CSGS
$43.17
C S G Sys Intl
($.21)
(.48%)
Earnings Details
3rd Quarter September 2020
Wednesday, November 4, 2020 4:05:00 PM
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Summary

CSG Systems Reaffirms

C S G Sys Intl (CSGS) reported 3rd Quarter September 2020 earnings of $0.62 per share on revenue of $244.1 million. The consensus earnings estimate was $0.67 per share on revenue of $227.9 million. Revenue fell 2.9% compared to the same quarter a year ago.

The company said it continues to expect 2020 non-GAAP earnings of $2.87 to $3.10 per share on revenue of $891.0 million to $924.0 million. The current consensus earnings estimate is $3.00 per share on revenue of $912.55 million for the year ending December 31, 2020.

CSG Systems International Inc is a business support solutions provider serving the communications industry. Its product solutions include cable and satellite care and billing; convergent rating and billing; mediation & data management & among others.

Results
Reported Earnings
$0.62
Earnings Whisper
-
Consensus Estimate
$0.67
Reported Revenue
$244.1 Mil
Revenue Estimate
$227.9 Mil
Growth
Earnings Growth
Revenue Growth
Power Rating
Grade
Earnings Release

CSG Systems International Reports Third Quarter 2020 Results

GREENWOOD VILLAGE, Colo.--(BUSINESS WIRE)--CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business transformation in the digital age, today reported results for the quarter ended September 30, 2020.

Financial Results:

  • Third quarter 2020 financial results:
    • Total revenue was $244.1 million and total non-GAAP adjusted revenue was $227.7 million.
    • GAAP operating income was $28.9 million, or 11.9% of total revenue, and non-GAAP operating income was $39.1 million, or 17.2% of non-GAAP adjusted revenue.
    • GAAP earnings per diluted share (EPS) was $0.42 and non-GAAP EPS was $0.76.
    • Cash flows from operations were $65.2 million, with non-GAAP free cash flow of $55.3 million.

Shareholder Returns:

  • CSG declared its quarterly cash dividend of $0.235 per share of common stock, or a total of approximately $8 million, to shareholders.
  • During the third quarter of 2020, CSG resumed its stock repurchase program, repurchasing approximately 139,000 shares of its common stock for approximately $6 million (weighted-average price of $39.93 per share).

“Our ability to help our clients solve their toughest problems resulted in us delivering another strong quarter in a very challenging environment,” said Bret Griess, president and chief executive officer of CSG International. “The combination of our resilient business model, long-term relationships with service providers in an expanding set of verticals, and our broad portfolio of solutions focused on helping companies compete in a more digital world positions us well for the future.”

Financial Overview (unaudited)

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

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

Percent

 

2020

 

2019

 

Changed

 

2020

 

2019

 

Changed

GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

$

244,108

 

$

251,414

 

(3

%)

$

730,046

 

$

742,063

 

(2

%)

Operating Income

 

28,947

 

 

33,420

 

(13

%)

 

81,881

 

 

95,851

 

(15

%)

Operating Margin Percentage

 

11.9

%

 

13.3

%

 

 

 

11.2

%

 

12.9

%

 

 

EPS

$

0.42

 

$

0.66

 

(36

%)

$

1.41

 

$

1.85

 

(24

%)

Non-GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Revenue

$

227,695

 

$

235,050

 

(3

%)

$

679,614

 

$

690,789

 

(2

%)

Operating Income

 

39,113

 

 

42,704

 

(8

%)

 

111,900

 

 

124,162

 

(10

%)

Adjusted Operating Margin Percentage

 

17.2

%

 

18.2

%

 

 

 

16.5

%

 

18.0

%

 

 

EPS

$

0.76

 

$

0.88

 

(14

%)

$

2.22

 

$

2.55

 

(13

%)

 

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 csgi.com.

