CSG Systems International Inc (CSGS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the CSG Systems second 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.

In anyone needs assistance at any time during the conference, please press the star, followed by the zero for an operator.

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

I would now like to turn the conference over to Miss Liz Bauer.

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 and expected outcome of the companies litigation with Comcast, our ability to successfully sell and implement our products and services into the telecom market, as well as the companies expectations relative to the timing for a turn around for worldwide 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 our press release, you can obtain a copy from our web site.

Effective today, CSG's quarterly earnings press releases will generally discuss it's operating results on a Generally Accepted Accounting Principles basis.

In our previous press releases, CSG included disclosures of certain nonGAAP financial measures as an additional means of evaluating our operating performance.

CSG previously referred to these nonGAAP financial measures as adjusted or pro forma, which included adjustments for the impact of the Kenan acquisition related expenses incurred in 2002, and the restructuring charges included - or incurred in 2002 and the first quarter of 2003.

CSG believes reporting it's operating results under GAAP is consistent with the recent SEC pronouncements and related interpretations on this topic.

In summary, going forward, the company will not provide adjusted or pro forma disclosures to reflect the impact of restructuring charges and the Kenan business acquisition related charges.

Our historical press releases and 10-K's and 10-Q's will not be modified to reflect the SECs new pronouncements.

We will provide the necessary information to access the impact that these charges and expenses had on CSG's results of operations to help investors come one a comparable view of CSG for those who use adjusted or pro forma numbers.

You can find this information on our web site in the Investor Relations section under the financial text.

And finally, we have with us today, Neil Hansen, Chairman and Chief Executive Officer;

Jack Pogge, President;

Peter Kalan, Chief Financial Officer;

Bill Fisher, President of our Global Software Services division; and Ed Nafus, President of our Broadband Services division.

Mr. Hansen will begin.

Thank you, Liz.

Thank you all for joining us this afternoon.

I'm pleased to report that CSG had a very strong quarter.

Today, I'd like to update you on our financial performance.

On the progress that we've made in getting the GSS division to break even, the status of our Broadband division, including an update on the Comcast arbitration and finally I'd like to provide you with color on what we will be focusing on on the near and long-term future.

First, let's talk about our financial performance.

For the quarter, revenues were $142.4 million and diluted earnings per share on a GAAP basis were 23 cents.

This quarter, we generated over $37 million in cash.

We ended the quarter with over $128 million in cash and short-term investments.

We paid down an additional $20 million in debt this quarter reducing our debt to under $250 million.

Peter will review in more detail our financial performance for the quarter.

Needless to say, I'm very pleased that we not only met our guidance but that we continued to execute on several goals that we had laid out.

And this brings me to an update on our divisions.

Our Global Software Services division really answered the call after a disappointing first quarter.

Bill and his team resolved the situation with the project in Europe that had negatively impacted our first quarter.

We worked closely with the client in putting together an agreement that eliminates any penalties to CSG.

We're on track with our deliverables and we have created a win/win situation for both us and the customer.

As we said last quarter, this particular project was highly unusual in nature and in size.

We are comfortable with the status of this project, and we are on track with our deliverables.

Now, in addition, we have strengthened our oversight by creating the office of Project Management reporting to the Senior Delivery Officer within GSS, Al Michaels.

The PMO office will provide key measurement metrics to the senior team.

Next, our sales organization had a solid quarter.

With each region reporting strong activity.

We renewed all of the maintenance contracts that expired in the second quarter.

We added Telecommunications Of Thailand to our customer list.

And ToT is Thailand's largest and oldest provider for communications services.

ToT will be using both our Kenan BP and our Data Mediation platforms to support its residential and it's business subscribers.

Which banded our relationship with a number of customers, including Saudi Telecom, Saudi Arabia's largest telecommunications provider, Axtel, Mexico's largest (sea lak).

EPSA, a European wire line services provider;

Globalcom, an Italian fixed line provider to businesses and Altel Communications, a North American wire line and wireless provider.

We continue to invest significant dollars into R&D and we ported the Kenan BP and Data Mediations Solutions to the IBM platform.

We enabled three of our clients in the Asia Pacific region to roll out new services like Y-5 and we introduced our wire line and wireless service field product offering.

Thurpoint Communications being our first customer.

And Thurpoint is a leading provider of wireline, high speed Internet and broadband services to rural communities.

They will consolidate their customer base from three different billing systems onto the CSG Service Bureau solution.

And finally, as a result of stronger revenues and continued cost controls, the GSS division reported significant progress towards reaching the goal of becoming break even by Q1 of 2004.

This quarter GSS had a contribution loss of $2 million down from a contribution loss of $7 million last quarter.

And one additional piece of good news that came in after the quarter ended, CSG has signed its first billing customer in China.

