CSG Systems International Inc (CSGS) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to senior Vice President of investor relations Liz Bauer.

Thank you.

Today's discussion will contain a number of forward-looking statements particularly with respect to any financial projections that may arise.

The company's ability to successfully deliver on complex implementation project, manage international operations, perform satisfactorily under the terms of its contract with Comcast as well as the level of cooperation between CSG and Comcast and successfully manage its credit agreement with its lenders.

All these statements reflect a 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 and others are discussed in more detail in our most recently filed 10Q and 10K.

Listeners are strongly encouraged to review all the company's filings with the SEC for further details.

In addition, if you did not receive a copy of our press release, you can obtain a copy from our Web site.

We have with us today Neal Hansen, Chairman and Chief Executive Officer, Jack Pogge, President, Bill Fisher, President of our Global Corporate Services Division, Ed Nafus, President of our Broadband Services division and Peter Kalan, Chief Executive Officer.

I'm sorry, what did I say? (Laughter) You got promoted!

Mr. Hansen will begin.

Thank you Liz, I think, and thank you all for joining us today.

I'm extremely pleased with our results this quarter especially in light of the various activities that we needed to accomplish.

Today, I will go over three areas.

First, I would like to provide you with some insight as to how the business is performing.

Next, I'll spend some time on the activities that we have undertaken over the past quarter.

And finally, I will share with you what we see going forward.

Let's begin by looking at the business.

CSG generated revenues of $129.9 million, which was in the middle of our revenue guidance of $125 to $132 million.

Our guidance for the fourth quarter's EPS was 14 to 16 cents, not including any restructuring charges to be taken in the quarter, as we were not able to estimate them at the time.

We reported EPS of 14 cents per share including a restructuring charge of $4.2 million or 4 cents a share.

Later in the call, Peter will review for you in more detail the financial performance of the company.

I'm heartened by these results.

They're indicative of our ability to successfully implement our cost reduction program and to stabilize our revenue streams.

I'm very pleased with our efforts, especially in what continues to be a challenging environment.

Let me now turn my attention to how our divisions performed.

I'd like to first review our broadband services division.

We're slowly starting to see cable operators turning their attention from upgrading their plants to automating their operations and rolling out new services.

Over the past two years, we have seen very little in the way of sales of our ancillary products and services while operators have focused on this upgrade program.

However, large customers have been focused on upgrading their plant, we've been putting hundreds of thousands of man hours into enhancing our core billing system and our ancillary products to be more flexible, more open and have even more advanced functionality to assist them with their businesses as they grow in complexity.

For example, we recently announced new enhancements to our care express solution.

In this solution, it allows our customers to view, manage and pay their bills over the internet.

As well as order, shop for different packages and promotions and upgrade their services.

Our video operators are seeing almost twice as many of their customers sign up for these self-care and internet bill pay services versus the average in the industry.

In fact, today, over 5,000 new users each day are signing up for care express services offered by our clients.

Now this translates into legitimate cost savings for our customers.

For example, an operator with 500,000 care express users can save roughly $3.5 million a year and reduce postage, printing and customer service costs.

I'm very pleased with the work that our product management and our development teams have made in creating solutions like care express that help our clients increase their own revenues while reducing their costs.

On the client front, we continue to expand and enhance our relationship with our third largest customer, Time Warner.

As many of you may recall, Time Warner renewed their relationship with CSG last year through 2013.

And since that renewal, we have added several products to various sites, including our work force express solution, our customer interaction tracking module, ATSR, our customer front end, and our auto check refund service.

In addition, we are also helping Time Warner roll out voice over IP in several sites over the next two quarters.

The Time Warner has been the most -- has the most aggressive plans for voice-over IP all the cable operators and we're really delighted to be working with them.

Finally, we continue to work with Comcast management team in defining a new relationship between our companies.

One that is based on Comcast business needs and one that demonstrates a mutual commitment to a partnership in the future.

I cannot predict when a new agreement will come about, but I'm pleased with the progress that we have made and I'm pleased with our employees hard work in demonstrating our dedication to the Comcast business.

Next, I'd like to discuss the performance of our global software services division.

Our fourth quarter was a light software license quarter compared to previous quarters.

However, this quarter we had some very important activities occur.

We had our first successful deployment of the Kenan/BP and data mediation solutions in China at Beijing Telecom.

Beijing Telecom is a fixed line advanced IP high speed internet and leased line services provider operating under China Telecom, China's largest telecommunications provider.

I think most impressive with this development is the fact that IBM and CSG completed the first phase of this implementation in just over four months.

China is a huge market in which over 60 million wireless subscribers are being added each year.

We are thrilled to have our first customer in a high growth region like China.

Belgium's largest mobile operator Proximus successfully deployed the Kenan/BP platform to support mobile, voice and data services to its 1.8 million post paid customers.