Results of Operations

GAAP Results: Total revenue for the third quarter of 2020 was $244.1 million, a 3% decrease when compared to revenue of $251.4 million for the third quarter of 2019, and a 2% increase when compared to revenue of $240.3 million for the second quarter of 2020. The year-over-year decrease in revenue can be mainly attributed to the pricing adjustments associated with the five-year Comcast extension effective January 1, 2020, as well as foreign currency headwinds. The sequential quarterly increase in revenue reflects the stabilization that CSG is beginning to experience with its sales and implementation cycles and rebound in processing volumes that were both negatively impacted during the second quarter of 2020 by the COVID-19 pandemic.

GAAP operating income for the third quarter of 2020 was $28.9 million, or 11.9% of total revenue, compared to $33.4 million, or 13.3% of total revenue, for the third quarter of 2019, and $19.8 million, or 8.2% of total revenue, for the second quarter of 2020. The year-over-year decrease in operating income is mainly due to the lower third quarter 2020 revenue, discussed above. Additionally, operating income for the second quarter of 2020 was negatively impacted by the write-off of approximately $10 million of deferred contract costs resulting from the discontinuance of a project implementation.

GAAP EPS for the third quarter of 2020 was $0.42, as compared to $0.66 for the third quarter of 2019, and $0.32 for the second quarter of 2020. The decrease in GAAP EPS year-over-year can be mainly attributed to the lower operating income discussed above and foreign currency losses included in other income. The sequential quarterly increase in GAAP EPS is due primarily to the impact of the write-off of deferred contract costs, discussed above, which had a negative impact on GAAP EPS for the second quarter of 2020 of $0.23.

Non-GAAP Results: Non-GAAP adjusted revenue for the third quarter of 2020 was $227.7 million, a 3% decrease when compared to non-GAAP adjusted revenue of $235.1 million for the third quarter of 2019, and a 1% increase when compared to $224.6 million for the second quarter of 2020.

Non-GAAP operating income for the third quarter of 2020 was $39.1 million, or 17.2% of total non-GAAP adjusted revenue, compared to $42.7 million, or 18.2% of total non-GAAP adjusted revenue for the third quarter of 2019, and $30.6 million, or 13.6% of total non-GAAP adjusted revenue for the second quarter of 2020.

The changes in non-GAAP adjusted revenue and non-GAAP operating income between quarters are primarily due to the factors discussed above.

Non-GAAP EPS for the third quarter of 2020 was $0.76 compared to $0.88 for the third quarter of 2019, and $0.59 for the second quarter of 2020, with the year-over-year decrease reflective of the lower operating income.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of September 30, 2020 were $212.1 million compared to $171.2 million as of June 30, 2020 and $182.7 million as of December 31, 2019. CSG had net cash flows from operations for the third quarters ended September 30, 2020 and 2019 of $65.2 million and $79.1 million, respectively, and had non-GAAP free cash flow of $55.3 million and $69.3 million, respectively. For the nine months ended September 30, 2020 and 2019, CSG generated net cash flows from operations of $115.7 million and $107.5 million, respectively, and had non-GAAP free cash flow of $91.5 million and $79.8 million, respectively.

Summary of 2020 Financial Guidance

CSG’s is updating its financial guidance for the full year 2020, as follows:

 

 

As of
November 4, 2020

 

Previous

GAAP Measures:

 

 

 

 

Revenue

 

No change

 

$960 - $1,000 million

Operating Margin Percentage

 

9.7% - 10.4%

 

11.1% - 11.7%

EPS

 

$1.58 - $1.81

 

$1.99 - $2.22

Cash Flows from Operating Activities

 

$125 - $145 million

 

$110 - $135 million

Non-GAAP Measures:

 

 

 

 

Adjusted Revenue

 

No change

 

$891 - $924 million

Adjusted Operating Margin Percentage

 

No change

 

16.0% - 16.5%

EPS

 

No change

 

$2.87 - $3.10

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 csgi.com.

