CSG Systems International Inc (CSGS) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by.

I would like to welcome everyone to the CSG Systems first quarter earnings release conference call.

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

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

If anyone should need assistance at any time during the conference, please press the star followed by the 0.

As a reminder this conference is being recorded Tuesday, April 27th, 2004.

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

Please go ahead.

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 perform satisfactorily and maintain good relationships with its customers, provide products and services that meets the needs of the marketplace, manage our international operations, which by nature is much more complex and carries a higher collections risk, successfully deliver on lengthy and/or complex implementation projects and our ability to realize expected savings from our cost reduction programs without jeopardizing our revenue opportunities.

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 website.

We have with us today Neal Hansen, Chairman and Chief Executive Officer, Jack Pogge, President, Peter Kalan, Chief Financial Officer and Bill Fisher, President of Global Software Services.

Mr. Hansen will begin.

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

I'm very pleased with our results this quarter and I'm becoming more and more comfortable with what we're seeing in the business environment.

Today I will go over three areas.

First, I will review our performance for the quarter.

Second, I'd like to provide an overview of how well we executed during the quarter, and finally, we will discuss why we are more optimistic about our business and the environment.

We know now without stealing Peter's thunder the moves that we have made on the cost containment side, in combination with the increased visibility on the revenue side, have allowed us to raise our earnings guidance for the year.

Let's begin with our financial performance.

This quarter, we generated revenues of $130.4 million, a slight increase over last quarter's revenues, and on the high end of our financial guidance.

Our guidance for the first quarter's earnings per share was 15 to 20 cents per share, not including any restructuring charges.

We reported earnings per share of 21cents including a restructuring charge of $2.2 million, or 2 cents per share.

This quarter we saw improvement in our operating margins as a result of higher revenues and strong cost controls.

And our cash flow for the quarter continued to be strong.

In fact, we paid Comcast the remaining $25 million remaining in the damages award and we prepaid $30 million in debt and we still ended up with cash and short-term investments of $105.7 million at quarter end.

In addition, we grew our software and services backlog by $14 million this quarter.

And this is the first time that this backlog has increased in two years.

All in all, a very healthy quarter, and one in which I believe we will continue to build on.

Let me turn my attention now to the business.

First, on the North American broadband side, Ed Nafus and his team have been extremely busy.

We extended our contract with Echo Star, we signed a new contract with Comcast that includes financial minimums, and right after the quarter ended, we signed a new five-year contract with Adelphia that includes us helping support their voice over IP rollout later this year.

The reason we have been successful in renewing and expanding our contracts with our customers is because we continue to invest in our products and services.

But mostly we continue to invest in our relationships with our customers.

Our number one goal is to help our customers grow and become more profitable.

One way we help our customers grow is by helping them roll out new services.

As you may recall, CSG supports 12 Time Warner sites with our billing platform.

These sites are typically Time Warner's largest locations.

This quarter we helped Time Warner launch its voice over IP services in one market.

We have two more sites ready for launch by the end of the second quarter, and based on Time Warner's plans we expect that all 12 sites will be up and running by year end.

Next I'd like to turn my attention to the software and services side of the business.

Importantly, this area made money this quarter.

We are seeing increased activity with our existing customers as they look to consolidate billing systems, roll out new advanced services, and as they turn to us for operational expertise.

In addition, we added several new customers to our client roster this quarter.

One of those new customers is a large mobile operator serving approximately 12 million consumers.

They will use CSG total care solution as their strategic customer profile management platform and they'll use it to provide additional support for their customer self-care functions.

This solution will enable this service provider to maintain a holistic view of its entire subscriber base resulting in better service and updated customer information -- information systemwide on a real-time basis.

In addition, our recently introduced Kenan FX business framework is getting quite a lot of attention.

Just last week Kenan FX was named the most innovative billing product at the billing systems show in London.

More impressive, however, is that this quarter we added eight customers to our Kenan FX client list including two brand new customers.

Now, this brings the total number of Kenan FX customers to 14.

And already this FX customer base is diverse in makeup, including many verticals, that they serve, and including the size of the customers.

They range from wireless to wire line, to broadband service providers.

We use FX to help them roll out everything from high-speed data to cable telephony, to IP, to push-talk services, and they range in size from the smallest operator having less than 200,000 customers to the largest one having over a million and a half customers.

We know the diversity of this customer base demonstrates the flexibility and the robustness of this solution.

We are very optimistic about what FX can do for our customers as their businesses become more and more complex.

Finally, I'd like to share with you why we are becoming more optimistic about the environment in which we operate.