Beijing Telecom, a wholly owned subsidiary of China Telecom, provides wireline, high speed Internet and broadband services to the northern Chinese market.

China is expected to become the second largest Internet market by the end of the year and become one of the world's largest markets for mobile services and the largest broadband market by 2006.

We believe that we are well positioned to benefit from this growth as a result of the combination of our technology assets, our expertise in convergent billing and the relationships that we have built with our partners, including Winova and IBM.

Beijing Telecom will utilize both our Kenan BP and our Data Mediation Solutions.

Next, I'd like to report on our Broadband Services division.

Ed and his team continue to help our clients reduce costs and to run their operations more efficiently.

Our Workforce Express solution continues to be rolled out in a number of Time Warner locations and they are already reducing their costs.

With this solution, they have increased the number of jobs that each technician can complete per day.

They've reduced the number of miles driven to each job.

And this has allowed Time Warner to actually keep the number of dispatchers and technicians steady while increasing the volume of work to rolling out new services.

In addition, we continue to work with our clients as they explore the rollout of voice-over IP services to their customer base.

This year's been an active participant in the cable labs packet cable initiative around voice-over IP.

We fully expect that we will be helping several of our clients to deploy these services in earnest in 2004.

Finally, as many of you know, we are currently in arbitration with Comcast.

Last Friday, we filed our post trial briefs.

We have been notified by the judge that he will allow each side to respond to the other's post trial briefs.

After that, the judge may request additional oral arguments to take place in the first part of September.

And upon conclusion of these activities, the judge has indicated that he will be ready to render a decision.

Now, while it's impossible to speculate as to the outcome of this arbitration, I want to reiterate how proud I am of our legal and management teams.

In addition, I am extremely proud of our people who are working with Comcast every day to service the over 16 million customers that are on our system.

This arbitration will pass and we look forward to a long and prosperous relationship with Comcast.

What you can expect from this management team is that as soon as a decision is rendered, we will issue a release, we will hold a conference call and go through all of the details of the decision.

Finally, I'd like to share with you what we're seeing on the horizon with our customer base and with our new ventures.

June was an extremely busy month that included two major industry trade shows.

The NCTA and the Billing World shows.

And I can truthfully say that it was the first time in two years that there was some real buzz in energy around the industry and what the future holds.

At the NCTA show, operators talked about the fact that their plant updates should be completed by year end and that funding will shift to revenue-generating activities such as rolling out advanced services.

This shift in spending should provide some upscale to CSG as these providers businesses should become more complex.

We were have introduced over 25 new products over the last seven years that have allowed our customers to roll out new services to provide self-care to their customers and to run their operations more efficiently.

We will continue to work closely with our customers so that they can successfully execute on their business on objectives.

Finally, Billing World had a similar positive tone.

Telecom providers talked about the pain that they are experiencing running 10 to 20 different billing platforms.

They talked about the need to roll out additional revenue generating services over their existing infrastructure.

Operators are looking for ways to distribute more content to the end user and to get paid for it.

In addition, several operators talked about the need to reduce the problems that they're experiencing relative to revenue leakage.

I was very heartened by the quality of the meetings and the level of activity that we had at both shows.

And while we continue to remain cautious about the environment in which we operate, we are seeing more signs that make me believe the worst is over.

Again, I am confident in our position and I believe that we are well positioned as the industry begins to turn around.

Why would I believe that?

Well, first, we are starting to see the fruits of our labor with a special group of senior leaders that I put together last winter.

I look at the most recent wins with Fairpoint Communications, and Beijing Telecom as proof that this was the right strategy at the right time.

Second, we continue to generate strong cash flow, which allows us to continue to invest in our products and our people.

As we have watched many of the smaller competitors fall by the wayside, we feel that our financial strength will continue to be an asset for both us and our customers.

Third, we have over 250 customers.

Customers that have been underspending for almost two years now.

And they're beginning to see their businesses stabilize and to see their businesses become more financially stronger.

As they get more and more confident in their own businesses, this will translate into additional opportunities for us.

And finally, our teams are hitting on all cylinders.

I'm extremely proud of the work and the dedication of our employees.

We continue to add new clients, to deepen the relationships with our existing customers, to introduce new products and to manage the business so that we can continue to invest in our future.

I want to thank our employees, our customers and you, our shareholders for your support over the past quarter.

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

Thank you, Neil and welcome to all of you listening today.

As Liz stated in the opening comments, we will refer to GAAP financial measures as our primary method of financial performance in today's call.

Though the second quarter financial guidance that we previously provided to you was before the impact of restructuring charges, we will not be providing this pro forma nonGAAP calculation.

I am very pleased to report the financial results for the second quarter of CSG Systems International, Inc., in which we generated $142.4 million of revenue and $11.9 million of net income or 23 cents per diluted share.

