CSG Systems International Reports Results for Fourth Quarter 2011

ENGLEWOOD, Colo.--(BUSINESS WIRE)--CSG Systems International, Inc. (Nasdaq: CSGS), a global provider of software- and services-based business support solutions that help clients generate revenue and maximize customer relationships, today reported results for the quarter and year ended December 31, 2011.

“Our transformation of our company to a global leader of business-enabling solutions is not complete. However, based on our engagement we have had with our clients, I am pleased with the progress we are making.”

Key Financial Highlights:

Fourth quarter 2011 results:
- Total revenues were $187.6 million.
- Non-GAAP operating income was $40.0 million, or 21.3% of total revenues and GAAP operating income was $27.0 million, or 14.4% of total revenues.
- Non-GAAP earnings per diluted share (EPS) was $0.64. GAAP EPS was $0.35.
Full year 2011 results:
- Total revenues were $734.7 million.
- Non-GAAP operating income was $139.0 million, or 18.9% of total revenues and GAAP operating income was $96.3 million, or 13.1% of total revenues.
- Non-GAAP earnings per diluted share (EPS) was $2.25. GAAP EPS was $1.28.
Cash flows from operations for the quarter were $31.8 million and $61.0 million for the year ended December 31, 2011.
During the quarter, CSG repurchased approximately 172,000 shares of its common stock for $2.3 million (weighted-average price of $13.20 per share) under its stock repurchase program.

“In 2011, we continued to strengthen our position with the leaders in the communications industry by continuing to invest in our relationships with our clients, add to our deep domain expertise and product sets, leverage our strong operational expertise on behalf of our clients and invest in our people so that they can help our clients successfully execute on their business plans,” Peter Kalan, president and chief executive officer of CSG Systems said. “Our transformation of our company to a global leader of business-enabling solutions is not complete. However, based on our engagement we have had with our clients, I am pleased with the progress we are making.”

Financial Overview (unaudited)

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

	Quarter Ended December 31,								Year Ended December 31,
	2011			2010			Percent Change		2011			2010			Percent Change
Revenues	$	187,574		$	154,079		22	%	$	734,731		$	549,379		34	%
Non-GAAP Results:
Operating Income	$	39,987		$	36,398		10	%	$	139,031		$	125,608		11	%
Operating Income Margin		21.3	%		23.7	%	-			18.9	%		22.9	%	-
EPS	$	0.64		$	0.69		(7	)%	$	2.25		$	2.30		(2	)%
GAAP Results:
Operating Income	$	27,043		$	20,661		31	%	$	96,285		$	74,342		30	%
Operating Income Margin		14.4	%		13.4	%	-			13.1	%		13.5	%	-
EPS	$	0.35		$	(0.05	)	NA		$	1.28		$	0.67		91	%

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 2011 were $187.6 million, a 22% increase when compared to revenues of $154.1 million for the fourth quarter of 2010, and a 3% increase when compared to revenues of $182.8 million for the third quarter of 2011. Total revenues for the full year 2011 were $734.7 million, a 34% increase when compared to revenues of $549.4 million for full year 2010. The year-over-year increases can be attributed to the inclusion of a full quarter and year of financial results in 2011 from Intec Telecom, acquired on November 30, 2010, as compared to the inclusion of only one month for the quarter and year ended December 31, 2010.

Non-GAAP Results: Non-GAAP operating income for the fourth quarter of 2011 was $40.0 million, or 21.3% of total revenues, which compares to $36.4 million, or 23.7%, for the same period in 2010. Non-GAAP operating income for the third quarter of 2011 was $33.3 million, or 18.2% of total revenues. Non-GAAP operating income for the full year 2011 was $139.0 million, or 18.9% of total revenues, which compares to $125.6 million, or 22.9%, for the full year 2010. The lower operating margin percentages in 2011 are consistent with the company’s expectations as it reflects the lower margin profile of Intec’s global software and services business.

Non-GAAP EPS for the fourth quarter of 2011 was $0.64, compared to non-GAAP EPS of $0.69 for the fourth quarter of 2010. Non-GAAP EPS for the full year 2011 was $2.25, compared to non-GAAP EPS of $2.30 for the full year 2010.