First, we are starting to see broadband operators have success with their initial voice over IP trials and rollouts.

This will help drive other operators to have and gain confidence in the service and what it can do for their customer loyalty and profitability.

And, of course, this creates more opportunity for CSG to help our customers.

Second, we believe that there are additional opportunities for market share gains in the cable and DBS space.

These operators need solutions that can bundle and package multiple products and services, and at the same time provide a holistic view of the customer.

We believe that we are best positioned to help these operators grow their businesses.

Third, we're gaining momentum with our Kenan FX solution.

Operators appreciate the pre-integrated modular framework.

They like the flexibility that it provides them, flexibility to solve one problem at a time.

And, of course, this provides us with opportunities to get even closer to our customers and to find more and more ways to help them with their business needs.

Fourth, we believe that the investment that we have made in our account management and our project management areas has helped us to become a partner to our customers, versus just being another vendor.

Our customers are increasingly turning to us to help them take advantage of an opportunity or to help them solve a problem.

This, in turn, helps us build and deliver products and services that become an integral part of their operations.

Their input is invaluable, and it leads to an even stronger bond between our people and our customers.

Finally, the investment that we have made in our strategic initiatives group has led to an increased pipeline of deals with a variety of providers, deals representing new verticals for CSG.

While it is too early to declare victory, I believe we're very close to having some demonstrable results from this organization.

One thing has we've learned over the past year is that in order to be successful, you must listen to your customers, provide solutions that help your customers, help them execute on their objectives, and you have to be flexible.

As we move from two years of a downward trend in spending into a stronger business climate, you should expect that we will continually evaluate how we serve the market so we can be flexible, so that we can be responsive, and so that we will be properly positioned to take advantage of opportunities.

Next, I'd like to hand the podium over to Peter Kalan, our Chief Financial Officer and ask him to review our financials in more detail.

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

I'm pleased to report the financial results for most recently completed quarter in which we achieved our targeted expectations, positioning us for continued strong financial performance.

For the first quarter ended March 31st, 2004, total revenue was $130.4 million, and net income under generally accepted accounting principals was $10.8 million, or 21 cents per diluted share.

During the first quarter the company incurred restructuring charges totaling $2.2 million which had the effect of reducing the reported earnings per diluted share by approximately 2 cents.

Processing revenues totaled $81.1 million for the first quarter, and were stronger than anticipated as a result of approximately $1.5 million in non-recurring revenues associated with open items resolved in contracts renewed in the quarter.

In ,we signed a new contract with Comcast which provides visibility for the coming years.

As a result of this new agreement, we have shortened the life over which we are amortizing the intangible associated with this contract which had the effect of increasing the amortization amounts in the first quarter and coming quarters.

The impact to the first quarter was approximately $450,000, and for the coming quarters, the increased amortization is approximately $1.3 million per quarter.

The amortization of the client contract intangible is reflected as an offset to processing revenues.

Software revenues for the first quarter totaled $25.1 million while professional services revenues totaled $16.5 million and software license revenues were $7.6 million.

For the first quarter, 26% of CSG's total revenues were derived from international markets with EMEA contributing 14%, Asia Pacific generating 7%, and Latin America delivering 5%, all of these in line with the fourth quarter of 2003.

Revenue from Comcast was approximately 18% of the company's total revenues for the first quarter, which was generally in line with the expectations for the quarter.

Going forward, we expect that revenues from Comcast will comprise approximately 16 to 17% of our consolidated revenues.

During the first quarter, we completed our previously announced $30 million expense reduction.

We incurred restructuring expenses in the first quarter totaling $2.2 million, and these costs are primarily attributed to staff reductions along with expense reserves for the impact of abandoned facilities.

The first quarter gross margin improved to 50.7% from the fourth quarter 2003 gross margin of 48.1%.

The operating margin for the first quarter was 16.3%, which was impacted by approximately two percentage points as a result of the restructuring charges.

We achieved sequential improvement in the operating margins from the 12.6% reported in the fourth quarter of 2003.

Excluding the impact of the change restructuring charges from the first and fourth quarters the operating margin improved by two percentage points.

The first quarter 2004 financial results included the first full quarter impact of stock-based compensation expenses associated with the stock option tender completed in the fourth quarter along with the implementation of FAS 123.

For the first quarter, non-cash stock-based compensation charges were $4.1 million which compares to $1.5 million of expense in the fourth quarter of 2003.

Amortization of intangibles totaled $6.3 million for the first quarter, and depreciation expense was $3.6 million.

