Press release

CSG Systems International Reports Results for Second Quarter 2019

0
Sponsored by Businesswire

CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business transformation in the digital age, today reported results for the quarter ended June 30, 2019.

Key Highlights:

  • Second quarter 2019 financial results:

    • Total revenues were $245.9 million and total non-GAAP adjusted revenues were $228.1 million.
    • GAAP operating income was $30.3 million, or 12.3% of total revenues, and non-GAAP operating income was $40.1 million, or 17.6% of non-GAAP adjusted revenues.
    • GAAP earnings per diluted share (EPS) was $0.60 and non-GAAP EPS was $0.85.
    • Cash flows from operations were $15.6 million.
  • CSG declared its quarterly cash dividend of $0.2225 per share of common stock, or a total of approximately $7 million, to shareholders.
  • During the quarter, CSG repurchased approximately 144,000 shares of its common stock for approximately $7 million (weighted-average price of $45.39 per share) under its stock repurchase program.

“We continue to deliver strong results at a time that our customers are reinventing the way that they do business,” said Bret Griess, president and chief executive officer for CSG. “This quarter offers a great example of how we help our clients become more operationally efficient, monetize their offerings and services, and improve their agility, flexibility and cost structure with our cloud-based solutions. We are realizing the benefits of our strategy by delivering improved organic revenue growth and expanded margins.”

Financial Overview (unaudited)

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

 

 

Quarter Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

2019

 

 

2018

 

 

Changed

 

 

2019

 

 

2018

 

 

Changed

 

GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

245,856

 

 

$

213,033

 

 

 

15

%

 

$

490,649

 

 

$

414,737

 

 

 

18

%

Operating Income

 

 

30,338

 

 

 

24,087

 

 

 

26

%

 

 

62,431

 

 

 

49,854

 

 

 

25

%

Operating Margin Percentage

 

 

12.3

%

 

 

11.3

%

 

 

 

 

 

12.7

%

 

 

12.0

%

 

 

 

EPS

 

$

0.60

 

 

$

0.46

 

 

 

30

%

 

$

1.19

 

 

$

0.88

 

 

 

35

%

Non-GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Revenues

 

$

228,078

 

 

$

213,033

 

 

 

7

%

 

$

455,739

 

 

$

414,737

 

 

 

10

%

Operating Income

 

 

40,145

 

 

 

35,578

 

 

 

13

%

 

 

81,458

 

 

 

70,877

 

 

 

15

%

Adjusted Operating Margin Percentage

 

 

17.6

%

 

 

16.7

%

 

 

 

 

 

17.9

%

 

 

17.1

%

 

 

 

EPS

 

$

0.85

 

 

$

0.73

 

 

 

16

%

 

$

1.67

 

 

$

1.42

 

 

 

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

GAAP Results: Total revenues for the second quarter of 2019 were $245.9 million, a 15% increase when compared to revenues of $213.0 million for the second quarter of 2018, and a slight increase when compared to $244.8 million for the first quarter of 2019. The year-over-year increase in revenues can be mainly attributed to the acquisition of Forte on October 1, 2018, and the continued growth in our cloud solutions and managed services arrangements.

GAAP operating income for the second quarter of 2019 was $30.3 million, or 12.3% of total revenues, compared to $24.1 million, or 11.3% of total revenues, for the second quarter of 2018, and $32.1 million, or 13.1% of total revenues, for the first quarter of 2019.

GAAP EPS for the second quarter of 2019 was $0.60, as compared to $0.46 for the second quarter of 2018, and $0.59 for the first quarter of 2019. The year-over-year increase in GAAP EPS is reflective of the higher operating income for the quarter.

Non-GAAP Results: Non-GAAP adjusted revenues for the second quarter of 2019 were $228.1 million, a 7% increase when compared to $213.0 million for the second quarter of 2018, and relatively consistent with the $227.7 million for the first quarter of 2019.

Non-GAAP operating income for the second quarter of 2019 was $40.1 million, or 17.6% of total non-GAAP adjusted revenues, compared to $35.6 million, or 16.7% of total non-GAAP adjusted revenues for the second quarter of 2018, and $41.3 million, or 18.1% of total non-GAAP adjusted revenues for the first quarter of 2019.

