CSG Systems International Inc (CSGS) 2002 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

And thank you for standing by.

Welcome to the CSG Systems second quarter earnings release conference call.

At this time, all participants are in a listen-only mode.

Following the formal presentation instructions will be given for the question-and-answer session.

If anyone needs assistance at anytime during the conference, please press the star followed by the zero for an operator.

As a reminder this conference is being recorded today, Monday July, 29, 2002.

I would now like to turn the conference over to Ms. Liz Bauer, Senior Vice President of Investor Relations.

Please go ahead, Ma'am.

Thank you for joining us this afternoon.

Our discussion today will contain a number of forward-looking statements particularly with respect to any financial projections that may arise, the status of our software assets, the status of the Company's arbitration with AT&T Broadband, the ability for the Company to successfully integrate the recently acquired Kenan Business, and the Company's expectations relative to the timing for turnaround in worldwide telecom spending.

While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary.

In addition to factors noted during the presentation, these risk factors are discussed in more detail in our most recently filed 10-Q and 10-K.

For the those of you who did not receive a copy of our press release, you can go on to our website at www.CSG systems.com for a copy.

We have with us today, Neal Hansen Chairman and Chief Executive Officer, John Pogge, President, Peter Kalan, Chief Financial Officer, Bill Fisher Executive VP of our Global Software Services division, our Executive VP of our Broadband Services division and Steve Cock, our Vice President of Investor Relations.

Mr. Hansen will begin.

Thank you, Liz and let me thank all of you for joining us today.

I'm pleased to report that this is the 26th straight quarter that we have met or beat street expectations.

Revenues grew 41% to $169.7 million, and earnings on an adjusted basis came in at 40 cents per diluted share.

We are extremely proud of these results, especially in light of what one might describe as one of the most difficult business environments that the telecommunications and technology sectors have experienced at least in our lifetime.

While we are pleased with our results, as many of you should have read in our press release issued earlier today, we do not see the upturn in business that we had projected for the second half of the year.

This is not a company-specific situation.

All the companies serving the telecommunications industry are seeing the same thing.

Sales cycles are slowing.

IT spending is extremely tight.

And our customers and prospects are experiencing tremendously difficult times.

As a result, we are lowering our revenue and earnings guidance for the remainder of the year.

We are expecting revenues for the year 2002 to be in the 610 to $630 million range and adjusted earnings per diluted share to be in the $1.44 to $1.57 range.

Today, I will focus on three things.

First, I'll provide you with a highlight of our second quarter both in the Broadband Services Division and the Global Software Services division.

Second, I'll talk to you about the initiatives that we are undertaking as a result of our revised guidance.

And finally, I'll summarize our growth strategies going forward.

So let's start, first, with the Broadband Services division.

Ed and his people had a very strong quarter with several significant events.

First, we renewed our contract with Charter Communications for 10 more years.

In addition, Charter significantly expanded the breadth and products that they will now be using from our solutions set.

Next, Time Warner Cable Houston, signed a contract to deploy CSG profit now, the industry's leading losing aimed at helping service providers combat customer churn and helping them increase profitability.

And finally, we expanded our relationship with Echostar Communications.

Our clients are telling us that our solutions are helping them save costs, save customers, and run their operations more efficiently.

For example, at Time Warner Desert Cities they are seeing tremendous results from our Profit Now solution which was implemented in February of this year.

First, of the inbound customer calls identified as having high-risk churn, Time Warner has saved over 82 % of these customers by offering retention strategies.

In addition, of the inbound calls from customers having been identified as most likely to buy a new product, 95 % of those customers accepted the upsell offer resulting in an average annual revenue increase of $287 per customer.

Next, in the Global Software Services division, we added several new customers to our customer list and we also expanded our relationship with several other clients.

I'd like to highlight just a couple of the contract wins that we had this quarter.

First, we added Sky Mexico to our list of customers.

Sky Mexico is the largest direct broadcast satellite operator in Mexico, serving more than 600,000 customers.

Our sales team in Japan signed the first new contract of the quarter with PoweredCom a Japanese telecommunications provider.

And finally we saw a solid stream of capacity upgrades in all region, including TelstraClear and APAC, Air Tell and Cingular in North America.

In addition, in July, we held our first client and partner conference for the APAC region in Shanghai.

We had over 100 customers and partners attend the conference.

We were applauded for our continued commitment to the Kenan DP product line, our future product strategy, and for the establishment of our customer care organization.

Finally, I really just can't say enough about how well the integration of the Kenan Business continues to go.

Bill Fisher and his management team are doing a bangup job.

I said on the last call that it feels like we are one company.

In my eyes, the integration is complete.

We are one company.

Next, I'd like to talk to you about the initiatives that we are undertaking as a result of our revised guidance.

