CSG Systems International Inc (CSGS) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen.

Welcome to the CSG Systems third 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 Q&A session.

If anyone needs assistance at any time during the conference, please press the star followed by the zero.

As a reminder, this conference is being recorded today Monday, October 25, 2004.

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

Please, go ahead ma'am.

Thank you.

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

The Company's ability to perform satisfactorily and maintain good customer relations with its customers, provide products and services that meets the needs of the market place, manage our international operations which by nature are much more complex and carries a higher collections risk, and our abilities to successfully deliver a lengthy and/or complex implementation projects.

All these statements reflect our best current judgement.

They're subject to risks and uncertainties that could cause actual results results to vary.

In addition to factors noted during the presentation, these risks factors are 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, & CEO, Ed Nafus, President, Broadband Services Division, Peter Kalan CFO, and Alan Michels, Senior Vice President, Global Software Services division.

Mr. Hansen will begin.

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

I'm pleased to report that we had a strong third quarter both from revenue and earnings per diluted share perspectives.

Revenues were $133.1 million and earnings per diluted share were 32 cents.

Four things positively impacted earnings: higher revenues and lower effective income tax rate, higher other income as a result of forward translation gains, and finally, a lower share count as a result of our buying back stock.

Obviously all four of these factors are not necessarily sustainable.

However, we are extremely pleased with the increase that we've had in revenues for the quarter.

While sales cycles continue to be long, the environment appears to have stabilized.

We're seeing increased activity with customers and prospects.

In particular, with our broadband customers and with operators in the Asian market.

Peter will discuss later each of the items that contributed positively to our earnings this quarter.

Today I would like to discuss two areas with you.

First, I'd like to provide you with an update on our divisions, and second, I will provide you with a insight as to what we're seeing in the marketplace, and how we believe that will impact CSG in the future quarters.

First let me start with our broadband division.

As you may recall, CSG has invested hundreds of thousands of man hours into the industry's leading convergent building platform called ACP.

As a result of of this investment, our clients can offer the most sophisticated and complex product offerings with ease and operational soundness.

Today we are operational and processing over 1.5 million end customers, representing five different cable operators on our ACP platform.

By the end of next year we anticipate that the overwhelming majority of our customers will have migrated to this solution.

This investment in our solution set allows CSG to help our clients roll out new services and generate new revenues, enhance the perceived value of their product offerings and generate higher customer satisfaction ratings.

One example of a new service that is gaining momentum is voice over IP.

Industry experts predict that by 2008 over 13 million customers will be getting their voice services from cable operators.

The bundle, which includes video, voice and data, becomes critically important to operators as they look to increase customer loyalty and to increase revenues.

We are actively engaged in roll-outs, trials, testing and planning for voice over IP roll-outs for all of the customers offering the product.

Our involvement ranges from the investment interfaces all the way to providing the customer care and billing for the subscriber.

As a result of our extensive investment in our solution, we are well-positioned to be the telephony customer care and building provider in our footprint.

For example, this quarter we helped the nation's largest cable site launch VoIP.

That's Time Warner in New York City.

Looking out over the next 12 to 18 months we expect to help operators launch voice services somewhere in the country every quarter.

One trend that we're in the very early stages of seeing is cable operators adding wireless to their bundle of products and services that they offer their consumers.

Again, thanks to our continued investment in our products and our services we believe that we are well-positioned to help providers as they look to add more and more services to their consumer bundle.

Finally, we continue to see interest in our solutions that help automate the call centers and the dispatch operations.

Operators continue to look for ways to differentiate themselves from the RBOCs.

Our work force automation, self-care, and call center applications continue to demonstrate a quick return on investment while increasing customer satisfaction ratings.

We expect that these solutions will continue to be in demand as cable providers businesses become more complex.

Let me now turn to our global software services division.

This quarter was a solid quarter for this division, both from a revenue and a contribution margin standpoint.

Revenues were strong as a result of our customers expanding their relationship with CSG and implementing the Kenan FX framework.

This quarter we signed a significant contract for Kenan FX with CTBC, a leading convergence services provider in Brazil.

As a part of the new agreement, CTBC will standardize all of its billing on to the Kenan FX platform; including services that were previously billed in-house or by competitors such as mobile, broadband and data services.

