CSG Systems International Inc (CSGS) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CSG Systems, Inc. international, first quarter earnings release conference call.

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

Following the 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 followed by the 0.

As a reminder, this conference is being recorded today, Tuesday, April 29th, 2003.

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

Please go ahead.

Thank you.

Today's discussion will contain a number of forward-looking statements, particularly with respect to financial projections that may arise, the status of our software assets, the status and expected outcome of the company's litigation with Comcast, our ability to successfully implement our products, as well as the company's expectations relative to the timing for a turn turnaround in the world Telecom spending.

All 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 the press release, you can obtain a copy from our web site.

In addition, our discussion will contain a number of references to non GAAP financial measures.

While the management does not place a greater emphasis on these versus GAAP measures, we believe that they provide further understanding of the company's business.

Reconciliation tables and additional financial data can be found on our web site in the investor relations section, under the financial tab.

We have with us today, Neil Hansen, Chairman and Chief Executive Officer.

Jack Pogge, Peter Kalan, Bill Fisher, President of Global Software and Services Division, and Ed Nafus, President of Broadband services.

Mr. Hansen will begin.

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

For the first quarter of 2003, we fell short of the guidance that we provided in January.

Revenues $141.9m dollars, a little over $2m short of the low end of our guidance for the quarter.

Primarily as a result of a professional services engagement and a shortfall in our expectations on maintenance revenues.

Diluted earnings per share came in at 17 cents a share on a GAAP basis, which when adjusted for non GAAP items, puts us 3 cents shy of the low end of the guidance that we provided in January January.

In spite of a performance that I was disappointed in, let's not lose sight of several items.

We've generated $22m in cash in the quarter, we ended the quarter with $114m in cash, and short-term investments on the books.

We continued to expand our relationships with our customer base and our partners throughout the world, and we made our scheduled debt payment of $1m and will prepay additional $20m this quarter, reducing our debt to below $250m.

Next, I'd like to talk about what we are seeing in the telecommunications industry.

As always, I've been spending my time on the road, meeting with customers, prospects and business partners, and here's what I find.

Everyone is feeling the pain, everyone knows it's tough and even in situation where is operators need products and need assistance, they're not certain how quickly they can open their purse strings to buy it.

In addition, there's another category of provider that is being created based on the misfortunes of the telecommunications industry.

They are the operators who have been formed as a result of restructuring, new types of owners, and rationalizations of assets.

As a result, there are a number of very large and very significant opportunities to leverage our products, our expertise, and our creativity in approaching business transactions.

I am pleased with the interest that these operators have expressed in our business propositions, and we are aggressively pursuing these opportunities.

Next, I'd like to share with you an update on how our divisions performed.

First, I'd like to talk about the broad band services division.

Over the past year, Ed Nafus and his team slid fight this business with the naming majority of the main players in the industry.

We have renewed and extended our accurate with Adelphi and charter.

We've expanded our relationships with Eco Star and Media Com and we've helped these clients roll out new services like high speed data or battle problems, like customer churn.

This quarter, I'm pleased to announce that we have signed a ten-year agreement with Time Warner Cable.

With this contract, we also added one sight that was previously on a competitor's system.

So today we serve 11 divisions, including four of Time Warner's top five seats, like New York City and Houston.

As many of you know, we have a strong relationship with Time Warner, dating back to the Warner AMEX days in the early '80s.

Historically, Time Warner Cable has operated in a totally decentralized fashion.

Over the years, we have had individual contracts with the various regions with terms ranging anywhere from 3 to 5 years.

This agreement is further validation that the top providers in the industry are turn to go CSG and its products to help them run their business today, and in the future.

I'm very proud of the work that Ed and his team have done, and more importantly, look forward to serving Time Warner over the next ten years.

Next, I'd like to provide you with an update on the status of our relationship with Comcast.

We are scheduled to begin the arbitration proceedings on May 5th.

I'm very appreciative of all the work that our management and legal teams have put into this.

This has been a drain on some of management's time.

However, as we move through each step of the process, I become more and more confident that we will prevail.

I am very proud of our people and I am very convinced of our case.

That being said, it is extremely frustrating spending our time and our money defending a contract, instead of putting those resources towards helping Comcast integrate the 16m plus AT&T customers.

However, this, too, will pass and by the end of the summer, we should have a decision from the arbiter.

In the meantime, we continue to work with the folks in the field as they execute on Comcast's goals of reducing churn, improving customer service, and reducing costs.

We are very pleased with what we are seeing with these interactions.

Next, I'd like to discuss the performance of our Global Software Services Division.

This group had a strong software license quarter that fell short of our expectations on the professional services and the maintenance side of the house.

First, I'd like to highlight a few of our wins for the quarter.

We signed a contract with a Barkley Air Telefor Operations Support.

And this is another example of where customers are turning to us to either run their operations or supplement their existing operations with our people.

Much like BT retail did in the fourth quarter of last year year.