Non-GAAP EPS for the second quarter of 2019 was $0.85, compared to $0.73 for the second quarter of 2018, and $0.82 for the first quarter of 2019.

The increases in non-GAAP adjusted revenues and non-GAAP EPS between years are primarily due to the factors discussed above.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of June 30, 2019 were $131.5 million compared to $141.9 million as of March 31, 2019 and $162.9 million as of December 31, 2018. CSG had net cash flows from operations for the second quarters ended June 30, 2019 and 2018 of $15.6 million and negative $(3.6) million, respectively, and had non-GAAP free cash flow of $6.0 million and negative $(18.1) million, respectively. Cash flows from operating activities for both the second quarter of 2019 and 2018 were negatively impacted by an increase in accounts receivable, primarily related to the timing of a recurring client payment that was delayed and received subsequent to the quarter-end.

Summary of 2019 Financial Guidance

CSG is maintaining its financial guidance for the full year 2019 as follows:

GAAP Measures:

 

Revenues

$965 – $995 million

Operating Margin Percentage

11.9% – 12.2%

EPS

$2.16 – $2.33

Cash Flows from Operating Activities

$125 – $150 million

Non-GAAP Measures:

 

Adjusted Revenues

$903 – $920 million

Adjusted Operating Margin Percentage

17.0% – 17.5%

EPS

$3.15 – $3.31

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 conference call on Wednesday, August 7, 2019 at 5:00 p.m. EDT, to discuss CSG’s second quarter results for 2019. The call will be carried live and archived on the Internet. A link to the conference call is available at http://ir.csgi.com. In addition, to reach the conference by phone, dial 1-888-254-3590 and ask the operator for the CSG 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 website.

About CSG

CSG is a provider of software and services that help companies around the world monetize and digitally enable the customer experience. For more than 35 years, CSG has simplified the complexity of business, providing revenue management and digital monetization, payments, and customer engagement solutions to help our customers tackle any business challenge and thrive in an ever-changing marketplace.

Operating across more than 120 countries worldwide, CSG manages billions of critical customer interactions annually. CSG is the trusted partner driving digital innovation for hundreds of leading global brands, including Arrow Electronics, AT&T, Charter Communications, Comcast, DISH, Eastlink, Formula One, iflix, MTN, and Telstra.

To learn more, visit our website at csgi.com and connect with us on LinkedIn, Twitter and Facebook.

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 two 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 its dependency on software solution sales, which are subject to greater volatility;

• Increasing competition in CSG’s market from companies of greater size and with broader presence;

• 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,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

113,777

 

 

$

139,277

 

Short-term investments

 

 

17,674

 

 

 

23,603

 

Total cash, cash equivalents and short-term investments

 

 

131,451

 

 

 

162,880

 

Settlement assets

 

 

88,575

 

 

 

124,627

 

Trade accounts receivable:

 

 

 

 

 

 

 

 

Billed, net of allowance of $2,861 and $3,115

 

 

265,795

 

 

 

235,827

 

Unbilled

 

 

39,275

 

 

 

37,227

 

Income taxes receivable

 

 

7,206

 

 

 

6,720

 

Other current assets

 

 

40,326

 

 

 

32,286

 

Total current assets

 

 

572,628

 

 

 

599,567

 

Non-current assets:

 

 

 

 

 

 

 

 

Property and equipment, net of depreciation of $102,018 and $93,278

 

 

84,354

 

 

 

81,813

 

Operating lease right-of-use assets

 

 

94,028

 

 

 

 

Software, net of amortization of $122,441 and $119,381

 

 

33,322

 

 

 

36,400

 

Goodwill

 

 

256,890

 

 

 

255,816

 

Acquired client contracts, net of amortization of $87,760 and $82,692

 

 

60,230

 

 

 

65,456

 

Client contract costs, net of amortization of $30,169 and $43,051

 

 

39,724

 

 

 

37,289

 

Deferred income taxes

 

 

10,442

 

 

 

11,087

 

Other assets

 

 

28,099

 

 

 

26,934

 

Total non-current assets

 

 

607,089

 

 

 

514,795

 

Total assets

 

$

1,179,717

 

 

$

1,114,362

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

8,438

 

 

$

7,500

 

Operating lease liabilities

 

 