This is an example of how operators are looking to consolidate their wireline and their wireless service into one billing platform to reduce costs and provide a more integrated offering to their consumers.

And more important, they continue to turn to CSG for help.

We saw this with (Tata) in India and (Selcome) in Malaysia.

In these examples, we're building for both wireline and wireless services with our Kenan billing platform.

In addition we continue to strengthen our customer relationships in the Asia-Pacific region including expanded contracts with (ORP Airotel), an Indian mobile and wireline provider and with KDB, a Korean mobile channel satellite employer.

Members of the senior management team and I have spent a significant amount of time in both the Asia-Pacific and European regions conducting detailed business reviews.

I am especially pleased with the activity that we're seeing in the Asia-Pacific region is, China and India are growing and we have a good presence in those countries.

Our customers are growing, and they're looking at our Kenan FX framework as a way to consolidate their multiple services onto one platform.

Finally let me summarize my comments today.

For several reasons I'm optimistic about our future.

First we have a solid customer base that is growing and looking for ways to simplify and consolidate their back office operations.

The Kenan FX platform puts us in the perfect position to help them as we demonstrated with our CTBC win this quarter.

Second, operators are looking for ways to increase the revenues and decrease their costs.

As a result, there's growing interest in outsource solutions.

With our technology and our operational expertise, we believe that we're well-positioned to benefit from this shift in spending.

Third, we continue to help our broadband customers roll out new services such as high-speed data and voice over IP.

This past quarter we have helped the nation's largest cable site launch voice over IP, and as I stated earlier we will be helping our customers roll this service out somewhere in the country each quarter this year, this coming year.

And finally our strong cash flow provides us with the maximum opportunity and flexibility to fund our operations and to invest in our business.

We will continue to invest in products that allow our customers to grow their businesses and to grow their bottom lines.

Next I'd like to turn it over to Peter Kalan our Chief Financial Officer and ask Peter to review our financial performance in more detail with you.

Thank you, Neal and thanks to all of us who have joined us for today's call.

I'm pleased to report the financial results for the third quarter in which our overall results were in line, but at the high end of our expectations.

For the third quarter ended September 30, 2004, total revenue was $133.1 million and net income under generally-accepted accounting principles was $16.3 million or 32 cents per diluted share.

Net income was positively impacted during the quarter as a result of a decrease in our 2004 estimated income tax rate along with foreign currency transaction gains.

These two items provided approximately eight cents per diluted share of benefit in the quarter.

Processing revenues totaled $80.7 million for the third quarter, and software maintenance revenues totaled $24.6 million.

Professional services revenues totaled $18 million for the third quarter driven by system upgrades and product installations, while software license revenues were $9.6 million for the quarter.

Overall our processing and maintenance revenues continue to be very steady and consistent and are indicative of the strength of our client relationships.

For the third quarter 28% of CSG's total revenues were derived from international markets, which is a slight increase from our more recent quarters.

Within the world's regions, EMEA contributed 18% of total revenues, Asia-Pacific generated 6%, and Latin America delivered 4%.

Revenue from our largest client Comcast was approximately 15% of the Company's total revenues for the third quarter.

We continue to expect that revenues from Comcast will be in line with these levels.

Total expenses for the third quarter were approximately $112 million, in line but at the high end of our expectations, and these amounts were an increase from the second quarter expenses.

Our expenses increased as a result of implementing an employee merit increase during the third quarter, as well as adding staff to support the growth opportunities for voice over ip, and expansion in foreign markets.

The third quarter gross margin was 46% which is a sequential decline from the second quarter but was expected in our expectations.

The operating margin for the third quarter was approximately 16%.

For the third quarter, non-cash stock-based compensation charges were $3.5 million, depreciation expense was $3.5 million, and amortization of intangibles totaled $6.8 million.

These non-cash charges totaled $13.8 million for the quarter.

Our full year 2004 estimated income tax rate is 32%.

And Is a decrease from our prior expectations.

This is primarily the result of the completion and resolution of certain tax matters in foreign jurisdictions during the third quarter of 2003.

In order to reflect an overall tax rate of 32% through September 30th, the tax rate for the third quarter was approximately 24%.

Turning to the company's divisional results, the broadband services division generated $86 million in revenues for the third quarter and produced a contribution margin of $32.4 million or 38% of revenues.