The composition of revenues for the first quarter was $91 million in processing and related revenues, $22.8 million in maintenance revenues, $16.3 million in professional services revenues, and $12.1 million in software revenues.

Our Professional Services revenues were impacted again this quarter as we renegotiated the business terms of a large implementation project that we are leading with a large European telecommunications provider.

Within this renegotiation, we eliminated potential contractual financial penalties and reduced the scope of work for which CSG was responsible.

This reduced Professional Services revenue by approximately $1 million for the second quarter.

With the exception of this matter, we were in line with the guidance for all our revenue categories.

During the second quarter, the company initiated additional targeted cost reduction efforts that resulted in a restructuring charge of approximately $1 million or 1 cent per diluted share.

For the quarter, total expenses including this restructuring charge were $121.8 million.

For the second quarter, the operating income of the company totaled $20.5 million for an operating margin of 14.4%.

Our financial results for the second quarter were within line with the guidance we provided and we believe we have started to see stabilization from the prior quarter's declines in the telecom market spending.

During the second quarter, as a result of foreign currency translation gain, the company benefited from the weakening of the dollar against the euro and pound by approximately $2.5 million or 3 cents per diluted share.

This translation gain is reflected below the operating income line.

And going forward, we are managing the assets and liabilities of the company to neutralize the foreign currency translation exposure.

For the second quarter, 25% of the company's revenues were generated from international markets consistent with prior quarters.

Amia produced 17% of the companies total revenue, and Asia Pacific and Latin America each produced 4% of the total revenues.

Revenue from Comcast totaled 26% of the company's total revenues, a slight decline from the 27% attributed to Comcast in the first quarter of this year.

For the second quarter, CSG incurred approximately $6 million of legal defense expenses in the arbitration proceedings with Comcast.

We continue to produce very strong cash flows, with cash flow from operations for the second quarter totaling approximately $37 million.

Earnings before interest, taxes, depreciation and amortization equal $32.4 million for three months.

Our strong cash generation for the second quarter contributed to the strengthening of the balance sheet.

We finished the second quarter with $128 million in cash and short-term investments while making a voluntary $20 million prepayment on our debt facility during the second quarter.

We will be making another $20 million nonmandatory debt prepayment in August, which will reduce our total debt outstanding to less than $230 million.

We finished the second quarter with $169 million in net billed accounts receivable.

Our primary measure of accounts receivable turnover, days billing, billed outstanding or DBO's was 78 days for the second quarter in excess of our targeted range of 65 to 75 days.

We continue to remain very focused on our accounts receivable and we have had members of our management in the Asia Pacific region meeting with the clients who have not paid timely.

We continue to have a concentration of receiveables from the clients within India but we have started to see payments come in.

We are confident that we'll be successful in the collection of the receiveables and we'll return our DBO's to our targeted range.

During the second quarter, we did not repurchase any shares of the company's stock.

The dates since the inception of the company stock repurchase program, CSG has repurchased 6.3 million shares with 3.7 million shares remaining authorized for repurchase.

Turning to the review of the company's businesses divisions, both of our divisions had successes within the second quarter.

Within the Global Software Services division, total revenues for the second quarter were $46.2 million with a contribution loss of approximately $2 million.

Which is an improvement when compared to the contribution loss of $7 million for the first quarter of this year.

The second quarter financial results reflected stabilization of the maintenance revenues and reduced operating expenses while Bill Fisher and his team also produced strong license revenues of $11.7 million.

During the second quarter, targeted expense reduction efforts were initiated that we expect will result in a reduction of expenses of approximately $2 million per quarter.

We are confident that we are on track to return the Global Software Services division to a break-even or better contribution margin in the coming quarters.

Within the Broadband Services division, total revenues were $96.2 million for the second quarter with a contribution margin of $42.8 million.

This division continues to perform very strongly while serving a market that is currently very cost conscious.

At the end of the second quarter, the Broadband division was servicing 46.4 million subscribers of which 42.4 million were video subscribers and 3.9 million were Internet subscribers.

During the second quarter, approximately 1 million Prodigy wholesale Internet subscribers were deconverted off our system to an in-house billing system.

Though this portion of the Prodigy subscribers deconverted, we renewed and extended our relationship with Prodigy for the remainder of their subscribers.

While we never like to see subscribers migrate to other billing platforms, the loss of these subscribers will not have a significant impact to our financials.

Average annualized revenue per video subscriber for the second quarter totaled $8.32, which was below our guidance of between $8.40 and $8.50.

The lower than expected average revenue per video subscriber resulted from our clients tightening their spending on some of our ancillary services.

Average annualized revenue per Internet subscriber for the second quarter totaled $3.10.

