CSG Systems International, Inc. Reports Second Quarter 2007 Results

CSG Systems International, Inc. (Nasdaq: CSGS), a leading provider of customer care and billing solutions, today reported results for the quarter ended June 30, 2007. Second Quarter 2007 Highlights: Results from continuing operations were as follows: total revenues were $99.5 million; operating income was $21.2 million; and income from continuing operations was $15.6 million, or $0.37 per diluted share. Both revenues and earnings per diluted share for the quarter were within the range of CSG’s financial guidance. Cash flows from operations for the quarter were $24.5 million, which came in below CSG’s expectations of $29-31 million for the quarter, primarily due to unexpected changes in certain operating assets and liabilities at quarterend. For the quarter, CSG repurchased 1.8 million shares of its common stock for $47.5 million (weighted-average price of $26.30 per share) under its stock repurchase program. On July 9, 2007, CSG closed on its acquisition of ComTec, Inc., a provider of print and electronic statement processing services headquartered in Fairfield, New Jersey. During the quarter, CSG completed the last significant migration of cable subscribers to its Advanced Convergent Platform, or ACP. As a result, nearly 100% of CSG’s cable clients are enjoying the rich benefits of this solution, designed to help manage bundled portfolios of services. "Our second quarter’s financial performance is reflective of the strong acceptance of CSG’s solutions,” Ed Nafus, chief executive officer and president of CSG Systems International, Inc., said. "Our clients continue to turn to us as a trusted and valued partner as they aim to strengthen customer relationships and roll out new products in this very competitive and ever-changing marketplace. Looking ahead, we remain very committed to delivering innovative solutions to ensure our clients have the tools they need to make every interaction with their customers both meaningful and efficient, driving value through customer satisfaction and cost savings as they expand their businesses.” Summary GAAP Results of Operations Information (unaudited) (in thousands, except per share amounts and percentages): Three Months Ended June 30, Six Months Ended June 30, 2007 2006 Percent Change 2007 2006 Percent Change Continuing operations: Total revenues $ 99,504 $ 95,053 5% $198,248 $ 188,013 5% Operating income 21,161 21,792 (3)% 41,615 43,993 (5)% Income from continuing operations 15,622 15,605 NC 31,397 31,071 1% Discontinued operations, net of tax - - - 269 - NM Net income 15,622 15,605 NC 31,666 31,071 2% Diluted earnings per share: Income from continuing operations $ 0.37 $ 0.33 12% $ 0.72 $ 0.66 9% Discontinued operations, net of tax - - - 0.01 - NM Net income $ 0.37 $ 0.33 12% $ 0.73 $ 0.66 11% Second Quarter 2007 Results From Continuing Operations Total revenues for the second quarter of 2007 were $99.5 million, which were within the range of CSG’s financial guidance for the quarter. Second quarter revenues represent an increase of five percent when compared to $95.0 million for the same period in 2006, and an increase of one percent when compared to $98.7 million for the first quarter of 2007. The components of total revenues were as follows: (i) processing revenues for the second quarter of 2007 were $90.3 million, an increase of three percent when compared to $87.7 million for the same period last year, and an increase of one percent when compared to $89.6 million for the first quarter of 2007; and (ii) software, maintenance and services revenues were $9.2 million for the current quarter, a 25 percent increase when compared to $7.3 million for the same period last year, and a one percent increase when compared to $9.1 million for the first quarter of 2007. Income from continuing operations presented in accordance with generally accepted accounting principles ("GAAP”) for the second quarter of 2007 was $15.6 million, or $0.37 per diluted share, compared to $15.6 million, or $0.33 per diluted share, for the same period last year, and $15.8 million, or $0.35 per diluted share, for the first quarter of 2007. Total customer accounts processed on CSG's systems as of June 30, 2007 were 45.1 million, as compared to 45.4 million customer accounts processed as of March 31, 2007. To date, nearly 100% of CSG’s cable customer accounts have migrated to CSG’s Advanced Convergent Platform, or ACP. Supplemental Data The following information is provided to assist readers in further evaluating CSG’s performance (in thousands, except per share amounts): Three Months Ended June 30, 2007 Three Months Ended June 30, 2006   Amount (1) Per Diluted Share Impact (2)   Amount (1) Per Diluted Share Impact (2) Certain key operating income items: Restructuring charges $ 472 $ 0.01 $ 1,141 $ 0.02 Certain non-cash expenses: Depreciation $ 3,038 $ 0.05 $ 2,699 $ 0.04 Amortization of intangible assets 4,285 0.06 3,796 0.05 Stock-based employee compensation 2,877 0.04 3,195 0.04 Total $ 10,200 $ 0.15 $ 9,690 $ 0.13 Six Months Ended June 30, 2007 Six Months Ended June 30, 2006   Amount (1) Per Diluted Share Impact (2)   Amount (1) Per Diluted Share Impact (2) Certain key operating income items: Restructuring charges $ 578 $ 0.01 $ 2,290 $ 0.03 Certain non-cash expenses: Depreciation $ 5,906 $ 0.09 $ 5,051 $ 0.07 Amortization of intangible assets 8,524 0.13 7,531 0.10 Stock-based employee compensation 4,852 0.07 6,029 0.08 Total $ 19,282 $ 0.29 $ 18,611 $ 0.25 (1) These items (on a pretax basis) are calculated in accordance with GAAP, and are reflected as part of continuing operations in the accompanying Unaudited Condensed Consolidated Statements of Income. (2) This represents the after tax impact to income from continuing operations on a per diluted share basis using CSG’s effective income tax rates from continuing operations of approximately 36% for the three and six months ended June 30, 2007 and 38% for the three and six months ended June 30, 2006. ComTec Acquisition On July 9, 2007, CSG closed on its acquisition of ComTec, Inc., a provider of print and electronic statement processing services headquartered in Fairfield, New Jersey, for approximately $23.5 million in cash. In addition, the merger agreement provides for contingent payments of up to $2.5 million over the next 12 months upon the achievement of certain predetermined operating criteria. CSG acquired ComTec to maximize its customer interaction for clients by expanding its statement processing footprint and capabilities through the addition of enhanced statement production and electronic statement presentation hardware and software technologies, as well as additional plant capacities. In addition, the acquisition increases CSG’s presence in its core video market, as well as in new industry verticals such as telecommunications, home security, healthcare, financial services, and utilities. Financial Condition and Cash Flows Certain key balance sheet items as of the end of the indicated periods are as follows (in thousands): June 30, 2007 March 31, 2007 December 31, 2006 Cash, cash equivalents, and short-term investments (3) $ 338,478 $ 367,586 $ 415,490 Net trade accounts receivable 102,635 103,100 110,020 Certain key operating cash flow items for the indicated quarters then ended are as follows (in thousands): June 30, 2007 March 31, 2007 December 31, 2006 Cash Flows from Operating Activities: Operations $ 28,217 $ 27,199 $ 29,549 Changes in operating assets and liabilities (4) (3,719) 8,464 (680) Net cash provided by operating activities $ 24,498 $ 35,663 $ 28,869 (3) The sequential quarterly decrease of approximately $29 million between March 31, 2007 and June 30, 2007 is primarily due to stock repurchases made during the quarter, offset by cash generated from operations. (4) The first quarter of 2007 changes in operating assets and liabilities was positively impacted by favorable changes in working capital items during the quarter, primarily related to the reduction in the trade accounts receivable balance. Stock Repurchase Program During the second quarter of 2007, CSG repurchased 1.8 million shares of its common stock for $47.5 million (a weighted-average price of $26.30 per share) under its stock repurchase program. Through June 30, 2007, CSG has purchased 6.4 million shares for a total of $165.3 million (a weighted-average price of $25.89 per share) towards its planned $350 million stock repurchases announced in August 2006. Third Quarter 2007 and Full Year 2007 Financial Guidance A summary of CSG’s financial guidance for continuing operations for the third quarter and full year 2007 is as follows (in millions, except for per share amounts and percentages). These expected results include the estimated GAAP impact of the acquired ComTec business, which closed on July 9, 2007, including estimates for certain acquisition-related expenses such as amortization of the acquired intangible assets, and planned integration efforts. The actual impact of the ComTec business may vary from our current expectations as we complete the purchase accounting and work through our integration efforts during the remainder of the year. Third Quarter Full Year Revenues $105 - $107 $412 - $416 Operating Margins 20% - 21% 20% - 21% Effective Income Tax Rate 36% - 37% 36% - 37% Earnings per Diluted Share $0.36 - $0.38 $1.46 - $1.50 Cash Flow from Operations $30 - $32 $121 - $125 There are certain non-cash items included in CSG’s third quarter and full year 2007 income from continuing operations per diluted share guidance noted above. The following table outlines the expected impact of these items, and is provided to assist readers in further evaluating CSG’s expected financial