Conference Call

CSG will host a conference call on Wednesday, November 4, 2020 at 5:00 p.m. EST, to discuss CSG’s third quarter results for 2020. 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, call 866-248-8441 and ask the operator for the CSG Systems International conference call and Liz Bauer, chairperson.

Additional Information

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

About CSG

For more than 35 years, CSG has simplified the complexity of business, delivering innovative customer engagement solutions that help companies acquire, monetize, engage and retain customers. Operating across more than 120 countries worldwide, CSG manages billions of critical customer interactions annually, and its award-winning suite of software and services allow companies across dozens of industries to tackle their biggest business challenges and thrive in an ever-changing marketplace. CSG is the trusted partner for driving digital innovation for hundreds of leading global brands, including AT&T, Charter Communications, Comcast, DISH, Eastlink, Formula One, Maximus, 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’s business may be disrupted and its results of operations and cash flows adversely affected by the COVID-19 pandemic;
  • CSG derives approximately forty percent of its revenue 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;
  • 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)

 

 

 

September 30,

 

December 31,

 

 

2020

 

2019

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

$

174,489

 

$

156,548

 

Short-term investments

 

37,605

 

 

26,109

 

Total cash, cash equivalents and short-term investments

 

212,094

 

 

182,657

 

Settlement assets

 

117,452

 

 

169,327

 

Trade accounts receivable:

 

 

 

 

 

 

Billed, net of allowance of $3,730 and $3,735

 

225,117

 

 

244,058

 

Unbilled

 

36,977

 

 

33,450

 

Income taxes receivable

 

3,341

 

 

4,297

 

Other current assets

 

42,205

 

 

35,293

 

Total current assets

 

637,186

 

 

669,082

 

Non-current assets:

 

 

 

 

 

 

Property and equipment, net of depreciation of $100,661 and $98,029

 

83,199

 

 

84,429

 

Operating lease right-of-use assets

 

115,726

 

 

94,847

 

Software, net of amortization of $135,644 and $125,437

 

28,769

 

 

32,526

 

Goodwill

 

266,636

 

 

259,164

 

Acquired client contracts, net of amortization of $100,864 and $93,767

 

50,225

 

 

55,105

 

Client contract costs, net of amortization of $39,206 and $31,526

 

45,038

 

 

50,746

 

Deferred income taxes

 

9,641

 

 

9,392

 

Other assets

 

35,396

 

 

27,739

 

Total non-current assets

 

634,630

 

 

613,948

 

Total assets

$

1,271,816

 

$

1,283,030

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

$

13,125

 

$

10,313

 

Operating lease liabilities

 

22,580

 

 

22,442

 

Client deposits

 

34,387

 

 

38,687

 

Trade accounts payable

 

36,617

 

 

32,704

 

Accrued employee compensation

 

59,534

 

 

77,527

 

Settlement liabilities

 

116,032

 

 

168,342

 

Deferred revenue

 

52,835

 

 

45,094

 

Income taxes payable

 

3,664

 

 

2,806

 

Other current liabilities

 

18,612

 

 

20,778

 

Total current liabilities

 

357,386

 

 

418,693

 

Non-current liabilities:

 

 

 

 

 

 

Long-term debt, net of unamortized discounts of $6,543 and $10,053

 

339,707

 

 

346,509

 

Operating lease liabilities

 

101,262

 

 

78,936

 

Deferred revenue

 

18,884

 

 

18,552

 

Income taxes payable

 

2,734

 

 

2,543

 

Deferred income taxes

 

10,388

 

 

6,376

 

Other non-current liabilities

 

31,528

 

 

14,759

 

Total non-current liabilities

 

504,503

 

 

467,675

 

Total liabilities

 

861,889

 

 

886,368

 

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; 33,125 and 32,891 shares outstanding

 

701

 

 

696

 

Additional paid-in capital

 

462,775

 

 

454,663

 

Treasury stock, at cost; 35,646 and 35,356 shares

 

(880,162

)

 

(867,817

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

Unrealized gains on short-term investments, net of tax

 