GAAP Results: GAAP operating income for the fourth quarter of 2011 was $27.0 million, or 14.4% of total revenues, compared to $20.7 million, or 13.4%, for the same period in 2010. GAAP operating income for the full year 2011 was $96.3 million, or 13.1% of total revenues, compared to $74.3 million, or 13.5% for the full year 2010.

GAAP EPS for the fourth quarter of 2011 was $0.35, compared to a loss of ($0.05) for the fourth quarter of 2010. The Intec acquisition-related charges of $23.7 million negatively impacted GAAP EPS for the fourth quarter of 2010 by $0.50 per diluted share. Additionally, GAAP EPS for the fourth quarter of 2011, when compared to GAAP EPS for the fourth quarter of 2010, was impacted by the following items:

an additional $3.1 million of amortization of acquired intangible assets related to the Intec acquisition, which negatively impacted GAAP EPS by $0.05 per diluted share; and
restructuring charges of $4.9 million, which negatively impacted GAAP EPS by $0.08 per diluted share.

GAAP EPS for the full year 2011 was $1.28, compared to $0.67 for the full year 2010. GAAP EPS for 2011 and 2010 were impacted by the following items:

the Intec acquisition-related charges of $26.2 million for the year ended December 31, 2010 negatively impacted 2010 GAAP EPS by $0.52 per diluted share;
the data center transition expenses of $20.5 million for the year ended December 31, 2010 negatively impacted 2010 GAAP EPS by $0.40 per diluted share;
the loss on the repurchase of convertible debt securities of $12.7 million for the year ended December 31, 2010 negatively impacted 2010 GAAP EPS by $0.25 per diluted share;
restructuring charges of $7.9 million for the year ended December 31, 2011 negatively impacted 2011 GAAP EPS by $0.13 per diluted share; and
an additional $17.4 million of amortization of acquired intangible assets related to the Intec acquisition negatively impacted 2011 GAAP EPS by $0.29 per diluted share.

Balance Sheet and Cash Flows

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

	December 31, 2011			September 30, 2011			December 31, 2010
Cash, cash equivalents, and short-term investments	$	158,830		$	138,599		$	215,550
Net billed trade accounts receivable (1)		179,804			157,276			155,005
Total long-term debt:
Par value	$	340,000		$	342,500		$	410,149
Unamortized OID		(30,256	)		(31,435	)		(35,462	)
Net debt carrying amount	$	309,744		$	311,065		$	374,687

	(1)		The increase in billed accounts receivable at December 31, 2011 can be primarily attributed to the fluctuations in the timing of client payments at quarter-end and to several billing milestones being met towards the end of the fourth quarter of 2011.

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,
	2011			2010			2011 (2)			2010
Cash Flows from Operating Activities:
Operations	$	34,348		$	32,529		$	130,337		$	112,262
Changes in operating assets and liabilities		(2,523	)		14,545			(69,378	)		9,047
Net cash provided by operating activities	$	31,825		$	47,074		$	60,959		$	121,309
Cash Flows from Investing Activities:
Purchases of property and equipment	$	(2,582	)	$	(4,419	)	$	(22,197	)	$	(14,277	)

	(2)		The decrease in cash flows related to operating assets and liabilities for the full year 2011 relates primarily to: (i) the change in the monthly invoice timing for DISH, which was included as part of its contract renewal terms in January 2011, which had a negative $20 million impact; (ii) an increase in accounts receivable at December 31, 2011, as discussed above; (iii) the timing of payments for several items specific to the first quarter of 2011, including approximately $8 million of Intec acquisition-related expenses and the 2010 employee incentive bonuses, both of which were accrued at December 31, 2010; and (iv) $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.

2012 Financial Guidance

A summary of CSG’s financial guidance for the full year 2012 is as follows:

Revenues			$715 - $740 million
Non-GAAP EPS			$1.85 - $2.00
GAAP EPS from continuing operations			$0.93 - $1.03
Adjusted EBITDA			$164 - $171 million

Conference Call

CSG will host a one-hour conference call on February 7, 2012, 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) 941-9205 and ask the operator for the CSG International conference call and Liz Bauer, chairperson.