In line with our guidance range of between $3 and $3.25.

With the completion of the Prodigy renewal, the Broadband division effectively renewed virtually 100% of relationships that were up for renewal this year.

Ed Nafus and his team are now focused on 2004 and the contracts that are up for renewal next year.

Looking toward the third quarter this year, we anticipate continued improvement in our financial results.

For the third quarter of this year, we expect that revenues will total between $140 million and $148 million.

Within our revenue categories, we expect that processing and related revenues will total between $91 million and $92 million and maintenance revenues will be between $23 million and $24 million.

We also expect that Professional Services revenues will be between $16 million and $19 million and license fees will be -- will total between $10 million and $13 million for the third quarter.

We finished the second quarter with a Software and Services backlog of approximately $110 million, in line with the Software and Services backlog as of the end of the fist quarter of this year.

We anticipate that third quarter total expenses for the company will be between $117 million and $121 million and at this time we are not projecting additional restructuring charges in the third quarter.

We anticipate that the third quarter expenses associated with the Comcast arbitration will total between $4 million and $5 million.

We are projecting that earnings per diluted share will be between $23 and 28 cents for the third quarter of this year.

This projection of earnings per diluted share does not anticipate any material gain or loss on foreign currency translation and we are assuming 51.7 million diluted shares for calculation purposes.

In summary, we are pleased with the results for the second quarter of this year, but as reflected in our financial guidance for the third quarter, we are targeting further improvement in our businesses.

We remain committed to improving the financial results of the Global Software Services division and are confident that we are on track with our goals.

We are confident in our abilities to provide customer care and billing services and a processing model and we will continue to look for ways to expand these types of services.

We are excited about the opportunities that are in front of us around the world and we believe very strongly that we have the assets to compete very effectively in this marketplace.

I look forward to reporting on our successes next quarter.

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

Thank you, sir.

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

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

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

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

If you are using speaker equipment, it will be necessary to lift the hand set before pressing the numbers.

One moment, please, for the first question.

Adam Waldo with Lehman Brothers, please go ahead.

Afternoon everyone.

Good afternoon.

A series of number questions I guess I'll focus for Peter, if I may.

Did you all see any - did you see stability in processing EBIT margin over the course of the quarter and would you say that the Professional Services software maintenance revenue stream was where the EBIT margin pressure hit?

Adam this is Peter.

We've saw stability in the EBIT margin on the processing.

We've had that for some time and we saw improvement between quarters on the processing and I'm sorry, the software maintenance and professional services side.

So we didn't see a downward pressure on the software and services business.

It was an improvement over where we were last quarter so I'm not sure how you are looking at it.

I apologize I misphrased the question.

I meant on the gross margin side.

On the EBIT margin side.

It was straight forward on the financial reporting.

My apologies.

On the gross margin?

Yes.

On the gross margin, there was improvement on the Software and Services side where we did a 37.5% gross margin on our Software Maintenance and Services.

So that was an improvement over the second quarter.

Okay.

I'll follow up with you offline.

I'm just having a hard time tieing out a couple of numbers.

If we turn to the legal expenses, did you spend the full $5.5 million that you'd guided toward Comcast in the quarter?

It was approximately $6 million for the quarter that we expensed in the second quarter.

Okay.

And then lastly, the $2.4 million and other income that's the currency translation impact on the income statement?

That is correct.

That is the translation gain as the balance sheet is brought to common currencies on the different entities.

Okay.

And no reserve reversals in the quarter from previously booked reserves associated with previously booked reserves - associated with previously booked charges for restructuring in '02 and first quarter of 03, is that fair?

We booked some accruals associated, or restructuring charges associated with building abandonments last year ,and you have the normal not reversal but the amortization of those amounts every quarter going forward.

That's the only normal item or the only item along those lines that we had.

Great.

Thank you.

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

Hi.

Good afternoon.

This is Tom Roderick speaking for Tom Ernst.

Congratulations on another nice quarter, guys.

Thank you, Tom.

So, wanted to the touch base on the maintenance contracts.

Looks like maintenance revenues stabilized here and that's certainly a good thing.

I think we had 14 contracts that slipped coming into this quarter, and I know a handful were tied up when we had the last quarter conference call.

Can you give a little bit of commentary on how the remainder of those fared and if there are any outstanding right now?

This is Bill Fisher.

I think we said last quarter that we had not renewed 14 contracts.

Since that time we renewed eight of those.

The remaining ones continue to be worked.

We had a number of contracts that were up for renewal in Q2 and 100% of those got renewed.

Fantastic.

Thank you.

One other issue, recently saw some activity from some wireline providers like SBC and Qwest make investments or resell agreements in the cable and satellite industry.