Our billing engine will process over 10.8 million call detailed records a day on behalf of Proximus.

This was the very large contract that we assumed from Lucent that caused us some problems in the first quarter of 2003.

And I'm very pleased that we were able to successfully complete this project and most importantly to satisfy our client.

Taipei group, India's leading provider of convergent telecommunications services, selected Kenan/BP as its exclusive billing platform across all the operators that are part of this organization.

And this includes operators providing convergent fixed line, wireless, internet, broadband and satellite operators.

We were able to secure license upgrades with one of BSNL regions in India and HSP Mobil.

And we deployed our first Arabic version of Kenan/BP in the middle east at Amantel for DSM services.

The middle east region is actually an area where we're seeing increased potential and activity.

Finally, the GSS division had a positive contribution margin of approximately $800,000 this quarter.

While I'm pleased with this effort, we still need to execute every day and continue to evaluate the most effective and efficient way to capture and grow our revenues.

Next I'd like to talk to you about some of the activities that we've undertaken over the past quarter.

First, we received a favorable amendment on our bank credit agreement in December and that Amendment allows us to be in compliance for the foreseeable future.

Second, we implemented a $30 million cost reduction program beginning in November.

We're about 90% through this exercise and have completed the overwhelming majority of changes.

These include the reduction of approximately 140 people, shifting some of our development offshore to Canada and India.

The realignment of our employee benefits and the elimination of some programs.

Third, we also successfully completed a voluntary employee stock option exchange program, a program aimed at providing our employees with a long-term incentive to continue to help create shareholder value.

The impact of this program was contemplated in our guidance that we announced on November 8.

I'm very proud of our management team's ability to execute on a number of various items as a result of the adverse ruling that we received on the arbitration.

We executed swiftly and thoroughly and I think my team and I especially thank our employees for their hard work.

Finally, I would like to conclude if I could with a look back on 2003.

In spite of the year being one of the most difficult years in my business career, I'm very pleased with what we accomplished.

You know, we said that we would leverage CSG expertise in out source processing operations with our GSS division software assets and we did.

We announced our northern-american service bureau aimed at mid tier wire line and wireless carriers and our first customer.

In addition, we leveraged our expertise across both operations to introduce a managed operations offering.

To date, we have had successful engagements with the Haute Tele services and with British telecom.

Next, we said that we would take the best of the Kenan and the CSG products emerge them.

And we did.

In the fall, we announced our most aggressive R&D spin to date with the introduction of Kenan FX, which has resulted in six new sales since its fall introduction.

Next in spite of less than desired outcome on the Comcast arbitration, we said that we would accept the arbiters' decision and move forward and we have.

We immediately implemented the new pricing as a result of the arbitration.

We successfully amended our credit agreement.

We paid the $120 million in award damages out of our cash balance and we've made significant strides in demonstrating to Comcast that we want to earn their business, not have a relationship solely based on what a contract says.

Next, we said that we would start to transition our software business from one that was solely based on perpetual licenses to one that is more recurring in nature and we did.

Approximately 17% of our contracts signed during 2003 were for a term license.

A license providing us with additional opportunities to generate revenue from these customers.

Finally, we said that we would take our expertise and our assets and we would pursue new verticals and open up new geographies with them.

And we did.

We expanded into China.

We expanded into the middle east.

We are the hands-down market leader in India.

We expanded into the E Commerce industry.

And we implemented our first utility customer in Italy.

Now in spite of all these accomplishments, I know that what matters most to our shareholders and by the way to our employees is what we're going to do today and what we're going to do in the future.

So here are some of things that you should expect from this team in 2004.

We will continue to execute flawlessly in our broadband services division.

And this includes maintaining our track record for renewals and selling more modules to our client base and delivering on high quality service to our clients especially into looking for market share gains.

In our global software services division, we must continue to build on the foundation that we have established.

This includes expanding our footprint within our own customer base, you know, really winning more than our fair share of the new deals that are out there and continuing to maximize our effectiveness as an organization.

And our strategic initiatives group will continue to identify new avenues for growth, either through leveraging our assets or leveraging our relationships.

You know, for over two years, the telecommunications industry has been reducing their spending as they directed their attention to the financial health of their companies.

And while we are not seeing an increase in the wholesale replacement of billing systems by carriers, we are seeing some positive signs.

First, operators are turning to companies like CSG to help them enhance and move their existing applications forward.

We believe that we are well positioned to capitalize on this opportunity with our pre-integrated and modular solutions.

Second, operators are also looking for more efficient alternatives to running their billing operations.

And again, I believe that we are well positioned as a result of our operational and technical expertise to help these operators.

And finally, as providers continue to consolidate their operations, they are looking for billing providers who understand scale, flexibility and efficiency.

You know, with our broad band solution currently managing over 45 million accounts, and our GSS solutions billing for over 7 billion call detail records a month, CSG clearly understands these concepts and is well positioned to help our customers and our prospects.