Total non-cash charges within the broadband services division totaled $5.9 million for the third quarter.

We finished the third quarter with 44 million subscriber accounts in our processing system.

The average annualized revenue per subscriber for the quarter was $7.36.

The average revenue per subscriber was higher than anticipated as our broadband clients used higher levels of ancillary services and products.

We expect that this will continue into the fourth quarter, and anticipate that the average annualized revenue per subscriber for the fourth quarter will range between $7.20 and $7.40.

As Neal stated our clients are in the early stages of offering voice over IP services, and we believe over the coming years these services will generate additional revenues for CSG, however, the associated with voice over IP services are currently very nominal.

We believe that our continued success with the CSG ACP platform will position us to support our clients' new product offerings and will provide growth opportunities for both our clients and ourselves.

CSG's Global Software Services division produced $47.1 million in revenues for the quarter with a contribution margin of approximately $3.6 million.

The GSS division had strength in software license revenues and also professional services for the third quarter.

The results for the Global Software Services division include non-cash charges of $5 million, associated with amortization of intangibles, stock-based compensation and depreciation.

We expect that our GSS decision division will continue to have positive contribution margins going forward.

We continue see our client relationships strengthening and are especially optimistic about the opportunities within the Asia-Pacific market.

India continues to be a country in which we're very strong, and we continue to focus on telecom providers in China, to expand beyond our current relationships.

As of September 30, our bill trade accounts receivable totaled approximately $123 million, net of the allowance for bad debts of approximately $5 million.

This compares to the June 30 net billed accounts receivable balance of approximately $124 million.

The billed trade accounts receivable reflected days bills outstanding, or DBOs of approximately 65 days for third quarter consistent with the second quarter level.

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

Cash flow from operations for the third quarter were approximately $25 million, investment in capital expenditures increased moderately from the second quarter totaling $2.7 million for the third quarter.

During the third quarter we repurchased 846,000 shares of CSG stock at a total purchase price of approximately $13 million.

Including these shares, the total shares repurchased since the inception of the CSG stock repurchase program totaled 9.3 million shares, and as of September 30, 2004 the remaining number of shares authorized for repurchase under the repurchase program, totaled 5.7 million shares.

In June of this year we completed an offering of $230 million of 2.5% senior subordinated convertible contingent debt securities in a private placement.

As part of this offering, we have the option to settle the securities in cash or CSG stock.

Since the time of our issuance of the contingent convertible debt, the consensus decision by the emerging issues task force on issue number 04-8, has been ratified by the Financial Accounting Standards Board, and is expected to become effective during the fourth quarter of this year.

Under these revised accounting rules, shares can be potentially issued under contingently convertible debt instruments, should be included in the diluted earnings-per-share, regardless of whether any of the contingent conversion triggers have been met.

We expect to make an irrevocable election in the fourth quarter of this year to settle the $230 million principal portion of the convertible debt in cash.

We will retain the option to settle any premium in excess of the principal amount of the convertible debt, in either stock or cash.

With this election, potential dilution will only occur for the value of the convertible debt in excess of $230 million which results when CSG's average stock price exceeds the current effective conversion price of $26.77.

If we were not to elect to settle the principal portion of the convertible debt in excess of $230 million, which results when CSG's average stock price exceeds the current effective conversion price of $26.77.

If we were not to elect to settle the principal portion of the convertible debt in cash, the new accounting rules would result in approximately 7% dilution, as a result of including the future share dilution associated with the total potential shares that could be issued upon conversion.

Our contingent convertible debt has a maturity of 2024, and the first print and call options are in 2011.

As of September 30, 2004, cash and short-term investments totaled approximately $139 million.

Based on the cash generation strength of our business we are comfortable that we will have the means to fulfill the cash settlement election on the convertible debt securities.

We also believe that he we will have sufficient cash resources to continue to invest in our business and to continue to repurchase shares of CSG stock in the open market.

Additionally during the third quarter, we completed $100 million revolving credit facility with a bank group, which will provide CSG with additional financial flexibility and liquidity.

This revolving credit facility allows us to have opportunistic capital available as we manage and grow our business.

For the third quarter, we generated strong overall financial results and we believe that the remainder of this year will continue to be strong.