And under this agreement, our professional services team will work on-site at Barkley to develop a world class billings operation organization and provide comprehensive day-to-day support for the Kenan billing solutions.

We will play a key role in developing standard operating procedures, enhancing business processes to optimize efficiencies.

And providing best practice recommendations on revenue assurance, and in assisting the operator to tap into under underutilized functions of the billing system.

Upon completion, the organization will be transferred back to bar-T, so they can operate themselves.

We also signed a professional services contract with eBay to include playing a larger role in their new billing system roll-out and we expanded our relationship with Telecom IT ALIA, on the residential services side.

And next TELEMAR, Brazil's largest telecommunications operator expanded their use of our data mediation solution to support their customer base and future IT-base service offerings.

And finally, voted VODAFON Espania expanded its relationship with us with additional license capacity upgrades.

Finally, I'd like to provide a little color on the professional services contract that negatively impacted our quarterly performance.

This contract was signed in 2001 under Lucent, and Lucent had subcontracted with another systems integrator who was subsequently fired for lack of delivery.

As a result, Lucent and now CSG, would be called on to perform a significant amount of professional services work with this customer in conjunction with many other third parties.

This was a highly unusual professional services engagement.

And to provide you with some perspective, our typical professional service engagements run 6 to 12 months, and they generate revenues of about $1m.

This particular engagement was to run approximately two years and generate revenues of over $24m.

Clearly, not the norm.

As we begin the testing phase of this engagement in the first quarter, the project implementation became much more complex as the customer required many more test scenarios to be run than had been originally contemplated.

This placed the delivery deadline back, and further analysis was done to determine what would be required to go into production.

At this point, it was determined that the hours required to finish this project would result in us losing money on the contract.

This meant that an additional $1m in expense would be booked in the first quarter.

In addition, because the deliver delivery deadline was moved from Q2 to the end of the year, we're not able to book approximately $2m in revenue from this contract until later in the year.

Between the expense being booked in the first quarter, and revenue being pushed to future quarters, our earnings were impacted by 4 cents a share this quarter.

I've been working with Bill Fischer and his organization to ensure that we have improved our processes and improved the management of this project and all engagements.

He is providing me with very detailed project status reports and we're watching this very closely.

We are on track with this client to go on track and run parallel systems in the second quarter and go into production later this year.

Next, I'd like to discuss why maintenance fell short of our expectations.

In this area we continued to see pricing pressure and we may have been optimistic in our forecast by using previous quarters' run rates.

Historically, a large portion of our maintenance contracts come due in the first quarter.

We renewed the majority of those contracts.

However, there were more than a dozen contracts that were not renewed in the quarter.

We have already renewed five of those maintenance contracts and we're continuing to work the remaining ones.

It is important to note that maintenance under Lucent contracts was much more of an event-driven process.

We believe that maintenance is a non-event and our contracts include an automatic renewal clause.

This should help us as we move past our one-year anniversary of owning the Kenan Business.

That being said, the GSS Division still had a negative contribution of approximately $7m this quarter.

While half of this can be attributed to the European contract, the fact that they are not operating at a break-even is not acceptable.

The management team will be regrouping over the next several weeks to look at what needs to be done to get this back on track as a result of the decrease in demand that we're seeing.

We're focusing on several areas.

Maximizing our delivery organization, tightening up our professional services organization to increase our profitability, enhancing our value proposition for our comp management organization, and looking at how we realign our product development goals to be more consistent with the carrier spending in the next one or two years.

We will get this operation to break even.

We will do so in an intelligent fashion, and we will do so in a reasonable amount of time.

Next, as you may remember, last October I created a special unit of senior leaders to pursue targeted, unique opportunities.

I felt that our distribution channel was properly equipped to handle the opportunities that come from RFPs and RFIs.

However we needed a special force, if you will, to go out and create new ways of doing business.

This group has been working diligently towards taking CSG into new verticals and defining new delivery vehicles for our products.

I am very heartened by the progress that this group is making with our partners and with the quality of the deals that we are pursuing.

We have identified several substantial opportunities that, frankly, would be inappropriate for me to go into at this time.

I will say, however, that even though the market is tough and decisions are hard to come by, I am confident that we will benefit from this group's activities in the next year.

Finally, before I turn it over to Peter, I'd like to outline what we will be focusing on in the coming months.

Now, obviously, we will continue to put forth the appropriate amount of time and energy to defend ourselves against Comcast.

One way or another, three to six months from now, this will all be over.

That means a substantial drain on earnings due to unusually high legal fees, and our management's time will be behind us and can be redeployed into much more productive uses.

We will continue to compete aggressively for market share.

We will continue to work for partners on new ways of delivering our products, both in making our distribution channels more effective and by capitalizing on significant new opportunities together.

And we will continue to implement tight cost controls to manage the business appropriately for today's environment.

And to continue to generate cash.

Once again, let's not forget, even in today's tough environment we still generated $22m in cash last quarter.