30

 

 

16

 

Cumulative foreign currency translation adjustments

 

(44,265

)

 

(39,519

)

Accumulated earnings

 

870,848

 

 

848,623

 

Total stockholders' equity

 

409,927

 

 

396,662

 

Total liabilities and stockholders' equity

$

1,271,816

$

1,283,030

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(in thousands, except per share amounts)

 

 

 

Quarter Ended

 

Nine Months Ended

 

 

September 30,
2020

 

September 30,
2019

 

September 30,
2020

 

September 30,
2019

Revenue

$

244,108

 

$

251,414

 

$

730,046

 

$

742,063

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

131,073

 

 

132,054

 

 

400,432

 

 

393,251

 

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

30,425

 

 

32,551

 

 

90,025

 

 

95,787

 

Selling, general and administrative

 

47,032

 

 

46,694

 

 

136,415

 

 

137,984

 

Depreciation

 

5,817

 

 

5,365

 

 

17,016

 

 

15,919

 

Restructuring and reorganization charges

 

814

 

 

1,330

 

 

4,277

 

 

3,271

 

Total operating expenses

 

215,161

 

 

217,994

 

 

648,165

 

 

646,212

 

Operating income

 

28,947

 

 

33,420

 

 

81,881

 

 

95,851

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(3,641

)

 

(4,390

)

 

(11,894

)

 

(13,448

)

Amortization of original issue discount

 

(751

)

 

(709

)

 

(2,221

)

 

(2,099

)

Interest and investment income, net

 

254

 

 

392

 

 

1,086

 

 

1,328

 

Other, net

 

(2,067

)

 

108

 

 

(3,184

)

 

(123

)

Total other

 

(6,205

)

 

(4,599

)

 

(16,213

)

 

(14,342

)

Income before income taxes

 

22,742

 

 

28,821

 

 

65,668

 

 

81,509

 

Income tax provision

 

(9,176

)

 

(7,262

)

 

(20,222

)

 

(21,320

)

Net income

$

13,566

 

$

21,559

 

$

45,446

 

$

60,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

32,115

 

 

32,016

 

 

32,070

 

 

32,079

 

Diluted

 

32,273

 

 

32,518

 

 

32,296

 

 

32,472

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.42

 

$

0.67

 

$

1.42

 

$

1.88

 

Diluted

 

0.42

 

 

0.66

 

 

1.41

 

 

1.85

 

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)

 

 

 

Nine Months Ended

 

 

September 30,
2020

 

September 30,
2019

Cash flows from operating activities:

 

 

 

 

 

 

Net income

$

45,446

 

$

60,189

 

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

 

 

 

 

 

 

Depreciation

 

17,016

 

 

15,919

 

Amortization

 

32,998

 

 

34,579

 

Amortization of original issue discount

 

2,221

 

 

2,099

 

Asset impairment

 

10,438

 

 

365

 

Gain on short-term investments and other

 

(120

)

 

(285

)

Deferred income taxes

 

3,844

 

 

6,124

 

Stock-based compensation

 

14,088

 

 

13,295

 

Subtotal

 

125,931

 

 

132,285

 

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

 

 

 

 

 

 

Trade accounts receivable, net

 

13,322

 

 

(8,748

)

Other current and non-current assets and liabilities

 

(9,228

)

 

(15,312

)

Income taxes payable/receivable

 

1,542

 

 

3,468

 

Trade accounts payable and accrued liabilities

 

(24,618

)

 

(7,978

)

Deferred revenue

 

8,736

 

 

3,812

 

Net cash provided by operating activities

 

115,685

 

 

107,527

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of software, property and equipment

 

(24,201

)

 

(27,706

)

Purchases of short-term investments

 

(49,100

)

 

(25,446

)

Proceeds from sale/maturity of short-term investments

 

37,743

 

 

38,029

 

Acquisition of and investments in business, net of cash acquired

 

(11,491

)

 

(17,194

)

Net cash used in investing activities

 