I want to thank all of our employees, I want to thank our clients, our partners, our suppliers and you, our shareholders, for all your support over the past years and I look forward to a prosperous 2004.

Next, I'd like to turn it over to Peter Kalan our Chief Financial Officer and ask Peter to review our financial highlights.

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

I'm pleased to report the financial results of CSG Systems for our most recently completed quarter.

For the fourth quarter ended December 31, 2003, total revenue was $129.9 million.

And net income under GAAP was $7.1 million or 14 cents per diluted share.

During the fourth quarter, the company incurred restructuring charges totaling $4.2 million, which had the effect of reducing the reported earnings per diluted share by approximately 4 cents.

Processing revenues totaled $80.8 million for the fourth quarter and was stronger than anticipated as a result of some one-time project work completed for clients.

Software maintenance revenues totaled $24.7 million for the fourth quarter while professional services revenues totaled $15.9 million and software license revenues were $8.5 million.

For the fourth quarter, 27% of CS's total revenues were derived from international markets with EMEA contributing 14%.

Asia-Pacific generating 9% and Latin America delivering 4%.

Revenue from Comcast was 17% of the company's total revenues for the fourth quarter, which was generally in line with the expectations for the quarter.

During the fourth quarter, we initiated our previously announced $30 million expense reduction and as of December 31, we will have completed the majority of our efforts to achieve the full $30 million cost savings and the cost savings in 2004.

As part of this expense reduction, we incurred restructuring expenses in the fourth quarter totaling $4.2 million.

These costs are primarily attributed to staff reductions along with expense reserves for the impacts of abandoned facilities.

The reported operating margin for the fourth quarter was 12%, which was impacted by 4 percentage points as a result of the restructuring charges.

Within the fourth quarter, our cost reduction initiatives provided approximately $2 million of savings.

Additionally, during the fourth quarter, we reduced the allowance for bad debt as we had significant success in collecting our AR balances.

In the fourth quarter, we announced the completion of the stock option exchange program as well as the decision to implement FAS 123, accounting for stock based awards using the perspective method of adoption.

For the fourth quarter, non-cash and stock based compensation charges were $1.5 million while amortization totaled $5.6 million and depreciation was $3.9 million.

EBITDA totaled $26 million for the fourth quarter.

Turning to the company's divisional results, the broadband services division generated $85.1 million in revenues for the fourth quarter and produced a contribution margin of $33.5 million.

We finished the fourth quarter with $44.1 million subscriber accounts, accounts on our processing system and our averaged annualized revenue per subscriber for the fourth quarter was $7.33.

Processing revenues associated with the previously mentioned one-time project work contributed 10 cents to the annualized fourth quarter revenue per subscriber.

We anticipate that for 2004, the average annualized revenue per subscriber will range between $7.10 and $7.25.

CSG's global software services division produced $44.8 million in revenues for the fourth quarter with a contribution margin of approximately $800,000.

We were originally targeting the GSS division to be at break even or better by the first quarter of 2004 and are focused on continuing the improved financial performance of this division.

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

As of December 31, our bill/trade AR totaled approximately $131 million, net of the allowance for bad debts of $11.1 million.

This compares to the September 30 net-billed trade AR balance of $149 million.

As I previously mentioned, we were very successful in the collection of our client receivables and believe that we have overcome the client and administrative issues that caused our AR to increase in prior quarters.

The bill trade AR reflects DBO of 67 days for the fourth quarter, an improvement from the third quarter level of 78 days.

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

As a result of the October 7, 2003 ruling in the Comcast arbitration proceeding, CSG was liable to Comcast for arbitration damages of approximately $119 million.

During the fourth quarter of 2003, we paid Comcast $94 million of the award and we finished the year with $105 million in cash and short-term investments.

Subsequent to the end of the year, we paid Comcast the remaining $25 million of the arbitration award.

Cash flow from operations for the fourth quarter was negatively impacted by the $94 million arbitration award payment.

As a result of the payments, we reported cash flow from operations of negative $38 million.

The fourth quarter cash flows excluding the Comcast payments were very strong as a result of the significant improvement in AR collections.

The first six months of 2004, we expect to realize tax refunds associated with the arbitration damages award of approximately $35 million.

In the fourth quarter, we amended our bank agreement to establish covenant that incorporated the impacts of the arbitration rule.

As part of the amended bank agreement, the interest rate of our debt increased 75 basis points and we agreed to make an additional principal payment of $30 million by the end of July 2004.

Additionally, we agreed to tighter covenants in regard to stock repurchases and acquisitions and we agreed to lower our revolving credit facility to $40 million.

Our total debt balance was $299 at year-end and we are now scheduled to make principal payments of $49 million in 2004.

We did not repurchase any shares of the company's stock during the fourth quarter and based on our projected debt levels in 2004, we do not anticipate repurchasing any shares during the year.

