   $ 42,722     $ 50,734     $ 176,569     $ 180,920  
         

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

 

 

 

Quarter Ended
December 31,

 

Year Ended
December 31,

    2012   2011   2012   2011
Amortization of acquired intangible assets   $ 5,780     $ 5,611     $ 22,717     $ 22,721  
Amortization of other intangible assets     4,502       4,236       18,748       16,454  
Amortization of deferred financing costs     602       727       2,713       2,998  
Total amortization   $ 10,884     $ 10,574     $ 44,178     $ 42,173  
                 

(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
December 31,

 

Year Ended
December 31,

    2012   2011   2012   2011 (6)
Cash flows from operating activities   $ 19,055     $ 31,825     $ 127,477     $ 60,959  
Purchases of property and equipment     (12,733 )     (2,582 )     (33,221 )     (22,197 )
Non-GAAP free cash flow   $ 6,322     $ 29,243     $ 94,256     $ 38,762  
(6)   Cash flows from operating activities for the year ended December 31, 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 and 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 approximately $8 million of Intec acquisition-related expenses, which were accrued expenses as of December 31, 2010; and (iii) $6 million payment of deferred income tax liabilities that became due in 2011 as a result of the repurchase of our 2004 Convertible Debt Securities.
     

Non-GAAP Financial Measures – 2013 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 2013 full year financial guidance, is as follows:

   

2013
Guidance

GAAP operating income margin   12.0 %
Restructuring charges (7)   0.5 %
Stock-based compensation (8)   2.0 %
Amortization of acquired intangible assets (9)   2.5 %
Non-GAAP operating income margin ("approximately 17%")   17.0 %
(7)   This represents the pretax impact of restructuring charges of an estimated $2 million on CSG's operating income margin as a percentage of the midpoint of 2013 revenue guidance.
 
(8)   This represents the pretax impact of stock-based compensation expense of an estimated $14 million on CSG's operating income margin as a percentage of the midpoint of 2013 revenue guidance.
 
(9)   This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $20 million on CSG's operating income margin as a percentage of the midpoint of 2013 revenue guidance.
     

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG's 2013 full year financial guidance is as follows:

    2013 Guidance Range (10)
    Low Range   High Range
GAAP EPS   $ 1.59   $ 1.70
Restructuring charges (11)     0.03     0.03
Stock-based compensation (12)     0.22     0.22
Amortization of acquired intangible assets (13)     0.31     0.30
Amortization of OID (14)     0.08     0.08

Non-GAAP EPS

  $ 2.23   $ 2.33
(10)   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 excludes the benefit of R&D and related income tax credits related to 2012 operations, as these credits are reflected in our 2012 effective income rate for non-GAAP purposes (see Note 2 above). This resulted in an estimated effective income tax rate for non-GAAP purposes of approximately 36%; and (ii) the estimated weighted-average diluted shares outstanding of 32.8 million.
 
(11)   This represents the estimated after-tax impact on a per diluted share basis of the full year restructuring charges of approximately $2 million.
 
(12)   This represents the estimated after-tax impact on a per diluted share basis of the full year stock-based compensation expense of approximately $14 million.
 
(13)   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 $20 million.
 
(14)   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 2013 full year financial guidance at the mid-point (in thousands):

    2013
GAAP operating income   $ 92,000  
Restructuring charges     2,000  
Depreciation     23,000  
Amortization of acquired intangible assets     20,000  
Amortization of other intangible assets     13,000  
Stock-based compensation     14,000  
Adjusted EBITDA   $ 164,000  
Adjusted EBITDA as a percentage of revenues     21 %
     
    2013
Net income   $ 54,000  
Interest expense     13,000  
Amortization of OID     5,000  
Interest and investment income and other, net     (2,000 )
Income tax provision     22,000  
Depreciation     23,000  
Amortization of acquired of intangible assets     20,000  
Amortization of other intangible assets     13,000  
Stock-based compensation     14,000  
Restructuring charges     2,000  
Adjusted EBITDA   $ 164,000  
     
    2013
Cash flows from operating activities (midpoint of guidance)   $ 123,000  
Income tax provision     22,000  
Changes in operating assets and liabilities and deferred taxes     6,000  
Interest expense     13,000  
Interest and investment income and other, net     (2,000 )
Restructuring charges     2,000  
Adjusted EBITDA   $ 164,000  
         

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 is provided below for the indicated period (in thousands):

    2013
Cash flows from operating activities (midpoint of guidance)   $ 123,000  
Purchases of property and equipment     (35,000 )
Non-GAAP free cash flow   $ 88,000  

 

Contacts

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