(47,049

)

 

(32,317

)

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

 

1,838

 

 

1,630

 

Payment of cash dividends

 

(23,441

)

 

(21,980

)

Repurchase of common stock

 

(19,926

)

 

(25,683

)

Payments on long-term debt

 

(7,500

)

 

(5,625

)

Net cash used in financing activities

 

(49,029

)

 

(51,658

)

Effect of exchange rate fluctuations on cash

 

(1,666

)

 

(2,199

)

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

17,941

 

 

21,353

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

156,548

 

 

139,277

 

Cash and cash equivalents, end of period

$

174,489

 

$

160,630

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for-

 

 

 

 

 

 

Interest

$

12,941

 

$

14,521

 

Income taxes

 

14,756

 

 

11,779

 

 

EXHIBIT 1
CSG SYSTEMS INTERNATIONAL, INC.
SUPPLEMENTAL REVENUE ANALYSIS

Revenue by Significant Customers: 10% or more of Revenue

 

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

September 30, 2020

 

June 30, 2020

 

September 30, 2019

 

Amount

 

% of Revenue

 

Amount

 

% of Revenue

 

Amount

 

% of Revenue

Comcast

$

52,483

22

%

$

53,282

22

%

$

58,446

23

%

Charter

 

53,202

22

%

 

51,364

21

%

 

49,575

20

%

 

Revenue by Vertical

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

September 30,

 

June 30,

 

September 30,

 

2020

 

2020

 

2019

Broadband/Cable/Satellite

59

%

60

%

59

%

Telecommunications

18

%

18

%

20

%

All other

23

%

22

%

21

%

Total revenue

100

%

100

%

100

%

 

Revenue by Geography

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

September 30,

 

June 30,

 

September 30,

 

2020

 

2020

 

2019

Americas

86

%

87

%

87

%

Europe, Middle East and Africa

10

%

9

%

9

%

Asia Pacific

4

%

4

%

4

%

Total revenue

100

%

100

%

100

%

 

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 revenue, 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
Revenue

 

Operating
Income

 

Adjusted
Operating
Margin
Percentage

 

EPS

Transaction fees

 

X

 

 

X

 

Restructuring and reorganization charges

 

 

X

 

X

 

X

Executive transition costs

 

 

X

 

X

 

X

Acquisition-related expenses:

 

 

X

 

X

 

X

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 revenue; however, other payments companies who do not provide and/or control an integrated service present their revenue net of transaction fees. The exclusion of these fees in calculating CSG’s non-GAAP adjusted revenue provides management and investors an additional means to use to compare CSG’s current revenue 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 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.
  • Executive transition costs include expenses incurred related to the departure of CSG’s CEO under the terms of his separation agreement. These costs, recognized beginning this quarter and through the end of 2020 (the CEO’s remaining term), are not considered reflective of CSG’s recurring business operating results. The exclusion of these costs 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 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 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, executive transition costs, 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 Revenue:

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

 

 

Quarter Ended
September 30,

 

Nine Months Ended
September 30,

 

 

2020

 

2019

 

2020

 

2019

GAAP revenue

 

$

244,108

 

 

$

251,414

 

 

$

730,046

 

 

$

742,063

 

Less: Transaction fees

 

 

(16,413

)

 

 

(16,364

)

 

 

(50,432

)

 

 

(51,274

)

Non-GAAP adjusted revenue

 

$

227,695

 

 

$

235,050

 

 

$

679,614

 

 

$

690,789

 

 

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,

 

Nine Months Ended
September 30,

 

2020

 

2019

 

2020

 

2019

GAAP operating income

$

28,947

 

$

33,420

 

$

81,881

 

$

95,851

 

Restructuring and reorganization charges (1)

 

814

 

 

1,330

 

 

4,277

 

 

3,271

 

Executive transition costs (1)

 

1,786

 

 

-

 

 

1,786

 

 

-

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

3,051

 

 

3,153

 

 