As a management team, we have been meeting with our customers and our prospects to determine what their real business needs are and, by the way, what their real abilities will be to fund new products and applications over the next 12 to 18 months.

You know it's a real balancing act.

In this environment, there is no reward for being too far ahead of your customer's ability to adopt and buy new products and services.

But there is also a penalty for not being ready to fully meet the needs of your customers when their spending needs -- when their spending begins to shift.

I commend our people for doing a superb job of identifying these customer factors and of timing our delivery schedules and priorities accordingly.

Over the past quarter, the optimism that our customers and our prospects had expressed regarding a turnaround in their own business, disappeared.

Based on this information, we believe that we need to realign the organization to be more consistent with our business and their businesses going forward.

Over the next 30 to 60 days, we will be working on taking approximately $45 million in expense on a full-year run rate out of the Company.

That translates into approximately 300 to 350 employees as well as reducing our spending in a number of different areas; for example, travel and entertainment.

These spending reductions are tied directly to our analysis of our customers and our prospects' markets.

We will right-size the Broadband Services division based on realistic expectations for the business.

We will take into account the organic growth of our clients' customer bases, their projections for adding new subscribers, their plans for rolling out new services and, frankly, their ability to invest in new technologies and product offerings.

While there are still large opportunities for gains in market share, the reality is there is a lack of funding available to our customers for new technologies and new products.

Next we will look at the Global Software Services division.

We will go through the same exact process that we did with Broadband Services division.

However, we will have two additional inputs.

We will evaluate what is needed to continue to build this division into a sustainable and very strong bills.

And next, we will analyze what will be needed to make sure that we are exceptionally well-positioned when the market turns around and the pent-up demand that has been created is unleashed.

Given what we are seeing today, I really like having a product-based business and having over 200 operators to sell additional products and services into.

That being said, one of the biggest challenge that is we will face in the coming months is making intelligent decisions as to when our customers are going to increase their spending and what the critical areas that our customers will be focusing on will be.

These decisions are important in establishing the proper growth strategies for the Company.

Now, the good news is that the Company generates strong cash flows from the overall business.

Let me assure you, we will be very judicious with our uses of that cash.

How we invest and use this cash allows us to execute on our growth strategies.

We have four areas in which we can and will invest these funds.

The first is R&D for the Broadband Services division.

The second is R&D for the Global Software Services division.

The third is by buying back the Company's stock.

And finally, in this environment, there are quite a few interesting opportunities in which you can acquire either a customer base to sell CSG products into or products to sell into our customer base and add to our overall solutions set.

In fact, we have a rare opportunity to make thoughtful decisions as to whether we should build or buy a new piece of technology.

And we are constantly evaluating these situations.

Folks, we have set up two rock-solid business units, units in our Broadband Services and our Global Software Services division.

We set these services up to provide service to an exciting customer base worldwide.

Once again, these units generate tremendous cash flow and, frankly, tremendous opportunities for us.

In addition, we will be looking very critically at our investment in our own businesses and in our M&A and joint venture activities.

Given the current environment and the opportunities this we see, we will be giving these areas even more attention.

We have positioned ourselves not only to do well in a very difficult market, but to be able to take advantage of opportunities that will indeed present themselves.

And finally, before I hand it over to Peter Kalan, our CFO, to review the financial results for the quarter, I'd like to conclude with the following: I'm very proud of the job that we have done in delivering against our business objectives and once again, what could be one of the most challenging times any of us will ever see.

It is not easy to stay the course and keep focused when there is as much chaos in the market as exists today.

However, I want to assure each of you that we are very focused, we are very disciplined.

And in spite of all the noise out there, we are very optimistic about the future.

And finally, there will eventually be a turnaround in the telecom and the technology sectors.

There will be pent-up demand for solutions that enable operaters to run their businesses more effectively and efficiently.

The thirst for innovating new services that consumers have will not dry up and go away.

And while we as well as any other provider out there cannot predict what quarter this turnaround will curb, I really like our position when it does.

Let me tell you, we will win our fair share and in fact I believe we will win more than our fair share of deals.

With that I'd like to turn it over to Peter Kalan and ask him to review the quarter's numbers.

Thank you, Neal.

Today I'll focus my discussions on four key areas.

First, I will provide you an over view of the second quarter financial results for CSG, second I will discuss the performance of the Company's operating decisions.

Third, I will review the balance sheet of the consolidated Company, and, fourth, I will discuss our revised financial guidance for the remainder of 2002.

I will begin with an overview of the financial results of the consolidated Company.

I am pleased to report that CSG's financial results for the quarter ended June 30, 2002, included revenues of $169.7 million and net income under generally accepted accounting principles of $19.2 million, or 36 cents per diluted share.