For the fourth quarter of 2004 we are expecting that revenues will range between 127 and $134 million, we anticipate that processing revenues will be between 80 and $81 million, and that software maintenance revenues will range between 23 and $24 million consistent with the third quarter.

We expect that professional services revenues will total between 16 and $18 million.

And software license revenues will range between 8 and $11 million.

As of September 30, our software and services backlog totaled approximately $103 million, our software and services backlog declined sequentially from the second quarter, as a result of certain software license and services revenues being recognized which had been deferred as of June 30.

We are projecting that the total expenses in the fourth quarter will be between $110 million and $113 million.

Included in these projected expenses are amortization charges of approximately $7 million, depreciation expense of approximately $3.5 million and stock-based compensation charges of approximately $3.5 million.

Based on these targeted revenues and expenses, we anticipate that earnings per diluted share for the fourth quarter will be between 21 cents and 27 cents.

This is based on an effective tax rate of 32% and diluted shares outstanding of approximately 50.3 million shares which assumes no dilution from the contingent convertible debt.

The lower tax rate for the fourth quarter provides one to two cents of benefit to the earnings per diluted share.

We have implemented a tax deferral program for international business, and we are starting to see benefits from this program.

On a normalized basis we expect that our estimated effective income tax rate will be between 35 and 37%.

With our financial performance for the first nine months of this year and our financial guidance for the fourth quarter, full-year revenues are expected to be between $520 million and $527 million, and GAAP earnings-per-share are expected to be between 89 cents and 94 cents.

This includes approximately $56 million of non-cash charges associated with depreciation, amortization, and stock-based compensation.

We expect that cash flows from operations for the fourth quarter will range between $24 million and $28 million, and for the full year cash flows from operations will range between 121 and $125 million.

In closing, we are extremely pleased with the financial results for the third quarter and we continue to be very optimistic about the activities we are seeing within the broadband markets, along with the expanding opportunities within the Asia-Pacific market.

We believe we are best positioned with our products and services to benefit from the activities that are occurring in the markets we serve, and we expect to aggressively compete and win this business.

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

Thank you sir.

Ladies and gentlemen, we will begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question is from Ashwin Shirvaikar with Smith Barney.

Please go ahead.

Thanks, congratulations on the very nice quarter.

Thank you,.

Thank you.

The first question is actually clarification on the tax rate, if you will, for next year on a go-forward basis.

You did say 35 to 37 so that's a little bit lower than the prior guidance, correct?

That's correct.

We're starting to see the benefits of a tax deferral program that we put in in the second half of this year and we think it'll give us full benefits next year.

Okay.

The second question is under what condition would you -- what would need for happen for CSG to not settle the convert in cash.

I mean, it seems like a pretty strong argument to actually do that.

For us not to elect the --

Why the language if this, if this that.

It seems like a clear case to me.

When we originally wrote the terms for the convertible debt we gave ourselves the option back in June to either have the option to settle the principal or the premium either one in cash or stock.

As we started looking forward on the growth opportunities in our cash, and where we had opportunities to invest that cash, and the amount that we saw that we would be producing we thought that it was the appropriate thing to elect cash, and not use our stock as a means to settle.

Coupled with that, at least for the principal amount for sure.

We felt like that was the right thing to do especially with the change in the accounting rules that came about from the EITF and the FASB, we thought it would make sense to be as clear as possible how we intended to settle the security.

A final question if I may on Kenan FX.

Could you provide some insight to the clients who have already signed up for Kenan FX are resulting in incremental professional services revenue or other software revenue.

Is that flow through happening?

As we deliver and implement the Kenan FX platform on behalf of our clients, we are recognizing revenues from that.

Yes.

I know, but the flow through from Kenan FX clients --?

The incremental from the modules and any other incremental work,

Yes.

We are starting to see that as well.

We have clients that are buying modules and those are being implemented, and as that's done both the services, the maintenance, and the license revenue is being recognized.

Great, thanks.

Thank you.

Thank you.

Our next question is from Marianne Wolk, with Susquehanna.

Thanks a lot.

Couple questions, first of all, Peter, can you talk through some of the reasons why the broadband margin fell from 43 to 38%.

I was especially curious if the RPU rose so much higher than any of us expected, and were there any reallocation of expenses from the Telco unit to the broadband unit, or transition cost for the new platform.