9,135

 

 

9,508

 

Earn-out compensation

 

-

 

 

-

 

 

-

 

 

1,260

 

Transaction-related costs

 

15

 

 

-

 

 

141

 

 

-

 

Stock-based compensation (1)

 

4,500

 

 

4,801

 

 

14,680

 

 

14,272

 

Non-GAAP operating income

$

39,113

 

$

42,704

 

$

111,900

 

$

124,162

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjusted revenue

$

227,695

 

$

235,050

 

$

679,614

 

$

690,789

 

Non-GAAP adjusted operating margin percentage

 

17.2

%

 

18.2

%

 

16.5

%

 

18.0

%

(1)

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

 

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

 

September 30, 2020

 

September 30, 2019

 

Amounts

 

EPS (3)

 

Amounts

 

EPS (3)

GAAP net income

$

13,566

 

$

0.42

$

21,559

 

$

0.66

GAAP income tax provision (2)

 

9,176

 

 

 

 

7,262

 

 

 

GAAP income before income taxes

 

22,742

 

 

 

 

28,821

 

 

 

Restructuring and reorganization charges (1)

 

814

 

 

 

 

1,330

 

 

 

Executive transition costs (1)

 

1,786

 

 

 

 

-

 

 

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

3,051

 

 

 

 

3,153

 

 

 

Transaction-related costs

 

15

 

 

 

 

-

 

 

 

Stock-based compensation (1)

 

4,500

 

 

 

 

4,801

 

 

 

Amortization of OID

 

751

 

 

 

 

709

 

 

 

Non-GAAP income before income taxes

 

33,659

 

 

 

 

38,814

 

 

 

Non-GAAP income tax provision (2)

 

(9,088

)

 

 

 

(10,092

)

 

 

Non-GAAP net income

$

24,571

 

$

0.76

$

28,722

 

$

0.88

 

Nine Months Ended

 

Nine Months Ended

 

September 30, 2020

 

September 30, 2019

 

Amounts

 

EPS (3)

 

Amounts

 

EPS (3)

GAAP net income

$

45,446

 

$

1.41

$

60,189

 

$

1.85

GAAP income tax provision (2)

 

20,222

 

 

 

 

21,320

 

 

 

GAAP income before income taxes

 

65,668

 

 

 

 

81,509

 

 

 

Restructuring and reorganization charges (1)

 

4,277

 

 

 

 

3,271

 

 

 

Executive transition costs (1)

 

1,786

 

 

 

 

-

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

9,135

 

 

 

 

9,508

 

 

 

Earn-out compensation

 

-

 

 

 

 

1,260

 

 

 

Transaction-related costs

 

141

 

 

 

 

-

 

 

 

Stock-based compensation (1)

 

14,680

 

 

 

 

14,272

 

 

 

Amortization of OID

 

2,221

 

 

 

 

2,099

 

 

 

Non-GAAP income before income taxes

 

97,908

 

 

 

 

111,919

 

 

 

Non-GAAP income tax provision (2)

 

(26,114

)

 

 

 

(29,099

)

 

 

Non-GAAP net income

$

71,794

 

$

2.22

$

82,820

 

$

2.55

(2)

For the third quarter and nine months ended September 30, 2020 the GAAP effective income tax rates were approximately 40% and 31%, respectively, and the non-GAAP effective income tax rates were approximately 27% for both periods. The difference between the GAAP and non-GAAP effective income tax rates is due primarily to the unfavorable GAAP basis tax impact related to the separation agreement entered into during the third quarter with CSG’s CEO. For the third quarter and nine months ended September 30, 2019 the GAAP effective income tax rates were approximately 25% and 26%, respectively, and the non-GAAP effective income tax rates were approximately 26% for both periods.

 

(3)

The outstanding diluted shares for the third quarter and nine months ended September 30, 2020 were 32.3 million for both periods, and for the third quarter and nine months ended September 30, 2019 were 32.5 million for both periods.