I continue to believe that in difficult environments there's a tremendous opportunity to create additional value for shareholders, your customers, and your employees.

While we cannot predict when times will get better, we can control how we respond to the present and how we plan for the future.

I believe that CSG is and will be well positioned for the future.

Now I'd like to turn the call over to Peter Kalan, and ask if he would review our financial performance for the quarter.

Thank you, Neil.

I will begin my comments with an overview of the income statement results of the consolidated company.

For the first quarter of 2003, total revenue was $141.9m dollars, and net income under generally accepted accounting principals was $8.8m, or 17 cents per diluted share.

During the first quarter, the company incurred re restructuring charges totaling $3.2m, which had the effect of reducing the reported earnings per diluted share by 4 cents.

Adjusted net income, which excludes these restructuring charges was $10.7m, or 21 cents per diluted share.

Processing revenues totaled $91.2m for the first quarter, and continues to be a very stable and recurring business.

Software and services revenues were $50.7m for the first quarter, comprised of maintenance revenues of $22.4m, professional services revenues of $18.2m, and software license revenues of $10.1m.

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

With AMIA, contributing 14%, Asia-pacific generating 6%, and Latin America delivering 5%.

Revenues from Comcast were 27% of the company's total revenues for the first quarter, compared to 31% in the same period last year.

The results for the first quarter were less than the first quarter expectations that we communicated on our January 29th, 2002 conference call.

As Neil stated in his comments, this is primarily the result of lower revenues from a large implementation project that is being accounted for under percentage of completion accounting, along with lower than expected revenues from maintenance services.

The changes associated with the large implementation project resulted in a reduction of revenues of approximately $2m and additional expense of $1m.

On a diluted share basis, this translates to approximately 4 cents.

From an expense perspective, we were expecting operating expenses would be between $120m and $125m.

For the first quarter, total expenses--excluding restructuring charges--equaled $120.8m, we achieved the low end of our expense target while absorbing unexpected items like the charge for the loss on the implementation contract, and higher than anticipated costs associated with our defense in the Comcast arbitration procedures.

The costs associated with the arbitration totaled approximately $5m for the first quarter, which was $2 million or two cents per diluted share, higher than we expected.

These costs were higher than we anticipated, as a result of a more involved deposition process, along with other defense preparation activities surrounding the arbitration arbitration.

We previously announced that we'd be selectively targeting expenses during the quarter and as an example we reduced our staffing levels by 66 people during the first quarter.

For the three months ended March 31st, 2003, adjusted earnings before interest, taxes, depreciation and amortization or adjusted EBITDA was $30m, or 21% of revenue.

For the first quarter, the gross margin of the company was 50%, the gross margin on processing and related services with 63%, while the gross margin on software maintenance and professional services totaled 27%.

We anticipate that the margins on the processing revenues will continue in line with the results of this quarter.

We are targeting to increase our margins on software maintenance and services to the mid 30s over time.

As we work through the completion of the large European implementation project, and additional cost rationalization efforts.

The first quarter operating margin excluding restructuring charges equaled 15% of revenues.

Over time, we are targeting the improved operating margin of the company with a target of between 20% and 25%.

Turning to go the company's divisional results, the broad band services division generated $97.5m in revenue for the first quarter, and produced a contribution margin of $45.9m.

We finished the first quarter with 46.6m subscriber accounts on our processing system, of which 41.4m were video subscribers and 5.1s were Internet subscribers.

Total subscribers increased sequentially over the fourth quarter of 2002 by 800,000 subscribers.

And when compared with the first quarter 2002, total subscribers increased by approximately 6%.

These increases are primarily driven by organic growth in broadcast, satellite and Internet clients.

For the first quarter annualized processing for video subscribe subscriber totaled $8.40 and annualized processing for internal subscribers $3.27.

These results were in line with our expectations for quarter of between $8.40 and $8.50 for video subscribers and between $3.00 and $3.25 for Internet subscribers.

CSG's Gobal Software Services Division produced $44.4m in revenues for the first quarter, with a contribution loss of approximately $7m.

As Neil said, we were originally targeting the GSS Division to be break-even or better for 2003.

The financial impact of the European implementation project that I previously mentioned, reduction in maintenance revenues and overall tightness of the worldwide communications market has resulted in financial results below our target.

The GSS Division had a solid first quarter of software licenses, which provides optimism for greater opportunities.

We believe we are well positioned to be successful over the long-term and we are committed to our financial goal of break-even or better.

In the second quarter, we expect to see some sequential improvement over the first quarter and as Neil stated, we will be evaluating the business in an intelligent manner.

Based on the current worldwide difficulties in the communications market, it is possible, though, that it may take up to 12 months to achieve break-even.

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

As of March 31st, our trade accounts receivable totaled approximately $170m, net of the allowance for bad debts of approximately $13m.

During the quarter, unbilled accounts receivable decreased approximately $3m to $25.6m, as we invoiced clients for services.