And then the second question was just a wide range in your guidance, it was a little -- it's a little bit wider than I would have thought given the revenue guidance.

Can you talk through some of the factors that could swing the margins either way?

Thanks.

First of all, on the broadband margins, Marianne, what we announced was that we would be implementing merit increases for all our employees in the third quarter, and adding more staff to support the VoIP roll-outs that we saw with our clients.

We have done both of those, and as Neal commented in his opening comments, we're seeing clients roll out voice over IP, he commented about Time Warner New York, and so we see the needs to have the people there to support our clients as we deliver these systems to support their new services.

Should we expect further weakness then in those margins over the next few quarters, as you start to ramp the Voice over IP services more broadly?

We believe we'll have the staff on the rolls and part of our organization this year so we do not anticipate that there will be meaningful change in our margins next year.

And then on your question about the wide range of guidance, you're talking about the fourth quarter, the range of guidance on the operating margins?

No the 21 to 27 cents.

Well, the main driver on that is the function of the range in revenues.

We've got a range from 8 to $11 million on the license fees.

And so that is the main driver of the broader range of the revenues, and has an impact on the bottom line.

Just so we get a better handle on that how concentrated with the software licenses in the Telco business this quarter.

Were from any 10% customers?

10% of total revenues, No.

10% of the Telco software.

I can't think of anybody that was over 10%.

There's none that come to mind off the top of my head on that, Marianne.

Okay.

Thanks.

Thank you.

Our next question question is from Tom Roderick with Thomas Weisel Partners.

Please go ahead.

Good afternoon.

Hi, Tom.

Asia-Pacific region, looks like things are going along really well there continued, and as you look at India versus China, those have been two areas that you have's talked about recently, can you point to where you're seeing more opportunities and what role partnerships are playing for you over in Asia-Pacific?

Do you want to start and I'll jump in.

Yeah, I'll start.

I think the best way to answer the question is I think they both offer excellent opportunities for us and they may be just a little bit different.

In India, I think we have an opportunity to consolidate positions that are already strong with existing clients.

To extend our product, to possibly be able to bill for more of those services than are currently being billed today in terms of wireless versus wireline, and also go deeper into the account in terms of wrapping, building operations support, and potentially having a little bit more longer term visibility in those accounts.

In China, a little bit more of a new market for us.

We've had a lot of success in generating revenue with partners, without having cost get way in excess of where we see revenue generation.

Certainly the size of the market in China is extremely large. 400 million potential clients grow into 700 or 800 million clients over the next 3 or 4 years, both in wireless and wireline, so there's a lot to play for in China in terms of new growth.

Last quarter we had a couple nice deals, (Schechuan) Telecom and Shanghai Telecom, can you give us how much those were able to benefit you this quarter, and if any of that contribution was part of the reason why deferred was down a little bit this quarter.

Do you want to take that?

Tom, we don't it wasn't give a breakout of any revenue by client in that way for any of the business, other than what we report on Comcast, what their percentage is.

We're in the process implementing both of these projects in China that you referenced and they would have been in a certain amount of visibility in our software and services backlog, and to the extent that we delivered some off of that, that would have reduced the software and services backlog number between quarters.

The big difference in the software and services backlog, was one delivery of certain project work and license work as well as a certain amount of the maintenance.

Since fourth quarter is our heavy maintenance period and when we have heavy renewals, you would expect some drop associated with that.

Great.

Touching on voice over IP here, being a modest driver, I think last quarter we talked about seeing some consulting revenues coming through.

Was the Time Warner work largely consulting, or is this moving on actual operations of how Time Warner is operating now?

Good question.

Tom.

The Voice over IP revenues would have been very nominal for the quarter when you look at the total revenues that broadband would generate.

The type of work that we would have been done for Time Warner in New York would have been start up services and the fees would not be material at this point.

Our business model is to make money over time as our clients drive services, and we're structuring this as heavily a recurring revenue model.

Okay.

Great, thank you, guys.

Thank you.

Thank you,.

Our next question is from Donna Yeagers from Janco Partners.

Please go ahead.

I'm here with Matt Riegner too.

Kenan that was a nice jump in margins.

How sustainable do you think that jump is, and is your goal still 10%.

