CSG Systems International Reports First Quarter 2020 Results

GREENWOOD VILLAGE, Colo.--()--CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business transformation in the digital age, today reported results for the quarter ended March 31, 2020.

Financial Results:

  • First quarter 2020 financial results:
    • Total revenue was $245.6 million and total non-GAAP adjusted revenue was $227.3 million.
    • GAAP operating income was $33.2 million, or 13.5% of total revenue, and non-GAAP operating income was $42.2 million, or 18.5% of non-GAAP adjusted revenue.
    • GAAP earnings per diluted share (EPS) was $0.66 and non-GAAP EPS was $0.87.
    • Cash flows used in operations were ($7.2) million, with non-GAAP free cash flow deficit of ($12.0) 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 first quarter of 2020, CSG repurchased under its stock repurchase program, approximately 142,000 shares of its common stock for approximately $6 million.

“Our first quarter results were solid, illustrating that, while CSG is not immune from the impact of this pandemic, we are in a good position to weather this storm,” said Bret Griess, president and chief executive officer for CSG International. “We provide business-critical solutions that help service providers acquire, monetize, engage and retain their customers. We do business with some of the largest and most well-established brands. Our solutions are well-entrenched in these companies’ operations. We have long-term recurring contracts that provide us with over 90% visibility entering every year.

“And, throughout our 35-plus year history, we’ve demonstrated that our business model is resilient. We have a healthy balance sheet with low debt levels and access to more funding if necessary, providing us with strength and staying power during challenging times and lots of options during normal times.”

Financial Overview (unaudited)

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

 

 

 

Quarter Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

2020

 

 

 

2019

 

 

Changed

 

GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

 

245,617

 

 

$

 

244,793

 

 

 

0

%

Operating Income

 

 

33,159

 

 

 

32,093

 

 

 

3

%

Operating Margin Percentage

 

 

13.5

%

 

 

13.1

%

 

 

 

 

EPS

 

$

 

0.66

 

 

$

 

0.59

 

 

 

12

%

Non-GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Revenue

 

$

 

227,293

 

 

$

 

227,661

 

 

 

0

%

Operating Income

 

 

42,154

 

 

 

41,313

 

 

 

2

%

Adjusted Operating Margin Percentage

 

 

18.5

%

 

 

18.1

%

 

 

 

 

EPS

 

$

 

0.87

 

 

$

 

0.82

 

 

 

6

%

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 first quarter of 2020 was $245.6 million, a slight increase when compared to revenue of $244.8 million for the first quarter of 2019, and a 4% decrease when compared to $254.7 million for the fourth quarter of 2019. The sequential quarterly decrease can be mainly attributed to the higher level of revenue CSG typically experiences in the fourth quarter and the pricing adjustments provided to Comcast in conjunction with the five-year extension signed in December 2019 that became effective January 1, 2020.

GAAP operating income for the first quarter of 2020 was $33.2 million, or 13.5% of total revenue, compared to $32.1 million, or 13.1% of total revenue, for the first quarter of 2019, and $30.3 million, or 11.9% of total revenue, for the fourth quarter of 2019. The sequential quarterly increase in operating income can be mainly attributed to lower employee-related compensation costs in the first quarter of 2020.

GAAP EPS for the first quarter of 2020 was $0.66 as compared to $0.59 for the first quarter of 2019, and $0.70 for the fourth quarter of 2019. The year-over-year quarterly increase in GAAP EPS is primarily due to lower non-operating expense for the first quarter of 2020. In addition, GAAP EPS for the fourth quarter of 2019 was positively impacted by a 7% effective income tax rate for the quarter resulting primarily from an approximate $4 million net income tax benefit related to Comcast’s exercise of 0.4 million vested common stock warrants in December 2019.

Non-GAAP Results: Non-GAAP adjusted revenue for the first quarter of 2020 was $227.3 million, relatively consistent when compared to $227.7 million for the first quarter of 2019, and a 4% decrease when compared to $236.9 million for the fourth quarter of 2019.

Non-GAAP operating income for the first quarter of 2020 was $42.2 million, or 18.5% of total non-GAAP adjusted revenue, compared to $41.3 million, or 18.1% of total non-GAAP adjusted revenue for the first quarter of 2019, and $41.5 million, or 17.5% of total non-GAAP adjusted revenue for the fourth quarter of 2019.

Non-GAAP EPS for the first quarter of 2020 was $0.87, compared to $0.82 for the first quarter of 2019, and $0.98 for the fourth quarter of 2019.