Given that both of these are reselling EchoStar, do you anticipate a pickup in processing revenues in the second half of the year, particularly going into the fourth quarter when some of the reseller agreements can take hold?

We think that will be good for us.

I think there's still -- I think they're still shaking out how that relationship will really work.

But I think that's going to be a good thing for EchoStar and it's a good thing for us.

Great.

Okay, and last question.

I may have missed this on the call, but did you give any per processing revenue per sub like video, Internet, telefonny?

Tom, I didn't give the guidance on that but I'll tell you that for the third quarter we would expect that the average revenue, the annualized average revenue per video subscriber would be between $8.30 and $8.40.

Eight dollars and thirty cents and eight dollars and forty cents.

And on the Internet side, we're staying with our previously communicated guidance of $3.00 to $3.25.

Wonderful.

Thank you very much again.

Sure.

Our next question comes from (Itai Kirdam) CIBC World Markets.

Hi, guys.

Congratulations on a good quarter.

Just a couple of quick ones from me with respect to GSS.

At the time you made the acquisition you were really close by the end of '02 to kind of break even on the division and it kind of slipped away.

You pushed out the break-even target to '03.

And if I'm not mistaken, the revised target is '04.

Can you provide us now that you are really close to break even, can you provide us a little bit more clarity as to where you would expect in 2004 for GSS to break even?

Let me kind of - this is Peter.

I'll first reiterate what we said on our call last quarter.

Last quarter we made the statement that we were focused on improving the financial results and getting to break even but we were going to do it very tactically and very - in a very focused manner.

And within that, we gave the guidance that we thought it may take up to 12 months to get to break even.

We're not modifying that.

And as Neil said in his comments, he referenced the first quarter of 2004, but we've had very strong success in the second quarter.

Strong revenues with expenses coming down and we believe we're very well on track towards that.

The success of the license fees in the second quarter shows that we've got an asset that is being received in the marketplace with our existing clients as well as new clients, and we think it's going to be a very solid basis that's going to drive us to the break-even status that we're driving toward and then profitability afterward.

Okay.

And with respect to software revenues, the guidance range that you provided 10 to 13, does that pretty much imply that revenues at GSS, you expect them to stay pretty much flat for the next quarter?

Would that be a fair assumption?

We're not giving any guidance between the two divisions.

We give guidance financially for the total company and don't try to make an assessment of one division versus the other.

Okay.

Fair enough.

Alright guys.

Congratulations on a good quarter.

Thank you.

Our next question comes from Vincent Demasco with Janie Montgomery Scott.

Hey, guys.

Congratulations once again on a solid quarter.

Thank you.

Sure.

A few cleanup questions.

One on the Prodigy account.

How many subscribers do you guys currently serve under that renewed contract?

How many other subscribers are still with us from Prodigy?

It's approximately about 1 to 1.5 million subscribers.

Okay.

And then I guess the secondly on head count, where does head count stand at the end of the quarter?

Let me give a quick look.

Total head count for the company as of June 30th was 2,670 employees.

Okay.

And then finally, any comments or concerns with the Vice Chairman of Comcast now and Bratsxy's Board?

No comments.

Jack?

No, I mean, I don't think we have any concerns about that.

It's looking at a good experienced industry guy and I think he'd be added to, I think, any Board.

Okay.

Well, have you guys had any experience with him before in a previous capacity or relationship?

With Mr. Bratsxy?

Yeah.

Probably not directly associated with CSG.

I think some of us have in our past lives.

Okay.

That's a good call.-Thank you very much, gentlemen.

Our next question comes from Peter Jacobsen with Kaufman Brothers.

Thanks, nice quarter, everyone.

Thank you.

Last quarter, I think you described management getting together for a special session to completely reassess the GSS business and evaluating things like alternate channel strategies and so forth.

Am I correct that you had some major reassessment discussions and if so, can you provide some details on that?

I think what they said is that the management team would get together and look at the company as a whole and look at how we were doing and how to assess the environment and make sure that we're organized in a fashion that can meet the needs.

This is Bill Fisher.

Really, the biggest thing that we did and we decided to attack it first is consolidate on the delivery side under Al Michaels.

That previously was an organization that had peace parts in three different parts of my organization.

We did take a good, hard look at the advantages of doing that and in the quarter we actually completed that consolidation and now have Al running the delivery organization as a single organization.

Some of the problems that we had experienced in the large international contract that's been alluded to a couple of times, we believe, was caused by a little bit of our organizational silos, if you will.

So we thought that was a problem that we wanted to get fixed first.

We had continued to look at alternatives for distribution.

Some with localized partners around the world and had actually advanced discussions with a couple in international -- excuse me, in places around the world internationally whereby rather than us being there direct, will work with an established partner.established partner.