Actually it's higher that longer term Donna.

We would think if we could get the critical mass of revenues, that there's opportunity to get contribution margins of 20%, but that's over a Longer time period.

We believe that the margins are sustainable.

We think we have the right expense base and allocation of expenses in place.

The important thing that is we have to continue to deliver revenues every revenue every quarter -- we believe it's a -- the market can support it, but there is still long sell cycles and so there still could be some choppiness in the market.

Great.

One other question too.

Is dish, is EchoStar a 10% customer and I notice you guys just renewed their contract to '06.

That's only two years.

Is that sort of their standard contract length?

First of all, Donna, they are a 10% customer.

They're just slightly over 10%.

You're correct we did renew them, I want to say it was at the end of the first quarter to go through into 2006, and it's not unusual for them to do shorter-term renewals.

That would be more the Norm than the abnormal.

Thanks.

Uh-huh.

Thank you.

Our next question is from Jeff Porter with Wedbush Morgan Securities.

Please go ahead.

Thanks, hi, everybody.

Hello.

Hi.

You talked a little bit about VoIP and mentioned high-speed internet.

What are you expecting in terms of other incremental opportunities at cable customers both right now and over the next year or two?

This is Ed Nafus, I would say say primarily the Voice over IP is obviously the leader, but the care products that we have, the work force products, and the early, some of the early things that we're seeing on the wireless side, are certainly reason to couple with the new platform that we've come out with.

Those would probably be the primary hitters in the near future.

Okay.

And in terms of VoIP, when do you expect, to see a significant revenue ramp in that?

Jeff, this is Peter.

When you look at the revenues on that, it's going to be a driver of the volumes that our clients deliver, and so when you look at what the projections are, both by third-party industry analysts as well as by the companies, they're being cautious in 2005, they show the volumes ramping by the end of 2005, and that's when we'd expect that you'd start seeing measurable dollars that would have an impact on our financials in the second half of 05.

And do you expect that to increase your RPU as well?

Yes, we do.

And lastly I'm curious how many total customers do you have that upgraded to FX.

17, we have 17 Jeff.

Michael Turits with Prudential Equity Group.

Hi, guys.

How are you?

Good.

Good, thank you.

I jumped on right but I know you've been talking about Voice over IP and also how things have been going to Asia-Pacific, but to the extent that you can, can you be specific about where the investments that you've made in these quarters have gone into those two areas of voice over ip, and how -- and what kind of returns you expect to be getting on them and what the time frame would be?

Well, Michael, the incremental investments we've been making have been primarily in the third quarter we added staff and these are the people that actually run the operations, work with our clients on both the implementation as well as the ongoing support of their product offerings on to our systems and applications, so if you think about it, they're all operational staff that are part of the day-to-day delivery of the services for our clients.

These are not one-time costs.

The application itself was always part of our existing staff.

We really didn't see a lot of additions to staff around the development team.

So we've been building this platform for about two years, and so the bulk of the investment has been over the last two years.

So now we're focused on rolling it out.

This is a business that we believe that the clients add incremental staff, or I'm sorry, add incremental subscribers buying the telephony service, that it will have a return for us and as I said earlier on the call with Jeff Porter was, that we believe it's going to be in the second half of '05 that we'll see the volumes of revenue that reach levels that are meaningful and measurable to us.

It'll work in terms of returns if it stays at kind of like for pennies of incremental RPU that my guess is, it's at right now?

Yeah, in time.

Yeah, certainly.

Okay.

And in APAC where are most of those incremental investments, and what's the time frame for a pay back?

In APAC the investment wasn't as heavy as what we did in broadband side.

It's primarily going to be in the delivery and support organizations.

We anticipate as we cement more relationships is when we'll be adding the resources.

We are very strong there and we think we'll continue to be strong and as we win the business is when we'll be adding staff.

Michael, this is Neal.

We just need to make sure we stay ahead of the power curve.

We've got some big long-term opportunities coming forward in that area.

Okay.

And as you know, you just want to make sure you have the people in place to stay before the power curve when you finally land those.

Thanks, guys, talk to you soon.

See you Michael.

Thank you.

Thank you.

Our next question is from Semir Hosten with Okemos Capital.

Please go ahead.

Hi, guys.

Good quarter.