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

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of March 31, 2020 were $131.3 million compared to $182.7 million as of December 31, 2019. CSG had net cash flows from operations for the first quarters ended March 31, 2020 and 2019 of ($7.2) million and $12.8 million, respectively, and had non-GAAP free cash flow of ($12.0) million and $4.5 million, respectively. Cash flows for the first quarter of 2020 were negatively impacted by the timing of two key client payments, totaling approximately $33 million, that were delayed and received shortly after quarter-end, and the payment of 2019 year-end accrued employee incentive compensation.

Summary of 2020 Financial Guidance

As a result of CSG’s current expectations related to the impact of the COVID-19 pandemic on its business, CSG is updating its financial guidance for the full year 2020, as follows:

 

 

 

As of

May 6, 2020

 

Previous

GAAP Measures:

 

 

 

 

Revenue

 

$960 - $1,000 million

 

$990 - $1,030 million

Operating Margin Percentage

 

11.4% - 11.9%

 

11.5% - 12.5%

EPS

 

$2.04 - $2.27

 

$2.13 - $2.46

Cash Flows from Operating Activities

 

$110 - $135 million

 

$130 - $155 million

Non-GAAP Measures:

 

 

 

 

Adjusted Revenue

 

$891 - $924 million

 

$917 - $950 million

Adjusted Operating Margin Percentage

 

16.0% - 16.5%

 

16.0% - 17.0%

EPS

 

$2.87 - $3.10

 

$2.96 - $3.29

For additional information and reconciliations regarding CSG’s use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG’s website at csgi.com.

Conference Call

CSG will host a conference call on Wednesday, May 6, 2020 at 5:00 p.m. EDT, to discuss CSG’s first 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, dial 1-888-204-4368 and ask the operator for the CSG conference call and David Banks, 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)

 

 

 

 

 

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

107,744

 

 

$

156,548

 

Short-term investments

 

 

23,529

 

 

 

26,109

 

Total cash, cash equivalents and short-term investments

 

 

131,273

 

 

 

182,657

 

Settlement assets

 

 

122,624

 

 

 

169,327

 

Trade accounts receivable:

 

 

 

 

 

 

 

 

Billed, net of allowance of $3,888 and $3,735

 

 

260,713

 

 

 

244,058

 

Unbilled

 

 

35,557

 

 

 

33,450

 

Income taxes receivable

 

 

5,435

 

 

 

4,297

 

Other current assets

 

 

42,702

 

 

 

35,293

 

Total current assets

 

 

598,304

 

 

 

669,082

 

Non-current assets:

 

 

 

 

 

 

 

 

Property and equipment, net of depreciation of $97,700 and $98,029

 

 

80,754

 

 

 

84,429

 

Operating lease right-of-use assets

 

 

107,009

 

 

 

94,847

 

Software, net of amortization of $128,662 and $125,437

 

 

30,645

 

 

 

32,526

 

Goodwill

 

 

262,833

 

 

 

259,164

 

Acquired client contracts, net of amortization of $93,866 and $93,767

 

 

55,329

 

 

 

55,105

 

Client contract costs, net of amortization of $34,644 and $31,526

 

 

51,967

 

 

 

50,746

 

Deferred income taxes

 

 

8,653

 

 

 

9,392

 

Other assets

 

 

28,963

 

 

 

27,739

 

Total non-current assets

 

 

626,153

 

 

 

613,948

 

Total assets

 

$

1,224,457

 

 

$

1,283,030

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

11,250

 

 

$

10,313

 

Operating lease liabilities

 

 

22,085

 

 

 

22,442

 

Client deposits

 

 

36,717

 

 

 

38,687

 

Trade accounts payable

 

 

37,960

 

 

 

32,704

 

Accrued employee compensation

 

 

46,448

 

 

 

77,527

 

Settlement liabilities

 

 

121,416

 

 

 

168,342

 

Deferred revenue

 

 

50,320

 

 

 

45,094

 

Income taxes payable

 

 

1,155

 

 

 

2,806

 

Other current liabilities

 

 

17,452

 

 

 

20,778

 

Total current liabilities

 

 

344,803

 

 

 

418,693

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of unamortized discounts of $8,897 and $10,053

 

 

344,853

 

 

 

346,509

 

Operating lease liabilities

 

 

91,620

 

 

 

78,936

 

Deferred revenue

 

 

18,575

 

 

 

18,552

 

Income taxes payable

 

 

2,651

 

 

 

2,543

 

Deferred income taxes

 

 

15,786

 

 

 

6,376

 

Other non-current liabilities

 