A little bit of the success that we had, one of the recent wins we that announced came from the relationship of working with the partner as our distributor.

So I don't think we expected to make a lot of progress in 90 days on that.

I think we expected that we'll change that model over the next several years but you should expect, rather than a totally traditional direct sales force, that we'll have a combination of direct partnerships around the world.

Okay.

Thank you.

And second question, regarding the IBM/ICMS platform, my understanding is that there's been perhaps greater loyalty to that product than was originally anticipated and therefore you plan to use that to a greater extent than was previous planned as a alternative platform to Kenan.

Is that accurate and if so, has there been a change in the R&D allocation to ICMS versus Kenan?

And is that an issue that's being addressed or not?

We have found the loyalty of the customer base to be very strong.

I don't know that that surprised us.

We've been watching that customer base for an extended period of time.

It is easily characterized as a little different product offering than the BP platform.

BP known to be an incredibly strong billing engine and the ICMS product known to be a little bit broader product offering to handle the full operations of the telecommunications provider.

We think there's an excellent fit for both.

We had been working very hard in most of our R&D has been aimed at the BP platform with our new product announcements that are coming out now and into the fall.

But we also have begun to do some work on the ICMS platform consistent with the customer wishes and consistent with our view that the platform that we can utilize to increase our recurring revenues around the world.

So I would say we're very pleasantly surprised, the due diligence team says they are not surprised at all.

They knew it was a excellent asset and I think we've found out from that customer base that they want to continue to invest and spend monies with us and that's helped us figure out a way to take that product forward.

Okay.

That's all I had.

Thank you.

You bet.

Our next question comes from David Goldsmith with Buckingham Research.

Hi, guys.

Hi.

Kind of different question for you.

Over the last couple of years there's been very little motion or movement of cable subscribers between billers.

Are you seeing them now a little more antsy attitude on the part of some of the MSO's and there may be some shifting?

Dave, this is Neil.

I think that if you look over the past couple of years, there have been a lot of situations in the industry which would have maybe precluded some of the MSO's taking a hard look at doing stuff like that.

Adelphia's had their situation to resolve, et cetera.

And so I think the status in the industry is one that may open up some opportunities for some movement, and I think what we see is that we've continued to put money into product.

We have a very, very solid product out there.

And we think as the industry opens up, we'll have at least our fair shot at the new business there.

Great.

Thanks a whole lot.

Our next question comes from Marshall Levine with Sales Fund Management.

Hello.

Congratulations on your results.

I was hoping that you could elaborate just a little bit more on the revenue per sub on video and Internet and explain exactly how and why the numbers have moved year-over-year and sequential?

Well, sequentially, the numbers were down slightly when you look in on apples to apples without any one-time items.

We had guided $8.40 to $8.50 for the second quarter.

The average revenue per video sub came in at $8.32, which is less than 1% differential from our low end of the guidance.

What drove that was there were certain ancillary services that our clients buy from us that they buy on a per usage basis.

And what we saw was a lower usage around some of our marketing services.

Product components that we have or services that we have that help them drive product offerings to the end consumer.

And there was a smaller usage of that period to period.

It's something that is sometimes will move up and down based on what they have going on in their market, but it can be a timing item between quarters.

At this point, we are keeping our guidance for the third quarter at $8.30 to $8.40.

If you look at it as a comparable quarter to the second quarter of last year, in 2002 we were generating periodic special projects that were nonrecurring in nature but would be classified as processing fees because they were projects that were part and parcel to the processing services.

So at times when you just look at the stated numbers between quarters, it can look like there's declines but there's some of it is a factor of those differences.

I can't tell you today what those amounts were the second quarter of '02.

I don't have that handy with me right here.

It looks if you back out the ancillary services, and I assume these are the advertisements and the various promotions that are added to cable bills and such, I assume if you back those out on a year-over-year basis, that the recurring revenue per sub was actually up a little bit.

Is that fair?

I don't have that basis to actually compare year-over-year on that specific item.

We are -- our contracts are typically written where we get annual price increases.

We usually see additional consumption of our products that drive up our average revenue per unit and so that's not uncommon see strengthening of the average revenue per unit over time.

Fair enough.

Thank you.

Our next question comes from Neil Jacobs with Bodry Capital Management.

Good afternoon.

Just a quick question on the balance sheet.

You now have net debt to cap position below 30%.

Assuming Comcast is behind you one way or the other, how can we expect, you know, you to leverage that strong balance sheet going forward?

Well, part of it it's going to be what we do with our balance sheet is going to be a function of what we see as the opportunities in front of us.

We have historically been open to doing acquisitions, targeted acquisitions as we did with the ICMS asset or some of the other product and client pickups that we did.

But we've also, as we've shown in the past, we're willing to go out and buy back our stock, we've repurchase 6.3 million shares to date and 3.7 million remaining to be that's available and authorized under the plan.