These non-cash charges totaled $14 million for the first quarter.

Turning to the company's divisional results the Broadband Services division generated $86.6 million in revenues for first quarter and produced a contribution margin of $37.3 million, or 43% of revenues.

As I said previously, the new Comcast agreement resulted in increased intangible amortization expense.

The impact to the first quarter was approximately $450,000, and for coming quarters the increased amortization is approximately $1.3 million per quarter.

Again, this is shown as an offset to revenues.

Total non-cash charges within the Broadband Services division totaled $5 million for the first quarter.

We finished the first quarter with 43.5 million subscriber accounts on our processing system which was a sequential decline from the fourth quarter of approximately 600,000 subscribers.

During the first quarter, certain contracts were renewed in which the definition of subscriber billing units were modified, having the effect of lowering the subscriber volume accounts processed, though the subscriber billing unit measures declined, the revenues were not materially affected.

The average annualized revenue per subscriber for the first quarter was $7.38.

The one-time revenues I mentioned previously contributed approximately 14 cents to the annualized first quarter revenue per subscriber.

We continue to anticipate that for the full year 2004, the average annualized revenue per subscriber will range between $7.10 and $7.25, though for the second quarter, we anticipate we will be closer to the higher end of this range.

CSG's Global Software Services division produced $43.8 million in revenue for first quarter with a contribution margin of approximately $1.2 million.

The GSS division produced a positive contribution margin in what is typically the weakest quarter for sales.

The first quarter results for the Global Software Services division included non-cash charges of $5.3 million associated with amortization of intangibles, stock-based compensation, and depreciation.

The expense reductions initiated in 2003 have positioned this unit for continued profit improvement during 2004.

Additionally, the increased commitment to Kenan FX by our clients has provided greater visibility to our services backlog.

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

As of March 31st, our billed trade accounts receivable totaled approximately $138 million, net of the allowance for bad debt of approximately $11.4 million.

This compares to the December 31st net build trade accounts receivable balance of approximately $131 million.

The billed trade accounts receivable reflected days billed outstanding, or DBO's, of 66 dates for the first quarter, an improvement from the fourth quarter level of 67 days.

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

Cash flows from operations for the first quarter were approximately $32 million, which reflects the impact of $25.2 million arbitration payment made to Comcast during the first quarter, and the receipt of the income tax refunds of approximately $34 million.

During the first quarter we made a $30 million debt payment, reducing our total debt balance to $128.9 million as of March 31st.

We have scheduled debt payments of approximately $20 million over the next 12 months.

Cash and short-term investments totaled $105.7 million at March 31st, 2004.

We did not repurchase any shares of the company's stock during the quarter and based on our projected leverage ratios for 2004, we currently do not anticipate repurchasing any shares this 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 the program.

For the second quarter of 2004, we are expecting that revenues will range between $127 million and $134 million dollars.

We anticipate that processing revenues will be between $79 and $80 million.

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

Service revenues will total between $16 and $18 million, software license fees will range between $8 and $11 million.

As of March 31st our software and services backlog increased $14 million to approximately $117 million.

We expect to recognize this software and services backlog over the next 12 months.

The software and services backlog, along with the visibility that we have in our processing revenues from the Broadband Services side, provide a 12-month backlog of total revenues of approximately $430 million.

We are projecting that the total expenses in the second quarter will be between $107 million and $110 million dollars.

Included in these projected expense are amortization charges of approximately $7 million, depreciation expense of approximately $4 million and stock-based compensation charges of approximately $4 million.

Based on these targeted revenues and expenses, we anticipate that earnings per diluted share for the second quarter will be between 20 and 25 cents.

As our business has stabilized and our margins have improved we are updating our full year 2004 financial guidance.

We continue to expect that revenues will total between $515 million and $530 million for 2004 and that the composition of the revenues will be consistent with the second quarter projections.

We project operating margin for full year will range between 17 and 18% and included in these projections are non-cash amortization charges for the full year of $28 million, depreciation of $16 million, and stock-based compensation expense of approximately $15 million.

Based on the improvement in operating margins we are raising our full year 2004 earnings per diluted share expectation.

We now expect earnings per share to be between 88 cents and 96 cents.

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

We expect that cash flows from operations will range between $90 and $110 million for the full year.

In closing, we are very pleased with the financial results for the first quarter, and I think that you can see the improving performance of our business.

Our margins are improving, which we believe will position us to aggressively compete for the business in these very competitive markets.

We continue to generate profits and strong cash flows which is critical to our clients as we work as a partner in their operations.