We expect substantially all of these balances will be bill billed and paid by clients during the next six months.

The trade accounts receivable reflected today's bill out outstanding or DBOs of 68 base days for the first quarter, improvement from the fourth quarter level of 73 days.

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

During the first quarter, we generated cash flow from operations of $22.2m, and anticipate levels similar to this in the coming quarters.

We finished the first quarter with cash and investments of approximately $114m, and during the first quarter the company repaid approximately $1.1m of its bank debt, and finished the quarter with approximately $269m in total debt.

Also, we are voluntarily prepaying an additional $20m of debt this month, which will reduce our total debt to below $250m.

We did not repurchase any of the shares of the company's stock during the quarter and to date since the authorization of the stock repurchase program, the CSG has purchased 6.3m shares, with 3.7m shares remaining authorized for repurchase under the program.

Looking forward, I want to give you our expectations for financial targets for the second quarter.

We expect that processing fees will range between approximately $91m and $92m dollars for the second quarter.

We have a very stable customer base that provides high visibility and processing fees, and have a solid history of performance.

We project that maintenance fees will total between $22m and $23m for the quarter.

The fourth and first example are the periods when the majority of the GSS contracts come up for renewal.

And as a result, the remaining revenue risk from renewals has been minimized.

Maintenance revenues have declined sequentially.

We do not believe there is significant revenue risk remaining for 2003 in our maintenance renewals.

Professional services revenues are projected to generate between vane $17m and $19m for the quarter, which includes the impact of lengthening the large implementation project in Europe.

And finally, we are targeting that license revenue and revenue associated with one-time processing projects will total between $8m and $12m in the second quarter.

In total we are expecting revenues of between $138m and $146m.

As of March 31st, we have a software services backlog of approximately $110m, that we expect to recognize over the next 12 months.

This is consistent with the size of our backlog as of December 31st, 2002.

We are projecting at the operating expenses for the company will total between $118 m and $122m, with the expectation that costs associated with the Comcast arbitration will total between $5 and $6m in the second quarter.

The results of the arbitration are binding on both parties parties, and we therefore expect that the costs associated with these proceedings will substantially decline upon the decision of the arbitrator.

Based on these targeted revenues and expense, we anticipate that earnings per diluted share for the second quarter will between 20 and 24 cents.

As I previously mentioned, we are evaluating actions to further reduce expense that is may result in restructuring expenses associated with eliminating costs.

At this point we cannot estimate the amount of restructuring costs that we may incur, but any of these type expenses would be outside the financial projections that I have provided you.

For the first quarter, exclusive of any additional share repurchases, we anticipate diluted shares outstanding will be approximately 51.5 million.

In closing, we continue to generate profits and strong cash flows.

And as a management team, we are also focused on improving the profitability of our business.

While at the same time we are also focused on preserving the strength of our business and exploiting the unique opportunities that present themselves around the world.

We look forward to reporting of our successes in coming quarters.

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 1 on your push button phone.

If you would like to decline from the polling process, press star followed by (inaudible) 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 Tom Ernst with Thomas Wiesel Partners.

Please go ahead.

Good afternoon, this Tom Roderick speaking for Tom Ernst.

Congratulations on the Time Warner announcement.

That was particularly nice news to get the day before the call.

So congratulations on that.

Thanks, Tom.

Thank you.

I wanted to see if you guys could shed a little bit more detail on that announcement and in particular what drove that deal to be announced now, and how you came about structuring a ten-year master agreement across all the different regions.

And if you could also give a little bit of detail about whether there was any competitive forces working in there as well?

That would be helpful.

Tom, this is Peter Kalan.

We've had a long history of working with Time Warner, going back to days even before CSG became an independent company.

We have had, as we mentioned, multiple contracts with Time Warner in the past.

And I think our operating performance and history with them was an important part of their making their commitment, especially their largest system sites around the country, five to six largest, (inaudible).

And so we think our history, we believe very strongly, our history of performance in meeting the needs for Time Warner was the basis for this.

I don't remember, he had many points on it.

Yes, the timing of the announcements.

We worked on this during the first quarter of the year and there's nothing unique about the timing, it's just the continued hard work by our SBU, and the people around the company to make sure that Time Warner and CSG have a well structured long-term contract.

As you may be aware, has a piece of the business that Time Warner.

As I said, we've had a long time a long-term history and I think from that the competitive forces were such that for the large systems system sites we were comfortable that we had the right solution with the scale and ability to deliver for their operational needs.

And those though we never take our eye off the competition, we felt like we had the best solution to meet their business needs.

So would you say it's fair to say that part of the impetus of driving the deal from Time Warner was in getting down to two vendors, trying to structure their way down to two vendors, and at the same time establishing a more long-term relationship with those both of those?

This is Ed Nafus, I think that's correct.

I think it was a combination of the change in management to a more centralized concept, which this is the first time that we have been able to do that with them.

And certainly they have made a conscious decision to utilize two vendors.