 

19,338

 

 

 

14,759

 

Total non-current liabilities

 

 

492,823

 

 

 

467,675

 

Total liabilities

 

 

837,626

 

 

 

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; 33,075 and 32,891 shares outstanding

 

 

699

 

 

 

696

 

Additional paid-in capital

 

 

452,524

 

 

 

454,663

 

Treasury stock, at cost; 35,498 and 35,356 shares

 

 

(874,225

)

 

 

(867,817

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gain (loss) on short-term investments, net of tax

 

 

(8

)

 

 

16

 

Cumulative foreign currency translation adjustments

 

 

(54,603

)

 

 

(39,519

)

Accumulated earnings

 

 

862,444

 

 

 

848,623

 

Total stockholders' equity

 

 

386,831

 

 

 

396,662

 

Total liabilities and stockholders' equity

$

1,224,457

$

1,283,030

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

2020

 

 

March 31,

2019

 

 

Revenue

$

245,617

 

 

$

244,793

 

 

 

 

 

 

 

 

 

 

 

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

 

131,206

 

 

 

128,963

 

 

Other operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

30,337

 

 

 

32,591

 

 

Selling, general and administrative

 

44,384

 

 

 

45,918

 

 

Depreciation

 

5,565

 

 

 

5,113

 

 

Restructuring and reorganization charges

 

966

 

 

 

115

 

 

Total operating expenses

 

212,458

 

 

 

212,700

 

 

Operating income

 

33,159

 

 

 

32,093

 

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense

 

(4,213

)

 

 

(4,560

)

 

Amortization of original issue discount

 

(730

)

 

 

(690

)

 

Interest and investment income, net

 

529

 

 

 

519

 

 

Other, net

 

(69

)

 

 

(1,511

)

 

Total other

 

(4,483

)

 

 

(6,242

)

 

Income before income taxes

 

28,676

 

 

 

25,851

 

 

Income tax provision

 

(7,162

)

 

 

(6,600

)

 

Net income

$

21,514

 

 

$

19,251

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

31,994

 

 

 

32,128

 

 

Diluted

 

32,358

 

 

 

32,438

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

$

0.67

 

 

$

0.60

 

 

Diluted

 

0.66

 

 

 

0.59

 

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

 

 

 

 

Quarter Ended

 

 

 

March 31,

2020

 

 

March 31,

2019

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

21,514

 

 

$

19,251

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities-

 

 

 

 

 

 

 

 

Depreciation

 

5,565

 

 

 

5,113

 

 

Amortization

 

10,788

 

 

 

11,949

 

 

Amortization of original issue discount

 

730

 

 

 

690

 

 

Asset impairment

 

259

 

 

 

69

 

 

Gain on short-term investments and other

 

(85

)

 

 

(157

)

 

Deferred income taxes

 

9,310

 

 

 

1,395

 

 

Stock-based compensation

 

4,857

 

 

 

3,693

 

 

Subtotal

 

52,938

 

 

 

42,003

 

 

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

 

 

 

 

 

 

 

 

Trade accounts receivable, net

 

(23,304

)

 

 

(12,018

)

 

Other current and non-current assets and liabilities

 

(8,452

)

 

 

(1,575

)

 

Income taxes payable/receivable

 

(3,092

)

 

 

3,886

 

 

Trade accounts payable and accrued liabilities

 

(32,455

)

 

 

(25,594

)

 

Deferred revenue

 

7,152

 

 

 

6,124

 

 

Net cash provided by (used in) operating activities

 

(7,213

)

 

 

12,826

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of software, property and equipment

 

(4,822

)

 

 

(8,286

)

 

Purchases of short-term investments

 

(16,037

)

 

 

(14,168

)

 

Proceeds from sale/maturity of short-term investments

 

18,670

 

 

 

19,619

 

 

Acquisition of and investments in business, net of cash acquired

 

(9,991

)

 

 

(4,000

)

 

Net cash used in investing activities

 

(12,180

)

 

 

(6,835

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

564

 

 

 

512

 

 

Payment of cash dividends

 

(8,277

)

 

 

(7,641

)

 

Repurchase of common stock

 

(13,876

)

 

 

(13,568

)

 

Payments on long-term debt

 

(1,875

)

 

 

(1,875

)

 

Net cash used in financing activities

 

(23,464

)

 

 

(22,572

)

 

Effect of exchange rate fluctuations on cash

 

(5,947

)

 

 

876

 

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(48,804

)

 

 

(15,705

)

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

156,548

 

 

 