We remain focused on continuing to improve the profitability of our business and expand our footprints in the markets we support which will increased opportunities for CSG.

With that I'll now turn it over to the moderator for questions.

Thank you, sir.

Ladies and gentlemen, at this time I would like to begin the question and answer session.

If you have a question please press the star followed by the 1 on your push button phone.

If you would like to decline from the polling process, press the star followed by a 2.

You will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in the order they are received.

And as a reminder, if you are using speaker equipment will you need to lift the handset before pressing the numbers.

One moment, please.

Our first question comes from Thomas Vincent with Smith Barney.

Please go ahead, sir.

Couple of questions.

First, Peter, on the expense side, you made a lot of good progress in the first quarter, but it sounds like expenses are going to be either flat or up in the second quarter.

Any reason why expenses should start to go up again, or am I reading the numbers wrong?

No, the guidance I gave you would show that the expenses may trend up a little bit, but it's based on higher levels of revenue.

That's been consistent with the guidance we've given all year that as certain pieces of our revenues increase, we may need to increase certain amounts of expense to support it.

Okay.

Within the two divisions, should the mix change, or how are you looking at the GSS division?

It could be on either side.

There's variable expense that could be generated out of the Broadband Services division and the -- associated with either processing expenses or could be in the printing expenses or computing services.

On the GSS side you could see some expenses associated with consulting services resources in the event that that business continues to get greater visibility than what we have today.

Okay.

But I guess the target that we should be kind of focused on is the GSS division will remain profitable throughout the rest of this year?

Absolutely.

Our expectation are that we will continue to be profitable in GSS and we have expectations that we'll be expanding that profitability.

Okay.

Now, on the guidance for the full year, I mean, it sounds like you're getting more traction with Kenan FX and things are improving in the GSS division.

And your backlog increased 14 million.

What's the rationale not to raise the total revenue guidance for the full year?

Thomas, we've always been a conservative company.

We have greater visibility both in our services and software backlog, but we see that visibility, you know, in the nearer quarters and the latter quarters and we want to continue to see the improvement in the business before we'd consider doing something for the full-year revenues.

Okay.

Maybe last question.

Neal, for you.

Where do you see when you look at the broadband division and GSS division, where do you see the biggest opportunities over the next 12 months?

Well, I think we have opportunities -- I think Ed's people have opportunities in the broadband business to gain some market share, and I think they'll go after that now that they can just focus on the business.

I think in GSS, you know, FX is a whale of a product.

I think that there's some people out there that will know we're there, so we'll -- I would think we'll take at least our share of the business and hopefully a disproportionate share.

The other opportunities we've got is we have been pretty successful in generating additional opportunities to run after in taking those Kenan products and leveraging them into more traditional continuing revenue streams.

So I would say those are the three major upsides that I see for us.

I think taking the Kenan product and leveraging them into processing, it's a -- there are tough sales and long sales, but the real winner's when we get some of those things.

Is there any differences between the North America, Europe, EMEA, Asia-Pac in terms of where you see the opportunities?

Ed, I think (inaudible) Ed's traveling.

Why don't you go ahead and hang up, Ed, because that telephone patch isn't working well.

Your question was, I think EMEA we're beginning to see some pretty good opportunities in EMEA.

We've gotten some pretty good -- I think some outstanding initial opportunities in Asia Pacific region that will pay out.

We're beginning to see some things turn around here in North America, so in different ways we're seeing all three of the regions strengthen.

There are just new opportunities in A-Pac, stronger traditional opportunities in EMEA, and we're seeing quite a few really significant opportunities here in North America, once again in looking at new ways of looking at our business.

Great.

Thanks a lot.

Thank you, sir, for your question.

Our next question comes from Adam Waldo with Lehman Brothers.

Please go ahead with your question.

Good afternoon, all.

Nice quarter.

Thank you.

Starting with Neal.

Neal, I wonder if you can give us a little more quantification of the size of the Time Warner VOIP project on which you expect to have all 12 major locations installed by the end of the year.

How much revenue do you expect to bill from the AT&T Warner engagement?

I think in the's small.

It's nothing you'd build into your -- it's small.

Okay.

Just -- Ed is traveling, and I just bounced him off of here because he had a bad telephone connection, so you can call Peter back on that.

Switching gears to a couple questions for Peter.

Peter, some analysts have recently speculated that you may start to, with continued strong free cash flow, but able to return surplus capital to shareholders in the near term either for buy-backs or dividends.

Clearly your amended credit agreements of December 8th limits you significantly on that in 2004 as well as around acquisitions and the level of capital spending.

