CSG Systems International Inc (CSGS) 2002 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CSG Systems International third quarter earnings release conference call.

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

Following today's presentation, instructions will be given for the question and answer session.

If anyone needs assistance at any time during the conference, please press the star, following by the zero.

As a reminder, this conference is being recorded today, Monday, October 28, 2002.

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

Please go ahead, ma'am.

Thank you.

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 and IBM business, and the company's expectations relative to the timing for our 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.

If you did not receive a copy of our press release, you could go to our website at www.csgsystems.com for a copy.

We have with us today Neal Hansen, Chairman and Chief Executive Officer;

Jack Pogge, President;

Bill Fisher, President of Global Software Services;

Ed Nafus, President of our Broadband Services Division; and Peter Kalan, Chief Financial Officer.

Mr. Hansen will begin.

Thank you, Liz.

And thank you all for joining us this afternoon.

I'm very pleased to report to you our earnings for the third quarter.

Revenues at $155.6 million, within our guidance for the quarter, and adjusted earnings per share came in at 30 cents -- also within our guidance.

I'm sure by now every one of you is sick and tired of hearing about how tough it is out there, how sales cycles are lengthening, how

spending is happening, and on and on.

Well folks, it is what it is.

In reality, this type of environment creates winners and losers.

This is true in our business, and quite frankly, it's also true in your business.

In reality, smart operators, creative operators, come out of a situation like this stronger than they went into it.

And while others may see doom and gloom, frankly, we see opportunity.

Now, don't get me wrong.

Many companies will not survive.

They usually don't have the products, the people, the client-base, or the business model.

We do.

We have the products, the people.

We have the client-base.

We have the business model.

We also have one more thing that truly does differentiate our company, and that is we have a winning attitude.

Our management team and people have the attitude that it takes to look at situations a little bit differently to identify new ways of delivering value to our clients, and to aggressively pursue the right opportunities.

You see, we see an opportunity to ensure that when any carrier in the world is looking to make a purchasing decision on business support and operational support systems, that CSG is always considered.

see an opportunity to ensure that when a systems integrator, a hardware provider, or network company is looking to partner with a billing vendor on a large-scale opportunity, that CSG is their first choice.

We see these opportunities because we have the mechanisms in place today to make them happen.

And we are making a lot of progress on achieving these goals.

Today, I'm not going to waste your time talking about things that we can't control, like the economy or the state of the telecom sector.

Instead, I'm going to talk to you about the things that we can control, and that is how CSG implements the right strategies in order to come out of this environment stronger and more successful.

What are these strategies and what is CSG doing to implement them?

Well, the first strategy is that a company must conserve their resources.

Earlier this year, CSG made very difficult decisions regarding our employee base.

We acquired a company that allowed its employee base to grow out of proportion with its revenue expectations.

And in addition, our own expectations regarding revenues turned to be more optimistic than what the market would show.

Rather than hope for a recovery, we shrunk our organization by over 600 employees.

This action allowed CSG to better match our expenses with our revenue expectations going forward.

Now, our management team and employees did a great job in handling and managing these reductions, and not missing a beat in day-to-day operations.

And while it's important to manage the business according to short-term needs, we also have to have an eye for where you're driving the business in the next year, the next two, the next three years out.

And the only way you can drive your business is with good, highly-motivated and talented people.

As a result, we have taken actions to ensure that we retain and incent our top employees.

In addition, we took a hard look at the existing infrastructure that we have throughout the world.

In many areas we have consolidated offices.

In some areas, we have closed offices.

And in some parts of the world, like India, we have opened new offices.

Now, this required looking at where our customers are, and determining how we can effectively and efficiently manage our operations and meet our customers' requirements.

And finally, we felt that it was important to get even closer to our customers to understand what their real product needs are, and what they actually will implement during these cash-constrained times.

My management team and myself have been all over the world talking to clients, and here's what they're telling us.

They're saying they do not have the capital necessary to fund theoretical products.

They're telling us that they need products that have short, but not immediate return on investment.

And they need to increase their revenues through products and services that they can deliver to their customers today.

Year-to-date, CSG has invested almost $60 million in research and development on brand new products aimed at helping providers increase their revenues and increase their expenses.

A little later, I will share with you some tangible examples of what we are doing.

The next strategy that I believe a company needs to deliver on to be successful is keeping your team focused, and focused on the fundamentals.

And I guess the best proof point for our ability to stay focused is the fact that we delivered on our numbers, in spite of this challenging environment.

As you know, earlier this year we set up two divisions within the company -- the Broadband Services Division, run by Ed Nafus, and the Global Software Services Division, run by Bill Fisher.

We did this for very specific reasons.

We wanted Ed and his broadband team to continue helping our clients deliver and services that their customers need and want.

And we wanted Bill and his team focused on expanding our relationship with our existing Software and Services customers.

We wanted them winning new business, and we wanted them creating a more sustaining a more sustainable business model, and one of the ways through term licenses.

Let me give you a couple of examples of how our divisions are executing on these objectives.

One of our large broadband customers needed to reduce the number of calls coming into their call center, and decrease their postage expense.

This year, they implemented our

and electronic bill presentment and payment application.

The results for the first six months have frankly been tremendous.

Four percent of their total subscriber base has opted to receive and pay their bills electronically.

Of those customers, 40 percent have opted to not to receive a paper bill, reducing the printed mail and the postage expense.