 

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

 

Nine Months Ended

 

September 30,

 

September 30,

 

2020

 

2019

 

2020

 

2019

GAAP net income

$

13,566

 

$

21,559

 

$

45,446

 

$

60,189

 

GAAP income tax provision

 

9,176

 

 

7,262

 

 

20,222

 

 

21,320

 

Interest expense (4)

 

3,641

 

 

4,390

 

 

11,894

 

 

13,448

 

Amortization of OID

 

751

 

 

709

 

 

2,221

 

 

2,099

 

Interest and investment income and other, net

 

1,813

 

 

(500

)

 

2,098

 

 

(1,205

)

GAAP operating income

 

28,947

 

 

33,420

 

 

81,881

 

 

95,851

 

Restructuring and reorganization charges (1)

 

814

 

 

1,330

 

 

4,277

 

 

3,271

 

Executive transition costs (1)

 

1,786

 

 

-

 

 

1,786

 

 

-

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets (5)

 

3,051

 

 

3,153

 

 

9,135

 

 

9,508

 

Earn-out compensation

 

-

 

 

-

 

 

-

 

 

1,260

 

Transaction-related costs

 

15

 

 

-

 

 

141

 

 

-

 

Stock-based compensation (1)

 

4,500

 

 

4,801

 

 

14,680

 

 

14,272

 

Amortization of other intangible assets (5)

 

3,282

 

 

2,704

 

 

9,816

 

 

7,744

 

Amortization of client contract costs (5)

 

4,190

 

 

3,676

 

 

12,758

 

 

16,074

 

Depreciation

 

5,817

 

 

5,365

 

 

17,016

 

 

15,919

 

Non-GAAP adjusted EBITDA

$

52,402

 

$

54,449

 

$

151,490

 

$

163,899

 

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

 

23

%

 

23

%

 

22

%

 

24

%

(4)

Interest expense includes amortization of deferred financing costs as provided in Note 5 below.

 

(5)

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

 

Quarter Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2020

 

2019

 

2020

 

2019

Amortization of acquired intangible assets

$

3,051

$

3,153

$

9,135

$

9,508

Amortization of other intangible assets

 

3,282

 

2,704

 

9,816

 

7,744

Amortization of client contract costs

 

4,190

 

3,676

 

12,758

 

16,074

Amortization of deferred financing costs

 

432

 

421

 

1,289

 

1,253

Total amortization

$

10,955

$

9,954

$

32,998

$

34,579

 

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

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2020

 

2019

 

2020

 

2019

Cash flows from operating activities

 

$

65,208

 

 

$

79,098

 

 

$

115,685

 

 

$

107,527

 

Purchases of software, property and equipment

 

 

(9,867

)

 

 

(9,848

)

 

 

(24,201

)

 

 

(27,706

)

Non-GAAP free cash flow

 

$

55,341

 

 

$

69,250

 

 

$

91,484

 

 

$

79,821

 

 

Non-GAAP Financial Measures – 2020 Financial Guidance

Non-GAAP Adjusted Revenue:

The reconciliation of GAAP revenue to non-GAAP adjusted revenue, as included in CSG’s 2020 full year financial guidance, is as follows:

 

 

2020 Guidance Range

 

 

Low Range

 

High Range

GAAP revenues

 

$

960,000

 

 

$

1,000,000

 

Less: Transaction fees

 

 

(69,000

)

 

 

(76,000

)

Non-GAAP adjusted revenues

 

$

891,000

 

 

$

924,000

 

 

Non-GAAP Operating Income:

The reconciliation of GAAP operating income to non-GAAP operating income, as included in CSG’s 2020 full year financial guidance, is as follows (in thousands, except percentages):

 

2020 Guidance Range

 

Low Range

 

High Range

Operating Income

 

 

 

 

 

 

GAAP operating income

$

93,500

 

$

103,700

 

Restructuring and reorganization charges

 

4,300

 

 

4,300

 

Executive transition costs

 