I wonder if you can just update us, or remind us, on what those restraints are in 2004 and what levels of key credit stats you would need to achieve to be able to start to resume returning capital to shareholders.

The main key that we would have to achieve if we wanted to have more flexibility in the use of our cash is to lower our leverage ratio.

The stats on top of my head, I believe, are 1.5 times leverage that we need to achieve.

On a gross basis, Peter?

Yes.

Okay.

And so as we look at things, we've just completed getting the Comcast agreement renegotiated and executed, and we are evaluating ways to give us more flexibility and best cost of capital based on the strength of our balance sheet and business.

And so as we get that sorted out over the coming months, we think we'll be in a position to come out and give better visibility of what we think we're going to do, but as it sits today our credit agreement has certain limitations around really investing in acquisitions or doing anything in the way of stock buy-back until we return a certain amount of capital back to the banks.

Okay.

And then finally, I think I caught in your prepared remarks you say EBIT margin would have risen 200 basis points if you stripped out a reserve reversal during 1Q '04 from previously accrued restructuring reserves.

I want to confirm that was accurate then ask if in effect you reversed about $2.3 million of previously booked restructuring reserves during the quarter.

What we booked in the first quarter was $2.2 million of expense that if we had not had that, we would have had even higher operating margin by 200 basis points, or two percentage points.

Got it.

Thank you.

That's very helpful.

What should also be considered is we have increased the amount of non-cash charges that are flowing through our financial results in Q1 over where we were in Q4 which continues to show the strength of the business that we're building.

Thanks very much.

Thank you.

Thank you, sir, for your question.

Our next question comes from Mary Ann Wolk with Susquehanna.

Please go ahead with your question.

Thanks.

I was surprised to see that you think you might be able to gain more share in the cable market and I was wondering if you were thinking about winning some more accounts for the full suite of your billing services in the cable area, or were you simply thinking about selling some of these modules and voice over IP support to those customers?

And then I had a follow-up.

I'm just thinking about being able now to go out and sell much more aggressively than what we have in the past.

What's your follow-up?

Okay.

Then as a follow-up, sounds like you're signing a lot of new business in the GSS division, but we're not yet seeing a lot of revenue reported.

I'm just wondering if a lot of the deals you're mentioning are all flowing through backlog or some of the new deals that have not yet flown through the software backlog?

Well, if we've signed a deal that we've got contracted revenue, it will show up in our software services backlog so we are seeing traction on that.

Importantly, when you think of the Kenan FX business and the -- those modules, or the key framework, being signed up for by our clients, it's going to drive first and foremost more services revenue.

It's going to lock in more certainty around our maintenance revenues, and importantly then, we're going to have the additional modules that have been -- that have come out in the fourth quarter.

And these clients will be able to buy these modules, since they're pre-integrated, and it's going to provide really a platform to be able to sell these additional new license components.

So there is visibility to opportunities that has not flown through the backlog yet because they're not contracted for, but to the extent when people sign up for Kenan FX, we see contracted services work coming in and that's what you see contributing to the $14 million worth of additional software and services backlog.

The last question you mentioned processing ARPU is going to be at the high end of the range, perhaps closer to the 725 level.

How should we be thinking about that number?

Does that include some sort of one-time non-recurring voice over IP fees from some of your customers, or how should we be thinking about that?

We have a little bit more visibility this quarter, (inaudible) some one-time revenues as we do some of the project work that Neal referenced.

I won't go into the specifics of what it's associated with, but we do have some stronger visibility to items that gives us comfort toward the high end of the revenue range and comfort that the overall year of 710 to 725 is still a sustainable level.

So we should be looking at a stair-step downward in Q3?

At this point in order to achieve the full year revenue guidance numbers that I gave you, you would do in that your models, but again we are conservatively not touching really the full-year guidance numbers for revenue.

Got it.

Thank you very much.

Thank you.

Thank you for your question.

The next question comes from Brandt Sakakeeny with Deutsche Bank.

Please go ahead with your question.

Thanks.

Hi.

Congratulations on a nice quarter.

Thank you.

Peter, I wanted to just ask you quickly about your current facility.

Could you just remind us again what the price of that facility is and who the lead bank is?

It's -- put a plug in there for Deutsche Bank?

No, I don't think it's us, is it?

No, it's not.

Sorry to have to say that, that way, but the lead bank is Bank Parabau, and I had a drink with the (inaudible) brothers on it.

It's priced at LIBOR plus approximately three to three fifty, based on the (inaudible) that you're in.