139,277

 

 

Cash and cash equivalents, end of period

$

107,744

 

 

$

123,572

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for-

 

 

 

 

 

 

 

 

Interest

$

6,194

 

 

$

6,506

 

 

Income taxes

 

857

 

 

 

1,374

 

 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

 

Revenue by Significant Customers: 10% or more of Revenue

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

March 31,

2020

 

 

December 31,

2019

 

 

March 31,

2019

 

 

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

Comcast

 

$

52,679

 

 

 

21

%

 

$

60,049

 

 

 

24

%

 

$

55,027

 

 

 

22

%

Charter

 

 

50,712

 

 

 

21

%

 

 

50,617

 

 

 

20

%

 

 

46,347

 

 

 

19

%

Revenue by Vertical

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2019

 

Broadband/Cable/Satellite

 

 

58

%

 

 

59

%

 

 

58

%

Telecommunications

 

 

17

%

 

 

18

%

 

 

19

%

All other

 

 

25

%

 

 

23

%

 

 

23

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

Revenue by Geography

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

March 31,

 

 

December 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

 

2019

 

Americas

 

 

88

%

 

 

88

%

 

 

86

%

Europe, Middle East and Africa

 

 

9

%

 

 

8

%

 

 

10

%

Asia Pacific

 

 

3

%

 

 

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 n on-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

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 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 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 Revenue:

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

 

 

Quarter Ended March 31,

 

 

 

2020

 

 

2019

 

GAAP revenue

 

$

245,617

 

 

$

244,793

 

Less: Transaction fees

 

 

(18,324

)

 

 

(17,132

)

Non-GAAP adjusted revenue

 

$

227,293

 

 

$

227,661

 

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 March 31,

 

 

 

2020

 

 

2019

 

GAAP operating income

 

$

33,159

 

 

$

32,093

 

Restructuring and reorganization charges (1)

 

 

966

 

 

 

115

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,051

 

 

 

3,181

 

Earn-out compensation

 

 

-

 

 

 

1,260

 

Transaction-related costs

 

 

53

 

 

 

-

 

Stock-based compensation (1)

 

 

4,925

 

 

 

4,664

 

Non-GAAP operating income

 

$

42,154

 

 

$

41,313

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjusted revenue

 

$

227,293

 

 

$

227,661

 

Non-GAAP adjusted operating margin percentage

 

 

18.5

%

 

 

18.1

%

(1) 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

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

 

Amounts

 

 

EPS (3)

 

 

Amounts

 

 

EPS (3)

 

GAAP net income

 

$

21,514

 

 

$

0.66

 

 

$

19,251

 

 

$

0.59

 

GAAP income tax provision (2)

 

 

7,162

 

 

 

 

 

 

 

6,600

 

 

 

 

 

GAAP income before income taxes

 

 

28,676

 

 

 

 

 

 

 

25,851

 

 

 

 

 

Restructuring and reorganization charges (1)

 

 

966

 

 

 

 

 

 

 

115

 

 

 

 

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,051

 

 

 

 

 

 

 

3,181

 

 

 

 

 

Earn-out compensation

 

 

-

 

 

 

 

 

 

 

1,260

 

 

 

 

 

Transaction-related costs

 

 

53

 

 

 

 

 

 

 

-

 

 

 

 

 

Stock-based compensation (1)

 

 

4,925

 

 

 

 

 

 

 

4,664

 

 

 

 

 

Amortization of OID

 

 

730

 

 

 

 

 

 

 

690

 

 

 

 

 

Non-GAAP income before income taxes

 

 

38,401

 

 

 

 

 

 

 

35,761

 

 

 

 

 

Non-GAAP income tax provision (2)

 

 

(10,176

)

 

 

 

 

 

 

(9,298

)

 

 

 

 

Non-GAAP net income

 

$

28,225

 

 

$

0.87

 

 

$

26,463

 

 

$

0.82

 

(2) For the quarter ended March 31, 2020 and 2019 the GAAP effective income tax rates were approximately 25% and 26%, respectively, and the non-GAAP effective income tax rates were approximately 27% and 26%, respectively.