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

Turning to our first quarter 2004 financial guidance, we are expecting that revenues will range between $125 million and $132 million.

We anticipate that processing revenues will be between 80 and $81 million.

Maintenance revenues will range between $24 and $25 million.

Services revenues will total between $15 and $17 million.

And software license fees will range between $6 and $9 million.

As of December 31, we have software and services back log of approximately $103 million that we expect to recognize over the next 12 months.

This is a slight decrease from our September 30th reported backlog of $110 million.

We are projecting that the total expense in the first quarter of 2004 will be between $109 million and $112 million.

Included in these projected expenses are amortization charges of $5.7 million.

Depreciation expense of $3.7 million and stock based compensation charges of $3.6 million.

The stock based compensation charges for the first quarter increased $2.1 million over the fourth quarter due to the timing of the stock option exchange program, which resulted in the fourth quarter not having a full three months of expense.

Though we have completed the majority of our cost reduction activities, we anticipate that we may incur additional restructuring charges in the first quarter as we complete our cost reductions.

At this point, we cannot estimate the additional amount of restructuring cost that we may incur and therefore any of these type expenses are excluded from the financial projections that I have provided you.

Based on these targeted revenues and expenses, we anticipate that earnings per diluted share for the fourth quarter will be between 15 and 20 cents.

We are maintaining our previously communicated full year 2004 financial guidance.

We expect that revenues will total between $520 million and $535 million for 2004 and that the composition of revenues will be consistent with the first quarter projections that I just gave you.

Our projected revenues have high visibility in that 80 to 85% of our revenues are from processing and maintenance services.

We project that our operating margins for the full year will range between 15 and 16% and included in these projections are non-cash amortization charges of $23 million for the full year, depreciation of $16 million and stock based compensation of approximately $14 million.

We are targeting that for the full year 2004, earnings per diluted share will be between 77 cents and 87 cents.

These earnings per diluted share estimates are calculated based upon projected shares of 52.5 million for 2004.

We continue to expect that cash flows from operations will range between $80 and $100 million for the full year excluding the impact of changes in working capital.

In closing, we are very pleased with the financial results for the fourth quarter and believe that the financial results reflect improvement in the business.

We continue to generate profits and strong cash flows and as a management team, we remain focused on continuing to improve the profitability of our business.

We look forward to reporting continued success in the coming quarters.

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

Thanks sir. (Operator Instructions) Our first question comes from Thomas Vincent with Smith Barney.

Please go ahead with your question.

Great.

Thank you.

A couple of questions.

First, Peter on the guidance, it looks like there could be some more volatility in the licensing business.

Could you talk about what you're seeing out there and why there could be some downside there?

I will give you one perspective, but I'll have Bill Fisher chime in as well.

First of all, the first quarter is typically one of the lighter quarters for software licenses in the year.

I think our history would show that most other software companies would.

Bill has history neck probably give some insight of what sees on GSS as well.

Yeah.

I hate first quarters, always have probably always will.

However, you know, we are rolling out a new product set.

The FX product.

Just because of that, we have in effect our revenue recognition treatment on recognizing license fees and we're taking that into consideration, of course.

You know, we see a healthy pipeline in the business, healthy consistent with last quarter going into the year.

But I think we're just making sure that we're cautious about what license fees that we could recognize.

Would you expect the licensing revenues to pick up throughout the year or?

Yeah, I think once again, history being that the first quarter is typically a lighter quarter.

I think we would expect that license fees would be stronger throughout the year.

OK.

And Peter, can you comment on the legal fees in a quarter, if any, and what the size were and if anything has been incorporated into the first quarter guidance?

Sure, Thomas.

We don't, we do not incur any legal fees of significance around our historical Comcast arbitration and we have nothing built into our 2004 guidance assuming any type of legal activities around that.

OK.

Last question and then I'll hand it over.

On the voice-over IP side, you said you're going to help Time Warner roll out the service over the next couple of quarters.

Can you talk about what product you're using there?

Is that coming from the Kenan side or maybe you can provide some more color on that?

This is Ed Nafus.

This is coming from an expansion and extension of the CCS ACSR world if you will and it's part of the new architecture that we'll be introducing during 2004.

OK.

Maybe I'll just tack onto that, the R&D spending, how should we look at that going forward?

We would expect that it would be fairly consistent with what we've done in the past between 10 and 12% of our revenues.

OK.

Great.

Thank you.

Thank you, Thomas.

Our next question comes from a Marianne Wolk from Susquehanna.

Just couple of quick ones.

First of all, can you help me quantify some of the one-time items in the December quarter?

It looked like from your comment that the broadband one time amount was about 1.1 million.

But you also mentioned you might have reversed a bad debt reserve.

Can you tell me what that was and where it was located?

Marianne, this is Peter.