But we have been restricted over previous quarters.

It's something we would consider going into again.

We're also willing to use our cash for deals as Neil has talked about on previous calls, we have been focused.

We have a group of people focused on generating new processing type transactions.

And as we did back in 1997 with TCI and the Summer Track acquisition, we'd be open to doing a transaction where we could lock in a long-term processing contract, solve the operational needs of a client and maybe pick up an asset along the way.

So we're open to those type of transactions as well, but it's going to be a function of what type of opportunities present themselves and what we do with our cash and with our balance sheet and whether we're willing to leverage more or just deleverage based on the ops.

Gotcha.

Is there a target debt to cap ratio that you'd like to keep in mind?

We don't work with a targeted debt to capital ratio within the company.

We've been fairly opportunistic and we will raise the debt in the company when we see a strong opportunity.

And then, based on the strength of our cash flows, then we use that to pay down the debt.

Again, we're opportunistic and we're - we'll take advantage of the opportunities that get presented in front of us.

Great.

Thank you.

Our next question comes from Peter Wright with PAW Partners.

Good afternoon.

Nice cash flow.

Congratulations.

Thanks, Peter.

Couple questions.

Number one, the other income was a couple million dollars, 2.4 million.

Could you give some color on that?

That's the foreign currency translation gain, which is, when we consolidate our legal entities across the world and we have to put our legal entities into a common currency, you can sometimes -- you'll get translation gain or loss as you take pounds into dollars or dollars into pounds on these different legal entities.

Being a company that has 25% of our revenues coming internationally today, there will be times with some of our legal entities may not have a natural currency position on its balance sheet.

So it's pure balance sheet translation gain.

As it occurs through the consolidation process of our books.

Great.

Second.

On the legal expenses clarification, you said 6 million.

Was that total or was that just associated with the Comcast deal?

That was the - that was for the Comcast.

And when you look at the improvement in the operating margin expectation for next quarter, how much of that is associated with the reduction of Comcast's legal expenses?

At this point, we're expecting the legal expenses for the third quarter associated with Comcast would be between $4 and $5 million.

So it could be anywhere from 1to $2 million associated with that.

Okay.

Or put another way, once those legal expenses are over, after next quarter it would be another 4 or 5 cents per quarter additive to earnings all else being equal?

That's a reasonable assessment.

Okay.

And I guess finally, was there a lot of software to Fairpoint?

Is that a receiveables concern in the quarter?

The Fairpoint transaction is a processing agreement where primarily we're being paid on a monthly basis for our services, and so it will be a perspective period in which we will be building in accounts receivable.

We've done a credit review and we're comfortable with them as a client.

We do not anticipate that we'll have collection issues.

Great.

Then the final question is receiveables were, I guess, flatish if I looked at the numbers correctly.

Do you have any expectations on what we should see the next six months of the year on those -- on that balance sheet item?

On a sequential basis, our net billed receiveables were fairly flat at roughly $169 million between the first and second quarter.

We were disappointed that some of our receivables did not get paid in the second quarter to the extent that we were hopeful that they would.

We have a concentration with clients in the country of India and based right now with what we see, we would expect that these Indian receiveables would be-- we expect that they'll be paid by the end of the year.

We reported in our Q that there was approximately $24 million worth of receiveables associated with India.

We were successful in collecting 5 million of those receiveables in the period.

There was approximately another $1 million billed.

So we are seeing movement in those dollars, just not if the pace that we expect.

And so in the remaining roughly $19 million we anticipate being paid by the end of the year more or less pro rata between now and the end of the year.

Great.

Thank you very much.

Thank you, Peter.

Our next question comes from Todd Rosenbloom with Standard & Poors Equity.

Hi.

Can you let us know what the tax rate would be for the other income foreign currency gain?

We used, for purposes of our books, we've got a tax rate of approximately 40.4%.

Okay.

So that's for everything?

Yes.

And the guidance you have for the third quarter is expecting any foreign currency gain as well or it's apples to apples?

We'll always have a little bit of foreign currency gain or loss.

This last quarter was a larger amount.

The guidance that I have would be that there wouldn't be a material amount one way or the other, not to the amount that we had in the second quarter.

Not the to the same 3 to 4 cent gain from that.

It was about a 3 cent gain in the second quarter and we're not projecting that same type.

We have actions under way to naturally hedge the balance sheets to try to minimize that occurring on our below the line on the income statement.

Okay, thank you.

Our next question comes from Brandt Sakakeeny of Deutsche Banc.

Thanks.

Good afternoon.

A couple quick questions for.

One, do you have the number of DBS subscribers?

Do we have a number?

Yeah.

We don't break out those specifically.