Additional Information

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

About CSG International

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

Forward-Looking Statements

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

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

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


CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED (in thousands, except share and per share amounts)

	December 31, 2011			December 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	146,733		$	197,858
Short-term investments		12,097			17,692
Total cash, cash equivalents, and short-term investments		158,830			215,550
Trade accounts receivable-
Billed, net of allowance of $2,903 and $1,837		179,804			155,005
Unbilled and other		30,981			30,803
Deferred income taxes		19,982			13,852
Income taxes receivable		4,139			9,043
Other current assets		16,224			17,241
Total current assets		409,960			441,494
Property and equipment, net of depreciation of $116,125 and $94,236		41,154			52,257
Software, net of amortization of $56,521 and $45,579		29,966			31,118
Goodwill		222,768			209,164
Client contracts, net of amortization of $159,225 and $133,218		98,403			116,328
Deferred income taxes		1,008			9,677
Other assets		14,393			19,660
Total assets	$	817,652		$	879,698
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt, net of unamortized original issue discount of zero and $621	$	27,000		$	69,528
Client deposits		30,523			31,897
Trade accounts payable		27,198			25,381
Accrued employee compensation		42,005			53,372
Income taxes payable		2,334			2,028
Deferred revenue		44,824			56,184
Other current liabilities		23,501			32,019
Total current liabilities		197,385			270,409
Non-current liabilities:
Long-term debt, net of unamortized original issue discount of $30,256 and $34,841		282,744			305,159
Deferred revenue		8,631			16,103
Income taxes payable		4,114			954
Deferred income taxes		30,943			33,247
Other non-current liabilities		19,121			16,748
Total non-current liabilities		345,553			372,211
Total liabilities		542,938			642,620
Stockholders’ equity:
Preferred stock, par value $.01 per share; 10,000,000 shares authorized; zero shares issued and outstanding		-			-
Common stock, par value $.01 per share; 100,000,000 shares authorized; 33,822,232 shares and 34,120,789 shares outstanding		645			641
Additional paid-in capital		449,376			439,712
Treasury stock, at cost, 30,551,519 and 29,956,808 shares		(714,893	)		(704,963	)
Accumulated other comprehensive income (loss):
Unrealized gain on short-term investments, net of tax		1			4
Unrecognized pension plan losses and prior service costs, net of tax		(1,794	)		(897	)
Unrealized loss on change in fair value of interest rate swaps, net of tax		(618	)		-
Cumulative translation adjustments		(1,998	)		868
Accumulated earnings		543,995			501,713
Total stockholders’ equity		274,714			237,078
Total liabilities and stockholders’ equity	$	817,652		$	879,698

CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED (in thousands, except per share amounts)

	Quarter Ended						Year Ended
	December 31, 2011			December 31, 2010			December 31, 2011			December 31, 2010
Revenues:
Processing and related services	$	133,076		$	129,382		$	524,666		$	497,775
Software, maintenance and services		54,498			24,697			210,065			51,604
Total revenues		187,574			154,079			734,731			549,379

Cost of revenues (exclusive of depreciation, shown separately below):
Processing and related services		60,548			61,034			244,776			258,638
Software, maintenance and services		30,474			13,166			120,874			31,166
Total cost of revenues		91,022			74,200			365,650			289,804
Other operating expenses:
Research and development		26,663			21,435			111,142			78,050
Selling, general and administrative		31,470			29,978			128,346			82,586
Depreciation		6,511			5,850			25,435			22,428
Restructuring charges		4,865			1,955			7,873			2,169
Total operating expenses		160,531			133,418			638,446			475,037
Operating income		27,043			20,661			96,285			74,342
Other income (expense):
Interest expense		(4,185	)		(2,237	)		(17,026	)		(6,976	)
Amortization of original issue discount		(1,179	)		(1,446	)		(5,206	)		(6,893	)
Interest and investment income, net		169			230			764			754
Loss on repurchase of convertible debt securities		-			(79	)		-			(12,714	)
Loss on foreign currency transactions		-			(14,023	)		-			(14,023	)
Other, net		292			(834	)		1,155			(817	)
Total other		(4,903	)		(18,389	)		(20,313	)		(40,669	)
Income before income taxes		22,140			2,272			75,972			33,673
Income tax provision		(10,846	)		(4,063	)		(33,690	)		(11,244	)
Net income (loss)	$	11,294		$	(1,791	)	$	42,282		$	22,429