In addition, they've seen a 20 percent reduction in the number of delinquent payments in month-to-month collections, as well as a 30 percent decrease in the number of customer inquiries into its high-speed data call center.

Another major broadband provider, Time-Warner Cable, wanted to roll out a new revenue generating service -- Video on Demand -- throughout its various sites.

Time-Warner turned to CSG to help manage a fairly complex project that included coordination with several outside vendors, including Scientific

and Pioneer.

Today, we are interacting with a server installed at each Time-Warner location that delivers the movies on demand.

the customer selects a pay-per-view movie using their set-top box, that transaction is routed via this new server to CSG, and we authorize the purchase, as well as collect the information for billing.

Again, not only are we helping our clients introduce new revenue-generating products, we are also enabling them to do it in a cost-effective, highly automated fashion, resulting in more money going directly, obviously, to their bottom line.

On the Global Software Services side, we continue to sign new and expanded contracts.

And oh, by the way, we signed several term contracts this quarter, making serious progress on Bill's plan to create a more sustainable business model for this division.

this quarter,

, Aruba's wireline, wireless, and internet provider, signed a seven-year term contract with us to utilize our key new BP billing solution, and our Data Mediation solution.

is Aruba's only telecommunications provider, and serves both the residential and business communities.

In addition, we expanded our relationship with a number of our billing clients this quarter, including

Telecommunications in Brazil,

in India, and U.S.

, just to name a few.

We also expanded our relationship with two very large Data Mediation clients this quarter -- AT&T and Verizon.

And our folks in

just signed last Friday a significant support and services contract with the U.K.'s largest communication provider, British Telecom Retail.

Now, this contract is a result of our professional services organization successfully helping BT deploy our Kenan/BP platform across its corporate customer base.

The contract will include business consultancy, application support and integration coordination between the BT internal systems, and the Kenan/BP billing platform.

You should expect to see a press release on this very soon.

And also, I believe that we will have additional opportunities like this in other large accounts.

Next, let me share with you another critical strategy needed in order to come out of this environment stronger than you competition, and that is aligning your company with winners.

Now, to do this, we organized our company so that we have our divisions, as I said, focusing on the day-to-day operations,

Jack Pogge and myself to work with the key architects of telecom, technology, banking, and systems integration industries to help redefine what telecom, communications and technology looks like when this turnaround occurs.

And out of that, we are identifying new ways of doing our business.

We're identifying new products that the industry needs, and we're identifying new alternatives to delivering these solutions.

So, we're working diligently with key systems integrators and with hardware providers to develop major outsourcing deals in telecommunications and new verticals.

These types of activities take time to develop, but they're being very well received by large carriers.

I'm hopeful that we will have more to discuss relative to these very large deals in the next six to 12 months.

Next, I think we've done an excellent job of targeting and pursuing the right customer base.

We didn't CSG wasting a lot of resources pursuing the internet startups

.

We focused, instead, our attention on becoming a leader in cable, direct broadcast satellite, wireline and wireless.

As a result of our efforts, today we work with over 20 tier one providers, including British Telecom,

,

, AT&T, AOL, Time-Warner, EchoStar, and Verizon, just to name a few.

In today's environment, we are proposing unique ways in which we establish even stronger relationships with our clients.

We've implemented user groups in the various regions.

We've installed a customer care organization.

And importantly, we are initiating joint product development labs with our large customers.

Now, this is significant because it allows our customers to target new revenue opportunities, and us to help them respond quickly.

In addition, it provides us with a direct pipeline of our customers' businesses and what products they need, and what products they are actually likely to implement near-term.

And the final strategy involves identifying

are the real opportunities that you can execute on.

And I think this is where I am most impressed with our management team.

I think they're people who understand what real opportunities are, and do not waste a lot of time and a lot of energy taking foolish risks.

You know, just because there are some really

acquisitions to be made out there, doesn't mean that they'd be a good acquisition or worthwhile to us.

In addition, each year when another killer application comes along -- whether it be analog cable telephony, home security monitoring, or buying Cokes from the vending machine with your wireless phone -- you still have to do your homework, and you have to determine whether or not you believe it is a strong, sustainable business, and whether it's worth pursuing and putting money into.

Now, we've made some mistakes and we're not perfect.

For example, I would guess we were about five years too early with electronic bill presentment, payment and self-care applications.

We invested far too much money in helping a large customer roll out analog telephony, when we knew the solution being dictated to us would have some difficulty working.

But, you learn from these mistakes, and you try not to make them twice.

But, by and large, I think we've made good product decisions, and I guarantee you we'll make even better decisions as a result of three things.

We've installed a more sophisticated process by which we evaluate our decisions and our spending.

We've aligned our customers to -- we've aligned very closely with our customers to ensure that what we are developing, as I said, is what they actually need.

And we've aligned with key systems integrators to really help draw up new blueprints so our operators can deliver our products and services in new, more cost-effective and profitable ways.

So, in conclusion, what can you expect from CSG and from the management team?

I think first, what won't you see?

You won't see us sniveling about how tough it is out there.

That just doesn't do you a lot of good.

You won't see us acting like we have a crystal ball.

We don't.

The only way you learn what's going on out there is to spend time in the field and spend it with your customers and prospects.

You won't see us chasing every company that an investment banker puts in front of us just because the stock is undervalued.

But, you will see us taking action when something good comes along.

And you won't see us trying to be all things to all people.

Now, let's talk about what you can expect.

You will see us conserve our resources.

We told you last quarter that we would be cutting $45 million in expenses on a full-year run rate out of the business, and we're well on track to do that.

You will see us continue to be focused on the fundamentals.

We told you that we would work hard to retain our customers, and we've renewed all the contracts up for expiration this year.

We have already started on the seven percent that are up for renewal next year.

We told you that we would be creating a more sustainable business model in the Global Software Services Division, and we've started to make progress.

In fact, we've made very good progress in doing that.

Third, you will see us work with the companies that we believe are going to be the winners, whether that be on the client side or the systems integrator side, and you should expect to hear a lot more about this in the coming quarter.

And finally, you will see us aggressively pursue opportunities that we believe will position us to come out of this time stronger than our competitors.

We have integrated the Kenan business into our business.

We just recently acquired the IBM Customer Care and Billing business and their customers, and we anticipate that that integration will go just as smoothly.

In addition, as a result of this acquisition, we now have a very strong relationship with IBM, and we're pursuing large-scale opportunities together.

And we continue to pursue other opportunities that will continue to strengthen our position with tier one and two providers, as well as the key systems integrators.

What I say is, "stay tuned."

Finally, I'd like to thank all of you for your support during these times.

And with that, I'd like to turn it over to Peter Kalan, our Chief Financial Officer, to review our financial performance.

Thank you, Neal, and thank all of you listening for participating with us on this call, and for your interest in CSG.

I will begin my comments 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 September 30, 2002, reflect revenues of $155.6 million, and net income under generally accepted accounting principals of $5.9 million, or 11 cents per diluted share.

During the third quarter, the company incurred restructuring charges totaling $12 million related to the implementation of several cost reduction initiatives.

Net income adjusted for these restructuring charges, along with certain incremental and direct Kenan acquisition related charges was $15.8 million, or 30 cents per diluted share.

For the three months ended September 30, 2002, adjusted earnings before interest, taxes, depreciation and amortization, was $42.3 million.

We continue to have a very stable and recurring processing business, with processing revenues totaling $93.6 million for the quarter.

And Software and Services revenues were $62.0 million for the third quarter.

In the third quarter, 29 percent of CSG's total revenues were derived from international markets, with Europe contributing 12 percent, Asia/Pacific contributing nine percent, and Latin America delivering eight percent.

We continue to expect strong revenues from the international markets, and are committed to leveraging the business infrastructure we have around the world.

Along with growth and expansion into the international markets, AT&T Broadband has decreased to 28 percent of the company's third quarter revenues, compared to 57 percent in the same period last year.

For the third quarter, the gross margin for the company was 54.6 percent.

The gross margin on processing and related services increased sequentially from the second quarter to 62.2 percent.

The gross margin on software maintenance and professional services sequentially declined to 43.2 percent due to a sequential decrease in these revenues.

We continue to incur legal expenses associated with the AT&T Broadband and Comcast litigations, which totaled approximately 700,000 for the third quarter.

We anticipate that we may spend approximately $1 million per quarter as we progress through the arbitration process and work to resolve the claims.

The third quarter operating margin, adjusted for restructuring charges and the Kenan business acquisition related charges, equaled 20 percent of revenues, in line with the previously communicated guidance for the third quarter.

Turning to the company's divisional results, the Broadband Services Division generated $99.5 million in revenues for the third quarter, and produced an adjusted contribution margin of $46.2 million.

We finished the third quarter with 44.9 million subscriber accounts on our processing system, of which 40.1 million were video subscribers, and 4.7 million were internet subscribers.

Total subscribers increased sequentially over the second quarter by 600,000, driven by organic growth in subscribers, primarily from our direct broadcast satellite and internet clients.

As of September 30th, we do not have any subscriber backlogs to convert.

For the third quarter, annualized processing revenue per video subscriber totaled $8.91, and annualized processing revenue per internet subscriber total $3.50.

We were pleased in the strength of the processing revenue per video subscribers as we continued to see project requests by our clients for CSG to help them enhance the operations of their businesses, which generate one-time fees for CSG.

For the third quarter, we experienced a decline in the processing revenue per internet subscriber greater than we had expected, as our clients' growth in internet subscribers achieved volume tiers that brought lower pricing.

We consider this good news, though, as we like to see the number of subscribers grow, and do not anticipate that this will have an adverse impact on our revenue expectations for the year.

For the fourth quarter, we expect that annualized processing revenue per video subscriber will be between $8.60 and $8.70, and for internet subscribers, between $3.50 and $3.60.

CSG's Global Software Services Division produced $56.1 million in revenues for the third quarter, resulting in an adjusted contribution loss of $2.3 million.

We continue to expect that for the fourth quarter, this division will generate a positive contribution margin.

As Neal stated in his comments, Bill Fisher and his team have begun to see success in selling the GSS software with the right to use for a specified period, which we refer to as a "term license," versus the historical perpetual right to use.

The business of selling term licenses provides opportunities to generate additional fees in future periods when the term of the license expires.

We typically recognize the revenue for term licenses upon delivery of the product for those transactions in which we are scheduled to receive payment for the product in a relatively short period of time.

In the event that the payments were to be scheduled over the term of the license, we would recognize the revenue ratably over the term.

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

As of September 30th, our trade accounts receivable totaled $152 million, net of the allowance for bad debts of $13 million.

Two primary factors contributed to the increase in the accounts receivable during the quarter.

One, a significant portion of our accounts receivable was generated from international telecommunications Software and Services transactions, which have longer invoicing terms and cash collection cycles.

Two, as part of the acquisition of the Kenan business, a significant amount of documentation and communication had to take place with clients to facilitate payments being made to CSG versus Lucent.

We understand the issues, and are focused on working with the clients to facilitate an expedited collection of the receivables.

And we have our worldwide management organization working on these issues.

We have reviewed the clients who are delinquent in their payments, and believe that we have adequately reserved for our

exposure.

In fact, since September 30th, we have collected $58 million, which is approximately 40 percent of the September 30th balance.

This increase in accounts receivable, and the slow collections along with the lower third quarter earnings, and the timing of various accounts payable, contributed to cash flow from operations of a negative $5 million for the three months ended September 30th.

We anticipate that the cash flow from operations for the fourth quarter will add a minimum return to the historical levels of approximately 20 to $25 million per quarter.

The trade accounts receivable reflected days billed outstandings, or DBOs, of 65 days for the third quarter, which is within our previously communicated target range of 65 to 75 days.

With the expansion of our business into broader markets, and the increase in revenues from Software and Services, our unbilled receivables have increased, as we expected they would.

Unbilled receivables totaled $33.5 million as of September 30th, with approximately 85 percent of these balances scheduled to be billed and paid by clients during the fourth quarter of this year.

The remaining balances are scheduled to be paid in early 2003.

Now, as part of the acquisition of the Kenan business, we acquired billed and unbilled accounts receivable from Lucent.

Since these acquired accounts receivable relate to Lucent's operations of the Kenan business prior to CSG's ownership, these amounts are tracked and reported separately from CSG's trade accounts receivable, and are not included in the determination of DBOs.

These acquired billed and unbilled accounts receivable totaled $11.5 million as of September 30, 2002, compared to $28.5 million as of June 30th of this year.

We have been successful in collecting these balances to date, and expect that we will have this substantially collected by the end of the year.

We finished the third quarter with cash and investments of approximately $55 million.

During the third quarter, the company invested approximately $11 million in the acquisition of the ICMS Customer Care and Billing business from IBM, and also repurchased 1.5 million shares of the company stock for a cost of $17 million.

To date, since the authorization of the stock repurchase program, CSG has repurchased 6.3 million shares, which 3.7 million shares remaining authorized for repurchase under the program.

As Neal mentioned in his comments, the company has taken action so that we will be able to attract and maintain key employees for the next several years.

During the third quarter, members of management surrendered previously granted stock options in a fair value exchange for restricted stock grants, so that the company would have adequate option shares available to be granted to attract, retain and incent key employees.

This resulted in a non-cash stock-based compensation expense, which totaled approximately $300,000 for the fourth quarter, and is estimated to total $1 million for the fourth quarter of this year.

Management agreed to this program to ensure that CSG is well-positioned to retain its best people for the next several years.

The company finished the third quarter with $270 million in outstanding debt, and the next scheduled payment of principal associated with the debt facility is due in March of 2003 in the amount of $1 million.

Looking forward to the fourth quarter of this year, we continue to target total revenues to be between 155 to $165 million.

Of this targeted revenue, we currently have approximately 85 percent under contract.

As of September 30th, we have a Software and Services backlog of approximately $115 million that we expected to recognize 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 underway.

We initiated expense savings initiatives in the third quarter, targeted to reduce expenses on an annualized basis by $45 million.

We have completed nearly all of our staff reductions, and also initiated actions to reduce facilities cost, and discretionary expenses.

On an adjusted basis, excluding the acquisition related charges associated with the Kenan business acquisition, we expect our fourth quarter operating margins will be between 24 percent and 26 percent.

We expect that adjusted earnings per diluted share will be between 36 cents and 42 cents for the fourth quarter.

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

And for the fourth quarter, exclusive of any additional share repurchases, we anticipate that our diluted shares outstanding will be approximately 51.5 million.

In summary, I am pleased with the financial results of the company for the third quarter.

We met our financial guidance, and have positioned CSG for the coming periods.

We continue to work very diligently to maximize the performance of the company, while maintaining financial integrity and ethics.

CSG is a company with unique strengths.

We believe in our business model.

We have the people to be successful.

We have an operating mindset and skills.

We have the intellectual property and the assets, and we have the desire to be successful.

With these resources available to CSG, we believe we will take advantage of the opportunities that arise from these market conditions.

We are committed to success.

I will now turn it over to the moderator for questions.

Thank you, sir.

Ladies and gentlemen, at this time we'll begin the question and answer session.

If you have a question, please press the star, followed by the one on your pushbutton phone.

If you would like to decline from the polling process, press the star, followed by the two.

If you are using speaker equipment, you will need to lift the handset before pressing the numbers.

One moment, please, for the first question.

Our first question comes from David Togut with Morgan Stanley.

Please go ahead.

Thank you.

Neal, just a couple of quick questions.

First, if you could give your view on what the leading indicators might be of a turnaround in the business?

Some might be, let's say pretty well-known.

But, what are some of the indicators that you'd be looking for, you know, either internally or externally?

Some of the things that we're seeing?

I think one of the things is,

, we continue to see more demand in the Asia/Pacific region than in other areas.

I think we've seen some -- the shake out of a lot of the weaker players.

As I'm out making high-level calls -- and I'm attempting to be out every week on key calls -- I think one of the key things, David, that I'm seeing is that there are -- with the companies that I term, "the winners" -- there are projects and changes in their business that have to go forward.

They're being very cautious in how they go forward, and there may be some new ways that you deliver services to them, and you deliver deals to them.

But, I think some of the key indicators -- as I go around and talk to senior people in telecom -- there are projects, as I said, that have to move forward for their business to move forward.

So, that's one thing I look for, and I'm seeing some good things there.

I'm really happy that we're out calling at that level.

I think the other thing is in the broadband industry, if you look in Europe, and you look here in the United States.

There's just a lot of movement and a lot of changes that are going to transpire.

You know, those

are gonna get changed -- or changed out in Germany, one way or another.

Somebody's gonna become a winner there.

There's just a number of situations that are probably on hold a little bit until some of these transactions complete.

So, I think maybe that's the second thing I'd look for.

Thank you.

Um-hmm.

Our next question comes from Adam Waldo with Lehman Brothers.

Please go ahead.

Yes.

Good afternoon, all.

The restructuring charge in the quarter was a bit larger than I was anticipating.

And I wonder, Peter, if you can comment on why we ended up running about 14 million in book charges, versus, I believe the expected six, and what the mix of cash and non-cash components was to the charge.

How much cash was paid out in the quarter?

Sure, Adam.

What I had given as guidance before was we thought that we'd have a cash charge of between five and $10 million associated with severance, and that we would have a non-cash charge associated with restructuring of facilities.

Our actual charge per -- the cash charge was a little over five million.

I can get the exact -- more exact number for you later, if you like -- with the remainder being a non-cash charge around the facilities.

So, you would expect the remaining -- let's call it nine million or so -- to be set up as a balance sheet reserve and run through in future quarters?

And if so, roughly what type of timetable should we expect on that?

It should be generally over the life of the terms of the leases that we're abandoning, and those vary by market.

We should be seeing, in most cases there, three to five years, is what I recall on those, Adam.

OK.

Thanks.

Where are we in terms of restructuring cost

?

Did we hit our run rate $45 million annual target as of the end of the third quarter,

, that you just essentially the headcount reductions?

Or, if not, at what point do you expect to hit that?

We believe that we'll have virtually the full 45 million in the fourth quarter.

OK.

We didn't receive 100 percent of it on the

out of third quarter, but we're close enough that we think we're in position to get the full amount in the fourth quarter.

OK.

And then finally, if you could, Peter, give us an update -- and you may have said this in your prepared remarks.

I apologize;

I was a little late in getting on.

But, can you give us a sense for where

stood in terms of aging past 90 days at the end of the third quarter, and how they compared with the second quarter?

I don't have that information with me right now, Adam.

I'd have to get that information later and get back to you.

Would it be fair to say it wasn't materially different, Peter?

We did see some degradation in our aging, because just the size of the AR growing, as I said in my comments.

But, we believe in general that based on our reserves, and based on what we know is the situation with the clients, and our operating activities with those clients, that we are adequately reserved.

We've got our worldwide management team looking at the activities with our clients who are delinquent, and feel very comfortable that we have these under control.

OK.

And then, finally, any comments on the big sequential fall-off in non-processing revenue broadband services during the quarter?

In the second quarter, we had two large transactions, or larger transactions that we commented on last time with, I believe both EchoStar and

Communications.

And we just did not see the duplication of that in this period.

The broadband market is very tough, as you're probably well aware of the capital constraints they have in their own businesses.

Thank you very much.

Thank you, Adam.

Our next question comes from Michael Turits with Prudential Securities.

Please go ahead.

Hi, guys.

The revenue guidance is pretty flattish, and generally, it looks like processing should be -- you know, maybe even down slightly if

comes down a little bit.

You had a nice bump in the software component of GSS this quarter.

Through the process of elimination, what is the outlook like for that line -- for essentially what, you know, really for new types of software projects?

You know, to the extent -- I know it's not guidance into next year.

But, are we at the point where we think that new software projects are flat, declining, bottomed?

How would you characterize where that's going on a trend basis?

This is Bill Fisher.

I don't think I can characterize it in any of the adjectives that you used.

What I'd tell you that we are seeing is -- as we talk to telecom executives around the world, they're basically faced with very limited capital spending.

So, a mission critical is rising to the top in those businesses.

Billion happens to be one of those.

So, we're still finding projects in the large telephony providers around the world, where they're interested in products that help them either save costs or increase revenue.

We're actively mining the current customer base, probably more proactively than we are mining new potential customers.

We're catering to that base, trying to make sure that we're included in their planning discussions.

An example of that is BT.

We just announced a new agreement with them for services.

We are also are working with them on a number of other opportunities having to do with new license opportunities.

You know, we have a good group of tier one and tier two customers around the world.

And I think we had as a business -- and the Kenan organization's kind of taken our eyes off that customer base.

And we've been focused back on them, and that's starting to provide us with some results.

They see our tier pricing model as very attractive, because, once again, they have limited capital.

And rather than buying a perpetual license from us, they see the attractiveness of buying a term license than paying more for it in the future.

So, I would be less than honest if I told you that new opportunities appear to be on the upswing.

I wouldn't say that's the case, although we signed a very nice contract with

in Aruba this quarter.

I think I see more opportunities with our current worldwide base -- looking at ways to improve their economies, and coming to us, either to customize services, or to provide them some new software to help them manage that system more effectively.

Michael, this is Neal.

I'd like to add a little bit.

You know, as we said, Bill and Ed are driving their normal businesses forward, and I'm out headhunting for the next big deals along with Jack.

And one of the things I'd tell you is that as you get out there, the quality of the product and the reputation of the products are outstanding.

And, as I indicated earlier when I spoke to David, there are some things that are going to get done that are getting direction at high levels of some organizations.

And they may not be things that necessarily come out for RFPs.

They may be things that get created.

And I think in this environment, that's -- if you look at new stuff, new opportunities, that's where it's going to be.

You've got to have the product and the backup to deliver it.

You've got to have the relationships with the systems integrators that are going to be a key part of it.

And you've got to be out there finding new ways to deliver, and finding new ways to find definitions for them.

And I think that's where -- that'll be the differentiator, is creating those.

Just a follow-up in terms of some sort of follow-up.

The effects on the quarter on the one hand of ICMS, and on the other hand -- any effects from term licensing?

Was anything signed that would have been different if it had been on a perpetual license basis?

First of all, Michael, on the issue of ICMS, the bringing on of that business was insignificant from a financial perspective -- both from an expense and a revenue perspective.

It was never targeted to be significant, and it actually came through for the quarter that we met in line with where our guidance was.

From the perspective of the term licenses, we did sign several of them.

And from that perspective, as I said in my comments of how we account for them, that if the payments are all in a relatively short time period for a term license, then we recognize that revenue up front.

And that's what we primarily did for the quarter in the term licenses that were sold.

And therefore, there was not multi-year revenue stream that had to defer over the term of the license.

OK.

And then one last balance sheet question.

I wouldn't want to get away without that.

But, if you took the Kenan receivables -- I'm sorry, not the Kenan receivables -- but unbilled receivable, it doesn't -- the percentage that's gonna get paid out this year still looks like it's about the same amount, or actually slightly more than what it would be on an absolute dollar basis if we did the percentage times the absolute dollar amount last quarter.

So, in other words, it doesn't seem to have gone down, and we're a quarter later.

So, any logic to that?

Well, last quarter, Michael, when we gave the guidance, the majority of the dollars that were in the unbilled receivables were expected to be billed and collected in the fourth quarter.

So, this is a continuation of where we were last quarter.

OK.

Great, guys.

Thanks very much.

Thanks, Michael.

Thanks, Michael.

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

Please go ahead.

Yes.

Good afternoon and thank you.

Hey, Tom.

On the term licenses, what is the length of the term for most of these contracts?

We basically look at anywhere from a three to ten-year term.

I would tell you that this quarter it was more to the middle of that bandwidth.

Once again, I think the customers are looking at this pricing opportunity as a situation for them to figure out how to conserve capital.

But as you might expect, they also understand that these systems are very sticky and stay involved, and therefore, they'll have to renew the term.

So, I would tell you that my history says that it will closer to seven years as a typical, than it would be to three or ten.

OK.

Good.

And what do you think price realization is for a term -- for an individual term contract, versus a perpetual?

How much do you typically get less than if you sold it perpetual?

Well, it's a theoretical model, unfortunately.

You know, a perpetual price is viewed of the eye of the customer to be forever, and the industry has been selling perpetual prices -- contracts forever.

And I think because of that, there's an incredible amount of scrutiny by CFOs and senior people on knocking down the price of those perpetuals.

I would tell you that one of the biggest reasons that I had to change from perpetual to term is that I believe we get a higher amount of realizable dollar in those term contracts than I do perpetual.

I can't tell you there's a math model.

I can only give you what my history is, and that is, for some reason, I'm under less scrutiny to discount a term than I am a perpetual, and that most of my competitors cannot afford to do terms, and therefore, setting there with big perpetual numbers in front of the customer and probably get beat up.

So, I know you want a crisper answer than I can give you.

I just don't have the set of experience to do that.

And we don't want to share with too many of the competitors that are tuned in.

Yeah.

Right.

With these term licenses, naturally we have a little bit more backlog beyond your traditional 12-month measure.

Any thoughts as to when you might be able to talk about longer-term backlog with us?

Well again, Tom -- this is Peter -- the backlog -- there's two types of backlogs that can generate from a term license.

One is when you sell a term license with the payment generally near-term, or in a nearer period, then you're gonna -- we recognize that revenue up front, and our next earning opportunity from it being a term license is gonna be at the expiration of that term.

So, that has backlog, but each one is gonna be unique, and it has to be renewed, and we can't put that in backlog, because we don't put non-contractual terms in our backlog.

If a customer was to go out and sign a contract with us for a term license with payments over the term of license, then that would start showing up in our Software and Services backlog.

And once those occur, you'll see that flow in.

But, I can't give you any specifics of when we think -- or how much that will affect our Software and Services backlog.

You don't have any of those yet with the

recognition payments over time?

I don't believe we signed any in the second quarter -- in the third quarter along those lines.

So, there should not be any.

OK.

Great.

Just one more question and I'll turn it over.

Any latest commentary on how you see your customers in terms of approaching you for any pricing relief in the processing business, and how you're handling that this quarter?

Thank you.

Not anything specific on that, Tom.

In general, what we're seeing is that our contracts are renewing at rates that are comparable to where we were before.

And I think that shows, based on our revenue per subscriber that we've been reporting for the last several years, is that we're maintaining and growing that number.

Yeah, you've been able to hold that number up very nicely.

Is there any change in the aggressiveness that you've seen over the last few months with your customers in asking for it?

I can tell you that every client out there, especially in the broadband space, is aggressive in trying to keep their costs down.

But, I think with what we've been able to withstand on a price point shows the services we provide, and the quality of those services.

Tom, I think the other thing is that if you look at, on the processing business, roughly one and a half percent of their revenue base out there -- there isn't a hell of a lot that you're gonna squeeze.

And if you really get into it, and with some of the customers, if they actually concentrate on implementing a number of the great products that we have that they could use, they could probably make or save more money than they pay us on processing fees every year.

So, we find some of them that are good managers, and they look forward and they implement stuff, and they're taking good advantage of it.

And some of them maybe have a bit more short-term attitude, and they don't take as much advantage of what they could that's out there.

All right.

Great.

Thank you, again.

Our next question comes from Thomas Vincent with Salomon Smith Barney.

Please go ahead.

Thank you.

I just -- I'm trying to figure out where you think the growth or rebound is gonna be in the fourth quarter, with guidance, you know, flat to up sequentially, but with data processing revenues down three to four percent, you know, on your new pricing.

Do you see more software revenues in your broadband division in the pipeline?

Or, do you expect to see actually the GSS division see an increase there in the fourth quarter?

Well, I guess, Tom, I have a question back for you first.

Where do see the three to four percent decrease in our processing ...

Well, I assumed the 8.6 for the video revenues - $8.60 guidance that Peter gave, versus the 8.91 in the third quarter.

Well, the ARPU on the internet subs applies to a much smaller subscriber count.

And then we get organic growth ...

The video subs -- I mean, you go from 8.91 ...

I'm sorry.

Right.

I'm sorry.

And then, on the -- and so what we get on the video subs is organic growth on those subscribers to be able to offset what would be any of the diminishment on that rate per sub.

We're also always hopeful that we'll be able to get more projects, like we did in the second and third quarters, but we're not gonna model those out from a guidance perspective.

But, when we look at that -- that's why we believe we have some consistency in recurring aspects of the processing business.

We think we'll be able to maintain that.

And then, we'll be looking for the Software and Services -- both from the broadband and from GSS to fill in the remainder to get to our guidance.

OK.

Did AT&T Broadband come back for any software revenues in the third quarter, or was it primarily just the processing?

We don't give the specifics of what products or services we provide on a client basis.

OK.

All right.

Thank you.

You bet.

Our next question comes from Vincent

with Janey Montgomery Scott.

Please go ahead.

Good afternoon, guys.

Just a few clean-up items -- one regarding the legal costs during the quarter.

I guess, Peter, you gave us guidance for, I guess, the future quarters.

But, just what was the amount for the current quarter?

I'm sorry, and then, secondly regarding

-- had you guys collected from your AR balance?

OK.

First of all, from the legal expenses for the third quarter, it was approximately $700,000 for the third quarter, and we are giving guidance that we believe that we'll be spending about a million dollars per quarter going forward on our defense within the case.

From an

perspective -- all the post-bankruptcy amounts have been paid very timely.

They're an excellent customer moving forward.

What we have is pre-bankruptcy amounts that are still within the bankruptcy courts, and there has not been any resolution out of the bankruptcy courts on that.

OK.

And then, just one follow-up regarding the BT Retail announcement that you guys will be making.

How is that different?

Or, what -- if you could just characterize what you guys will be providing, versus what

announced on -- I think it's a few weeks ago -- and what they're providing with their

solution?

We currently have -- I believe it's six systems installed in BT.

We have a system installed in the business customer environment in BT Retail.

This is a multi-year services support contract for that system, providing them with the ability to enhance that product, upgrade that product, and provide the right level of professional services for that product.

Our five other systems are part of BT Ignite, and it's not included in this contract.

We are also a prime vendor of services -- billing systems and services -- to BT.

just announced a, what you'd call "a corporate contract" with BT.

I was in Europe last week and met with the senior officials there about the same sort of topic.

What that basically is doing is consolidating the purchasing power of those billing systems around BT into a contract that gives us opportunity, and then

an opportunity to amalgamate the volume, if you will, rather than have it in individual systems.

So, there's really -- our contract announcement was specific.

Theirs was a general corporate agreement, and you should expect that we have the same logic, and I confirmed that with the BT executives last week.

Great.

Thank you very much.

Our next question comes from Stacy Forbes with Janco Partners.

Please go ahead.

Hi.

Good afternoon.

Hi, Stacy.

Just a couple of questions.

I know that you said you're not really experiencing the pricing pressure, and obviously, your numbers show that you're not on the processing business to date.

But, there are a couple of large contracts, such as DirecTV that's coming to expire next year.

Do you see the prices -- you know, really seeing a lot of pricing pressure on winning the new business?

You know, I know with Charter that was an issue with their

contract -- but the pricing pressure really showed up, and the new provider actually had a pretty low price.

Do you see that as being an issue going forward?

We'll always see -- I mean, Stacy -- the cable business.

You'll always see pricing pressure, even after you have an agreement that's been ratified.

You'll always see them come back and try to back trade, so.

OK.

And then, on the AT&T/Comcast situation -- I know that you guys don't have a timeline on resolution of that issue.

But, is there a deadline?

I mean, can this thing drag on for another year?

Or, I mean, is there a point where you guys are gonna, you know, get some resolution?

Well, this is Jack Pogge.

Obviously, there will be a point where we will get to resolution, and a lot of that depends upon the arbitrator himself, and how long he determines that the process needs to go.

You know, we're currently in the midst of gathering documents, and going through the discovery phase.

You know, suffice it to say, there's millions of pages of documents on both sides that have to be produced, analyzed and reviewed before you even get to the deposition stage.

So, you know, don't know exactly when it's gonna be resolved, but we're diligently moving forward with it.

OK.

And I was just wondering in terms of -- you know, you guys said, "a million dollars in legal costs going forward."

I didn't know how long to bring that forward.

Well, we'll get -- Stacy, one of the nice things is we'll keep generating enough cash flow to cover the legal costs as far as we have to go.

All right.

And then the other thing -- I missed the beginning of the call.

On the 54 percent tax rate -- what can we expect as a normalized tax rate going forward?

We believe that the 41 percent tax rate that we're using for the adjusted basis is a reasonable number to use for your modeling going forward, but we're always evaluating, looking at opportunities to do deferral strategies so that we can get a longer-term, lower tax rate as we've expanded our business internationally.

The 54 percent is on the GAAP earnings.

On a pro forma basis, we believe it's 41 percent.

OK.

And the last thing is just on the Kenan business.

I know you guys had hoped that you'd be able to integrate some of those technologies with your core processing cable broadband product here, especially on the telephony side.

Have you made any progress there?

And what do you think the timing on that might be?

This is Neal.

I'll go back.

The Kenan assets are great assets.

They're assets that could lend themselves very well to be delivered in a manner other than selling a packaged software, and that could include enhancing that, like we've done with BT.

Or, it could include opportunities to provide opportunities more in line with our traditional business on Ed's side of the house.

We have time for one more question.

Our final question comes from

with RCB Investment Management.

Please go ahead.

Thank you.

I'm honored.

Thank you.

Hey, guys.

The two questions -- I missed part of your comments on your change to the executive program.

Can you just be a little bit more detailed about that?

Sure.

During the period, the management team agreed to exchange options that they held in a fair value exchange for restricted stock, so that there would be adequate number of shares available to support the attraction, retention and motivation of the key employees of the company for the next several years.

That was the focus behind it, and it was a transaction that we think shows the commitment of the management team and the company to the long-term business.

In the third quarter, there was approximately a $300,000 non-cash compensation charge associated with it, and in the fourth quarter, we anticipate that it will be approximately $1 million of non-cash compensation charge.

So,

in the money options exchange for restricted stock, which obviously, then, will be on the income statement?

The exchange -- or the issuance of restricted stock hits the income statement as per the terms of GAAP accounting.

And what is the thought on the share repurchase, given, you know, the environment, as well as the uncertainty with the AT&T?

Are you legally restricted at all, or just holding back?

Or, what's your thought?

Well, we think we were fairly aggressive in the third quarter purchasing 1.5 million shares.

We do not have limiting restrictions from our debt facilities, so we still have access there.

And we still, legally, have the right to go out and repurchase our shares.

So, you would expect -- bar anything else -- you think you could do another million and a half in the fourth.

We don't know.

We don't know.

We can't comment on that.

OK.

And the last -- what was your relationship with UPC before they ran into the ground?

And how do you handicap your ability to, you know, pick their business up in later '03 as they get back on their feet?

UPC?

Yeah.

So, which is the European -- it mentioned in your growth, that's the European growth element of what might get better.

And I was just wondering.

So, what's your relationship with them?

And how do you handicap yourself versus some of the other competitors?

Well, I don't -- well, I don't handicap myself versus competitors on the calls, because too many of them listen.

But, UPC has spent a considerable amount of money developing a system called Derby.

Derby is predicated on the Kenan/BP platform.

And obviously, UPC is largely controlled by interest here in the United States that we've done business with before.

So, we will try to be accommodating, and help them through their situation over there.

So, the majority of their systems, or -- you have a number of relationships via Kenan with UPC, and therefore, that you feel like you have a pretty good step up to the plate once you ...

I really am not gonna comment about any specific customers of prospects.

Well, great.

I ...

We have a number of relationships with a lot of them.

And as any of these entities go through the changes that will probably occur, we will do our best to accommodate what's going to be necessary for them to run their business, and for us to help them in any way we can.

Thank you very much, gentlemen.

You bet.

Well, thank you, everyone, for tuning in.

And, as I say, it doesn't do a lot of good for you or me to complain about the economy and the marketplace out there.

What I hope the message is that you got from us is that we are working very hard at making sure we take real good care of the core business, and making sure that we go out and look for the opportunities, and look to make opportunities out of this situation.

And we fully intend -- you know, the communications world will come out of this dilemma.

People are going to keep communicating with one another.

And when it does, we fully intend to be much, much stronger in a relative position to the competitors out there than we were when we entered the marketplace.

So, thank you for your support.

Ladies and gentlemen, this concludes the CSG Systems International third quarter earnings release conference call.

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