22,279

 

 

 

 

Client deposits

 

 

36,369

 

 

 

36,889

 

Trade accounts payable

 

 

44,874

 

 

 

45,386

 

Accrued employee compensation

 

 

51,434

 

 

 

61,107

 

Settlement liabilities

 

 

87,194

 

 

 

123,613

 

Deferred revenue

 

 

48,277

 

 

 

40,236

 

Income taxes payable

 

 

430

 

 

 

218

 

Other current liabilities

 

 

36,289

 

 

 

35,442

 

Total current liabilities

 

 

335,584

 

 

 

350,391

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of unamortized discounts of $12,327 and $14,549

 

 

349,860

 

 

 

352,326

 

Operating lease liabilities

 

 

77,993

 

 

 

 

Deferred revenue

 

 

15,463

 

 

 

17,527

 

Income taxes payable

 

 

2,684

 

 

 

2,284

 

Deferred income taxes

 

 

11,204

 

 

 

8,205

 

Other non-current liabilities

 

 

12,605

 

 

 

22,605

 

Total non-current liabilities

 

 

469,809

 

 

 

402,947

 

Total liabilities

 

 

805,393

 

 

 

753,338

 

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; 33,062 and 33,158 shares outstanding

 

 

696

 

 

 

693

 

Common stock warrants; 439 warrants vested; 1,425 issued

 

 

9,082

 

 

 

9,082

 

Additional paid-in capital

 

 

446,512

 

 

 

441,417

 

Treasury stock, at cost; 35,172 and 34,779 shares

 

 

(858,186

)

 

 

(842,360

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gains on short-term investments, net of tax

 

 

30

 

 

 

2

 

Cumulative foreign currency translation adjustments

 

 

(42,908

)

 

 

(42,937

)

Accumulated earnings

 

 

819,098

 

 

 

795,127

 

Total stockholders’ equity

 

 

374,324

 

 

 

361,024

 

Total liabilities and stockholders’ equity

 

$

1,179,717

 

 

$

1,114,362

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 

 

Quarter Ended

 

 

Six Months Ended

 

 

 

June 30, 2019

 

 

June 30, 2018

 

 

June 30, 2019

 

 

June 30, 2018

 

 

Revenues

$

245,856

 

 

$

213,033

 

 

$

490,649

 

 

$

414,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation, shown separately below)

 

132,234

 

 

 

109,492

 

 

 

261,197

 

 

 

210,588

 

 

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

30,645

 

 

 

30,953

 

 

 

63,236

 

 

 

60,332

 

 

Selling, general and administrative

 

45,372

 

 

 

40,624

 

 

 

91,290

 

 

 

81,272

 

 

Depreciation

 

5,441

 

 

 

4,548

 

 

 

10,554

 

 

 

8,462

 

 

Restructuring and reorganization charges

 

1,826

 

 

 

3,329

 

 

 

1,941

 

 

 

4,229

 

 

Total operating expenses

 

215,518

 

 

 

188,946

 

 

 

428,218

 

 

 

364,883

 

 

Operating income

 

30,338

 

 

 

24,087

 

 

 

62,431

 

 

 

49,854

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,498

)

 

 

(4,480

)

 

 

(9,058

)

 

 

(8,746

)

 

Amortization of original issue discount

 

(700

)

 

 

(661

)

 

 

(1,390

)

 

 

(1,313

)

 

Interest and investment income, net

 

417

 

 

 

770

 

 

 

936

 

 

 

1,581

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

(810

)

 

Other, net

 

1,280

 

 

 

1,008

 

 

 

(231

)

 

 

362

 

 

Total other

 

(3,501

)

 

 

(3,363

)

 

 

(9,743

)

 

 

(8,926

)

 

Income before income taxes

 

26,837

 

 

 

20,724

 

 

 

52,688

 

 

 

40,928

 

 

Income tax provision

 

(7,458

)

 

 

(5,607

)

 

 

(14,058

)

 

 

(11,797

)

 

Net income

$

19,379

 

 

$

15,117

 

 

$

38,630

 

 

$

29,131

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

32,093

 

 

 

32,589

 

 

 

32,111

 

 

 

32,558

 

 

Diluted

 

32,458

 

 

 

32,908

 

 

 

32,448

 