Weighted-average shares outstanding – Basic:
Common stock		32,257			32,428			32,624			32,537
Participating restricted stock		127			433			189			543
Total		32,384			32,861			32,813			33,080

Weighted-average shares outstanding – Diluted:
Common stock		32,520			32,428			32,833			32,822
Participating restricted stock		127			433			189			543
Total		32,647			32,861			33,022			33,365

Earnings per common share:
Basic	$	0.35		$	(0.05	)	$	1.29		$	0.68
Diluted		0.35			(0.05	)		1.28			0.67

CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED (in thousands)

	Year Ended
	December 31, 2011			December 31, 2010
Cash flows from operating activities:
Net income	$	42,282		$	22,429
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation		25,435			22,428
Amortization		42,173			19,438
Amortization of original issue discount		5,206			6,893
Gain on short-term investments and other		(60	)		(129	)
Loss on repurchase of convertible debt securities		-			12,714
Loss on foreign currency transactions		-			14,023
Deferred income taxes		3,977			3,275
Excess tax benefit of stock-based compensation awards		(828	)		(1,147	)
Stock-based employee compensation		12,152			12,338
Subtotal		130,337			112,262
Changes in operating assets and liabilities:
Trade accounts and other receivables, net		(31,552	)		(4,295	)
Other current and non-current assets		3,210			(509	)
Income taxes payable/receivable		7,573			(9,971	)
Trade accounts payable and accrued liabilities		(20,074	)		22,288
Deferred revenue		(28,535	)		1,534
Net cash provided by operating activities		60,959			121,309
Cash flows from investing activities:
Purchases of property and equipment		(22,197	)		(14,277	)
Purchases of short-term investments		(37,798	)		(64,583	)
Proceeds from sale/maturity of short-term investments		43,450			81,900
Purchase of foreign currency hedge		-			582
Payments related to foreign currency transactions		-			(14,605	)
Acquisition of businesses, net of cash acquired		-			(259,502	)
Acquisition of and investments in client contracts		(9,133	)		(4,797	)
Net cash used in investing activities		(25,678	)		(275,282	)
Cash flows from financing activities:
Proceeds from issuance of common stock		1,486			1,405
Repurchase of common stock		(14,365	)		(34,030	)
Payments on acquired equipment financing		(1,587	)		(1,157	)
Proceeds from long-term debt		-			385,000
Payments on long-term debt		(70,149	)		(150,958	)
Payments of deferred financing costs		(205	)		(14,999	)
Excess tax benefit of stock-based compensation awards		828			1,147
Net cash provided by (used in) financing activities		(83,992	)		186,408
Effect of exchange rate fluctuations on cash		(2,414	)		1,934
Net increase (decrease) in cash and cash equivalents		(51,125	)		34,369
Cash and cash equivalents, beginning of period		197,858			163,489
Cash and cash equivalents, end of period	$	146,733		$	197,858


Supplemental disclosures of cash flow information:
Net cash paid during the period for -
Interest	$	13,921		$	4,345
Income taxes		22,836			17,869

EXHIBIT 1
CSG SYSTEMS INTERNATIONAL, INC.
SUPPLEMENTAL REVENUE ANALYSIS

CSG Systems International acquired Intec Telecom Systems on November 30, 2010. Therefore, CSG included Intec’s financial results for one month in its full year results ended December 31, 2010, and for twelve months in its full year results ended December 31, 2011.

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

Revenues by Geography

	Americas	Europe, Middle East and Africa	Asia Pacific	Total Revenues
Year Ended December 31, 2010	98%	2%	<1%	100%
Quarters ended:
March 31, 2011	86%	10%	4%	100%
June 30, 2011	86%	10%	4%	100%
September 30, 2011	85%	10%	5%	100%
December 31, 2011	85%	10%	5%	100%
Year Ended December 31, 2011	85%	10%	5%	100%

Revenues by Significant Customers: 10% or more of Revenues

	Comcast	DISH	Time Warner	Charter
Year Ended December 31, 2010	24%	18%	12%	10%
Quarters ended:
March 31, 2011	19%	13%	<10%	<10%
June 30, 2011	18%	12%	11%	<10%
September 30, 2011	20%	12%	10%	<10%
December 31, 2011	19%	13%	10%	<10%
Year Ended December 31, 2011	19%	13%	10%	<10%