The amount of one-time project work was approximately $1.1 million.

So that is correct.

From our management of the bad debt reserve, you can see from the balance sheet between September and December that the reserve went down by approximately $2.6 million.

That is primarily associated with the international receivables and you will see that around some of our business within GSS.

We were very successful in collecting accounts receivables as you can see by our outstanding accounts receivable balances dropping by 149 to approximately $131 million.

Peter, would the GSS division have been unprofitable third quarter without that reversal?

Basically, I'm trying to understand from your guidance should we assume that GSS stays profitable in March and June and sort of from here on out?

Well we, as a company, are looking to reduce expenses and have implemented expense reduction that we believe have set us in position going forward from the bad debt reserve.

We have built that reserve up over time.

As we were successful in collecting our receivables and reducing the risk inherent in the business, we took that down appropriately in the fourth quarter.

So going forward we believe that we have the expense base in line with the cost reductions that were and that we have the ability to be profitable in 2004.

So should we assume it stays break even or better for several quarters?

That is our goal, yes.

OK.

Just can you walk us through how to allocate that stock comp charge in our numbers?

Will that hit gross margin or the operating expenses in the March quarter?

It will hit across all categories.

Because the recipients of the stock awards are within the different areas of the company, some will be in cost of revenues and some will be in operating expense.

I don't have that information to try to give you a basis within the numbers that today.

But I can work with you off-line to try to provide that to you.

A final question for Bill Fisher.

If we had seen those new wins reported as traditional licenses would the license fees have been up subsequently this quarter for GSS?

Well, yeah.

I mean I assume you're talking about our efforts to create more recurring revenue through term licenses.

Yes.

A term license definitely costs less than a perpetual license just basically by definition.

I can't quantify what the difference would have been, but when we license a new customer; we license them on terms typically for a fixed period of time and therefore less than a perpetual license.

OK.

Thanks.

Our next question comes from a Tom Ernst with Thomas Weisel partners.

Go ahead with your question.

Yes, Good afternoon and thank you.

Following up on that last point, you mentioned that 77% of contracts were term license.

Is that a comparable percentage of the bookings or the contract value as well?

I think I said 17, not 70.

Right, 17.

State your question, I'm not sure I --.

You said that 17% of contracts were term license, is that comparable in terms of your books or the revenue expected revenue from the contracts?

Or are these done on larger or smaller deals as a matter of practice?

If the question is -- do we offer term licenses across the board to our clients, yes, we do.

OK, so roughly 17% of contracts probably roughly comparable on a revenue basis as well or on a bookings basis

I haven't looked at it like that.

But I'm telling you the way we approach it in the business world is we ask our sales force when possible to get us term licenses versus perpetual because we know they're good for the business long-term.

Sure.

OK.

Did that ramp over the course of the year?

Or were you booking those steadily throughout the year?

I think it was pretty steadily.

I mean we've been at it a couple of years now.

And we've been pushing it -- we put a little bit more in cidnies (ph) if you will into the compensation plan for the sales team this year, but I would say fairly steadily.

OK.

Looking out at your pipeline, the overall volume, how has it moved across your industry segment, the cable wireless wire line this quarter?

You know, quite honestly, I don't track it that way.

I look it at more by region.

Continue to see real strong opportunity for us in our products in Europe.

I think that's easily been our strongest geographic area this year.

Probably our weakest has been the Latin American market.

But, you know, since we have a product that adopts well to wire line which is where we made our name or wireless or DSL, broadband, we implemented a couple of satellite providers this year.

So I don't track it by the sector, I'm sorry.

That's all right.

I think bill mentioned that your backlog was down slightly in Q4.

And that perhaps you're looking for softer seasonality in Q1.

How did you perform relative to expectations?

Did your sales force by and large make quotas?

Did the company overall make quotas?

We did not achieve the overall performance goals we wanted for our unit.

So I'm still kind of the goat compared with Ed and his ability to make his business work.

But I will tell you we're making progress every quarter.

We had sales people make their quota.

We had a number of them who did not.

OK.

One final question and I'll turn it over.

You had a big win in financial services a year ago.

Do you see a pipeline or a good opportunity in that vertical or in other verticals for your products?

Excuse me?

You say financial services?

Right.

Are you talking about ebay?

Yes, I am.

Peter Kalan OK, we continue to market successfully, I think to some verticals outside our traditional space.

We've been any number of opportunities actually around the world.

I'd say we're primarily focused, our sales force is trained to sell into the standard markets, but that wasn't a one-time event or opportunity.

We still continue to --primarily the reason we see some opportunities, I think, there's a tremendous growth in the need to rate transactions in the industry, transactions original originating from a variety of devices or inputs.

We happen to have high quality rating engines and I think we're going to continue to see us ourselves involved in a little bit outside of the traditional norm.

All right.

Thank you, again.

Thanks, Tom.