Net income adjusted for certain incremental and direct Kenan Business acquisition-related charges was $21.3 million, or 40 cents per diluted share.

The second quarter financial results include amounts to fully cover our collectibility exposure on the accounts receivable due from Adelphia Communications which declared bankruptcy on June 25th.

Also during the second quarter, CSG incurred costs associated with the AT&T Broadband and Comcast litigations totaling approximately $1.5 million, or approximately 1.6 cents per diluted share.

These actions and activities were not anticipated when we began the year, and I am pleased that we have been able to meet our financial guidance for the quarter inclusive of these charges.

For the three months ended June 30, 2002, adjusted earnings before interest, taxes, depreciation and amortization was $51.7 million.

Processing revenues totaled $91.6 million for the quarter.

And software and services revenues were $78.1 million.

When we announced the Kenan acquisition in December of last year, we stated that the acquisition would expand our geographic diversity of revenues.

For the second quarter of this year, 73 percent of CSG's total revenues were from the United States. 15 percent from the European market, and the remaining 12 percent coming from Asia-Pacific and Latin America.

With the growth of our business to broader markets, AT&T Broadband has continued to decrease as a percentage of our total revenues, from 57 percent in 2001 to 31 percent last quarter, to 25 percent this quarter.

I will now discuss our divisional results.

CSG's Broadband Services division generated $112.8 million in revenues for the second quarter, and produced operating income of $107.2 million.

As Neal said, during the second quarter this division completed the renewal of the Charter Communication contract.

With this renewal, we have successfully renewed over 99 percent of the subscribers that were up for renewal this year.

This reflects the stable base of services that we provide and the resultant revenues that we derive from these services.

Now, looking forward to 2003, we have approximately 7 percent of our subscribers up for renewal and Ed's team is already hard at work to extend these relationships.

We finished the second quarter with 44.3 million subscriber accounts on our processing system, of which 39.8 million were video subscribers and 4.4 million were Internet subscribers.

We continued to see strong organic growth consistent with historical levels from our direct broadcast satellite clients and our Internet clients.

But some of this gain this quarter was offset as clients cleaned up some inactive accounts on our system.

As part of the renewal of the Charter Communications contract, we have contractual commitments for the number of subscribers that CSG will support.

We will also be assisting Charter in their efforts to standardize their systems by region.

We anticipate that we will see some fluctuations in the number of subscribers that we service for charter as they migrate some of their markets currently not on CSG to us and some markets on CSG to alternative providers.

But at a minimum, we will end up with the same number of subscribers as of today.

Now, for the second quarter, annualized processing revenue for video subscriber totaled $8.90, an annualized processing revenue for Internet subscriber totaled $4.40.

Both of these measures included some one-time fees that were unusually high for the quarter.

And we anticipate that for the third and fourth quarters of this year, these revenue measures will return to within our previously stated expectations of between $8.50 and $8.60 for video subscribers and between $3.70 and $3.80 for Internet subscribers.

CSG's Global Software Services division produced $56.9 million in revenues for the second quarter, resulting in an adjusted operating loss of $2.2 million.

We anticipated that this division would be near break-even by the second quarter, and we are very pleased with the results to date.

Bill Fisher and his team have worked very aggressively to integrate the acquired Kenan Business into CSG while at the same time continuing to generate revenues from throughout the world in a very difficult telecommunications market.

The results to date have been very impressive and show us that the acquired Kenan assets are still industry-leading.

Turning to the consolidated balance sheet of the Company, I will begin with a review of the accounts receivable of the Company.

As of June 30th, our trade accounts receivable totaled $128 million, net of the allowance for bad debts of $13 million.

As I mentioned in my comments earlier, we are fully reserved against our collectibility exposure for the receivables due from Adelphia Communications and are comfortable that we have adequately reserved against the collection risk of our broader client base as of the end of the second quarter.

The trade accounts receivable reflected days billed outstanding or DBO's of 56 days for the second quarter.

We anticipate, though that given the current state of the telecommunications industry, DBOs may increase from its 55 to 60 range and go to 65 to 75 day range.

As part of the acquisition of the Kenan Business, we acquired billed and unbilled accounts receivable from Lucent.

These acquired accounts receivable relate to Lucent's operation of the Kenan Business prior to CSG's ownership, these amounts are tracked and reported separately from CSG trade accounts receivable and are not included in the determination of DBO's.

These acquired billed and unbilled accounts receivables total $28.5 million as of June 30, 2002, compared to $64.9 million as of March 31st of this year.

We have been very successful in collecting these balance to date and are continuing our aggressive collection efforts.

During the second quarter, we received the final audit of the Kenan Business net assets and as a result, Lucent paid CSG approximately $11 million.