Great.

And just one last question, regarding the structure of the deal.

I understand you probably can't comment too much on the pricing of the deal, but if you could give us some metric with regards to any price relief that you did offer them them -- offer Time Warner and how that will effect -- how we should think about per sub pricing going forward, that would be helpful.

Tom, this is Peter again.

Any time you put together the type of deal we did with Time Warner, with the commitments they've made, you're willing, when people lengthen our relationship, as well as make the commitments that they've made, to trade that off for certain pricing benefits to them.

The information I've provided for our processing revenues incorporated the scope of this, and as you can see, that our guidance for Q2 is fairly much in line with where we were in Q1 in actuals.

So though we made a commitment between ourselves and Time Warner, overall with this business it's not going to materially impact our performance.

Okay, great, thank you all very much.

Thank you.

Our next question comes from Stacy Forbes with Janco Partners.

Please go ahead; hi, go ahead.

Hi, Stacy.

Just a little bit of follow-up stuff on the maintenance issues that you've been discussing.

You did say the majority of those contracts renewed in the first and fourth quarter.

Is it fair to say, then, that the or rate of revenue that you gave us regarding Q2 is something you expect to remain fairly stable for the remainder of the year, in that $20m to $22m whatever you guys gave guidance for. $22m to $23m?

This is Bill Fisher.

The majority of that maintenance is in the GSS group.

And yes, based on the majority of our contracts renewing in the fourth quarter fourth and first quarter, I think we have a good view to the stability of that maintenance stream.

We're not through renewing yet, but given that we have the majority of them, yeah, I think we feel comfortable with that guidance.

Okay, and are you putting in re newly clause clauses now, where it's going to automatically renew unless there's something drastic that happens, you know Neil touched on that.

Could you give us a little more detail there?

Sure.

One of the things we've been working on over the last year year, we called project mainstream, I think we might have talked about it a little bit before here, but it was in essence moving the customer base away from either historical Kenan contracts or Lucent contracts to our paper.

Any time we get a chance to do anything contractually with the customer, we basically want to take and convert that contract to our contract paper.

Our business philosophy there is consistent in that we have terms that call for renewal unless the customer gives us notice.

The customer can surely decide not to take maintenance from us, but it requires them to do some preplanning and give us sufficient notice.

As opposed to the way the Kenan and Lucent contracts-- number of those were constructed whereby you had to get a signature renewal on an annual basis.

And you know, the customer base tells us consistently that these are products that they require maintenance on.

So having to go through that negotiation process annually is something that we want to get away from, and quite frankly so, does the customer base.

Okay, and can you give us a sense of, you know, I know some of the customers were renewing at more basic levels rather than not renewing at all.

And it looks like out of the dozen or so, you've renewed five of those this quarter.

Do you expect to renew the other seven so everyone is renewing to some capacity and can you give us a sense what have percentage of people are renewing at lower levels?

Yeah, I would say the majority, give went the guidance, the majority of the customers are renewing at the historic level.

There is a small percentage of customers who because of volume commitments that they made in the past, were negotiating with them, they're not at those volume levels.

In some cases we may convince them to take a lower level of service, move from 24 by 7 service to 8 by 5.

That allows them to get a reduction and also gives us a corresponding reduction in our expense side.

I'd say on the renewal, it would be suicide to say I'm not going to get all 14 of them renewed.

But also it probably would not be smart to promise you all 14 of those would be renewed.

I would say we've had good dialogue with the customer base those that have yet to renew and feel very comfortable that for the most case they want the service that we provide and we expect to get business resolution with them.

There were a number of these that were also contracts that we acquired when we acquired the ICMS asset.

And frankly, I don't think we got enough attention paid to them soon enough, and now that we're focused on those, I think those will bear fruit for us.

We actually have only nine left to renew.

Oh, thank you.

I'm the goat this quarter so everybody's trying to help me as much as they can.

Okay, and lastly, I just wanted to ask about the CSG software side, if I'm reading this correctly, it was about 1.7m in the quarter.

Which seems a little lower than typical levels.

Do you have any guidance there, or what do you see happening in that area?

Thanks.

on the broad band side?

Yeah, on the broad band side.

Stacy, we don't give specific guidance on the division as to what we expect to drive our revenue guidance based on the entire company.

We've seen a softening of the license transactions on the broadband side just because of the status and state of that market with the consolidation and some of the balance sheet problems that our clients have had.

We have -- SBU teams are effective at pushing products but you don't see the larger type transactions we saw in 2000 and 1999.

You're seeing smaller purchases of software which is contributing to the changes over time to smaller software revenues out of Ed's business.

Okay, thank you.

Our next question comes from Adam Waldo with Lehman Brothers.

Please go ahead.

Good afternoon, everyone.

You've had a lot of balls in the air but I have quite a few questions, I'll try to ask a few and come back later.

Can you give us a little more color either on annual revenue minimums or subscriber levels guaranteed in the Time Warner renewal?