Our next question comes from Matt Riegner with Janco partners.

Please go to the question.

Good afternoon, guys.

Last quarter you spoke about being cautiously optimistic that the business environment had stabilized and that in fact you may even see a bottom there.

Do you still feel that way, can you give us an update, you know, your feelings there?

And a second, real quick, you mentioned that you're about 90% of the way through the expense reduction program.

Can you give us any more specifics on what is left there?

This is Neal.

I can talk to you about what I see in the business environment.

You continue to see people talking about making some changes in enhancements and doing some things to existing systems.

I think I mentioned that in my remarks.

I just came back from about 10 days in Europe where I made a number of calls on customers and prospects.

And so I guess that's a sample of ten days and probably ten customers.

And what you're seeing there is a person beginning to talk about the things they're going to do and they have to do.

But you're also seeing a lot of caution in how quickly they're going to implement things and how they're going to go about things.

So I would still go with what we said before.

In terms of the expense reductions, Peter, maybe you'd -

I think between Bill and I, we can answer it.

Most of the work was nearly implemented by the end of the year, but there were some activities to offshore, some of the development that actually rolled in with the first quarter this year and so we'll probably have some restructuring charges associated with that.

But that's the primarily open item that we have left.

We have notified affected employees of move -- of a certain amount of R&D offshore into Canada and into China -- excuse me, India.

We are transitioning that in an orderly manner to make sure we retain the kind of -- the contract support that we need because a lot of this work is new R&D that goes into the FX product.

So we'll continue that through the first quarter with the employees that are notified and know that they'll be no longer with the company by the end of the quarter.

Great.

That's very helpful.

Thanks.

Our next question comes from Peter Jacobsen with Kaufmann Brothers.

Please go ahead with your question.

Thanks, good evening.

Could you comment on the acquired IBM ICMS product and how that's developing and servicing those customers and coordinating development efforts on that side with your -- with the Kenan product?

Sure.

This is Bill Fisher.

Although, overall we didn't make our goal members, we actually did make our goal members in the ICSM product set.

We had some great license wins with current customers there.

We actually have a healthy pipeline.

I met with IBM this morning.

They're very satisfied, one of their issues is whether the customer base would have problems with IBM given they sold the product -- IBM would be very happy with our support.

We have very active user groups in the ICMS organization.

We meet with them frequently.

We're renewing the maintenance for that business very successfully.

So, I think we're happy.

We have chosen not to integrate that business into the Kenan business.

We've invested a lot of money in the Kenan business worldwide.

That's where we're putting a majority of our R&D, so running that as a separate business successfully running that as a separate business successfully.

Looking at ways to spend money in that line of business consistent with the amount of money that we draw from that customer base.

These are very loyal, dedicated customers to a platform running on the S-400.

And expect that given they've been through several owners we have shaken out ones that aren't tough.

These are pretty tough ones left.

We're doing a good job servicing them.

We continue to show them that where our R&D money is going long-term is in the BP product and we're hopeful we'll convert some of those over time.

But we're not putting any undue pressure on them and continuing to support the product consistent with our agreement with IBM.

This is Neal.

I would say the other thing we found in that product, we are using that product on a services basis with North American services bureau in fair point.

I don't know, to use a term, I would say that's a pretty good old truck.

That old devil will haul a lot of transactions and do it pretty inexpensively and do it very effectively.

It's a good integrated product.

So in addition to the customer base out there, without going too far.

I would say that we see additional potential opportunities like we have with Thurpoint.

Right.

Thanks.

And with respect to Beijing telecom, any readings as far as how quickly that might ramp up and get you to the next level of licensing where you get some new revenues out of that?

Bill said if we could answer those kinds of futuristic questions, we would probably have different jobs.

Actually, the good news on our contract there is we contracted very low volume to start with.

IE, just basically kind of where they were at so it will be fairly easy trigger volume and additional revenue for us.

I think the exciting thing for us is that it's China telecom it's an implementation of what absolutely stunningly well.

So we're real excited about our first step into that part of the world.

So additional tours in 2004 anticipated additional revenue tours?

We're set up for it if they add volume.

I can't speak to their business model.

But I think with went in with the logic that, you know, we'll basically contract for where you are today and if, as you grow, which we expect they surely will they'll come back to us for more volume.

Most of our contracts are like that.

This one just happened to be --we typical expect it -- the customer wants to buy enough hardware so they don't have to buy any again for another year, year-and-a-half, and we actually look at typically volumes on the software side about the same.

But this one, they wanted fairly close to what they were doing so we said fine.

OK.

Thank you very much.

You bet.

Our next question comes from a Christian Cooper with Lehman Brothers, please.

Go ahead with your questions.

Thanks for taking my questions.

Just two quick follow-up questions for you.