This final purchase price adjustment resulted in a total purchase price paid by CSG for the Kenan Business of approximately $250 million plus related transaction fees.

We concluded the second quarter of 2002 with total cash and investments of $94 million, and total debt of $270 million.

We continue to have very strong cash flow from operations totaling $46 million for the first six months of this year, and are expecting comparable amounts for the second half of the year.

As Neal mentioned in his comments, we are revising guidance for the remainder of this year.

We expect that revenue for the full year 2002 will be between $610 million and $630 million.

For the first six months of this year, we have reported total revenue of $300 million.

Therefore, our second half revenues of 2002 are expected to be between 310 million and the 330 million, evenly split between the third and fourth quarters.

We have very high visibility on these projections with approximately 90 % of our targeted full-year revenues being under contract.

We believe that this level of revenues, 155 to $165 million per quarter, can be maintained during this difficult telecommunications market.

As of June 30th, we have a soft run services backlog of approximately $130 million that is expected to be recognized over the next 12 months.

Our software and services backlog includes products and services that are under contract with delivery of the products and services under way.

Our backlog does not include sales pipeline or letters of intent.

As a result of the continuing deterioration of the telecommunications industry, we will be reducing the expenses of the Company, as Neal stated.

We have started several initiatives to accomplish this.

We have evaluated our staffing needs for the Company and will be reducing staffing by approximately 300 to 350 people.

We have implemented a hiring freeze.

And we are reducing spending in a number of areas such as travel and entertainment and corporate infrastructure.

Through these initiatives, as Neal stated, we anticipate that we will reduce our consolidated expenses by approximately $45 million on a full-year run rate.

As part of these initiatives, we will incur a one-time restructuring charge in the third quarter of this year.

On an adjusted bases excluding the acquisition related charges associated with the Kenan Business acquisition and the one-time restructuring charge in the third quarter of associated with our expense reduction initiatives, we expect our operating margins will be as follows: In the third quarter, between 20 % and 23 % and in the fourth quarter of this year, between 24 % and 26 %.

For the last two quarters of this year, we expect that adjusted earnings per diluted share will be between 29 cents and 36 cents for the third quarter and between 36 cents and 42 cents for the fourth quarter.

These anticipated results are reflective of an expected effective tax rate of approximately 41 %.

For the full year 2002, we are targeting adjusted earnings per diluted share to total between $1.47 -- $1.44 and $1.57.

For the remainder of this year, exclusive of any share repurchases, we anticipate that our diluted shares outstanding will approximate 53.1 million.

Though we are facing tumultuous times in an extremely difficult telecommunications market, we believe in our business model, one that provides strong recurring revenues and strong cash flows.

We are a financially solid company with strong liquidity, and we are focused on maximizing our cash returns so that we have the assets and resources to invest in opportunities as they arrive.

We believe in our business and our business model.

With that I'll now turn it over to the moderator for questions.

Thank you, sir.

Ladies and gentlemen, at this time we will begin the question-and-answer session.

If you have a question, please press Star 1.

To decline from the polling process, press the star followed by the 2.

You will hear a 3 tone prompt acknowledging your selection and your questions will be polled in the order they are received.

If you are using speaker equipment, lift the handset before press the numbers.

One moment, please, for our first question.

Michael Turits with Prudential Securities, please go ahead.

Hi, guys.

The Broadband revenue should be pretty constant, I would think.

So can you give some description of what's -- what GSS revenue should be like for the rest of the year?

And maybe you can give us a little bit of insight into what the composition of those revenues are?

How much of that is recurring?

Do we have some maintenance, something we can count on and how much of that is related to license and other stuff that has to be won?

And is there any move towards making more of that a larger portion of that more recurring?

Michael, this is Peter.

You're correct, the business on the Broadband Services side is very recurring in the nature as the nature of that business is long term contracts and revenue-producing units that we bill for every month.

On the Global Software Services side, we do a significant amount of consulting services as well as maintenance services for our clients and so we have good visibility in those numbers for the remainder of the year.

And we believe we'll still have some opportunities to sell some software transactions that -- but that's not where we are banking to get our numbers.

So if you look at the visibility on our Broadband side, you should look at it fairly consistently with what we produced in the second quarter.

And on the GSS side, we see very high visibility as a result of our maintenance and consulting services.

One of the other things, Michael, and I'll let Bill address this a little bit, we are working diligently towards moving as much as we can to a recurring -- to a more recurring revenue model in GSS.

Bill, do you want to talk just a little bit about the work you are doing on term licenses versus perpetual licenses?

Yes, Neal.

Yeah, the Kenan Business primarily was based on pricing two separate parameters.

One was volume-based.

The more volume, the more license fees we get.

And we see a lot of opportunity in upgrading those customers over time.