performance for these periods (in thousands, except per share amounts): Third Quarter - 2007 Full Year – 2007 Certain non-cash expenses (5): Depreciation $ 3,300 $ 12,700 Amortization of intangible assets 5,000 18,500 Stock-based employee compensation 3,400 11,500 Total $ 11,700 $ 42,700 Per diluted share impact (6) $ 0.18 $ 0.66 (5) These items (on a pretax basis) are calculated in accordance with GAAP and take into account estimates related to the ComTec acquisition. (6) This represents the after tax impact to income from continuing operations on a per diluted share basis using CSG’s estimated effective income tax rates from continuing operations as noted above. Conference Call CSG will host a one-hour conference call on Tuesday, July 24, at 5 p.m. EDT, to discuss CSG's second quarter results. The call will be carried live and archived on the Internet. A link to the conference call is available at www.csgsystems.com. Additional Information For additional information about CSG, please visit CSG’s web site at www.csgsystems.com. Additional information can be found in the Investor Relations section of the web site. About CSG Systems International Headquartered in Englewood, Colorado, CSG Systems International (Nasdaq: CSGS) is a leading provider of outsourced billing, customer care and print and mail solutions and services supporting the North American cable and direct broadcast satellite markets. CSG’s solutions support some of the world’s largest and most innovative providers of bundled multi-channel video, Internet, voice and IP-based services. CSG’s unique combination of solutions, services and expertise ensure that cable and satellite operators can continue to rapidly launch new service offerings, improve operational efficiencies and deliver a high-quality customer experience in a competitive and ever-changing marketplace. CSG is a S&P Midcap 400 company. For more information, visit our website at www.csgsystems.com. Safe-Harbor Statement 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. These factors include, but are not limited to: 1) CSG's ability to continue to perform satisfactorily and maintain good customer relations with its four largest clients, Comcast Corporation, Echostar Communications, Time Warner, Inc., and Charter Communications, which combined make up approximately 70% of CSG’s revenues; 2) the continued acceptance of CSG’s Advanced Convergent Platform and its related products and services; 3) CSG's ability to enhance current products and develop new technology that will retain existing clients and capture new market share; 4) significant forays into new markets, which may prove costly and unprofitable; 5) the degree to which CSG's expectations of market penetration and consumer acceptance of advanced IP services prove true -- and even if realized, CSG’s ability to meet the billing and customer care needs of those markets; 6) client consolidation, which has decreased the number of potential buyers for many of CSG's products and services; 7) CSG's ability to renew contracts and sell additional products and services to existing and new clients; 8) CSG's ability to successfully deliver on lengthy and/or complex implementation projects, which by their nature, carry much more risk; and 9) CSG’s ability to successfully integrate and manage acquired businesses or assets in order to achieve the expected strategic, operating and financial goals established for such acquisitions. 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)   June 30, 2007 December 31, 2006 ASSETS Current assets: Cash and cash equivalents $ 179,378 $ 240,687 Short-term investments   159,100     174,803   Total cash, cash equivalents and short-term investments 338,478 415,490 Trade accounts receivable- Billed, net of allowance of $1,619 and $1,143 102,635 110,020 Unbilled and other 5,637 5,555 Deferred income taxes 9,166 8,927 Other current assets   5,700     5,636   Total current assets 461,616 545,628 Property and equipment, net of depreciation of $67,017 and $66,656 26,198 23,680 Software, net of amortization of $33,615 and $32,989 7,099 7,725 Goodwill 14,150 14,228 Client contracts, net of amortization of $90,384 and $82,486 33,993 36,024 Deferred income taxes 12,882 19,617 Other assets   6,010     6,594   Total assets $ 561,948   $ 653,496   LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Client deposits $ 23,378 $ 23,645 Trade accounts payable 16,928 15,509 Accrued employee compensation 13,020 20,962 Deferred revenue 17,625 17,586 Income taxes payable 314 3,651 Other current liabilities   9,945     10,158   Total current liabilities   81,210     91,511   Non-current liabilities: Long-term debt 230,000 230,000 Deferred revenue 9,650 8,632 Income taxes payable 4,243 - Other non-current liabilities   4,932     5,619   Total non-current liabilities   248,825     244,251   Total liabilities   330,035     