A hind of to beat a dead horse here about the restructuring charge in the latest quarter and the 30 million in annual cost savings, do you only anticipate incurring additional charges in the first quarter of this year or do you see it going beyond that?

It's possible it could roll into a second quarter potentially, but we think numbers will get smaller.

We believe we took the bulk of it in Q4.

But you know I just got to be realistic and recognize it as we manage some of these items out and we manage facilities around and such as well as the labor reduction that we could incur additional costs.

Its just not exact science how you roll this out you've got to be sensitive to the business issues.

Right.

I understand and secondly, was the book tax rate on the restructuring charge in the latest quarter the same as what you reported for the full company 47.2%.

Yes.

That's all I have.

Thank you for very much.

Thank you.

Our next question comes from a George Cross from HD Burrough.

Please state your company name followed by your question.

Yeah, George Cross HD Burrough.

My question is regarding the GSS division.

I'd like to see if you could comment on the level of activity in this space and size of the RFPs that you're seeing and also sub question, like how many RFPs you currently have out in GSS and how is that activity compared to last year?

Well, we don't have enough.

I'm not going to quantify the number, but we like to have more.

I think I would say that it's up from last year.

We do track a pipeline of committed and up side and what we call leads.

And we take a look at that often by region.

And, I can characterize for you that within the last couple of quarters, our sales consulting group, which is the group that primarily reacts to RFIs and RFPs, has seen a lot of -- a lot more activity than they might have seen a year ago.

But, you know, I guess at the end of the day, I'd tell you that I'd like to see a lot more than we're having.

And like the dollar amounts?

Is that any -- are they bigger, too?

They're all over the board.

You know, I'm not trying to avoid your question, but you know, we have some very sizable ones, we typically always do that we're chasing.

We have a major one in India that we have been working on for some time.

There's one in London that's not part of the typical market we chase that we've been chasing for some time that's sizable and I wouldn't tell you that I would characterize it as being uniquely different than where was a year ago.

We are seeing a lot of volume upgrades.

It appears to me that more than in the past, they're adding capacity to these networks.

Now you could avoid adding them for some period of time.

I would imagine the hardware manufacturers are little bit seeing the same thing.

They're probably seeing that they're may be shipping a little more iron these days for volume upgrades, but that's the only indications I get.

OK.

As of last, in terms of the debt repayment, how much do you anticipate paying down in '04?

Well, we have -- this is Peter.

We have agreed with our banks to pay a total of $45 million during the year and then we'll watch our cash balance where our cash balances are around the world and consider making prepayments as we have in the past.

No commitment to that.

But something that we continually evaluate.

OK.

Thank you.

Our next question comes from Michael Turits with Prudential equity group.

Hello guys good evening.

Hi, Michael, how you doing?

I'm doing well.

Thanks.

Hey on the ARPU, are you able to break that out on the different processing segments?

Michael, this is Peter.

We don't break that out anymore based on some of the contractual changes that have taken place as a result of the arbitration.

So we're just giving overall average revenue per unit now.

OK.

And then you gave the guidance for next quarter on ARPU, what are your thoughts on long-term trends there?

One of the -- your competitors was very specific they were seeing pricing pressure and they do lot of service to our business, so what are your thoughts sort of secular thoughts about it?

And then how would that affect you in given what you seen in terms of the contracts you have in terms up for renewal?

I guess I would generically tell you that if there is pricing pressure, there is competitive environments out in the business that add runs on our broadband processing and he can chime in here on this some.

The guidance I gave is consistent with the guidance that I had for the fourth quarter.

So you can see that we are being cautious in what we believe our revenue per unit would be, because we believe there will be some pricing pressure that we have to confront.

Then should it continue to go down over the course of the remainder of the year?

At this point, the guidance I gave was 710 to 725 for the full year.

Oh, that was for the full year might

We finished on 733, $7 and 33 for the fourth quarter, which had 10 cents of one-time items.

So you can see that I've given a range that should allow for us to manage the competitive situations for the year.

And you may have mentioned it but I jumped on late, just could you review what contracts there are that are up for renewal, just echo star this year and what is up in '05?

This is Ed Nafus, the major contract that is up in '04 is echo star.

We haven't taken a look at, I don't think there's any significant ones -

But I don't think there's anything else that's of any real -- that.

That would be the big one.

That's this year.

Yeah.

And then in '05, any idea it's a roughly what percentage of revenue might be up for renewal.

Mike and I've looked at '05 and there's nothing of significance in '05.

OK.

Thanks, guys

Thanks, Michael.

Next question comes from a Todd Rosenbluth with Standard & Poor's.

Please go ahead with your question.

Can you comment on any currency effects for this current quarter and then things are in impacted for '04 guidance?

This is Peter.

From the quarter, you can see on our income statement, below the line below the operating line, we have other income of approximately $700 thousand in that category that's where you'll see our translation gain coming through from a go forward into '04, we are looking to naturally hedge, but all is well as we're currently looking at synthetic hedges to manage any type of currency exposures we have.