However, the volume was for a perpetual period of time.

We are beginning now to talk to the customer base about changing those contracts effective with the ownership change to term licenses.

We have been quoting -- began to quote term licenses to our new prospects for additional capacities and for additional products going forward.

We are going to basically work very hard with the customer base to convert to a term licensing model which basically will give us more of a recurring form of revenue versus the one-time hit from a perpetual license.

And thus far, I haven't talked to all the customers, but I have been around to the different locations and, you know, the customers are wanting and needing to budget for these expenditures on an ongoing basis, and this fits a little bit with that model.

So I think we'll be successful with that.

Thank you, Bill.

If I could just add a follow-up, I'm trying to get a good feeling for what's happening on the GSS side.

At one point you were talking about 180 million in Kenan revenues.

Now you are breaking it out on a GSS basis.

But can you somehow foot to where we are going to be relative to that prior benchmark in.

We are not actually giving the breakout between the two operating units in our guidance.

But when you model out what we have doesn't on the Broadband side for the first half of the year and project that out fairly consistently over the second half, you'll see where GSS falls in.

GSS is primarily made up of the acquired Kenan Business with some other businesses that we had already in place.

So I think you can get a pretty good sense that how that breaks out, Michael.

That's only probably what, like four or five million per quarter in the old software that's in GSS?

That's a good approximate number.

Okay, thanks very much.

Thanks, Michael

Our next question comes from Stacy Forbes with Janco Partners.

Hi, good afternoon.

I just have a couple questions on the expense cuts and the operating income guidance or operating margin guidance.

One, you expect to achieve about 45 million in cost reductions and say by the end of this year it will be fully implemented.

Does that mean in the fourth quarter, you know, is that evenly split?

Can we example about -- expect about $11 million of savings in that quarter or a little bit less than that?

And I'm assuming that's going to be reflected in the SG&A line?

Stacy, this is Peter.

Two points. we are still working out the specifics of the timing and when we can see certain projects that are under way and how the timing of any reductions in the company take place.

But we are very focused on getting it done aggressively and our desire would be to get as much as possible on a run rate basis out of the fourth quarter but it's difficult to get that exact type of -- give that exact type guidance at this point but we are very potentialed on getting it done quickly and very expeditiously.

From a perspective of where the reductions will be, we believe they will be across the board both from the support organizations of the company in SG&A as well as in the parts that are supporting the products and the revenue generation and in the cost of sales.

So this is not just a overhead focus but this is all aspects of the business, consistent with how Neal talked about matching up our investments in line with where the market is and where the market isn't buying.

Okay.

So then those 300 to 350 jobs are not all Kenan-based?

They would be some --

No.

We're -- Stacy, we're one company.

I meant what I said.

So we've locked at the business climate in the Broadband area.

And we have looked at the business climate in GSS area.

And what we've got, what our customers and prospects are likely to buy, and what you'll find is that we've, uhm, I think our people I'd say it again, I think our people have done a very good job of fitting potential expense reductions to what the marketplace is out there.

We remain committed to new products going forward, but we're timing those products to come out predicated market being able to buy them.

Okay.

And then on the operating income side, I just want to understand correctly that that excludes all the extraordinary costs and with the cost savings you're implement, I'm not sure why there is such a cut there in the third and fourth quarters.

Well, they are exclusive of any structuring charge, Stacy, and exclusive of any of the ongoing integration work that we are doing from the Kenan acquisition that has been thinning out and we have less in the second haft year to do from setting up legal infrastructure and legal entities around the world.

Right, so where's the big decrease coming from?

In our operating margin?

Yeah.

Well, we have decreasing revenues versus second quarter for the third and fourth quarter.

When we say 155 to 165, there's a slight drop and therefore we are then aligning the expenses as we move forward out of that.

It will take us a little bit of time to get those expenses out.

The one-time restructure charge is only for the severance cost it does not eliminate the cost of the people on our payroll while they are still employed and while they are still producing work.

Okay.

And then with Adelphia, I now took the hit this quarter on accounts receivable but does this guidance reflect some kind of -- are you still accruing for those subs?

And then those accounts receivable balances are going to get bigger and you are going to keep taking the, you know, expected that they won't be paying or how are you accounting for that going forward?

There are two ways that you have to look at this.

There are two things you have to evaluate, Stacy.

One is you have to look at pre-bankruptcy amounts and make sure that you have treated those appropriately and then there is post-bankruptcy amounts.

Our history has been that -- and fortunately, we have not had many situations like this but when a client has gone bankrupt, that the bankruptcy court looks very favorably about our operations and making sure that we get paid for the services we delivered because we drive the cash flow that helps the bankruptcy court pay off the debts and keeps the business going.