We have a couple, actually three clients right now that are in the DBS base and as you're aware we have EchoStar who's one of the leading providers.

But we don't break those out specifically between cable and DBS.

Okay.

The next question is, I just noticed on the corporate expenses just year over year, they - you've got great cost control within the individual segments.

The corporate number is up fairly dramatically year over year, could you just remind me again where that incremental. like 7 million came from?

You know what?

I kind of got beat on our general counsel quite a bit on how much we're spending on legal fees in the sence of the arbitration.

Its was an expense we didn't have last year but he always convinces me it's money well spent that we're doing the right thing in defending this.

I can't counter him on that.

The major item is the big difference between the periods it's 6 million that we incurred in the second quarter.

There's about a $7 million difference year-over-year.

Okay.

So you start with legal and the rest of it, the other million is everything from Sarbanes-Oxley internal audit support.

A lot of things we've had to put into place associated with the new regulation that's come out.

Okay.

So it's not a lot of steak dinners at headquarters then?

No, not a lot of steak dinners at headquarters.

Thank you very much.

Legislative overhead.

Our next question comes from Richard Power with Seligman.

Hi, guys.

Question for you.

On the license side, the guidance for license is actually frankly better than I thought it was going to be.

How much of that is coming off the balance sheet or is this Chinese contract that you signed, I guess, the beginning of July and how much of it has to be signed in the quarter?

And then have I some other follow ups.

I guess first of all, Rich, this is Peter.

We don't give the breakout of what's on the balance sheet or not.

I gave you a software and services backlog number this is 110 million as of the end of the second quarter.

It is consistent and structure as it has been in past quarters which the bulk of that is maintenance.

And then secondly, followed by professional services.

But we don't go through saying what's in and out of deferred revenue and what's in the software backlog.

It's just a practice we don't step into.

Okay.

Can you give me an idea of how large that Chinese contract is?

It's in the early stages.

It's not significant.

We look at this and I'm sure Bill can add some color but we're excited about being in China for what the growth opportunities are.

Yeah.

This contract is a greenfield with Beijing Telecom so it's basically them starting up and adding their subscribers and our ability to benefit this as a long-term on growth in that subscriber base.

It is a contract that is priced based on subscriber volume growth so as they grow they'll pay me additional license fees.

So that's new licensing structure you guys have been trying for a while?

Yes.

And beginning to have some success with that by the way.

Great.

On the professional services side, 1 million for renegotiating with that European contract.

Does that start to come back in Q3?

How does that work?

On the renegotiation, we reduced the scope of what we were liable for, what we were responsible for under the existing contract.

I think the team feels pretty strongly that there will be additional opportunities down the road to do further work and that will generate some additional opportunities.

Well, yeah.

I spent the week with the customer and negotiated the new agreement.

As we told you once before, this is a very large contract we inherited from Lucent with the contract that was not that favorable to us.

And we needed to change those terms.

We had the ability to apply leverage, which is our knowledge and technology that we were providing.

So we managed to do that.

Changed the scope such that this is one that had an open ended amount of testing by the customer and we shifted that to their responsibility and away from us.

That cost us some hours and some revenue but it was the right thing to do and in essence, that did away with our liabilities there.

It has a very strong, good relationship with the management team that's very favorable.

We expect they'll continue to use our products and services, in fact, that is the nature of the ongoing business, we are getting additional time and materials business from them away from this contract.

So that's positive.

Okay.

Last question I wanted to ask.

With the new agreements for EchoStar with the Telco's, can you help me understand what the revenue opportunity is for CSG when they add a subscriber through SBC versus when they add a subscriber through their own sale?

Rich, this is Peter.

Some of the details of how SBC intends to bundle the service on their bill is still being - the details worked out.

Neil commented earlier and would I concur with him, that any time that we have a client like EchoStar who has additional marketing arms out there, we believe is gonna generate incremental revenue for us, but I can't tell you how that specifically plays out because some of the details are still being finalized.

Okay.

Thank you.

You bet.

We have -- we have time for one more question.

Our final question comes from (Itai Kirdam) with CIBC World Market.

Hi, guys.

Just one follow-up on the arbitration just to clarify then, you expect that to be finalized in the September/October time frame?

The judge will hear -- he desires to hear final arguments in the first part of September, then it's up to him as to when he's going to rule, but we would expect that would generally be the right time frame.

Okay.

Thank you very much.

Thank you.

All right.

Let me just wrap up then.

Once again, I am very pleased.

This was a strong quarter for us in a lot of ways and a lot of momentum of our people.

I think the results speak for themselves, but a lot of momentum of our people feeling good and when I said that they're all hitting on all cylinders, that's what's going on.

So look forward to talking to you in another 90 days and we're out there hard at it.

Thank you.

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

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