13,800

 

 

13,800

 

Acquisition-related expenses:

 

 

 

 

 

 

Amortization of acquired intangible assets

 

11,700

 

 

11,700

 

Transaction-related costs

 

100

 

 

100

 

Stock-based compensation

 

19,200

 

 

19,200

 

Non-GAAP operating income

$

142,600

 

$

152,800

 

 

 

 

 

 

 

 

Operating Margin Percentage

 

 

 

 

 

 

GAAP revenue

$

960,000

 

$

1,000,000

 

GAAP operating margin percentage

 

9.7

%

 

10.4

%

 

 

 

 

 

 

 

Non-GAAP adjusted revenue

$

891,000

 

$

924,000

 

Non-GAAP adjusted operating margin percentage

 

16.0

%

 

16.5

%

 

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2020 full year financial guidance is as follows (in thousands, except per share amounts):

 

2020 Guidance Range

 

Low Range

 

High Range

 

Amounts

 

EPS (7)

 

Amounts

 

EPS (7)

GAAP net income

$

51,100

 

$

1.58

$

58,500

 

$

1.81

GAAP income tax provision (6)

 

22,400

 

 

 

 

25,200

 

 

 

GAAP income before income taxes

 

73,500

 

 

 

 

83,700

 

 

 

Restructuring and reorganization charges

 

4,300

 

 

 

 

4,300

 

 

 

Executive transition costs

 

13,800

 

 

 

 

13,800

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

11,700

 

 

 

 

11,700

 

 

 

Transaction-related costs

 

100

 

 

 

 

100

 

 

 

Stock-based compensation

 

19,200

 

 

 

 

19,200

 

 

 

Amortization of OID

 

3,000

 

 

 

 

3,000

 

 

 

Non-GAAP income before income taxes

 

125,600

 

 

 

 

135,800

 

 

 

Non-GAAP income tax provision (6)

 

(33,100

)

 

 

 

(35,800

)

 

 

Non-GAAP net income

$

92,500

 

$

2.87

$

100,000

 

$

3.10

(6)

For 2020, the estimated effective income tax rate for GAAP and non-GAAP purposes is expected to be approximately 30% and 27%, respectively.

 

(7)

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 2020 full year financial guidance (in thousands, except percentages):

 

 

2020 Guidance Range

 

 

Low Range

 

High Range

GAAP net income

 

$

51,100

 

 

$

58,500

 

GAAP income tax provision (6)

 

 

22,400

 

 

 

25,200

 

Interest expense

 

 

15,500

 

 

 

15,500

 

Amortization of OID

 

 

3,000

 

 

 

3,000

 

Interest and investment income and other, net

 

 

1,500

 

 

 

1,500

 

GAAP operating income

 

 

93,500

 

 

 

103,700

 

Restructuring and reorganization charges

 

 

4,300

 

 

 

4,300

 

Executive transition costs

 

 

13,800

 

 

 

13,800

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,700

 

 

 

11,700

 

Transaction-related costs

 

 

100

 

 

 

100

 

Stock-based compensation

 

 

19,200

 

 

 

19,200

 

Amortization of other intangible assets

 

 

13,100

 

 

 

13,100

 

Amortization of client contract costs

 

 

17,500

 

 

 

17,500

 

Depreciation

 

 

24,300

 

 

 

24,300

 

Non-GAAP adjusted EBITDA

 

$

197,500

 

 

$

207,700

 

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

 

 

22

%

 

 

22

%

 

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):

 

 

2020 Guidance Range

 

 

Low Range

 

High Range

Cash flows from operating activities

 

$

125,000

 

 

$

145,000

 

Purchases of software, property and equipment

 

 

(25,000

)

 

 

(35,000

)

Non-GAAP free cash flow

 

$

100,000

 

 

$

110,000

 

 

Liz Bauer, Investor Relations
(303) 804-4065
E-mail: liz.bauer@csgi.com

Source: CSG Systems International, Inc.