That being said, we very comfortable that moving forward, that we'll be continuing to provide services to Adelphia and getting paid for it.

We have been in contact with the management team and their legal resources at Adelphia, and feel comfortable that we'll have a revenue stream going forward from them.

Okay, thanks.

Thank you, Stacy.

Our next question comes from David Togut with Morgan Stanley.

Thanks.

Just two quick questions.

First, Neal, could you comment on demand both, you know, U.S. versus international?

And then across your different product lines?

Are you seeing any significant differences in demand, you know, video versus Internet versus core wireline?

The -- Bill is seeing pretty strong demand in some of his international areas, particularly in a pack and we are seeing opportunities in amea but his apac region is very strong.

In the United States, I would somewhat characterize the prospect list and customer list as a bit traumatized.

You've got a lot of folks that are just frozen right now on decision cycles.

You've got mergers that are being looked at or contemplated.

So I'd say decisions anyway in the United States in telecom and particularly Broadband are pretty tough.

But in Amea and APAC, we're seeing an awful lot more obviously, 2.5 activity going on.

I guess the United States, what these folks are just saying is, life is hard.

Okay.

And just a quick second question.

What can you tell us with respect to the AT&T arbitration?

Any thoughts in terms of timing and resolutions.

We are aren't going to give you any predictions of timing or anything else.

What we will say about the AT&T arbitration is that it's proceeding and, uhm, you know, we are doing our best to get a resolution of it as quickly as is prudently possible from CSG's standpoint.

Okay.

Thank you.

Thank you, David.

Our next question comes from Hampton Adams with CIBC World Markets.

Hi, guys.

A few questions.

First of all, when you guys bought Kenan, you guys said there was a supply support agreement that went out to some period in the future.

Can you guys give us any color on that and how that figures into the $130 million backlog on the software side?

Hampton, this is Peter.

The supply agreement is a relationship agreement that we have with Lucent and which we agreed to supply services to them for those contracts that they were not able to assign to us with their clients.

So all it does is guarantee that their clients will continue to get maintenance services and maintenance releases from the Company since Lucent has disposed of the asset.

Okay.

So that's not a material number really?

130 million backlog is a real good backlog, Hampton.

No, you but I mean the Lucent supply agreement.

We don't view Lucent as a distributor.

They are not out there selling our product.

All we have done is for people who are currently using the Lucent or the Kenan product, out in the field, where Lucent was retaining the contract for -- because they couldn't get it assigned and unwound from other contracts, we have committed to make sure that they get ongoing support services from us for those clients.

The clients are ending up getting those services consistent with what they get today.

Okay.

The second question, just would be to clarify this whole Adelphia impact.

DST took one approach to this and I just wanted to see how you guys are taking the approach.

I take it from what you said that you guys booked a certain a revenues and then took allowance for any kind of receivables you had left over at the end of the quarter, is that right?

What we did was upon the determination that there was bankruptcy, we stopped any revenue for that period and any period after that and so since there was bankruptcy declared in June, we did not book revenue for June and then any amounts that were received or in our accounts receivable before that time, we've booked a reserve against those.

Okay.

And then how will that play outgoing forward?

Well, going forward, as I mentioned to Stacy Forbes at Jan Co-, we believe we will be paid for post bankruptcy amounts and we'll be working with the management team to ensure that that happens.

So we would expect that we will have no collection problems for post-bankruptcy amounts.

And you will be able to book revenues then?

We believe so.

Okay.

Then the last one and then I'll leave you alone was just on the deferred revenue line.

It came down pretty substantially in the quarter.

Was anything going on there?

We have normal business that we book for maintenance where we bill at the beginning of the year and it burns down and then we rebuild it up as we bill for those services generally in the first part of the year.

Just normal thing.

Normal seasonality.

Thank you

Our next question comes from Doug Campbell with Spirit Capital.

You mentioned working as lows closely as you could with your customers in order to evaluate the level of services you needed to serve them and concluded were you going to reduce your cost basis considerably.

In working with those clients, were you able to communicate satisfactorily with the AT&T folks with whom you are in a binding arbitration situation, or is that level of utilization -- level of service required during the arbitration period less knowable by you?

I'm going to just -- any questions regarding AT&T I'm just going to refer to Jack and for obvious reasons we'll have to be reasonably vague.

I think you have to look at the AT&T arbitration as our AT&T relationship in two different parts.

One is our ongoing business relationship with AT&T where we are committed to provide the highest quality service over and above even what we have agreed to in our contract.

At the whole different level of relationship that Ed manages day to day and I would say that there is still a very healthy rip and ongoing relationship with them of course, the arbitration is a dispute that we are, you know, will be sitting down with an arbitrator and going through over the next period of time.

So, uhm, I don't see any diminution of service on the operating side.