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

	December 31, 2011	September 30, 2011	June 30, 2011	March 31, 2011	December 31, 2010
Cable/Satellite Customer Accounts	48,837	48,730	48,860	49,081	48,913

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

Use of Non-GAAP Financial Measures and Limitations

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

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

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

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

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

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

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

Non-GAAP Financial Measures: Basis of Presentation

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

Non-GAAP Exclusions	Operating Income	EPS
Data center transition expenses (1)	X	X
Intec acquisition-related charges (1)	X	X
Restructuring charges	X	X
Stock-based compensation	X	X
Amortization of acquired intangible assets	X	X
Amortization of original issue discount (“OID”)	-	X
Gain/loss on repurchase of convertible debt securities	-	X
Unusual income tax matters	-	X

	(1)		The data center transition project and the Intec acquisition were completed in 2010, and thus, there were no costs for these items in 2011.

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

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

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

Non-GAAP Financial Measures

Non-GAAP Operating Income:

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

	Quarter Ended December 31, 2011				Quarter Ended December 31, 2010
	Amounts		% of Revenues		Amounts		% of Revenues
GAAP operating income	$	27,043	14.4	%	$	20,661	13.4	%
Data center transition expenses		-	-			338	0.2	%
Intec acquisition-related charges		-	-			9,641	6.3	%
Restructuring charges		4,865	2.6	%		-	-
Stock-based compensation		2,468	1.3	%		3,038	2.0	%
Amortization of acquired intangible assets		5,611	3.0	%		2,720	1.8	%
Non-GAAP operating income	$	39,987	21.3	%	$	36,398	23.7	%

	Year Ended December 31, 2011				Year Ended December 31, 2010
	Amounts		% of Revenues		Amounts		% of Revenues
GAAP operating income	$	96,285	13.1	%	$	74,342	13.5	%
Data center transition expenses		-	-			20,480	3.7	%
Intec acquisition-related charges		-	-			12,242	2.2	%
Restructuring charges		7,873	1.1	%		-	-
Stock-based compensation		12,152	1.6	%		12,338	2.3	%
Amortization of acquired intangible assets		22,721	3.1	%		6,206	1.2	%
Non-GAAP operating income	$	139,031	18.9	%	$	125,608	22.9	%

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, 2011				Quarter Ended December 31, 2010
	Pretax Amount (2)		Per Diluted Share Impact (3)		Pretax Amount (2)		Per Diluted Share Impact (4)
GAAP income before income taxes	$	22,140	$	0.35	$	2,272		($ 0.05	)
Income tax impacts (5)		-		-		-		0.10
Data center transition expenses		-		-		338		0.01
Intec acquisition-related charges		-		-		23,664		0.50
Restructuring charges		4,865		0.10		-		-
Stock-based compensation		2,468		0.05		3,038		0.05
Amortization of acquired intangible assets		5,611		0.12		2,720		0.05
Amortization of OID		1,179		0.02		1,446		0.03
Loss on repurchase of convertible debt securities		-		-		79		-
Non-GAAP income before income taxes	$	36,263	$	0.64	$	33,557	$	0.69


	Year Ended December 31, 2011				Year Ended December 31, 2010
	Pretax Amount (2)		Per Diluted Share Impact (3)		Pretax Amount (2)		Per Diluted Share Impact (4)
GAAP income before income taxes	$	75,972	$	1.28	$	33,673	$	0.67
Income tax impacts (5)		-		-		-		(0.03	)
Data center transition expenses		-		-		20,480		0.40
Intec acquisition-related charges		-		-		26,265		0.52
Restructuring charges		7,873		0.16		-		-
Stock-based compensation		12,152		0.25		12,338		0.24
Amortization of acquired intangible assets		22,721		0.46		6,206		0.12
Amortization of OID		5,206		0.10		6,893		0.13
Loss on repurchase of convertible debt securities		-		-		12,714		0.25
Non-GAAP income before income taxes	$	123,924	$	2.25	$	118,569	$	2.30

	(2)		These items (on a pretax basis) are calculated in accordance with GAAP, and are reflected as part of the results of operations in the accompanying Unaudited Condensed Consolidated Statements of Income.