It is all prepayable debt with, as I said in my comments, about $20 million worth of principal payments over the next 12 months, then the remainder of the principal payments more heavily back-end weighted.

Okay, and right now, so I think you said you paid $30 million in the first quarter, did you say, and 20 remaining for the last three-quarters?

For the upcoming 12 months, there's about $15 million for the remaining three-quarters.

Is that over and above the principal?

Are you in essence paying it down faster than the facility dictates?

No, not per the terms of the amendment that we signed in the fourth quarter.

We do have a history of accelerated pay-down on our debts but as part of the amendment that we entered into with the banks in the fourth quarter we agreed to make adds $30 million payment on our debt by July of this year, and so we just made that payment a little bit earlier.

Okay.

Got it.

That's great.

And just, Neal, would you mind, on this GSS, y'all mentioned some expanded relationships with customers.

Can you just drill a little deeper and maybe let us know exactly what relationships there were and if the terms have been extended for either increase in revenue per subscriber or length in terms and things like that?

Under GSS?

Yes, please.

As you know a lot of the GSS customers were originally installed by -- were installed with heavy use of systems integrators in the installation, and I think a couple of things with the improved services in that GSS has implemented, and with the more complete system and with the greater visibility that we've gotten now, the nature of the changes range but they range from actually asking us to come in and do things that we're probably more appropriately geared to do instead of hiring it all out to SI's on a continuing basis.

Doesn't mean we're replacing the SIs, but we're doing things that are probably more in our sweet spot than in the S Is' sweet spot.

I think that pretty much is -- helping them in some cases with operations that's pretty generally the kind of things we're seeing, right, Bill?

Right.

Okay.

Thank you very much.

Thank you, sir.

The next question comes from Ben Abramovitz with Jefferies & Company.

Please go ahead with your question.

Thank you.

Good afternoon.

Just a quick maintenance question.

Capex for the quarter, and then is your old capex with some of the -- do you still expect the same capex for 2004 as you previously did coming into the beginning of the year?

Capex for the first quarter, I'm making sure I give you an accurate number, it was approximately $1.8 million, first quarter.

We originally had given expectation of capex for the full year of approximately $15 million.

Let me back up.

Capex for Q1 was $1.4 million.

I'm thinking of Q4.

So $1.4 million for Q1.

It is less than what a prorated portion of our full-year guidance would be but with some of the types of processing opportunities that Neal has commented are being pursued in North America we could use up that $15 million worth of capex so we're not really changing anything from our expectations for the full year of capex.

Okay.

And then you talked about the improvement in pipeline.

It doesn't look -- if you look at first quarter run rate, you pretty much hit your full year guidance.

I know you're being conservative.

If you could give some color in terms of maybe what's in the pipeline, maybe the range of the size of the contracts, in terms of, you know, smallest to largest, or on average because of modular, you know, how large are some of these contracts that you're looking at in the pipeline?

I'd say in the pipeline we're seeing strength in all regions, we're seeing strength in pretty much all the verticles, and we're seeing traditional kinds of deals.

Traditional kinds of modular deals?

Traditional kinds of deals to what we've seen before.

We're also seeing in our strategic initiatives the opportunity to respond in some large-scale deals, but in our traditional GSS side of the business we're seeing strength in all regions, in all verticals, and traditional size deals.

Okay.

Thank you.

Thank you, sir.

The next question comes from Scott Sutherland with Wedbush Morgan Securities.

Please go ahead.

Mr. Sutherland?

Yes.

Good afternoon, and good job on the quarter.

Thank you.

A few questions kind of going back to the pipeline.

Maybe you could talk about a couple of trends.

This improvement, are you seeing it because of the number of deals or the size of deals, and can you also talk about trends?

Are you seeing this from newer customers or existing customers?

This is Bill Fisher.

First of all, I think what we're seeing is we're seeing volumes growing in the networks kind of consistent around the world, and those volumes do a couple of things for us.

One, since we license our software based on volume, they drive some nice upgrade to the business.

Two, volumes obsolete technology, and, you know, that's basically pushing customers to look at our FX release.

We did a CIO visit in each of the regions last quarter.

We just did our first customer conference in Asia.

We've got just some incredible amount of attention to FX because of the ability for the customers to save money.

We got some new wins in the quarter.

That's always good to see.

We saw activity strong around the world.

Neal said that earlier.

And I echo that.

We ended up selling different products.

Sold a new data mediation customer this quarter.

That's an excellent product offering of ours that comes from Belcore Labs originally.