But in terms of managing your own costs, do you think that you are able to develop as good an understanding as you needed to in order to incorporate expectations with respect to that client to your own staffing levels?

Absolutely.

We're in -- Ed's in contact with AT&T or his team is on a daily base, and we have a very good idea where they are going.

Okay, great, thanks.

We feel very good about that.

Right.

Our next question comes from David Goldsmith with Buckingham Research.

Hi, guys.

Just really one question.

You usually tell us how many subscribers you have in backlog.

Are there any (indiscernible)?

I just want to be sure about that.

We did know have any last quarter -- and this quarter there are not any that we are reporting on.

We don't have any in backlog.

Great, thanks.

Our next question comes from Vincent Dimasko with Janney Montgomery Scott.

Good evening, gentlemen.

Just two questions, actually.

One is regarding in the press release, you mentioned that you guys are expecting to complete additional charges for the completion of the integration of Kenan.

Would you just walk me through that?

Uhm -- What that's going to involve?

Vince, this is Peter.

We have been incurring costs.

We have the oshlg cost in the first quarter which primarily was severance and write-off of in process R&D and then subsequent to that -- to that for the rest of this year, we were seeing we were going to have legal and it thing -- accounting type integration costs as we built legal entities throughout the remainder of the world, entities that we didn't have in place and put in infrastructure to support the business.

Those amounts were approximately $3.5 million in the second quarter and I'm looking for our estimates for the second half of the year.

Do you care to know what those numbers are?

Yeah.

If you would have them on hand.

Okay.

One second.

It's about a million to a million and a half per quarter.

Okay.

And then regarding the renewal with Charter, was there a pricing discounts or anything?

I'm just trying to get a sense of the decline in pricing per or I guess processing or pricing for specific subscribers.

We don't give specific pricing per customer.

That's -- I think as you can actually see that our overall rate increased from second to third quarter as I talked about in my comments.

First and second quarter, I'm sorry, as I mentioned in my dimensions.

What we have done with that relationship is we have extended it and they have agreed to buy more services and we don't think that the terms of that contract will have a material impact to our revenue per sub in either direction.

Thanks a lot.

That's are all my questions.

Thank you

Our next question comes from Steve Culp with the "Rocky Mountain News".

Hello, everybody.

Hi, Steve.

I think you said that you incurred $1.5 million so far in legal fees on the AT&T Comcast deals, is that right?

In the second quarter, that's correct.

What are the possibilities of recovering those costs?

I'm going to defer -- [ Laughter ]

The, uhm...

Steve, that's all depends upon the outcome of the ash traimplgts the arbitrator has, I believe, in his power the ability to grant -- (indiscernible) one way or the other but I would be real speculative at this point to give you a prediction on that.

Okay.

And then you also mentioned an expansion of your relationship with Echostar?

Yup.

Can you give details about that?

Steve, this is Liz.

This quarter we expanded quite a few of the services we are providing into their call center.

So to help with their customer service organization.

Okay.

Thanks.

And then, uhm, do you have any kind of a breakdown on the jobs that are going to be disappearing, the 300 to 350 jobs?

That's a work in process. -- that we're working diligently on and very close to coming to some conclusions on.

It will be across organization.

And we will be preliminarily be fairly rapidly on that.

And Steve, this is Peter.

These are not just Denver-based jobs.

These are jobs throughout our many locations around the world.

Okay.

Great.

Thanks.

Thanks, Steve.

Our next question comes from Chris little with Osster Rice Capital.

Hey, guys.

Just a quick question.

At the end of the first quarter, you guys broke out the receivables and the allowance for the Kenan Business and you said that you were going to keep track of that going forward.

Could we have the net allowance or the net of allowance for doubtful accounts at the end of the second quarter?

And could you tell us if there was any reversal of that, that would help profits in the second quarter?

Thank you.

Well, looking for the numbers right now, the... the net amount was 28.59.

I don't have the allowance in front of me.

And you can call my office.

I can get that for you later.

Any movement of those collections or changes in the reserve do not flow through the income statement.

Anything that we collect above and beyond the net accounts receivable balance on our books will flow back to the balance sheet and not to the income statement.

Okay.

Thank you.

And then just one follow-up.

Can you give us a little more clarity on the base business excluding Kenan why the receivables and unbilled receivables went up so much given revenues were kind of flatish?

Well, flat compared to what period?

Well, sequentially.

It looked like revenues were -- I'm talking about the base business.

It looks like excluding Kenan, because you are separating the receivables out, it looks like the base business or the old CSG business had a relatively flatish revenues but receivables and the unbilled receivables item went up pretty considerably.

I just kind of wanted some more clarity on that please.

Let me add a couple of comments to that before I give you your answer.