	(3)		These items represent the estimated after-tax impact to net income on a per diluted share basis using the following: (i) the estimated income taxes related to these items, which includes the impact of the difference between GAAP and non-GAAP pretax income. This resulted in an overall estimated effective income rate for non-GAAP purposes of approximately 42% and 40%, respectively, for the quarter and year ended December 31, 2011; and (ii) the weighted-average diluted shares outstanding of 32.6 million and 33.0 million, respectively, for the quarter and year ended December 31, 2011.

	(4)		These items (excluding the one-time adjustments to income tax reserves discussed in Note 5 below) represent the estimated after-tax impact to net income on a per diluted share basis using the following: (i) the estimated income taxes related to these items, which resulted in an overall estimated effective income tax rate for non-GAAP purposes of approximately 31% and 35%, respectively, for the quarter and year ended December 31, 2010; and (ii) the weighted-average diluted shares outstanding of 32.9 million and 33.4 million, respectively, for the quarter and year ended December 31, 2010.

	(5)		CSG’s GAAP effective income tax rate for the fourth quarter and full year 2010 were approximately 179% and 33%, respectively. These rates differ significantly from CSG’s normal, historical effective income tax rates due to the impact of several unusual income tax matters, which are primarily related to the income tax benefits recorded upon the completion of CSG’s IRS examination during the second quarter of 2010, and the tax treatment of certain Intec acquisition-related charges in the fourth quarter of 2010. This represents the income tax impact of these items.

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,
	2011			2010			2011			2010
GAAP operating income	$	27,043		$	20,661		$	96,285		$	74,342
Data center transition expenses		-			338			-			20,480
Intec acquisition-related charges		-			9,641			-			12,242
Restructuring charges		4,865			-			7,873			-
Depreciation (excluding data center transition expenses)		6,511			5,657			25,435			20,221
Amortization of acquired intangible assets (7)		5,611			2,720			22,721			6,206
Amortization of other intangible assets (7)		4,236			3,561			16,454			12,476
Stock-based compensation		2,468			3,038			12,152			12,338
Adjusted EBITDA	$	50,734		$	45,616		$	180,920		$	158,305
Adjusted EBITDA as a percentage of revenues		27	%		30	%		25	%		29	%

	Quarter Ended December 31,						Year Ended December 31,
	2011			2010			2011			2010
Net income (loss)	$	11,294		$	(1,791	)	$	42,282		$	22,429
Interest expense (6)		4,185			2,237			17,026			6,976
Amortization of OID		1,179			1,446			5,206			6,893
Interest and investment income and other, net		(461	)		604			(1,919	)		63
Income tax provision		10,846			4,063			33,690			11,244
Depreciation (excluding data center transition expenses)		6,511			5,657			25,435			20,221
Amortization of acquired intangible assets (7)		5,611			2,720			22,721			6,206
Amortization of other intangible assets (7)		4,236			3,561			16,454			12,476
Stock-based compensation		2,468			3,038			12,152			12,338
Data center transition expenses		-			338			-			20,480
Intec acquisition-related charges		-			23,664			-			26,265
Restructuring charges		4,865			-			7,873			-
Loss on repurchase of convertible debt securities		-			79			-			12,714
Adjusted EBITDA	$	50,734		$	45,616		$	180,920		$	158,305


	Quarter Ended December 31,						Year Ended December 31,
	2011			2010			2011			2010
Cash flows from operating activities	$	31,825		$	47,074		$	60,959		$	121,309
Income tax provision		10,846			4,063			33,690			11,244
Changes in operating assets and liabilities, and deferred taxes		183			(17,980	)		65,401			(12,322	)
Data center transition expenses		-			145			-			18,273
Intec acquisition-related charges		-			9,641			-			12,242
Restructuring charges		4,865			-			7,873			-
Interest expense (6)		4,185			2,237			17,026			6,976
Interest and investment income and other, net		(461	)		604			(1,919	)		63
Other		(709	)		(168	)		(2,110	)		520
Adjusted EBITDA	$	50,734		$	45,616		$	180,920		$	158,305

	(6)		Interest expense includes amortization of deferred financing costs as provided in Note 7 below.