Do you know the numbers off the top of our head?

I think it's basically it stays at the levels that we're at for the first 30 months.

And then it is 3.5m minimum for the remainder of the ten years.

Okay.

And are there renewal operations at the end of the ten years? [LAUGHTER] okay, maybe more on that later.

What I mean is are there options successive options built in the contract?

I'm not sure.

Okay.

I don't think there are, though.

Okay.

Switching gears just a minute, you know, Comcast revenues were only down 5% year over year in the first quarter, and are getting ever closer to those guaranteed minimums.

I wonder if you can give us a sense of what contemplated the level of Comcast revenue is reflected in our second quarter guidance, Peter?

We don't look at so much as on their specific usage.

We look at things as the pool of subscribers and where we see usage going.

I guess I want to correct one thing of your comment.

You said they're getting closer to their subscriber minimums.

If I look at the amounts that we generated from Comcast in the first quarter and annualize that, that's $152m worth of revenue.

Sorry I meant the revenue minimums.

And the revenue minimums are --

$120m.

That's the information that's out there and so we believe we still have, you know, that we're still generating a great amount of service from Comcast and business that's very important to Comcast and their operations.

Okay, so no specific comments on Comcast revenue outlook for the second quarter?

The one thing I would tell you, that we said at the end of our fourth quarter, is that everyone is watching dollars, and same way that we as a company are reducing expenses based on the market opportunities, every client is out there, whether it's on the broad band or the GSS side, look to go optimize their operational performance.

So, will there be shifts on what any of our clients use and what they spend?

You would expect that they're going to try to rationalize all their expenses and we'd be one vendor they'd be looking to get that from.

Okay.

And then if you turn over to the Comcast arbitration, I believe Neil made some comments and also Peter made some comments about the status of that.

And your expectation that the hearing would conclude by the end of the summer.

That's a little bit longer, I think, than most of these arbitrations tend to run and I was wondering whether that was conservative guidance or whether there was something specific that prompted that view?

Let me have Jack answer that.

He did not mean the hearing would last through the end of the summer.

I think he said the arbitration would be revolved by the end of the summer.

We anticipate anywhere between 4 and 8 weeks of trial for lack of a better word, and then the judge has to have some time to make a decision.

So --

Okay.

That's very helpful.

And then finally, over on the GSS/Kenan side.

Given the contract gone bad in the quarter, is there any latitude to either adjust the final purchase price or the level of carrying value of the capitalized intangibles from that acquisition for the contract?

We don't have any opportunity to go back to Lucent as part of the purchase and assign any -- or draw any money back from Lucent, if that's what you're suggest suggesting.

Okay.

And you would evaluate potential adjustments to the carrying value of the capitalize intangibles at the annual auditor's review, is that fair?

That is when we would expect our annual review of our intangibles are in the third quarter of this year.

Okay.

That would be when it would be.

Thanks a lot.

It would be very small.

Yeah, okay.

Our next question comes from Americo Casella (ph.) with Aries Management.

Please go ahead.

Hi, guys, I wanted to maybe (inaudible) a little more color.

If you look at the professional services division the same you were talking about the software maintenance earlier.

In the legacy company rather than just Kenan-is there a plan there, or an expectation that you would further rationalize costs or is there a plan that the business, you know, together with the Kenan Business, would reach a more profitable level?

You're saying the professional services in the broadband?

or in what you didn't acquire with Kenan.

That's all part of Bill's organization now.

Yeah, if you take a look at our overall professional services, the vast majority of that is in GSS GSS now.

It includes professional services that previous, were part of CSG and weren't part of the Kenan acquisition, but we put them all together now.

Let me get your question.

Is there an expectation for further cost rationalization there or is there an expectation off the current cost base you would continue to build the revenues revenues?

I think, you know, what Neil said in his remarks is that we're going to look real hard at increasing the profitability there, which primarily looks at project utilization now.

You know, projects, we're doing, for example, in international marketplaces, we have opportunities to shift some project load to place where is it doesn't cost us as much, and we're doing some of that.

Do I think there will be a material change there?

No, I don't think we're looking at a material change.

This quarter, the professional services looked worse than normal.

Primarily because we lost part of that percentage of completion contract to revenue and we also booked an expense there for that contract once we knew that that contract would not be profitable.

So, my intentions running the professional services part of the business going forward are to return to the level of margins that Peter talked about in his presentation.

if I could just make one other comment.

We did, our people did an excellent deal when we acquired the Kenan asset from Lucent.

And when we acquired that asset, you know, you acquired the asset, you acquired some of the things that Lucent had done and made commitments to and you had to work out in the end get a complete those commitments and that was part of the deal.

And so I think those people have done a very sound job of rationalizing the business that we got, of completing the Lucent commitments, and building a business going forward.

So, you know, I would just look -- (inaudible) run the business.

Got it.