First of all, revenues for the company increased 41 % from the first quarter to what we booked in the second quarter.

So 41 % up.

I'm talking about excluding Kenan.

I'm making sure that everybody hears all the information on this

Okay.

That's our total revenue.

The revenues Ford Broadband were fairly consistent from first to second quarter.

We increased quite a bit of our revenues out of our GSS group.

What we reflect in our trade accounts receivable is both our receivables for the Broadband group as well as the GSS group, what we keep track of separately in that $28.5 million of receivables is the receivables we purchased at the date of the acquisition as of 2/28.

So those are kept separately because they are not reflective of the ongoing that we are doing starting on March 1st.

So there is a difference.

The trade accounts receivable includes both Broadband and GSS revenues and those are GSS revenues generated since March 1st.

Does that make sense?

Thank you.

Our next question comes from James Lynn with green light capital.

Hi, how are you?

I think most of my questions have been answered but I may have missed some of them.

What was Kenan's contribution to revenues in the second quarter?

We don't provide the specifics of Kenan.

Kenan's results are included in the GSS results.

Okay.

And I think the comment made by a previous person on the call was that the GSS division is predominantly Kenan's revenues, correct?

That's correct.

And what was the -- I guess you gave an estimate for the core, you know, legacy, CSG --

The analyst who asked that would $4 to $5 million be about the core and I said that's a reasonable approximate number to use.

Okay.

Thank you very much.

Thank you.

Our next question comes from Tom Urtz with Thomas Weisel Partners.

Good afternoon, thank you.

Thinking about the shift to term-based licenses versus perpetual licenses, that adds visibility but at the same time it comes with the cost of potentially lower near-term revenue.

Have you included that in the guidance or is that part of the decline we are looking at?

The number one item that drove the decline is just the overall telecommunications market.

We have always been interested in converting the Kenan Business from perpetual to term whether it's term over a long period of time or intermediate terms just because we like the recurring aspects and the visibility of revenue and the types of business that that drives for us.

But that was not the driving force in changing our visibility.

Okay.

But if we have some very large uptake or you see some strong success in rate and term-based program, would that mean that we should expect another decline in expectations?

No.

No, I don't think -- this is Neal.

I don't think that's what it means but what it does say is that we're prepared to, if you will, work harder to generate more revenues and have them on a more sustainable base rather than take a big pop this quarter and go from a big pop to a big pop.

So as Peter said, not reflectedive going forward.

Reflective more of a philosophy in the way we run the business and would intend to run the business.

Okay.

So maybe we should think of three, thinking about a higher mix of term base licensing as we think about our models.

We would like to think that's where our business will take in us 2003.

Got it.

Thank you.

Our next question comes from Chris Scott with Credit Suisse First Boston.

How are you doing, guys?

Good, Chris.

Can you comment in terms of Adelphia as a percent of revenue both in the first quarter and second quarter?

There's not a material difference except for the one month of revenue between the second and first quarter.

It's clearly less than 10 % of our revenue.

We service about 3 million accounts for them.

And if you just look at that 3 million across 44 million accounts, it's going to be less than 10 %.

Great.

Consistent between the two quarters.

Sure.

Uhm, in terms of AT&T Broadband, as a percent of revenue, it's down 25 % this quarter.

Will you comment on any trends going forward with that number?

We have given guidance before that we thought AT&T as a percentage of our total revenue it would be between -- would be between 25 and 30 percent.

We still believe that will be the percentage of revenue that they contribute to us even with this lower guidance for the remaineders of the year.

And one final quick one.

Can you break down EBITDA between the GSS division and Broadband?

We don't provide that.

I can try to help you work towards that later.

But on the call, I don't have that information.

Okay.

Thank you.

Thanks, Chris.

Our next question comes from Russ Dougworth with Sterling Capital Management.

Hi.

You have a covenant in the bank loan that limits the amount of stock that you can repurchase.

As of the end of the quarter, how much of a limitation -- or how much stock could you buy back if you wanted to?

Under the current bank agreement we have in the covenants, we could buy $50 million worth of stock back for this year.

Okay.

Thanks.

Thank you.

Gentlemen, at this time, I show we have no further audio questions.

Please continue.

Okay.

Let me just conclude by saying it is pretty harden environment out there for you.

I'm really happy that we have the management team and the people that we have in this company to get us through this in the business model that we have to build the future of the Company on.

So thank you all for your support and your questions.

And we'll talk to you next quarter.

Ladies and gentlemen, this concludes the CSG Systems second quarters earnings results conference call tomorrow.

Listen to a replay of today's conference please dial 303-590-3000, and enter an access code of 479731.

Once again to listen to a replay of today's conference please dial 303-590-3000.

Enter an access code of 479371.

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