 

 

33,005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.60

 

 

$

0.46

 

 

$

1.20

 

 

$

0.89

 

 

Diluted

 

0.60

 

 

 

0.46

 

 

 

1.19

 

 

 

0.88

 

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

 

Six Months Ended

 

 

 

June 30,

2019

 

 

June 30,

2018

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

38,630

 

 

$

29,131

 

 

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

 

 

 

 

 

 

 

 

Depreciation

 

10,554

 

 

 

8,462

 

 

Amortization

 

24,625

 

 

 

20,957

 

 

Amortization of original issue discount

 

1,390

 

 

 

1,313

 

 

Asset impairment

 

365

 

 

 

1,001

 

 

Gain on short-term investments and other

 

(170

)

 

 

(108

)

 

Loss on extinguishment of debt

 

 

 

 

810

 

 

Deferred income taxes

 

4,181

 

 

 

4,944

 

 

Stock-based compensation

 

8,500

 

 

 

10,213

 

 

Subtotal

 

88,075

 

 

 

76,723

 

 

Changes in operating assets and liabilities, net of acquired amounts:

 

 

 

 

 

 

 

 

Trade accounts receivable, net

 

(31,751

)

 

 

(11,369

)

 

Other current and non-current assets and liabilities

 

(16,222

)

 

 

(13,995

)

 

Income taxes payable/receivable

 

(315

)

 

 

1,828

 

 

Trade accounts payable and accrued liabilities

 

(17,328

)

 

 

(27,772

)

 

Deferred revenue

 

5,970

 

 

 

799

 

 

Net cash provided by operating activities

 

28,429

 

 

 

26,214

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of software, property and equipment

 

(17,858

)

 

 

(26,715

)

 

Purchases of short-term investments

 

(22,542

)

 

 

(44,345

)

 

Proceeds from sale/maturity of short-term investments

 

28,753

 

 

 

116,866

 

 

Acquisition of and investments in business, net of cash acquired

 

(4,000

)

 

 

(68,636

)

 

Net cash used in investing activities

 

(15,647

)

 

 

(22,830

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

1,115

 

 

 

1,134

 

 

Payment of cash dividends

 

(14,808

)

 

 

(14,375

)

 

Repurchase of common stock

 

(20,741

)

 

 

(18,319

)

 

Proceeds from long-term debt

 

 

 

 

150,000

 

 

Payments on long-term debt

 

(3,750

)

 

 

(121,875

)

 

Payments of deferred financing costs

 

 

 

 

(1,490

)

 

Net cash used in financing activities

 

(38,184

)

 

 

(4,925

)

 

Effect of exchange rate fluctuations on cash

 

(98

)

 

 

(1,031

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(25,500

)

 

 

(2,572

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

139,277

 

 

 

122,243

 

 

Cash and cash equivalents, end of period

$

113,777

 

 

$

119,671

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

$

8,110

 

 

$

7,744

 

 

Income taxes

 

10,244

 

 

 

4,778

 

 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

 

Revenues by Geography

 
 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

 

2018

 

Americas

 

 

87

%

 

 

86

%

 

 

85

%

Europe, Middle East and Africa

 

 

9

%

 

 

10

%

 

 

10

%

Asia Pacific

 

 

4

%

 

 

4

%

 

 

5

%

Total revenues

 

 

100

%

 

 

100

%

 

 

100

%

Revenues by Significant Customers: 10% or more of Revenues

 
 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

 

2018

 

Comcast

 

 

23

%

 

 

22

%

 

 

25

%

Charter

 

 

20

%

 

 

19

%

 

 

21

%

Components of Revenues

 
 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

June 30,

 

 

March 31,

 

 

June 30,

 

 

 

2019

 

 

2019

 

 

2018

 

Cloud and related solutions

 

$

222,183

 

 

$

219,590

 

 

$

187,401

 

Software and services

 

 

12,173

 

 

 

13,028

 

 

 

13,331

 

Maintenance

 

 

11,500

 

 

 

12,175

 

 

 

12,301

 

Total revenues

 

$

245,856

 

 

$

244,793

 

 

$

213,033

 

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 adjusted revenues, non-GAAP operating income, non-GAAP adjusted operating margin percentage, 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;
  • 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

 