(3) The outstanding diluted shares for the quarter ended March 31, 2020 and 2019 were 32.3 million and 32.4 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

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

GAAP net income

 

$

21,514

 

 

$

19,251

 

GAAP income tax provision (2)

 

 

7,162

 

 

 

6,600

 

Interest expense (4)

 

 

4,213

 

 

 

4,560

 

Amortization of OID

 

 

730

 

 

 

690

 

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

Interest and investment income and other, net

 

 

(460

)

 

 

992

 

GAAP operating income

 

 

33,159

 

 

 

32,093

 

Restructuring and reorganization charges (1)

 

 

966

 

 

 

115

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

3,051

 

 

 

3,181

 

 

 

 

-

 

 

 

1,260

 

 

 

 

53

 

 

 

-

 

Stock-based compensation (1)

 

 

4,925

 

 

 

4,664

 

Amortization of other intangible assets (5)

 

 

3,285

 

 

 

2,374

 

Amortization of client contract costs (5)

 

 

4,026

 

 

 

5,979

 

Depreciation

 

 

5,565

 

 

 

5,113

 

Non-GAAP adjusted EBITDA

 

$

55,030

 

 

$

54,779

 

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

 

 

24

%

 

 

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

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Amortization of acquired intangible assets

 

$

3,051

 

 

$

3,181

 

Amortization of other intangible assets

 

 

3,285

 

 

 

2,374

 

Amortization of client contract costs

 

 

4,026

 

 

 

5,979

 

Amortization of deferred financing costs

 

 

426

 

 

 

415

 

Total amortization

 

$

10,788

 

 

$

11,949

 

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

 

 

 

March 31,

 

 

 

2020

 

 

2019

 

Cash flows from (used in) operating activities

 

$

(7,213

)

 

$

12,826

 

Purchases of software, property and equipment

 

 

(4,822

)

 

 

(8,286

)

Non-GAAP free cash flow

 

$

(12,035

)

 

$

4,540

 

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

 

$

109,000

 

 

$

119,200

 

Restructuring and reorganization charges

 

 

1,000

 

 

 

1,000

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,400

 

 

 

11,400

 

Transaction-related costs

 

 

100

 

 

 

100

 

Stock-based compensation

 

 

20,800

 

 

 

20,800

 

Non-GAAP operating income

 

$

142,300

 

 

$

152,500

 

 

 

 

 

 

 

 

 

 

Operating Margin Percentage

 

 

 

 

 

 

 

 

GAAP revenue

 

$

960,000

 

 

$

1,000,000

 

GAAP operating margin percentage

 

 

11.4

%

 

 

11.9

%

 

 

 

 

 

 

 

 

 

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

 

$

65,700

 

 

$

2.04

 

 

$

73,100

 

 

$

2.27

 

GAAP income tax provision (6)

 

 

23,900

 

 

 

 

 

 

 

26,700

 

 

 

 

 

GAAP income before income taxes

 

 

89,600

 

 

 

 

 

 

 

99,800

 

 

 

 

 

Restructuring and reorganization charges

 

 

1,000

 

 

 

 

 

 

 

1,000

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,400

 

 

 

 

 

 

 

11,400

 

 

 

 

 

Transaction-related costs

 

 

100

 

 

 

 

 

 

 

100

 

 

 

 

 

Stock-based compensation

 

 

20,800

 

 

 

 

 

 

 

20,800

 

 

 

 

 

Amortization of OID

 

 

3,000

 

 

 

 

 

 

 

3,000

 

 

 

 

 

Non-GAAP income before income taxes

 

 

125,900

 

 

 

 

 

 

 

136,100

 

 

 

 

 

Non-GAAP income tax provision (6)

 

 

(33,400

)

 

 

 

 

 

 

(36,100

)

 

 

 

 

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 27%.

(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

 

$

65,700

 

 

$

73,100

 

GAAP income tax provision (6)

 

 

23,900

 

 

 

26,700

 

Interest expense

 

 

16,900

 

 

 

16,900

 

Amortization of OID

 

 

3,000

 

 

 

3,000

 

Interest and investment income and other, net

 

 

(500

)

 

 

(500

)

GAAP operating income

 

 

109,000

 

 

 

119,200

 

Restructuring and reorganization charges

 

 

1,000

 

 

 

1,000

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,400

 

 

 

11,400

 

Transaction-related costs

 

 

100

 

 

 

100

 

Stock-based compensation

 

 

20,800

 

 

 

20,800

 

Amortization of other intangible assets

 

 

10,900

 

 

 

10,900

 

Amortization of client contract costs

 

 

18,700

 

 

 

18,700

 

Depreciation

 

 

25,600

 

 

 

25,600

 

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

 

$

110,000

 

 

$

135,000

 

Purchases of software, property and equipment

 

 

(25,000

)

 

 

(35,000

)

Non-GAAP free cash flow

 

$

85,000

 

 

$

100,000

 

 

Contacts

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

Contacts

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