And then secondly, if you look at what's happened to the stock price, has that caused any pressure or any difficulty in retaining some of your key folks, particular particularly some of the folks that are involved in the more stable processing of business that may have had, you know, equity incentives in their contracts?

I'm very gratified by the wonderful work force that we have and the wonderful team of people we have here.

We did some things last summer to the senior management team in fact gave up a significant church of their options options, we redistributed some of them, and we just got an outstanding group of people.

It's a little frustrating dealing with things that they think are unfair on that side of the house.

But as I indicated, that's going to come to conclusion here pretty soon.

Thank you.

Our next question comes from Thomas Vincent with Smith Barney.

Please go ahead.

Thank you.

A couple of questions.

On that GSS Division and the maintenance revenues and the 14 contracts that decided not to renew, obviously you got 5 of them.

Could you provide some more color on why those customers decided not to renew or why you're still negotiating with them?

Obviously, there's always pricing pressure around contract renewal, but were there anything else that put some of the customers on hold?

It varies by contract.

One of the larger ones is a very large TELCO, in Latin America.

They are coming off of -- they have a lot of volume, they're also working with us, they want us to help them provide some professional services to help them streamline their operation.

I think they decide to parlay the negotiation of those services costs and the maintenance one together.

Typically that won't work, but in this case it is a large customer and they do have some leverage.

Another one, quite frankly said I can't make the renewal decisions, sign the contract until my board meets.

My board meets on April 30th, I'll give you a decision after that.

Whether or not that's true or not, I guess we have to believe that that's the case.

They're all a little bit different.

I can't categorize them for you other than to say when you have them as an annual event, you better start early on them, and I think having what we had going on this year, if I had to do anything differently, I probably would have started much earlier on the ICMS one than I did.

And probably won't see that happen to us again, I guess.

So is it fair to assume there's no significant technical issues, that's the reason for --

No, there's not.

No.

These customers -- by the way, you know, I can give you other examples, very large European customer who is deciding whether or not to renew maintenance or not.

We basically continue to provide them support even beyond the period where their contract expires.

They still have priority issues that we manage, you know, we know that they need us, we know what's going to happen.

It just takes some time.

In the case of the customer, when we finally penetrate and and, you know, in this case I'm talking about a very large European TELCO operator that it took us probably a month just to get to the process of who could sign the contract.

They have had a number ever changes in management.

But in no case, no case do I know of, I think no case exists where we have technical problems and the customer not getting what they want for service.

Great.

That's very helpful.

On the other processing side, Peter, you've given in the past, you know, guidance for the annualized revenue for video subscribers and per Internet subscriber.

Any chance we could get that for 2 Q?

Sure.

We're still maintaining the same range of $8.40 to $8.50 on video subs. $3.00 to $3.25 on the Internet side.

I would tell that you I would -- I was pleasantly surprised that the Internet was on the high end of the range and I expect that will come down during the quarter some and we have built those types of assumptions into the revenue side on the overall processing fees.

Okay.

And it sounded on your guidance for licensing revenues overall, that there could be some one-time projects in the pipeline for 2 Q, in the broadband division.

Is that --

One of the reasons why I give the guidance like, that we have a clear understanding by looking at our history and what our subscribers do, of what to expect from the traditional processing services.

But there will be times where clients ask us to do related projects associated with the processing business that will be included in our processing fees.

And instead of trying to estimate that on top of that base of 91 and 92, I keep it separate and just say between those fees and our typical license fees that are driven out of the two sides of the business that we expect that range that I gave.

Okay.

Great.

And then my final question, could you maybe provide some color on how many of your professional services contract or how much of your revenues either way you look at it, is based on fixed fee contracts?

One second.

Out of our total revenues from the GSS Division, I don't have it off the top of my head.

Tom, in the benefit of time, I'm sure we'll be talking a little bit later, I can catch that as a later call -- wait wait, --

That's great.

No, it was 27% of our total GSS revenues were from percentage of completion revenues.

Okay.

Fantastic.

Thanks a lot.

Thank you.

Our next question comes from Mary Ann Wolk with Folcom Global Partners.

Please go ahead.

A couple of quick questions.

First of all, in the past few quarters you've had some I guess extraordinary payments from some of your broadband customers and I was wondering if any of those came through this quarter or whether you thought that that was possible next quarter?

I'm not sure I understand your question, Mary Ann, what you were referring to.

The database-related payments.

I remember last quarter you said that was $5m additional processing revenue.

That was in last year's numbers, primarily in the third and fourth quarter of 2002.

We did not have projects of that scope that were again in the first quarter and we don't predict or project out when we think those will come about.

Those are usually driven by specific business needs of the clients.

Those would be included in the guidance, Mary Ann, I think we look at them as one-time projects as opposed to extraordinary payments.

Okay, that's helpful.

And then secondly was regarding the DBO comment you made, that it improved by a few days and I'm looking at the fact revenues came down but receivables came up.

So I'm trying to understand what the swing factor was that enabled to you improve your DBO?