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

	Quarter Ended December 31,				Year Ended December 31,
	2011		2010		2011		2010
Amortization of acquired intangible assets	$	5,611	$	2,720	$	22,721	$	6,206
Amortization of other intangible assets		4,236		3,561		16,454		12,476
Amortization of deferred financing costs		727		194		2,998		756
Total amortization	$	10,574	$	6,475	$	42,173	$	19,438

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,
	2011			2010			2011 (8)			2010
Cash flows from operating activities	$	31,825		$	47,074		$	60,959		$	121,309
Purchases of property and equipment		(2,582	)		(4,419	)		(22,197	)		(14,277	)
Non-GAAP free cash flow	$	29,243		$	42,655		$	38,762		$	107,032

	(8)		The decrease in cash flows from operating activities for the year ended December 31, 2011 relates primarily to: (i) the change in the monthly invoice timing for DISH, which was included as part of its contract renewal terms in January 2011, which had a negative $20 million impact; (ii) an increase in accounts receivable at December 31, 2011, primarily attributed to the normal fluctuations in the timing of client payments made at year-end and to several billing milestones being met towards the end of the fourth quarter of 2011; (iii) the timing of payments for several items specific to the first quarter of 2011, including approximately $8 million of Intec acquisition-related expenses and the 2010 employee incentive bonuses, both of which were accrued at December 31, 2010; and (iv) $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 – 2012 Financial Guidance

Non-GAAP Operating Income Margin:

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

		2012 Guidance
GAAP operating income margin		12%
Restructuring charges (9)		-
Stock-based compensation (10)		2%
Amortization of acquired intangible assets (11)		3%
Non-GAAP operating income margin (“approximately 17%”)		17%

	(9)		This represents the pretax impact of restructuring charges of $1 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.

	(10)		This represents the pretax impact of stock-based compensation expense of an estimated $14 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.

	(11)		This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $22 million on CSG’s operating income margin as a percentage of the midpoint of 2012 revenue guidance.

Non-GAAP EPS:

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

	2012 Guidance Range (12)
	Low Range		High Range
GAAP EPS	$	0.93	$	1.03
Restructuring (13)		0.03		0.03
Stock-based compensation (14)		0.30		0.32
Amortization of acquired intangible assets (15)		0.48		0.51
Amortization of OID (16)		0.11		0.11
Non-GAAP EPS	$	1.85	$	2.00

	(12)		The estimated after-tax impact of these items is calculated using: (i) the estimated income taxes related to these items, which includes the impact of the difference between GAAP and non-GAAP pretax income, and the anticipated approval of R&D tax credits by the end of 2012, resulting in an estimated effective income rate for non-GAAP purposes of approximately 43%; and (ii) the estimated weighted-average diluted shares outstanding of 32.9 million.

	(13)		This represents the after-tax impact on a per diluted share basis of the full year restructuring charges of approximately $1 million.

	(14)		This represents the estimated after-tax impact on a per diluted share basis of the full year stock-based compensation expense of approximately $14 million.

	(15)		This represents the estimated after-tax impact on a per diluted share basis of the full year amortization of acquired intangible assets expense of approximately $22 million.

	(16)		This represents the estimated after-tax impact on a per diluted share basis of the full year expense related to the amortization of the OID expense for CSG’s convertible debt securities of approximately $5 million.

Non-GAAP Adjusted EBITDA:

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

		2012
GAAP operating income	$	88,000
Restructuring charges		1,000
Depreciation		26,000
Amortization of acquired intangible assets		22,000
Amortization of other intangible assets		16,000
Stock-based compensation		14,000
Adjusted EBITDA	$	167,000
Adjusted EBITDA as a percentage of revenues		23	%

	2012
Net income	$	32,000
Interest expense		16,000
Amortization of OID		5,000
Interest and investment income and other, net		(1,000	)
Income tax provision		36,000
Restructuring charges		1,000
Depreciation		26,000
Amortization of acquired of intangible assets		22,000
Amortization of other intangible assets		16,000
Stock-based compensation		14,000
Adjusted EBITDA	$	167,000

	2012
Cash flows from operating activities	$	115,000
Income tax provision		36,000
Changes in operating assets and liabilities and deferred taxes		(1,000	)
Restructuring charges		1,000
Interest expense		16,000
Interest and investment income and other, net		-
Adjusted EBITDA	$	167,000

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):