My gut check says volumes are kind of the key for us, and we're starting to see volumes in the network.

People have laid off spending technology money for a couple of years, you know, that catches up with you, and I think we're going to benefit some of that.

Our services pipe now is as strong as it's been since I've been following the business.

Not this quarter, but looking out one and two quarters, and we'll use that to kind of estimate, you know, where we might need talent and it's strong -- it has been strong and continues to be but it's kind of strong around the world.

Bill, the other thing I'd add is I spoke to -- earlier today and we just had an outstanding high-level customer and partners meeting in Thailand.

It was very well attended.

Excellent people, and the -- to echo what Bill was saying, the partners and the customer base that was there are singing high praises for FX.

I think would I'd say is we've got, as Bill said, some volume coming through the customer base, that's good for us, we've got the right products out there, it seems right now.

That's very good for us.

And over this period of time, I think we've done a very solid job of introducing CSG to the customer base and getting a lot of confidence of those customers, and they're coming back.

As I referenced earlier, asking to us do more things for them.

So I think it's just good business principals that are taking us forward.

Okay.

And can you talk about the software revenue, what your outlook is for that?

You were down sequentially year-over-year, so what can you do to kind of get that going forward to to a hire revenue level?

And also, on your GSS margins, now that you hit profitability for two quarters there and according to expectations what's your long-term goals for the margins in that division and what kind of time frame?

That's not something -- out here, you know, we don't ask a man how many acres he farms or how many cattle he runs, so --.

Okay.

Oh, software revenue.

On the software revenues, we commented as part of our fourth quarter release that the roll out of the new FX product caused us to not be able to recognize certain products until they had been installed or we need to achieve certain pieces on it, then the -- in the first quarter it's typically a soft license quarter, and so it was down sequentially between the two periods but not in a material sense.

And as you can see from our guidance that we're giving for Q2 we believe that we have good visibility towards an increasing software license revenue, and that is built in based on what we've seen in the recent sales that we've completed in Q1 that are in our software and service backlog coupled with the pipeline we have coming forward.

Thank you.

You bet.

Thank you, sir, for your question.

The next question is a follow-up from Adam Waldo with Lehman Brothers.

Please go ahead.

You know, you all have highlighted the last couple of quarters and also in your 10-K, obviously, the VOIP opportunity middle to latter part of this year.

I wonder, if in some aggregated fashion, you can give us a sense for what sort of revenue would you expect to see from that transformation within your carrier base in '04.

Adam this is Peter.

On voice over IP, we believe that from our client's perspective, when we look at their networks, that they're going to be successful.

We like what they're doing, but it's still the early stages of trials, and as part of these trials are evaluating whether or not they're going to be offering flat-rate solutions or if it's going to be metered, and how they're going to package it and all that can affect the solution they need from us, how we service them, and, therefore, what the revenues would be.

So we're going to wait for their business models to get solidified more before we come out and give you guidance because we're really dependent upon them in two facets.

One on the delivery of the service to the client and, two, in the business model which they deliver.

This is Neal.

Let me just add I am very pleased with what I see that our people have put together in terms of product and services to be able to support VOIP.

Just really echoing and taking what Peter said another step.

You know, I've watched enough of these things begin to roll out that the business model on this whole thing will change three or four times over the next year or two, anyway, so the important thing is that we can support that customer base in spades, and we've got enough latitude to respond to however they change their business models, and think at this stage of the game, you know, that's really the -- that's really where we're at.

I would say we've got a very strong support for the broadband people, and I'd be very uncomfortable if I was an (inaudible) sitting out there right now because, collectively, I think we can come after them pretty good.

That's very insightful.

Two quick things, if I could, on India.

One, could you give us an update on the credit selection side where the two outstanding client receivables in India at the end of last year stood at the end of this quarter.

Secondly, any updates on your offshore initiatives to reduce your cost base both on processing and development side.

Adam, this is Peter.

We improved the collections.

I don't have the numbers in front of me on India.

I think we have approximately $7 million outstanding from our India client and I'd have to go back to my more detailed records, but I know we collected a significant amount and rebilled new services so that is not a stale balance out there.

We're seeing good turnover in those balances overall.

On the outsourcing I'll let Bill comment on that.

As Neal and Peter both discussed we completed our costing exercise and we were basically moving some expenses offshore, both in house in the case of Toronto.

In fact, we're up there training some new people as we speak, and offshore totally into operations in India.

We're pretty much complete with that now.

So Bill, if I've interpreted this right and if I were to use a baseball metaphor sounds like you're in the eighth or ninth inning of what you anticipate doing then?