That's affected by two pieces.

One our billings that take place during the quarter as well as what our receivables are during the period.

We had a significant amount of billings that happened during the periods, especially late in the quarter as we had projects come up and the billing dates on those projects that have a positive impact to the DBOs.

Was there an extraordinary figure that you're adjusting receivable balance by that I should be aware of?

Not anything extraordinary.

Just normal billings.

We'll have certain periods where they're heavier based on where we are in some of the professional services contracts, or some of the billings on license contracts that you may have heavier billings at the ends of a period period.

Okay, thank you.

Our next question comes from Brandt Sakakeeny with Deutsche Banc.

Please go ahead.

Hi, thank you for taking my question.

A couple questions.

First, on the R&D line.

That number continues to come down a bit.

Are you getting more efficiencies out of every R&D dollar or are you making a conscious effort to cut the amount of R&D spending?

I think we're doing a couple of things.

I think we're getting better and we're getting more efficiencies and we're getting more pin pointed in the things we're doing.

I think the other thing is as I indicated in my comments, one of the things that we can do is to time the arrival of new products at a time when the customers are going to have money to buy them.

And so, if a customer base isn't going to have money to buy a product for a year or year and a half, there's no sense getting it done in six months so you can stretch it out a little bit there.

Should we expect it to stay flat for the rest of the year or trend down like it did last year quarter by quarter.

One of the things Neil commented in his opening remarks is that we're going to look at the timing of when we deliver products versus the market's appetite for that.

So we'll look at that and that could end up with reductions in our R&D, but I want this at this point we're not giving specific projections because we need to evaluate what those market opportunities are in the near term.

Your cap ex budget for the year is how much again?

If you look at the first quarter we did about $2m worth of cap ex and I would tell you for the remainder of the year for conservatism, I would say $10m for the remainder of the year.

Total of $12m for the year.

Perfect.

And one final question.

I think I heard you say either you're planning on paying down $30m in debt, and just in terms of looking at the cost of debt versus the cost of equity, what's the allocation process in terms of deciding to take the $30m and paying down debt versus, say, buying back stock?

The first point is we pay down a voluntary prepayment of $20m during the quarter, not $30m.

Okay.

Peter Kalan.

Make sure everybody's clear on that.

We look at opportunities to buy back our stock.

We have done it aggressively in the past.

There are times when our window closed and we're cautious to make sure that with all the activity that we have around the company right now, that we don't -- we don't -- that we're not aggressive around our window.

So we looked at the window of opportunity this first quarter and saw we were building significant amount of cash, that we had strong cash flow still projected and decided to take the debt off the table at this point even though it's fairly reasonable cost of capital.

But it was in the absence of any near term opportunities elsewhere we thought that was the prudent thing to do.

And going forward, should we expect to see more debt pay downs or are you expected with the leverage ratio today?

We're not uncomfortable with the leverage ratio but not reticent to go down and pay more debt down as we move forward.

We'll evaluate what our opportunity for the cash are at that time.

Thank you.

We have time for one more question.

Our final question comes from Russ Duckworth (ph.) with Sterling Capital Management.

Please go ahead.

Hi, why were processing revenues flat year over year when subscribers were up?

We saw a decline in our average revenue per sub on the Internet side.

We've seen that from a couple of points whereas the number of our interpret subs grow they get leverage over some of the services we provide that effectively are fixed in nature of a fee that's standard fee they may pay us regardless of the number of subs they have.

So as they grow their subs their average unit comes down.

We saw some consolidation of accounts in the fourth quarter that took revenues down from the Internet side, and we haven't seen as many of the one-time special projects as we saw last year, which brought the revenues down as well.

Okay.

These processing contract, it's my impression that they pretty much across the board have automatic price increases every year.

That is the typical, yes.

Okay.

And was that the case in this new Time Warner deal?

the Time Warner deal has price increase factors.

Those are part of that transaction, yes.

Okay.

And I think some people out there are under the impression that pricing is permanently under pressure in the broad broadband cable business due to the fact that the industry has a lot of financial leverage and it's consolidated.

What is your view on that?

The broadband cable industry, I've been involved in it for over 20 years now, and pricing has always been for every vendor a constant pressure because the nature of the business is -- has always been they're just struggling to generate cash flow.

Right now they just have some bigger guys bringing pressure.

Okay.

Thanks.

Thank you.

Let me close once again thank everyone for joining us.

But today I want to also add, let me thank the employees out there who have, through a lot of hard times in the economy economy, and a lot of things that we're accomplishing.

You've all just kept your heads down and done your job, and moved forward, and as you know, I appreciate it great greatly.

We'll go get them another time.

Thanks.

Ladies and gentlemen, this concludes the CSG Systems, Inc. international first quarter earnings release conference call.

If you would like to hear a replay of today's conference you may dial 303-590-3000 and enter the access number 531881.

Once again, if you would like to listen to replay -- thank you for participating, you may now disconnect.--- 0