Adjusted

Revenues

 

Operating

Income

 

Adjusted

Operating

Margin

Percentage

 

EPS

Transaction fees

 

X

 

 

X

 

Restructuring and reorganization charges

 

 

X

 

X

 

X

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

X

 

X

 

X

Earn-out compensation

 

 

X

 

X

 

X

Transaction-related costs

 

 

X

 

X

 

X

Stock-based compensation

 

 

X

 

X

 

X

Amortization of original issue discount (“OID”)

 

 

 

 

X

Gain (loss) on extinguishment of debt

 

 

 

 

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:

  • Transaction fees are primarily comprised of interchange and other payment-related fees paid, in conjunction with the delivery of service to clients under CSG’s payment services contracts, to third-party payment processors and financial institutions by CSG. Because CSG controls the integrated service provided under its payment services client contracts, these transaction fees are presented gross, and not netted against revenues; however, other payments companies who do not provide and/or control an integrated service present their revenues net of transaction fees. The exclusion of these fees in calculating CSG’s non-GAAP adjusted revenues provides management and investors an additional means to use to compare CSG’s current revenues with historical and future periods, as well as with other payments companies.
  • Restructuring and reorganization charges are expenses that result from cost reduction initiatives and/or significant changes to CSG’s business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. 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 financial results with historical and future periods.
  • Acquisition-related expenses include amortization of acquired intangible assets, earn-out compensation, and transaction-related costs. Transaction-related costs, which typically include expenses related to legal, accounting, and other professional services, are direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring core business operating results. The total amount of acquisition-related expenses can vary significantly between periods based on the number and size of acquisition activities, previously acquired intangible assets becoming fully amortized, and ultimate realization of earn-out compensation. In addition, the timing of these expenses may not directly correlate with underlying performance of the CSG’s operations. Therefore, the exclusion of acquisition-related expenses 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 equity awards 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. 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.
  • The convertible notes 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 notes for cash flow, liquidity, and debt service purposes.
  • Gains and losses related to the extinguishment of debt are a result of the refinancing of CSG’s credit agreement and/or repurchase of CSG’s convertible notes. These activities are not considered reflective of CSG’s recurring core business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of this item allows investors to further evaluate the cash impact of these repurchases for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS 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, debt servicing capabilities, and enterprise valuation. CSG defines non-GAAP adjusted EBITDA as income before interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency transaction adjustments, acquisition-related expenses, and unusual items, such as restructuring and reorganization charges, and gains and losses related to the extinguishment of debt, 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, pay cash dividends, and fund ongoing operations. CSG defines non-GAAP free cash flow as net cash flows from operating activities less the purchases of software, property and equipment.

Non-GAAP Financial Measures

Non-GAAP Adjusted Revenues:

The reconciliations of GAAP revenues to non-GAAP adjusted revenues for the indicated periods are as follows (in thousands):

 

 

Quarters Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

GAAP revenues

 

$

245,856

 

 

$

213,033

 

 

$

490,649

 

 

$

414,737

 

Less: Transaction fees

 

 

(17,778

)

 

 

 

 

 

(34,910

)

 

 

 

Non-GAAP adjusted revenues (1)

 

$

228,078

 

 

$

213,033

 

 

$

455,739

 

 

$

414,737

 

 (1)

 

Non-GAAP adjusted revenues are defined as GAAP revenues less transaction fees.  Transaction fees are primarily comprised of interchange and other payment-related fees paid, in conjunction with the delivery of service to clients under CSG’s payment services contracts, to third-party payment processors and financial institutions by CSG.  Because CSG controls the integrated service provided under its payment services client contracts, these transaction fees are presented gross, and not netted against revenues; however, other payments companies who do not provide and/or control an integrated service present their revenues net of transaction fees.