335,762   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; 42,546,022 shares and 46,831,643 shares outstanding 621 616 Additional paid-in capital 344,448 340,564 Treasury stock, at cost, 19,582,708 shares and 14,776,238 shares (483,116 ) (360,259 ) Accumulated other comprehensive income (loss): Unrealized gain on short-term investments, net of tax 9 25 Unrecognized pension plan losses and prior service costs, net of tax (852 ) (852 ) Accumulated earnings   370,803     337,640   Total stockholders’ equity   231,913     317,734   Total liabilities and stockholders’ equity $ 561,948   $ 653,496   CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED (in thousands, except per share amounts)   Three Months Ended Six Months Ended June 30, 2007 June 30, 2006 June 30, 2007 June 30, 2006 Revenues: Processing and related services $ 90,313 $ 87,715 $ 179,922 $ 174,136 Software, maintenance and services 9,191   7,338   18,326   13,877   Total revenues 99,504   95,053   198,248   188,013     Cost of revenues: Processing and related services 43,339 41,686 87,964 84,590 Software, maintenance and services 6,648   5,210   12,599   9,726   Total cost of revenues 49,987   46,896   100,563   94,316   Gross margin (exclusive of depreciation) 49,517   48,157   97,685   93,697   Operating expenses: Research and development 14,127 10,874 27,839 20,775 Selling, general and administrative 10,719 11,651 21,747 21,588 Depreciation 3,038 2,699 5,906 5,051 Restructuring charges 472   1,141   578   2,290   Total operating expenses 28,356   26,365   56,070   49,704   Operating income 21,161   21,792   41,615   43,993   Other income (expense): Interest expense (1,895 ) (1,903 ) (3,681 ) (3,788 ) Interest and investment income, net 5,071 5,277 10,610 9,947 Other, net 73   3   135   (52 ) Total other 3,249   3,377   7,064   6,107   Income from continuing operations before income taxes 24,410 25,169 48,679 50,100 Income tax provision (8,788 ) (9,564 ) (17,282 ) (19,029 ) Income from continuing operations 15,622   15,605   31,397   31,071   Discontinued operations: Income from discontinued operations - - - - Income tax benefit -   -   269   -   Discontinued operations, net of tax -   -   269   -   Net income $ 15,622   $ 15,605   $ 31,666   $ 31,071     Basic earnings per common share: Income from continuing operations $ 0.37 $ 0.34 $ 0.72 $ 0.67 Discontinued operations, net of tax -   -   0.01   -   Net income $ 0.37   $ 0.34   $ 0.73   $ 0.67     Diluted earnings per common share: Income from continuing operations $ 0.37 $ 0.33 $ 0.72 $ 0.66 Discontinued operations, net of tax -   -   0.01   -   Net income $ 0.37   $ 0.33   $ 0.73   $ 0.66     Weighted-average shares outstanding: Basic 41,928 46,527 43,156 46,714 Diluted 42,312 47,121 43,514 47,265 CSG SYSTEMS INTERNATIONAL, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED (in thousands)   Six Months Ended June 30, 2007 June 30, 2006 Cash flows from operating activities: Net income $ 31,666 $ 31,071 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation 5,906 5,051 Amortization 9,115 8,126 Restructuring charge for abandonment of facilities 308 401 Gain on short-term investments (2,355 ) (209 ) Deferred income taxes 6,574 5,849 Excess tax benefits from stock-based compensation awards (650 ) (1,088 ) Stock-based employee compensation 4,852 6,029 Changes in operating assets and liabilities: Trade accounts and other receivables, net 7,303 11,081 Other current and non-current assets (70 ) (2,699 ) Income taxes payable/receivable 3,053 11,666 Trade accounts payable and accrued liabilities (6,598 ) (17,164 ) Deferred revenue 1,057   2,615   Net cash provided by operating activities 60,161   60,729   Cash flows from investing activities: Net payments from the disposition of discontinued operations - (436 ) Purchases of property and equipment (8,424 ) (3,525 ) Proceeds from sale of aircraft held for sale - 7,376 Purchases of short-term investments (139,258 ) (97,695 ) Proceeds from sale/maturity of short-term investments 157,300 73,700 Acquisition of business, net of cash acquired (1,400 ) (20,777 ) Acquisition of and investments in client contracts (5,868 ) (3,002 ) Net cash provided by (used in) investing activities 2,350   (44,359 ) Cash flows from financing activities: Proceeds from issuance of common stock 1,435 3,154 Repurchase of common stock (125,905 ) (22,287 ) Payments on acquired equipment financing - (481 ) Excess tax benefits from stock-based compensation awards 650   1,088   Net cash used in financing activities (123,820 ) (18,526 ) Net decrease in cash and cash equivalents (61,309 ) (2,156 ) Cash and cash equivalents, beginning of period 240,687   346,113   Cash and cash equivalents, end of period $ 179,378   $ 343,957       Supplemental disclosures of cash flow information: Net cash paid during the period for - Interest $ 2,970 $ 3,067 Income taxes 7,244 1,518