CSG Systems Reports Solid Third Quarter 2009 Results

CSG Systems International, Inc. (Nasdaq: CSGS), a leading provider of customer interaction management and billing solutions, today reported results for the quarter ended September 30, 2009.

Key Highlights:

• Results for the quarter ended September 30, 2009, were as follows:
  • Total revenues were $124.5 million, an increase of six percent over the same period in 2008.
  • Non-GAAP operating income was $22.5 million, or 18.0% of total revenues, and GAAP operating income was $17.3 million, or 13.9% of total revenues.
  • Non-GAAP adjusted EBITDA was $33.5 million for the quarter and $100.9 million for the nine months ended September 30, 2009.
  • Non-GAAP earnings per diluted share (EPS) was $0.43, which reflects an unexpected $0.03 benefit as a result of a better than expected income tax rate. GAAP EPS from continuing operations was $0.29.
  • Cash flows from operations for the quarter were $37.9 million, and $97.4 million for the nine months ended September 30, 2009.
  • During the third quarter, CSG successfully converted approximately 500,000 customer accounts onto its systems, including triple play and business customers, bringing the total number of customer accounts processed as of September 30, 2009, to 46.1 million.

"CSG continues to execute both operationally and financially, while investing in its solutions, its people and its clients,” said Peter Kalan, chief executive officer and president of CSG Systems. "This quarter we successfully converted 500,000 new customers onto our ACP platform and converted another 700,000 since quarter-end. We are on track to convert the remaining backlog of customer accounts onto our solution by the first half of 2010.

"In addition, we continue to increase the penetration of our products and services in our client base, with product integrations across both CSG and competitor platforms, as well as were successful in cross-selling our products and services into new vertical markets,” Kalan added. "Finally, we remain at the forefront in helping content providers create a more meaningful and interactive customer experience with our Content Direct platform by helping providers manage and optimize their customers experience with the online experience, resulting in increased loyalty and revenues.

"While it continues to be a difficult business environment, we are optimistic about the remainder of the year and 2010 based on our results for the first nine months of this year,” said Kalan.

Results of Operations

Revenues: Total revenues for the third quarter of 2009 were $124.5 million, a six percent increase from the $118.0 million for the same period in 2008, with the year-over-year increase related primarily to organic growth factors, and relatively consistent when compared to the $124.8 million for the second quarter of 2009.

Operating Income: Non-GAAP operating income for the third quarter of 2009 was $22.5 million, or 18.0% of total revenues, which compares to 17.9% for the same period last year. Non-GAAP operating income excludes $5.2 million of expenses related to CSG’s transition of its data center, which began in the first quarter of 2009. GAAP operating income for the third quarter of 2009 was $17.3 million, or 13.9% of total revenues.

Earnings per Share: Non-GAAP EPS for the third quarter of 2009 was $0.43 per diluted share, compared to non-GAAP EPS of $0.39 per diluted share for the third quarter of 2008. The third quarter of 2009 reflects an unexpected benefit of $0.03 per share as a result of a better than expected income tax rate for the quarter. Non-GAAP EPS excludes the impact of the following items from continuing operations on a tax-affected, per diluted share basis: (i) Data Center Transition Expenses; and (ii) amortization of the original issue discount (OID) for CSG’s convertible debt securities. GAAP EPS from continuing operations for the third quarter of 2009 was $0.29, compared to $0.34 for the same period last year.

Adjusted EBITDA: Non-GAAP adjusted EBITDA for the third quarter of 2009 was $33.5 million, compared to $31.4 million in the same period last year, and was $100.9 million for the first nine months of 2009, compared to $99.8 million for the same period in 2008.

Additional disclosures and reconciliations related to CSG’s use of non-GAAP financial measures are included in Exhibit 1 at the end of this press release.

Balance Sheet and Cash Flows

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

Cash Flows: Certain key operating cash flow items for the indicated quarters then ended are as follows (in thousands):

CSG spent $10.1 million on capital expenditures in the third quarter, which includes approximately $2 million related to our data center transition efforts.

Supplemental Data

The following information is provided to assist readers in further evaluating CSG’s financial performance (in thousands, except per share amounts):

Total customer accounts processed on CSG's systems as of September 30, 2009, were 46.1 million, compared to 45.4 million customer accounts processed as of June 30, 2009, with the sequential increase related primarily to conversions completed during the quarter.

2009 Financial Guidance

A summary of CSG’s financial guidance for the full year 2009 is as follows. Overall, CSG’s current expectations are in line with its most recent financial guidance.

Non-GAAP EPS shown above is a non-GAAP financial measure and is explained in greater detail and reconciled to the comparable GAAP measure in the attached Exhibit 1.

Conference Call

CSG will host a one-hour conference call on October 27, 2009, at 5:00 p.m. ET, to discuss CSG's third 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. In addition, to reach the conference by phone, dial (877) 941-6009 and ask the operator for the CSG Systems conference call and Liz Bauer, chairperson.

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, Inc.