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):

 

 

Quarters Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

GAAP operating income

 

$

30,338

 

 

$

24,087

 

 

$

62,431

 

 

$

49,854

 

Restructuring and reorganization charges (2)

 

 

1,826

 

 

 

3,329

 

 

 

1,941

 

 

 

4,229

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,174

 

 

 

2,496

 

 

 

6,355

 

 

 

4,203

 

Earn-out compensation

 

 

 

 

 

 

 

 

1,260

 

 

 

 

Transaction-related costs

 

 

 

 

 

3

 

 

 

 

 

 

2,358

 

Stock-based compensation (2)

 

 

4,807

 

 

 

5,663

 

 

 

9,471

 

 

 

10,233

 

Non-GAAP operating income

 

$

40,145

 

 

$

35,578

 

 

$

81,458

 

 

$

70,877

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjusted revenues

 

$

228,078

 

 

$

213,033

 

 

$

455,739

 

 

$

414,737

 

Non-GAAP adjusted operating margin percentage

 

 

17.6

%

 

 

16.7

%

 

 

17.9

%

 

 

17.1

%

(2)

 

Stock based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges.

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

 

 

Quarter Ended

 

 

June 30, 2019

 

 

June 30, 2018

 

 

Amounts

 

 

EPS (3)

 

 

Amounts

 

 

EPS (3)

GAAP net income          

 

$

19,379

 

 

$

0.60

 

 

$

15,117

 

 

$

0.46

GAAP income tax provision (3) 

 

 

7,458

 

 

 

 

 

 

 

5,607

 

 

 

 

GAAP income before income taxes        

 

 

26,837

 

 

 

 

 

 

 

20,724

 

 

 

 

Restructuring and reorganization charges (2)         

 

 

1,826

 

 

 

 

 

 

 

3,329

 

 

 

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets        

 

 

3,174

 

 

 

 

 

 

 

2,496

 

 

 

 

Transaction-related costs   

 

 

 

 

 

 

 

 

 

3

 

 

 

 

Stock-based compensation (2)  

 

 

4,807

 

 

 

 

 

 

 

5,663

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of OID       

 

 

700

 

 

 

 

 

 

 

661

 

 

 

 

Non-GAAP income before income taxes             

 

 

37,344

 

 

 

 

 

 

 

32,876

 

 

 

 

Non-GAAP income tax provision (3)      

 

 

(9,709

)

 

 

 

 

 

 

(8,877

)

 

 

 

Non-GAAP net income 

 

$

27,635

 

 

$

0.85

 

 

$

23,999

 

 

$

0.73

 

 

Six Months Ended

 

 

Six Months Ended

 

 

June 30, 2019

 

 

June 30, 2018

 

 

Amounts

 

 

EPS (4)

 

 

Amounts

 

 

EPS (4)

GAAP net income          

 

$

38,630

 

 

$

1.19

 

 

$

29,131

 

 

$

0.88

GAAP income tax provision (3) 

 

 

14,058

 

 

 

 

 

 

 

11,797

 

 

 

 

GAAP income before income taxes        

 

 

52,688

 

 

 

 

 

 

 

40,928

 

 

 

 

Restructuring and reorganization charges (2)         

 

 

1,941

 

 

 

 

 

 

 

4,229

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets        

 

 

6,355

 

 

 

 

 

 

 

4,203

 

 

 

 

Earn-out compensation      

 

 

1,260

 

 

 

 

 

 

 

 

 

 

 

Transaction-related costs   

 

 

 

 

 

 

 

 

 

2,358

 

 

 

 

Stock-based compensation (2)  

 

 

9,471

 

 

 

 

 

 

 

10,233

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

810

 

 

 

 

Amortization of OID       

 

 

1,390

 

 

 

 

 

 

 

1,313

 

 

 

 

Non-GAAP income before income taxes             

 

 

73,105

 

 

 

 

 

 

 

64,074

 

 

 

 

Non-GAAP income tax provision (3)      

 

 

(19,007

)

 

 

 

 

 

 

(17,300

)

 

 

 

Non-GAAP net income 

 

$

54,098

 

 

$

1.67

 

 

$

46,774

 

 

$

1.42

(3)

 

For the second quarter and six months ended June 30, 2019 the GAAP effective income tax rates were approximately 28% and 27%, respectively, and the non-GAAP effective income tax rates were approximately 26% for both periods.  For the second quarter and six months ended June 30, 2018, the GAAP effective income tax rates were approximately 27% and 29%, respectively, and the non-GAAP effective income tax rates were approximately 27% for both periods.

 

(4)

 

The outstanding diluted shares for the second quarter and six months ended June 30, 2019 were 32.5 million and 32.4 million, respectively, and for the second quarter and six months ended June 30, 2018 were 32.9 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 GAAP net income is provided below for the indicated periods (in thousands, except percentages):

 

 

Quarter Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

GAAP net income

 

$

19,379

 

 

$

15,117

 

 

$

38,630

 

 

$

29,131

 

GAAP income tax provision

 

 

7,458

 

 

 

5,607

 

 

 

14,058

 

 

 

11,797

 

Interest expense (5)

 

 

4,498

 

 

 

4,480

 

 

 

9,058

 

 

 

8,746

 

Amortization of OID

 

 

700

 

 

 

661

 

 

 

1,390

 

 

 

1,313

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

 

 

 

810

 

Interest and investment income and other, net

 

 

(1,697

)

 

 

(1,778

)

 

 

(705

)

 

 

(1,943

)

GAAP operating income

 

 

30,338

 

 

 

24,087

 

 

 

62,431

 

 

 

49,854

 

Restructuring and reorganization charges (2)

 

 

1,826

 

 

 

3,329

 

 

 

1,941

 

 

 

4,229

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets (6)

 

 

3,174

 

 

 

2,496

 

 

 

6,355

 

 

 

4,203

 

Earn-out compensation

 

 

 

 

 

 

 

 

1,260

 

 

 

 

Transaction-related costs

 

 

 

 

 

3

 

 

 

 

 

 

2,358

 

Stock-based compensation (2)

 

 

4,807

 

 

 

5,663

 

 

 

9,471

 

 

 

10,233

 

Amortization of other intangible assets (6)

 

 

2,666

 

 

 

2,323

 

 

 

5,040

 

 

 

4,581

 

Amortization of client contract costs (6)

 

 

6,419

 

 

 

5,784

 

 

 

12,398

 

 

 

11,262

 

Depreciation

 

 

5,441

 

 

 

4,548

 

 

 

10,554

 

 

 

8,462

 

Non-GAAP adjusted EBITDA

 

$

54,671

 

 

$

48,233

 

 

$

109,450

 

 

$

95,182

 

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenues

 

 

24

%

 

 

23

%

 

 

24

%

 

 

23

%

(5)

 

Interest expense includes amortization of deferred financing costs as provided in Note 6 below.

 

(6)

 

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

 

 

Quarter Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Amortization of acquired intangible assets

 

$

3,174

 

 

$

2,496

 

 

$

6,355

 

 

$

4,203

 

Amortization of other intangible assets

 

 

2,666

 

 

 

2,323

 

 

 

5,040

 

 

 

4,581

 

Amortization of client contract costs

 

 

6,419

 

 

 

5,784

 

 

 

12,398

 

 

 

11,262

 

Amortization of deferred financing costs

 

 

417

 

 

 

408

 

 

 

832

 

 

 

911

 

Total amortization

 

$

12,676

 

 

$

11,011

 

 

$

24,625

 

 

$

20,957

 

Non-GAAP 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

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

$

15,603

 

 

$

(3,641

)

 

$

28,429

 

 

$

26,214

 

Purchases of software, property and equipment

 

 

(9,572

)

 

 

(14,480

)

 

 

(17,858

)

 

 

(26,715

)

Non-GAAP free cash flow

 

$

6,031

 

 

$

(18,121

)

 

$

10,571

 

 

$

(501

)

Non-GAAP Financial Measures – 2019 Financial Guidance

Non-GAAP Adjusted Revenues:

The reconciliation of GAAP revenues to non-GAAP adjusted revenues, as included in CSG’s 2019 full year financial guidance, is as follows:

 

 

2019 Guidance Range

 

 

 

Low Range

 

 

High Range

 

GAAP revenues

 

$

965,000

 

 

$

995,000

 

Less: Transaction fees

 

 

(62,000

)

 

 

(75,000

)

Non-GAAP adjusted revenues

 

$

903,000

 

 

$

920,000

 

Non-GAAP Operating Income:

The reconciliation of GAAP operating income to non-GAAP operating income, as included in CSG’s 2019 full year financial guidance, is as follows (in thousands, except percentages):

 

 

2019 Guidance Range

 

 

 

Low Range

 

 

High Range

 

Operating Income

 

 

 

 

 

 

 

 

GAAP operating income

 