Yeah.

I think game over.

Okay.

Been in the business a long time, you know, the game's never over, right, you're always scrubbing expenses, but for what Neal asked us to do, and we were able to do, yeah, we've basically gotten that done.

Okay, so that was embedded in your first quarter cost base, then.

Yeah, pretty much so.

Okay.

Thanks a lot.

Adam, I pulled the -- I did find the notes, we were a little bit over $7 million worth of billed balances as of 3/31 for India.

We actually collected during the first quarter $7 million in -- while we build out an additional approximately $5 million during the quarter, so you can see that we're turning over the balances in a very reasonable fashion there.

Great.

Nice progress.

Thank you.

Thank you.

Thank you, sir.

The next question comes from Duane Fenlingworth with Raymond James.

Please go ahead with your questions.

Thank you.

Most of my questions have been answered.

I think in the past you've talked about processing longer term in the GSS division.

Could you talk about if that's still an area of opportunity for you and kind of what your expectation would be a year out?

Thanks.

Well, I mentioned earlier that I'm very pleased with the opportunities that are coming up through our strategic initiatives group.

There are big opportunities, and I'm very pleased with the way we're able to respond to those opportunities.

You'll see us doing some things over the next month to strengthen that even more.

And, you know, that's around the GSS assets.

As far as telling you, you know, where it is a year from now, these are big opportunities.

I don't know that I'd jump all over that one.

Understand.

Thanks.

And then, secondly, if you can provide any color at all around what verticals look interesting in terms of expansion.

I like -- go ahead.

No, go ahead, Pete.

We signed up eBay approximately about a year ago or so.

That is a fully-operational installation.

We have proven through that, that it's the core Kenan engine, as it was deployed, can handle e-commerce types of solutions.

We announced earlier this year the go-live of the Kenan asset in the utility business, and so we've proven that it can go into utility billing as it's done in Italy.

And so those are two areas that are interesting.

That's not to say that we're going to jump full force and try to make either one of those go, but it shows the versatility of that billing.

I think what we're seeing -- let me change a little bit -- we're seeing a lot of inquiries and a lot of opportunities to respond in the e-commerce area, in the MD&O area.

I think the poor old teleco's are going to get hit in a lot of different areas.

We're seeing that we have the -- we have the core systems and the expertise to be able to respond.

A lot of times when people are coming to us now, they're asking us if we're able to take on even more responsibilities for them, and these RFPs, so in doing that we've -- I would tell you that we've joint venture bid with at least one other firm where we can bring a full range of call center business, operating the business, et cetera.

So the key, and I told you this two years ago when we bought Kenan, the key is to have the software assets and intellectual property that you can go after different markets.

We've made that asset one that we can use, and we're beginning to get quite a bit of traction out there, so --.

Thanks very much.

Thank you, sir.

Our next question comes from (inaudible) from (inaudible) Capital.

Please go ahead with your questions.

Hey, guys.

Great job on the quarter.

Just had --

Thank you.

-- a few quick questions.

Looks like you're raising your free cash flow guidance for '04 at least cash and operation, $90 to $110 million, which approximately about $100 million in free cash.

The question is, as we look beyond '04, '05, '06, longer term, what should we expect for free cash number growth rates?

Oh, well, but from a free cash flow perspective, we don't really see our capital expenditures being significantly different as we look into the foreseeable future.

And so as you model out your expectations of the business for coming years, I think you would expect the cash flow would grow at an equivalent rate, if not stronger, as we get some leverage out of the business.

Awesome.

Next question is, I think in the past you guys have said that you would expect GSS to, in the long term, operate as a software company, as software company margins, 15 to 20%.

Is that still conceivable?

As a traditional software business, yes, and as we get deeper into processing opportunities and such we think that, as that business evolves we'll be looking to lift those margins even higher.

Great.

And the final question is, can you give me a sense of what kind of traction are you getting in GSS from tier 1 clients and whether you're getting more business or less business from them now?

This is Neal.

Fish can jump in if he wants, but we're getting opportunities to work in some very large situations that might surprise some people.

Great.

Thank you.

Operator, we have time for one more call.

It appears there are no further questions at this time.

Perfect.

Good.

Well, let me just wrap it up and say it's very great to hear a great call, great quarter, folks, and I like that, so we'll do our best to be able to hear that again in the future.

Thanks for everyone attending the call, and we'll talk to you in about 90 days.

Thank you, sir.

Ladies and gentlemen, this concludes your CSG Systems first quarter earnings release conference call.

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