So in today, we don't believe we have excessive exposure in '04, but we continue to manage it.

Then, with the moving of some reducing of some of employees and shifting some to Canada and India is the SG&A percentage of revenues roughly are consistent with what's going to happen in the run rate of '04?

The shifting of employees to Canada and India are primarily development and support and so you're going to see that, some in the cost of revenues but primarily in the R&D line is where you'll see those dollar savings coming through.

So the reduction in SG&A this time was a result of bad debt

That's where the bad debt shows as well as some of the cost saving that we implemented in the fourth quarter for programs that would show as in the SG&A line.

Any specifics because Tim, like you mentioned the employees being moved overseas and some facilities closing.

Is there something I'm missing?

Well, there were other impacts where we eliminated certain programs within the company that would be considered G&A and that flowed through that line item as well.

When you look at it comparatively between Q3 and Q4 for the decline, recognize that in Q3, we had approximately a $1 million worth of legal expenses associated with the Comcast arbitration that we would not have had duplicated in the fourth quarter.

That would be on the G&A line as well.

OK, thank you.

Our next question comes from Wayne Fillinworth (ph) with Raymond James, please go ahead with your question.

All right, thank you.

With regard to the GSS division, I was wondering what percent of that is sold direct and did you have any 10% customers or resellers in that division?

No.

We have no 10% customers or resellers.

And 99% of what we do is direct.

We have -- had a couple of situations where we have IBM through our ICMS business basically been our contracting agent but for the most part, it's our paper and with our direct sales force.

Great.

Thank you.

And on the broadband side, with regard to, I guess maybe your top two or three opportunities in 2004 that you see, could you maybe give us a flavor for that both in North America and other regions you might expect to win some business in '04?

Thanks.

From the North America, primarily the US business, probably the biggest opportunities in the short haul are additional products that we are continuing to add on.

We're seeing good activity continue certainly in care express, some renewed interest, I think, as we start coming out of this in work force express.

In the short-term, I don't think as you can all see, there's probably not a lot of up side in the voice-over IP, but we see that as a longer-term foundation that we're certainly building for some growth in the future there.

It would be pretty hard to comment on any other major things that we're looking at.

Thank you very much.

Our final question comes from Sameer Bhasin with Okumus Capital.

Hello, just a couple of questions.

First is clarification.

When you guys gave guidance in October for '04, it was for 90 cents to a dollar.

And then in November, when you adopted the stock program, you made it 87 to -- 77 to 87 cents with a 13 cent charge but now that you are saying the charge would be 17 cents.

So should we assume that the October guidance would have been 4 cents higher, 94 to 1.04?

Well, there's two pieces on that, Sameer.

This is Peter.

One is that we already had stock based comp that was implied in the 90 cents to a dollar.

So we adopted FAS 123, there was at that time estimated in incremental $11 million worth of expense that would come in.

We are now for the overall information we've given you is the total stock base comp of that we had in our guidance that did increase slightly from what we estimated before.

But then we also had some shifts and some other non-cash items so that in total we have about $52 to 53 million of non-cash charges that are in our '04 guidance.

OK.

So, but you still maintain the 80 to 100 million cash from operations without any working capital adjustments?

That's correct.

We still are projecting that is an attainable goal for the company.

Got it and cap-ex for '04 now?

We're estimating that will be between $10 and $15 million.

OK.

So seems like on an operating pre-cash basis but you guys can do at a mid point is $70 to 80 million.

That math works out on calculators, too.

Got it.

It's a very strong result for the company, we believe.

$1.50 a share.

OK and do you think any of the current restructuring that you're going through had any impact in your sales force being able to close license deals and perhaps license would have been stronger had you not been going through this restructuring?

This is Neal.

I don't think the restructuring we had had a great deal of impact on our sales force closing licenses.

I think Bill and his people executed wonderfully in that.

As I say, I spent ten days working out of the London office and I think they're hitting on all cylinders over there.

I think the closing deals are just a very difficult economic environment out there.

I think we have some situations where perhaps the organizations would like to do a deal right now.

But situations beyond our prospective customers control are precluding them from maybe doing something right now that gets sold.

They get merged and you're seeing activities out there that are just pushing the deals out.

That's probably what you said as well, right?

Yeah, I mean I would say little or no impact on the sales side.

The impact was in the delivery side of the organization.

But we've been able to service the sales people whenever they had customer opportunities.

Let me wrap it up.

We're running a little long.

Let me just say, thank you all for joining us today.

Let me reiterate that I feel we had a really solid and effective quarter and that the team and everyone turned in a really solid result for all of you.

And as all of you know the environment is tough, the economic environment out there but I for one, do look forward to a good and very prosperous 2004 and I know we're all going to work very hard to achieve that.

So thank you very much.