$

114,600

 

 

$

121,800

 

Restructuring and reorganization charges

 

 

2,200

 

 

 

2,200

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,600

 

 

 

12,600

 

Earn-out compensation

 

 

3,800

 

 

 

3,800

 

Stock-based compensation

 

 

20,300

 

 

 

20,300

 

Non-GAAP operating income

 

$

153,500

 

 

$

160,700

 

 

 

 

 

 

 

 

 

 

Operating Margin Percentage

 

 

 

 

 

 

 

 

GAAP revenues (mid-point)

 

$

965,000

 

 

$

995,000

 

GAAP operating margin percentage

 

 

11.9

%

 

 

12.2

%

 

 

 

 

 

 

 

 

 

Non-GAAP adjusted revenues (mid-point)

 

$

903,000

 

 

$

920,000

 

Non-GAAP adjusted operating margin percentage

 

 

17.0

%

 

 

17.5

%

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2019 full year financial guidance is as follows (in thousands, except per share amounts):

 

 

2019 Guidance Range

 

 

Low Range

 

 

High Range

 

 

Amounts

 

 

EPS (8)

 

 

Amounts

 

 

EPS (8)

GAAP net income

 

$

70,100

 

 

$

2.16

 

 

$

75,400

 

 

$

2.33

GAAP income tax provision (7)

 

 

25,400

 

 

 

 

 

 

 

27,300

 

 

 

 

GAAP income before income taxes

 

 

95,500

 

 

 

 

 

 

 

102,700

 

 

 

 

Restructuring and reorganization charges

 

 

2,200

 

 

 

 

 

 

 

2,200

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,600

 

 

 

 

 

 

 

12,600

 

 

 

 

Earn-out compensation

 

 

3,800

 

 

 

 

 

 

 

3,800

 

 

 

 

Stock-based compensation

 

 

20,300

 

 

 

 

 

 

 

20,300

 

 

 

 

Amortization of OID

 

 

2,800

 

 

 

 

 

 

 

2,800

 

 

 

 

Non-GAAP income before income taxes

 

 

137,200

 

 

 

 

 

 

 

144,400

 

 

 

 

Non-GAAP income tax provision (7)

 

 

(35,300

)

 

 

 

 

 

 

(37,300

)

 

 

 

Non-GAAP net income

 

$

101,900

 

 

$

3.15

 

 

$

107,100

 

 

$

3.31

(7)

 

For 2019, the estimated effective income tax rate for GAAP and non-GAAP purposes is expected to be approximately 27% and approximately 26%, respectively.

 

 (8)

 

The weighted-average diluted shares outstanding are expected to be approximately 32 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 GAAP net income is provided below for CSG’s 2019 full year financial guidance (in thousands, except percentages):

 

 

2019 Guidance Range

 

 

 

Low Range

 

 

High Range

 

GAAP net income

 

$

70,100

 

 

$

75,400

 

GAAP income tax provision

 

 

25,400

 

 

 

27,300

 

Interest expense

 

 

18,400

 

 

 

18,400

 

Amortization of OID

 

 

2,800

 

 

 

2,800

 

Interest and investment income and other, net

 

 

(2,100

)

 

 

(2,100

)

GAAP operating income

 

 

114,600

 

 

 

121,800

 

Restructuring and reorganization charges

 

 

2,200

 

 

 

2,200

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,600

 

 

 

12,600

 

Earn-out compensation

 

 

3,800

 

 

 

3,800

 

Stock-based compensation

 

 

20,300

 

 

 

20,300

 

Amortization of other intangible assets

 

 

9,900

 

 

 

9,900

 

Amortization of client contract costs

 

 

19,400

 

 

 

19,400

 

Depreciation

 

 

22,700

 

 

 

22,700

 

Non-GAAP adjusted EBITDA

 

$

205,500

 

 

$

212,700

 

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenues

 

 

23

%

 

 

23

%

Non-GAAP 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):

 

 

2019 Guidance Range

 

 

 

Low Range

 

 

High Range

 

Cash flows from operating activities

 

$

125,000

 

 

$

150,000

 

Purchases of software, property and equipment

 

 

(30,000

)

 

 

(40,000

)

Non-GAAP free cash flow

 

$

95,000

 

 

$

110,000