Headquartered in Englewood, Colorado, CSG Systems International, Inc. (NASDAQ: CSGS) is a customer interaction management company that provides software- and services-based solutions that help clients engage and transact with their customers. With a 25-year heritage in providing customer management and billing solutions to North American cable and direct broadcast satellite companies, CSG has broadened its customer interaction management capabilities to proudly serve this client base as well as new, highly competitive industries including financial services, healthcare, utilities and more. Today, CSG's solutions reach more than half of all U.S. households each month and manage over $36 billion in transactions annually on its clients' behalf. For more information, visit our Web site at www.csgsystems.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. These factors include, but are not limited to: 1) the concentration of approximately two-thirds of CSG’s revenues with four clients; as a result, the loss of business from any one of those clients could potentially have a material adverse impact to CSG’s financial results; 2) CSG’s dependency on a variety of computing environments and communications networks, as well as risks inherent to transitioning data centers, thus subjecting CSG to the risks of extended interruptions, outages, unauthorized access and corruption of data; 3) the timing, duration, and degree of an economic turnaround are uncertain; thus there can be no assurances regarding the performance of our business, and the potential impact to our clients and key vendors, resulting from the current economic conditions; 4) continued market acceptance of CSG’s Advanced Convergent Platform (ACP) and related products and services; 5) CSG's ability to continuously develop and enhance products in a timely, cost-effective, technically advanced and competitive manner; 6) CSG's ability to implement new solutions, and migrate or convert clients to our solutions in a timely and effective manner; 7) CSG’s dependency on the North American communications industry; as a result, key market factors such as further industry consolidation, new market entrants that may not be clients of CSG, macroeconomic conditions affecting the credit and equity markets generally, and/or the financial status of CSG clients may affect CSG’s ability to maintain and expand market share; 8) increasing competition in our market from companies of greater size and with broader presence in the communications sector, thus exerting greater influence over client buying decisions; 9) CSG’s ability to successfully integrate and manage acquired businesses, technology or assets to achieve the expected strategic, operating and financial goals established for such acquisitions; and 10) CSG’s continued ability to protect its intellectual property rights. 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.

EXHIBIT 1
CSG SYSTEMS INTERNATIONAL, INC.
DISCLOSURES FOR NON-GAAP FINANCIAL MEASURES

Use of Non-GAAP Financial Measures and Limitations

To supplement its consolidated financial statements presented in accordance with GAAP, CSG uses the following non-GAAP financial measures: non-GAAP operating income, non-GAAP earnings per share (EPS), and non-GAAP adjusted EBITDA. CSG believes that these non-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: (i) certain internal financial planning, reporting, and analysis; (ii) forecasting and budgeting purposes; (iii) certain management compensation incentives; and (iv) 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 a more complete understanding of CSG’s underlying operational results, trends, performance, and cash generating capabilities, in addition to providing consistency and comparability with CSG’s historical financial results, as well as comparability to similar companies in the industry, many of which present similar non-GAAP financial measures to investors.

Non-GAAP financial measures are not a measure 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 statements result in the exclusion of items that are recurring and will be reflected in its financial statements in future periods.
• 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 GAAP amounts excluded from the non-GAAP financial measures and reconciles each non-GAAP financial measure to the most directly comparable GAAP measure.

Non-GAAP Financial Measures – Historical Results

Non-GAAP Operating Income: CSG’s calculation of non-GAAP operating income begins with GAAP operating income and adds back the impact of CSG’s transition of its data center services (Data Center Transition Expenses). Non-GAAP operating income as a percentage of total revenues (also referred to as "non-GAAP operating income margin”) is calculated by taking non-GAAP operating income and dividing it by total revenues for the respective period. The Data Center Transition Expenses are considered a unique and infrequent occurrence for CSG, and therefore are not reflective of CSG’s recurring core business operating results. The exclusion of these costs in calculating CSG’s non-GAAP operating income and non-GAAP operating income margin allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.

The reconciliations of GAAP operating income to non-GAAP operating income for the indicated quarters and nine months then ended are as follows (in thousands, except percentages):

Non-GAAP EPS: CSG’s calculation of non-GAAP EPS begins with GAAP EPS from continuing operations and then excludes the following items from continuing operations on a tax-affected, per diluted share basis: (i) CSG’s Data Center Transition Expenses; (ii) amortization of the original issue discount (OID) for CSG’s convertible debt securities; and (iii) the gain on the repurchase of CSG’s convertible debt securities. CSG believes this presentation provides meaningful supplemental information regarding CSG’s performance, and these items are included in CSG’s determination of non-GAAP financial information for the following reasons:

• The Data Center Transition Expenses and any gains on the repurchase of CSG’s convertible debt securities are unique and infrequent in occurrence for CSG, and therefore may not be 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 amortization of the convertible debt securities OID is additional interest expense as a result of the adoption of a new accounting pronouncement effective January 1, 2009. The exclusion of these costs in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current interest expense with historical periods prior to the adoption of this new accounting pronouncement. In addition, 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.

The reconciliations of GAAP EPS from continuing operations to non-GAAP EPS for the indicated quarters and nine months then ended are as follows (in thousands, except per share amounts):

Non-GAAP Adjusted EBITDA: CSG defines adjusted EBITDA as income before interest, taxes, depreciation, amortization, stock-based compensation, and unique and infrequent items, such as the Data Center Transition Expenses and the gain on the repurchase of CSG’s convertible debt securities, discussed above. CSG’s calculation of adjusted EBITDA begins with CSG’s non-GAAP operating income, shown above, which excludes interest income and expense, income taxes, and unique and infrequent items, and adds back CSG’s non-cash charges: depreciation, amortization of intangible assets, and stock-based compensation. CSG believes that adjusted EBITDA is useful to investors and other users of its financial statements as it provides additional information in evaluating the following: (i) operating performance; (ii) liquidity and debt servicing capabilities; and (iii) enterprise valuation purposes.

CSG’s calculation of adjusted EBITDA and the reconciliations of CSG’s adjusted EBITDA measure to net income and cash flows from operations for the indicated quarters and nine months then ended are as follows (in thousands):

Non-GAAP Financial Measures – 2009 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 2009 full year financial guidance is as follows:

The reconciliation of GAAP EPS from continuing operations to non-GAAP EPS as included in CSG’s 2009 full year financial guidance is as follows: