CSG Systems International Inc (CSGS) 2002 Q4 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the CSG Systems International fourth 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 should need assistance at any time during the conference, please press the star followed by the zero and an operator will assist you.

As a reminder, this conference is being recorded today on Tuesday January 28, 2003.

I would now like to turn the conference over to Liz Barrow (ph) with CSG Systems.

Please go ahead, ma'am.

Thank you.

Today's discussion 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 litigation with Comcast, our ability to integrate Kenan, IBM and da Vinci technologies businesses, as well as the company's expectations relative to the timing for a turnaround in worldwide Telecom spending.

All of 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, 10-k as well as recent press releases.

If you did not receive a copy of our press release, you can obtain a copy from our website.

We have with us today Neil Hansen (ph), Chairman and Chief Executive Officer, Jack Poggy (ph), President, Peter Calen (ph), Chief Financial Officer, Bill Fischer (ph), President of Global Software Services and Ed Nafis (ph), President of our broadband services division.

Neil will begin.

Thank you, Liz, and thank you all for joining us this afternoon.

I'm pleased to report our numbers for the fourth quarter and for the full year 2002.

Revenues for the fourth quarter were $155.2 million and for the full year for $610.9 million.

Both within our guidance.

Adjusted earnings per share for the quarter were 36 cents and for the full year for $1.45, also within our guidance.

I am very proud of our employees for what they have accomplished through 2002.

We performed in one of the most challenging environments, I think, that any of us have ever seen.

We performed at a time when our core broadband market was frozen due to tentative mergers and constant management shake-ups.

We performed in integrating several acquisitions into our organization and finally, we performed at a time when we could have been easily distracted by the actions of AT&T broadband, now Comcast.

We've been able to perform -- to not only perform, but to put ourselves in a stronger position.

We've been able to do this for several reasons.

Our people, our products and services, our business model, and the opportunistic attitude in our focus on bringing the best possible service to our customers and value to our shareholders.

Let me share with you some of the great things that our teams accomplished this quarter.

First, our broadband services division had another very strong quarter.

This division has a steady base of revenues coming in from processing and maintenance.

In this environment, we continue to experience weak software and services sales, but there continues to be a demand for ancillary products that enable our customers to reduce their overall costs.

For example, this quarter, our web-enabled call center, health care and electronic bill presentment and payment solutions saw continued demand.

Companies, like AOL/Time Warner, Clear Source and Grande communications expanded their relationship with us through these products.

In addition, we reduced our print mail distribution through power district.

Ed and his team continued to invest in our technologies to help our customers roll out new revenue and profit-producing products by high-speed data, video on demand and other interactive services.

This investment in our solutions in the quality of service that we provide enable CSG to have one of the strongest renewal records in the telecommunications industry.

With over 99% of our customers renewing their contracts with us since 1994.

This year, we have only 7% of our subscriber base up for renewal.

Finally, the dark spot on the quarter and on the year for this division has been the AT&T broadband, now Comcast, litigation.

We continue to feel extremely confident in our position, and we will be totally prepared for the arbitrary proceedings which are scheduled at the end of May 5th.

We look forward to getting a resolution to this matter and frankly, helping Comcast as they begin to integrate a system two times their size into their operations.

Next, our global software services division had an extremely impressive quarter.

While we sung their praises on previous calls for the work that our team and the Asian Pacific market has done, I'm extremely pleased to see our America's and European regions continue to contribute in significant ways.

This quarter, we signed new contracts with e-Bay, the world's on-line marketplace.

Excuse me.

This was an extremely competitive situation, which all contenders were asked to set up their systems on-site at E--bay and to run various scenarios.

We blew through the benchmark on speed and scale.

This really reinforces why we love this Kenan bp engine so much.

It scales.

It's fast.

It's versatile, and we can use it in new markets outside of Telecom.

In addition, we signed a new crack with TSA (ph), a totally incumbent wire line provider in parts of the France Telecom organization.

We will be deploying Kenan bp to support their fixed voice and data services.

We signed a new contract with Sunrise, the second largest telecommunications provider in Switzerland to support their roll-out of new 2.5 and 3-g services.

Again, this was a highly competitive situation.

Not only will Sunrise be using our billing solution, but they will also be using our revenue settlements offering to help them manage the complex revenue sharing agreements needed to deliver value content to their one million plus mobile customers.

In addition, we continue to extend our relationship with one of our data mediation customers, Cingular.

While this list is not encompassing, it does show that we are winning new customers in new markets and winning them in highly competitive situations.

Once again, I am very proud of what this team has accomplished.

Next, as many of you saw, we acquired deVinci technologies, a leading provider of self care and electronic billing tools.

Basically, these products will allow the end user to access and service their accounts over the internet utilizing any mobile device in any currency or language.

We will be integrating these products with our Kenan/bp engine and will be selling them as a stand-alone module.

This March, the third acquisition that we closed in 2002, all three acquisitions were made -- were purchased using cash.

And that brings me to, I think, a very important point.

Because of our strong business model, CSG has been able to do the following this year.

On revenues of $610 million, we generated almost 90 million in cash flow.

We made three acquisitions made them using cash.

We bought back over a million and a half shares of our stock.

We paid down $30 million of our debt.

We've cut expenses without impacting the delivery of our products in the marketplace.

We've added an entire account management organization to our software division, and we've done so at a time when most would be under investing instead of investing.

We've expanded our geographic presence with employees now in over 20 countries and clients in over 40 countries.

We've expanded the industries that we can serve to include wireline, wireless, global I.T. and broadband.

We've continued to take actions that strengthen our position in business and operational support areas.

And once again, we've done that in a time when most are only struggling to survive.

Why do we do all this?

We do it so we can help our clients execute on their business plans and to help them weather this difficult environment.

With our solutions, our clients are able to lower their costs of operations, improve their own cash flows, introduce new products and services quickly and seamlessly and retain their customers.

All of these things become extremely important as all of us in this business enter another year of challenging times.

We continue to stay away from trying to predict when the turnaround in the markets that we serve will occur.

As a result, Peter will be providing you with guidance for the upcoming quarter, which happens to be traditionally a slower quarter in the software business.

I, however, would like to share with you more of the big picture as to what I think you should expect from this management team and from this company over this next year.

We will continue to focus on generating strong cash.

This allows us to invest in the company for the long term.

We will continue to find leverage in business.

You will see us provide our customers with the option to purchase software on a provincial and long-term business and we will give customers the option to buy software or buy servers from us.

We will continue to invest in new products and services.

You know, this leads to increasing flow for CSG.

It leads to increasing loyalty among our customers and it lowers the total cost of ownership for our customers.

We will continue to take the Kenan billing engine and we will expand it into new verticals.

We'll do this like we're doing with the telegas, a large utility provider in Italy, like we are doing with e-Bay and like we will do with others, and we will continue to strengthen our relationships, the relationships with our customers, relationships with our key partners, whether that be systems integrators, hardware providers, or others and certainly, our most --some of our most important and valuable relationships, those with our employees.

I want to thank you all for your support over the past year, and with that, I will turn it over to Peter Calen, our Chief Financial Officer, to review our financial performance.

Thank you, Neil.

I will begin my comments with a financial results with the consolidating company.

I'm pleased to report that CSG's financial results for the quarter ended December 31st, 2002, reflect revenues of $11.2 million and net income under generally accepted accounting principles of $17.1 million or 33 cents per diluted share.

During the fourth quarter, the company incurred restructuring charges in Kenan business acquisition related charges totaling $1.2 million.

Net income adjusted for these charges was $18.4 million, or 36 cents per diluted share.

For the full year of 2002, revenues were $610.9 million, a net income adjusted for these restructuring and acquisition-related charges was $76.3 million, or $1.45 per diluted share.

For the three months ended December 31st, adjusted earnings and of interest, taxes, depreciation and amortization or EBITDA was $46.5 million, and for the full year 2002, EBITDA was $184.1 million.

We continue to have a very stable and recurring processing business with revenues for these services totaling $96.9 million for the quarter.

The fourth quarter processing revenues included approximately $5 million of services that are related to special project requests by our clients.

Software and services revenues were $58.3 million for the fourth quarter, and as of December 31st, we have a software and services back log of approximately $110 million that we expect to recognize over the next 12 months.

For the four quarter of 2002, over 25% of CSG's total revenues were derived from international markets.

With Europe contributing 12%, Latin America delivering 7%, and Asia Pacific generating 6%.

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

Revenue from Comcast/AT&T broadband was 28% of the company's fourth quarter total revenues.

This compares to 47% in the same period last year.

For the fourth quarter, the gross margin of the company was 53.5%.

The gross margin on processing and related services was 63.3%, while the gross margin on software, maintenance and professional services totaled 37.2%.

We continue to incur expenses associated with the AT&T broadband and Comcast litigation which total approximately $4.2 million for the fourth quarter.

This was greater than we previously anticipated and as we look forward, we estimate that we may spend approximately $3 million per quarter as we progress through the arbitration and legal processes and work to resolve the claims.

The fourth quarter operating margin adjusted for restructuring charges in Kenan business acquisition related charges equal 22% of revenues.

Turning to the company's divisional results, the broadband services division generated $103.1 million in revenues for the fourth quarter and produced an adjusted contribution margin of $51.3 million.

We finished the fourth quarter with -- 45.8 million subscriber accounts on our processing systems and -- 5 million were internet subscribers.

Total subscribers increased by the first quarter by 900,000 primarily driven by organic growth in subscribers primarily our direct satellite and internet clients.

As of December 31st, we do not have any subscriber backlog to convert.

For the fourth quarter, annualized processing revenue per video subscriber totaled $9.14 and annualized processing revenue per internet subscriber totaled $3.25.

As I mentioned earlier, the fourth quarter processing revenue included project requests by our clients that generated one-time fees for CSG.

Adjusting for these one-time fees, the annualized processing revenue for video subscriber for the fourth quarter totaled $8.60.

And for the fourth quarter, we experienced a decline in the processing revenue for internet subscriber to $3.25.

This occurred as our clients reduced the use of ancillary services and our clients increased the number of combined video and -- bills.

Now, looking forward in the near term, we are projecting that our annualized processing revenue for video subscriber will be $8.40 and $8.50 and for internet subscribers between $3 and $3.25, continuing the trends of the fourth quarter.

CSG's global software services division produced $52.1 million in revenues for the fourth quarter resulting in an adjusted contribution loss of $300,000.

We targeted the GSS (ph) division to be a break-even or better by the fourth quarter and while they slightly missed that goal, we are very pleased with their performance in this extremely difficult environment.

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

As of December and 1st -- 31st, our trade accounts receivable totaled approximately $160 million.

Net of the allowance for bad debts of $12 million.

Included in this balance is approximately $10 million of broadband receivables that went beyond year-end before being paid.

And during the quarter, unbilled accounts receivable decreased approximately $5 million to $28.8 million as we invoice clients for services.

On these unbilled accounts receivable, we expect to substantiate all of these balances will be billed and paid by clients during the next six months.

During the fourth quarter, we were very successful in the collection of our accounts receivable, which in combination with our earnings results generated cash flow from operations of $47.5 million for the fourth quarter.

The trade accounts receivable reflected days billed outstanding, or (inaudible), of 73 days for the fourth quarter.

This is within our previously-communicated target range of 65 to 75 days.

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

It's these accounts receivables that relate to the operations of the Kenan business prior to CSG's ownership.

These are tracked and reported separately from the CSG accounts receivable and are not included in the determination of (inaudible).

These acquired billed and unbilled accounts receivables totaled $600,000 as of December 31st, 2002, which compares to $11.6 million as of September 30th of this year and compares to approximately $65 million as of March 31st.

We originally targeted to have the purchased accounts receivables substantially collected by the end of 2002, and we have successfully achieved this goal.

We finished the fourth quarter with cash and investments of approximately $95 million.

And during the fourth quarter, the company invested approximately $2 million in the acquisition of deVinci.

The company did not re-purchase any shares of the company's stock during the fourth quarter and to date, since the authorization of the stock re-purchase program, CSG has re-purchased 6.3 million shares with 3.7 million shares remaining authorized for re-purchase under the program.

The company finished the fourth quarter with $270 million in outstanding debt.

The first scheduled payment of principal associated with the debt facility in due in March in the amount of $1.1 million with approximately $16 million in principal payment scheduled for the full year 2003.

This has been a very difficult year for all companies that service the telecommunications market, but as we look back on 2002, we find several positive results.

As Neil said, in 2002, we acquired three businesses that significantly expanded the markets that CSG can address.

While at the same time, we implemented several cost reduction initiatives, including staff and facility reductions.

And with the telecommunications markets still suffering in a depressed state, we will continue to reduce costs and manage to the opportunities that are available.

We will reduce expenses and we will report these expenses as one-time restructuring expenses.

We will provide you an update on the expense reduction initiatives on our first quarter conference call in April.

Looking to the first quarter of 2003, I want to review the composition of our revenues and the recurring characteristics of these revenues.

Processing revenues, adjusted for one-time revenue items, are expected to total approximately $91 million in the first quarter.

With long-term contracts, virtually 100% renewal history and a stable base on consumer accounts that we service, we have a very high visibility in processing revenues.

Along with the high visibility of the processing fees, we have strong visibility in maintenance services associated with our software products.

From which we expect to generate approximately $27 million of revenues in the first quarter.

And based on recent quarters, we would expect professional services to generate approximately $21 million in revenues.

While the professional services are not 100% contracted, our recent history supports this expectation.

These categories are expected to provide in excess of $139 million of revenues for the quarter.

In addition to these revenues, we have software licenses and other non-recurring services that are expected to generate additional fees.

The software business has certain seasonal characteristics with the first quarter of the year generally being slower than later quarters and taking this into account, we expect that total revenues for the first quarter will total between 144 million and $152 million.

Looking at the cost of the company, we expect and anticipate that operating expenses for the first quarter will total between 120 million and 125 million dollars, excluding any restructuring charges.

This includes our estimate of $3 million in cost as we continue the company's defense in the lawsuit proceedings.

As I previously mentioned, we will continue to reduce expenses, but we do not expect that we will see the full benefit of these efforts in the quarter that they are initiated.

Going forward into subsequent quarters, we would expect that our costs would decline as we manage the business in this economy.

Through the management of expenses and the achievement of our targeted revenue range, earnings per diluted share should be between 24 cents and 27 cents for the first quarter before the impact of restructuring costs.

And for the first quarter, exclusive of any additional share re-purchases, we anticipate that our diluted shares outstanding will be approximately 51.7 million.

Our business generates strong cash flows and we expect that operating cash flows for the first quarter will be approximately $18 million to $20 million.

We continue to look and will continue to look for attractive acquisitions that are strategic for our business and in the absence of these investment opportunities, we would use our cash for share re-purchases or debt reduction.

In summary, I'm very pleased with the financial results of the fourth quarter.

We met our financial guidance and continue to position CSG for the coming periods.

CSG is a company with 65% of its revenues generated by the broadband services division, which is made up of long-term relationships with premier clients.

Over haft half of the remaining 35% of revenues are fairly visible with the information I provided you earlier.

Even in the difficult times, we have visibility.

We have demonstrated that we can manage our costs and we are committed to seeking additional ways to leverage our business.

Through cost reductions and expanding the markets that we can serve. 2003 will continue to present challenges, but our management team is focused and committed to delivering billing solutions to the marketplace while also optimizing financial results for the company.

We look forward to delivering results in 2003.

I will now turn it over to the operator (ph) for questions.

... our first question comes from Tom Ernst (ph) with Thomas Wiesel Partners (ph).

Thank you.

First high-level question thinking that the 30,000 feet, it looks like Kenan has successfully been taken into North America.

Do you see an opportunity to take the broadband services products and penetrate more significantly into Europe now that you had this under your belt for a while?

This is Neil.

I think there are some significant opportunities in Europe.

And specifically in broadband.

If nothing else, just because of all the turmoil and the transition that's going over there, so, yeah, I see significant opportunities.

I think there will be deal-type opportunities, and I think we're in an outstanding position to participate in those opportunities.

Not only because of the software products that we have, but I think because of the expertise that we have in backing it up and helping these people with their operations.

I'm very enthusiastic about those possibilities.

It seems like it's been a tough year or so.

We've had no subs in backlog, if my notes are right, for the last four or so quarters.

Any sense you can give us for the activity level this your customers are in terms of talking to you about potential billing migration on the broadband side in the last four months?

In north America?

Both North America and Europe, please.

I think one of the things I said in my comments earlier is, certainly in North America, the broadband industry, I think has been pretty much frozen over the past year.

I think Ed Nafis (ph)and his crew have just done an outstanding job in building solid relationships with the customers that are out there and they're in good position, but if you go down the list, restructuring of cable is getting done in Europe and the United States is in kind of a frozen -- has been in kind of a frozen period this year.

If you look in Europe, you know, you had an announcement today that Deutsche Telecom is finally moving to -- subs.

You know, we kind of wish that Liberty had gotten those a year and a half ago, but I think Liberty's kind of happy they didn't.

You've got a lot of restructuring, so I think it leaves opportunity in the future, but it's kind of been frozen.

Okay.

One final question.

It looks like we're seeing some modest compression this year or at least in your expectations of price per sub on the processing side.

How much of that is, say, price concession given a service level versus maybe a little bit more services, you know, for the customer, so increased volume but same pricing?

Tom, I think the biggest thing that we're seeing is a change in behavior of how our clients are using their systems f you think about what Neil described, north American broadband providers are facing.

They're really look doing to optimize their near-term results and therefore, they're looking to reduce how to use some of their vendors, and I think we're seeing that on some of our ancillary costs.

We site on the high-speed data in video where they're looking to leverage the envelope and make sure that they can get both invoices effectively combined together.

We think that's good (inaudible) for the business -- good long term for the business for them as they optimize their efficiencies and we will turn around and get opportunities down the road, but in the near term, I'm going to, cautious and conservative based on what they're facing and that's built into the guidance that I gave you.

Thanks, again.

Thanks.

Next, we have a question from Thomas Vincent with Salomon Smith Barney.

Please go ahead with your question.

I guess as a follow-up on the previous question to the data processing side, for the last two quarters, you have seen the processing revenue for video come in significantly above expectations and the processing revenue for the internet accounts come in below expectations.

Some I'm wondering if you can get some more color on, you know, how much visibility you have into the pricing on a quarter over quarter basis, and I understand web self-care product.

Maybe you can talk about if you have anything in the pipe line for the first quarter.

Well, when we, the guidance I gave you is reflective of what we anticipate based on what we're seeing on our clients.

We don't always see the one-time projects at the time that we give the guidance, and that's why I'm cautiously giving you a set of numbers that don't have one-time items in them.

The success of the last two quarters in supporting our clients as they change how they run their business on us and getting those one-time fees has been strong.

But those efforts also contributed to them being able to go and change how they run their business and go into some of these combined bills so we get short-term benefit as they go through that migration.

From the wealth of the products that we have in front of the clients, we work very closely with them on rolling those out, but we don't always control how they actually use the products or how their end consumers use them, so many times in the quarter, when we start the quarter, I can't give you good color on what's going to happen there.

Okay, and on the GSS (ph) division, I mean, it's been down sequentially in the fourth quarter.

Can you provide some color on the outlook in that business, I guess, from some of your competitors, it's been a pretty muted outlook, so I guess if you can provide color on where you see interest, which products are maybe driving some of the stability in that business?

Let me go ahead and take the first piece on that.

We had a very nice quarter from a licensed basis.

We're pleased both in what we have signed and we were able to recognize in the quarter.

We had some change in our professional services within the quarter where we recognized 18 million, and it was lower than what I gave you as guidance for the first quarter, and that's primarily driven to some percentage of completion contracts in which the scope of the project and the hours needed to complete the project were longer than we originally anticipated and moved some dollars of revenues out of the fourth quarter and into 2003.

And so that caused the numbers to be lower than what you maybe you have seen some of the history has been on those professional services, but we had a strong quarter from revenues inclusive of that.

I think the other thing in business is people have done a phenomenal job of getting the organization cranked up from where it was at Lucent and getting some control in there, and I think the other thing, you know, we do have kind of a product plan in a method that we can take out and talk to people logically and that product continues to prove as we saw in e-Bay that we just got a whale of a product, so what we're seeing is if we look at the kind of the pipe line, if you will, of things that are out there, we're looking at a good geographically diverse pipe line.

We're looking at a pipe line that importantly is product and solution diverse, and we're looking at a pipe line that is diverse in the size of the deals, from smaller deals to reasonably pretty good size deals out there, and I guess that's the best feel I can give you about it.

And I think (inaudible) girls (ph) are coming on.

They've been very competitive.

If I was the competition, I'd be concerned.

Thank you.

Next, we have a question from Michael Turits (ph) from Prudential Securities.

Good evening, guys.

Couple questions.

First, on the special projects.

Just in the 5 million, did you specify what those projects were in what was the amount, Peter, last quarter in special projects, and do you have some visibility into where they might be and is it really safe to say that there's nothing there next quarter?

What might be more realistic for them to pop up just about every quarter?

I guess, first of all, it was approximately 5 million in the fourth quarter and, Michael, I'm going to have to go back to my notes for third quarter.

I think it was around $3 million in the third quarter, but I would like to have that confirmed, and I can follow up with you on that.

Visibility on that, it is very difficult because sometimes we have a not as much runway as we would always like from a visibility perspective.

Today, as we look at it, we think that there are opportunities to continue to provide services for people, but I can't give you a specific amount of what we see as that remaining amount of revenue on top of the $139 million, how much of it comes from one-time items, but the great thing is with our strategic business units that we have and the team that Ed Nafis (ph) has focusing on it, there's always opportunities for us to continue to help our clients really optimize their business and optimize how they use their systems.

I'm sorry.

What were the special projects in this quarter?

Well, I'm not going to go into the detail things.

Just the big ones.

The broader type things that we help our clients do is maximize how their data is maintained on the systems and how the system is used.

Very good example is the project where one of our clients who previously had used a silo process of using the high-speed data services or their high-speed data clients and kept them completely separate from their video accounts, they're looking to manage those two together from a client relationship perspective or consumer relationship perspective and get some efficiencies out of that, but that took some work to get it structured along those lines, so that would be one of the large type, one-time items that you set it up once and the client changes their business processes going forward.

My next question is just on the trends in both the maintenance and professional services.

You had a nice bump up in maintenance this quarter, but it looks like you're going to flat maintenance for next quarter, and as you said, the percentage of completion, things have come down.

Maybe you can tell us how much of that decline was a function of that account, sort of an accounting issue.

What are the trends?

How sustainable is growth on a couple quarter basis in maintenance?

Should we view these as flat since the revenue outlook is kind of flat.

What should we expect and how visible is it?

From a maintenance perspective, I'm giving you the base from what we can see today.

As we continue to sell new licenses into clients, that generates incremental maintenance services, but without giving specific visibility of what we see coming from the software licensing in the fourth quarter or in the first quarter, I'm sorry, then I can't tell you how I'm going to model that out.

That's why I gave you a range on that.

From the professional services piece, it is less visible.

The impact from the percentage of completion projects is approximately $3 million, and that's where I brought that back to the guidance of the baseline at 21 million for the first quarter, but we are trying to maintain a conservative viewpoint and recognize that our professional services is partially impacted by the new product sales that (inaudible) and his team need to deliver to continue to feed the professional services business.

Okay.

Last question.

Is e-Bay recognized this quarter?

We don't go into the specifics of which clients have been recognized in which quarter.

Thanks.

Our next question comes from David Togut (ph) with Morgan Stanley.

Go ahead, sir.

Thank you, Neil, as you look at potential additional restructuring, can you give us a sense of how you're thinking about the industry longer term, whether you see this as continued weakness into '03 or perhaps beyond that, and then just as a follow-up question, how are you thinking of the cost structure?

You know, if we remain in an extended downturn in terms of how much it might be fixed versus variable in a tough environment.

I'm going to go in reverse, okay.

Okay.

I'm going to give you a macro answer on cost structure and I'm going to let Pete, when I get done, take it over.

The way I feel about cost structure, particularly in an environment like this where it's unpredictable and there are, you know, you just don't know.

It's going to turn around, but you don't know when it's going to turn around, so the way I feel about cost structure is in a business like this is you run your cost structure at a level that is a pretty conservative outlook for what the industry is going to do, and what that does then is that gives us the ability to have quite a bit of leverage when things start turning around or we can find something to pop.

So Pete can you give you some additional information that way, but that's the way we're running it.

Now, why are we running it that way?

You asked about the restructuring that's going on and the restructuring that's going on, you know, both here in the United States and internationally.

I don't know if you were especially interested in broadband or telecommunications, but if you look at broadband, I indicated before, you know, the industry's kind of been frozen in the United States.

The industry's kind of been frozen in Europe with NTL (ph), KBG (ph), NTC (ph), everybody going through what they're going through.

If you look at the factors that are going to play out here, you know, here we've got a half dozen players in the United States.

You got Comcast, and my god, they've got to take on an organization double their size this year and all the people from that organization are gone.

They probably have all they can say grace over.

Charter is working out their set of situations.

You got Adelphi yeah working out their set of situations.

You have AOL/Time Warner working out the management transitions.

So I believe that there will be some additional rationalization going on here in the United States, you know, it's beyond me to say when that's going to happen.

Dave, let me give you, we have a fairly similar outlook to the industry as to what the broader analyst community do.

We know this market will turn around and there will be opportunities.

We're not going to turn our back from an R&D perspective.

We continue to invest significant dollars in our products.

You have seen us in the past go 10% of our revenues.

I would anticipate that you will see that type of continued investment from us as a company.

And you need to think about in the third quarter of '02, we did a significant restructuring and reduced a significant amount of staff around the world in all parts of our business.

We're not talking about a, you know, another large restructuring similar to that, but we're going to be doing very managed and select focus reductions and expense where we don't see the opportunities to invest in, and so it's not --it's a restructuring, but it's not the same type of thing that we did in the third quarter.

It's more of a fine tuning as we move forward.

I see.

I see.

Okay.

Thank you very much.

You bet.

Our next question comes from Stacey Forbes (ph) with Janco Partners.

Go ahead with your question.

Good afternoon.

Hi, Stacey.

Just a couple of things to follow-up on the cost structure.

It says that the entire impact was felt in the fourth quarter.

I think you originally said that cost savings would be 40 million per year.

So is that something for 2003 that we should be modeling in, that there's going to be a 40 million, you know, aside of R&D thing, a 10% of revenue, what-not, but there will be $40 million, you know, improvement year over year?

I wouldn't say year over year.

We didn't have a full year of the Kenan business.

If you look at our fourth quarter numbers, it would fully reflect the benefits of the cost savings that we implemented and started implementing in the third quarter.

Your baseline that you ought to be looking at is fourth quarter.

From that, we're going to continue to look to optimize how we run the business and invest where there's opportunities and if there's some areas where we don't think we're going to see the near to intermediate return, we're going to reduce our expense on that, and do remember that the fourth quarter had $4.2 million worth of legal expenses and we continue to see that we're going to have expenses going forward associated with the Comcast litigation proceedings.

And then on the operating expense line, you guys were slightly below guidance in the fourth quarter.

You know, I think one of the things that was cited was less broadband software contracts.

I mean, how much is that really contributing?

Is that high margin that it makes a two percentage point difference, or was there something else in effect there?

You're not talking about operating expense.

You're talking about operating margins?

Yes.

New were to adjust out --if you were to adjust out the $3 million of incremental litigation costs that we didn't anticipate, we would have been right on the button on our operating margins.

Okay.

That was the difference there.

Okay, and then, you know, on the internet subscribers, you know, with that price continuing to decrease, there a volume discount reflected there, as well.

Or is it simply because you guys are moving to combined billing, and does video billing per sub go up because you're moving them to one bill on the video side?

Does it move from one spot to the other, or does it get completely eliminated over time?

How far can we expect that to continue to drop because I assume most customers are using separate bills.

Is that something that will go dramatically down over time as people use combined bills?

Well, a couple of points on that, Stacey.

Even though they go to a combined bill, as we've seen with some of our clients, we still get a charge for the HSD (ph) services we provide, but what we don't see is that when they start focusing on envelope economics, we lose the duplicate revenues that we got on some of the print and mail services and some of the other ancillary products.

So what we're really seeing them doing is really employing technology that we've had in place and then changing their business, their business processes to really get some near-term results from how they deal with their clients and what their operating costs are.

What is the floor that we see in that?

Well, I gave a lower range of 3.25 to $3 for the first quarter and for the near term.

I'd like to see this progress a little bit further, and then when we get to the next earnings call, I will give you an idea if that's still what we think going forward or if I need to adjust that again.

That's what we see for the near term.

Okay.

One last thing, on the AT&T/Comcast situation, have you guys gotten any insight as to when a judge will hear your dismissal and/or whether or not the arbitration will proceed, the case?

Oh, in the Philadelphia suit, we do not know at this point in time when the judge will rule on our motion.

Okay.

Thank you.

You bet.

Thanks.

Next, we have a question from Vincent Damasco (ph) from Jenny Montgomery Scott.

Thank you.

Just a few cleanup questions.

What was the head count at the end of the quarter?

Oh ...

We'll have to get that to you.

I don't have it in front of me.

I can give you an approximate number, but I would rather give you an exact.

Regarding the operating margins for the GSS (ph) division.

What do you think long term that you will be able to achieve now that you're close to break even?

I'm hesitant to talk long term because we need to see when the market's going to turn around and in what type of business model we're going to be delivering that in.

But we do believe that we are very focused on maintaining a minimum of break-even focus in the near term while we wait for that market to turn around.

Okay, and just possibly maybe an update.

You guys mentioned perpetual versus the subscription-based model that you guys are targeting and last quarter, you mentioned about six customers that you had targeted.

Any success in moving them over or landing any new deals under the subscription model.

... do you want to jump in?

Yes.

Yes, we continue to have success with a couple of what we call term model versus subscriptions, term licensings this quarter.

You know, I think the customer base sees this as an opportunity to have a variety of licensing models, not only perpetual and also term, and I think they're receiving that very favorably.

So it's not something that is going to happen all in one fell swoop.

It's going to happen incrementally as customers have events to purchase new products or extend their volume with current products and we'll continue to be successful with some of the them near term.

Great.

Thank you very much.

Bill Fischer You bet.

Next up, the question from (inaudible) Grant with Deutsche Bank.

Please go ahead.

Hi, Peter.

Peter, on the guidance for this year, what assumptions did you make in terms of the incremental maintenance and service business of the e-Bay contract?

My second question just goes to that contract.

Any specific opportunities you can cite in just the broader transaction, payments base that you're sort of going after?

Thanks.

Okay.

Well on the maintenance piece, it does encompass our expectations for the first quarter, do encompass those contracts we have completed in the fourth quarter, and the business terms that are associated with them.

From the broader business of payment, kind of settlements, I'm going to defer that to Neil.

Do you have any other opportunity on e-Bay?

Not specifically about e-Bay.

Should he go into further?

Well, I assume that everyone else that is competing in some of the things that we're competing on have somebody listening in on the call, so I pause a moment to answer this, but we have received opportunities to bid on (inaudible) and in substantially different industries and have responded to those (inaudible) in those industries, and have found that the billing engine and the support and software that we have fits very well from insurance to travel to any place where there's a highly complicated or more complex billing and settlement requirement.

We seem to shine very well.

We think we'll have additional opportunities.

Okay, but nothing you want to go into in more detail at this point at least?

No.

No territory review today.

Okay.

Peter, just to follow up, I'm sorry, did you include any incremental -- I guess what I'm (inaudible) is sort of in your thoughts as to the year rolls out from the second, third, or fourth quarter.

You obviously expect to get some additional maintenance and service business, is that correct, out of this contract?

Oh, you know, any time you get incremental license fees, you expect to get the maintenance fees because we do believe the customers are going to use it and will want to maintain the product, so that will come out in later parts of the years, but at this point, what we have in our first quarter is what we've got contracted.

Okay.

Great.

Thank you.

Our next question comes from Sarab (ph) from Fararon.

This is Charles.

Peter, can you review the operating expense and walk forward September to December to march.

I guess September to deuce, you -- saw a $7 million improvement in total expenses, cogs plus R&D and SG&A and with what you are expecting to get to, it sounds like you're short of the 45 million that you are were expecting on the annual basis and if you can explain why the -- might tick up, especially in the legal expenses will be a million dollars less than they were in December?

First of all, we gave a range in operating margins that if we adjust for the higher level of legal expenses, we were dead on the money at the low end of the range, and we're on the lower end of our revenue number at this point, so I believe that we have achieved everything that we targeted out of the September efforts that were initiated, and very comfortable that we had a successful project there.

When you look forward, we are a business that has vendors that we paid invoices to that have increases in cost.

We, as a business, still have wage increases that occur every year because of the breadth of the number of employees that we have, so it's not a constant that doesn't vary on that, so if you move those expenses forward and look at what I put in the first quarter, it would make a logical sense to see that type of migration from fourth to first.

Okay.

Thank you.

Our next comes from Glen Primac (ph) from Prime View.

Good afternoon.

Hi, Glen.

Two questions.

One's probably just real quick.

Do you have a S.W.A.T. team that's just looking at those different transactions type customers, like an e-Bay?

You know, (inaudible) to those opportunities.

S.W.A.T. team didn't do e-Bay.

That was in Fisch's organization.

Okay.

But we do have a S.W.A.T. team pulled together that looks at special situations.

Okay.

And then Eco Star, they're still a pretty big customer, and with that deal with Direct TV going away, did Direct TV get a chance, did they know to become familiar with your systems?

I assume if something would have happened there, those subs would have been converted on to CSG system.

How many subs do they have, and what kind of, you know, contract are they in currently?

Glen, this is Peter, first of all, and we will probably have several chime in.

Direct TV, I have to believe, has had a chance as they were doing their preparation to see how Eco Star ran their operations and they ecostar saw them perform their operations and I can't expect something to come about just because of that, and my understanding is Direct TV has somewhere in excess of 10 million subscribers.

Okay.

Are they in a long-term type contract?

One with those subscribers ...

It's basically all public domain.

That's it.

Thanks.

Next, we have a question from Peter Jacobson (ph) with Kaufman Brothers.

Please go ahead.

Thank you.

Two questions.

First, any new developments with the former IBM icms customer base, and two, are you pursuing any outsourced processing deals overseas in all likelihood through a partnership if you were doing that?

On the (inaudible), I think that we're still actively pursuing a number of the customers and prospects in and around (inaudible), and right now, we are very satisfied with the results of that acquisition.

And in terms of outsourcing deals and processing deals, we're actually seeing opportunities to pursue those kinds of deals really in North America, in the Americas, and in (inaudible) and we're seeing those opportunities come forward to us in all three of those regions.

Okay, and am I correct that the ones overseas would be accomplished through some kinds of partnership?

That could be true.

Okay.

But that suggested it might not be, meaning it might build or buy (inaudible) overseas?

There's a lot of facilities everywhere that are already built.

Okay.

All right.

Thank you very much.

Thank you, Peter.

Thanks, Peter.

Next, we have a question from Amin Sullivan (ph) with David Greene & Company.

Hi, guys.

Hi.

One, you can shed more light on the why the litigation expenses came in so much higher than the million you anticipated?

First of all, it's really made up of several pieces.

We had the management of the discovery process and the document management that came in higher than was expected.

We're starting to incur some costs on expert specialists who are starting to work with us on pieces, as well as just the extra litigation coming from Comcast with what they filed.

We expended legal costs on that, as well.

Those are the three major categories.

And second question was, what was directly the seasonality in sales?

What was the percentage of revenue coming from licenses in the first quarter versus the entire year?

First quarter this year?

Historically for first quarter.

... versus first quarters in the past.

He's asking what the seasonality looks like.

I think what one of the hard parts on this is when you look that we have effectively acquired the -- business and only had it for one period, one month of the first quarter, that is something that gives us less of a comparable history to draw upon.

When we say first quarter in software business, this is drawing from Bill Fischer's and Neil Hansen's (ph) running software businesses and knowing it's slower getting started for the buyers as they start their years.

Buyers have typically run out their budgets in the fourth quarter or at the end of the year, and first quarter will end up being implementation quarter because they didn't implement over the holidays.

Okay.

Thank you.

You bet.

We have time for one more question.

Actually there are no further questions at this time.

Well, if there are no further questions, I'd like to summarize by saying I think that our people have just done an outstanding job this year in putting your company in a strong position to go forward and putting it in a position to go forward with some leverage as things begin to turn around.

No one asked me the question, was I happy I bought a Kenan.

If you asked me, I would say I'm dog gone right I'm happy, and I would do it again.

Once again, our people have done a magnificent job of putting that business in good shape and they have given us a magnificent set of products to leverage into other growth areas.

So with that, I would like to thank you all and we'll all look forward to a great year this year.

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

If would you like to hear a replay of today's conference, dial 303-590-3000, and use the passcode 5193335.

Once again, if would you like to hear a replay of today's conference, dial 303-590-3000 and use the passcode 519335.

Thank you, once again, for your participation.

You may now disconnect.