Thank you,.

Thank you. (multiple speakers)

What are the total amount uses of cash, what other purposes could you see cash with, besides the CapEx?

We've been consistent in the past of buying back our shares in the open market.

It's something that we're not opposed to doing.

We don't have the opportunity to pay down our debt, since it's now in a convertible bond, so we won't be applying the capital there.

We would expect to look to find opportunities to invest back in the business, whether that's spending money to take assets we have and convert them into processing businesses, or to see if we can do things to move market share on an accelerated basis.

We're not opposed to either one of those, and with the amount of cash we've produced we've shown a history and willingness, and would expect to do so in the future that we with would buy shares back in the open market.

Could you elaborate what kind of details to increase market share, or that conversion that you just referred to?

You used the term deals, and the nature of deals is such that you can't really put them in a box and say they would all be the same.

It's something that would move market share in the domestic broadband space, it could be to accelerate moving clients on to Kenan FX and a service bureau, those are all things that we're pushing for as initiatives in our business, and those are things that we'd be willing to do, we've done it in the past and we'll do it again.

Give that stock is trading at material discount to peers, 11% free cash flow yield, is it reasonable to expect the same level of aggressiveness in the share buy-back going forward?

I don't we want to give too much of a statement on that within the public markets but we've got quite a number of shares you know, still authorized under our plan, and we're comfortable with the amount of cash we buy -- or cash that we produce that we could be aggressive in the marketplace if we chose to be.

This quarter didn't see any fresh leaders coming out of China, is that just a timing issue or are you still working on deals?

Can you just tell me how that market's progressing.

We have not announced any new contracts in China through press releases.

Al, do you want to talk about how things are going in China?

No, very positive on the deal flow.

It seems to be a product centric market.

It's Greenfield.

There seems to be a lot of pent-up demand for a product centric model, which is basically our sweet spot.

We've developed some very good partnerships which we're leveraging because we've had some win,s and I will just tell you the amount of business that we are responding to, and have been responding to, is probably indicative of what we might see in couple quarters out.

Okay, got it.

Thank you so much and great job on the quarter.

Thank you, thank you. (multiple speakers)

Thank you.

Our next question is from Thomas Ernst with Deutsche Bank.

Please go ahead.

Yes, good afternoon.

Can you hear me?

Yes.

Yes.

Yes, good afternoon, thank you.

You mentioned that you have active projects with each of your broadband customers for Voice over IP which sounds great.

Can you talk a little bit about what the evaluation process was, how competitive was the selection process, and looking forward do you think that you've already won the mandate across your customer base, or do you think there's still open competition as the business scales?

In across the footprint, you know, it's been a fairly extensive list of activities that we've gone through and what I guess I would describe primarily as a proof of concept on through to, now some actual subscribers being processed.

So in that regard, it's been, if you will, an open dialogue with all of our clients.

Obviously I'm not going to speak for our clients in terms of where they're at, other than to say that we're actively engaged with everyone that is going to go into the Voice over IP space, and at some level of activity, be it in the early stages of planning, clear through to implementations which we've completed, so I would not stop short of saying it's a mandate, but things are going along quite well.

I think people are very impressed with the work that's gone into, the thought that's gone into the product, and in the early stages of implementation, the work that goes into rolling these out in a seamless manner.

Were any of these selections noncompetitive or did all of them involve a full competitive evaluation?

Well, pretty much we do involves a competitive situation.

There's no free lunches out there for anybody.

I assumed as much.

What was competitive behavior like?

Were the main competitors aggressive and who was the most present across your customer base?

I would probably hesitate to elaborate on that other on that say all of the usual players were very present and everyone had their day in court.

This is Neal.

I'm going to jump in.

Based on the feedback at least that I've been getting from our customer base, regarding, the ACP product, what we've done in the telephony world, and importantly what Ed and his people are doing in implementations, I'm very pleased and I think we're getting very, very good feedback from our customer base, and the people using it, and just look for us to be -- to remain very, very competitive out there.

Okay.

Sounds good.

And if you'd permit me one more follow up to that.

Outside your installed base, are you winning Voice over IP projects with some of your competitors's bigger customers?

Not on the broadband side, no, no.

We're pretty well full up with activity in terms of in our footprint at this stage in time.

Great, great, thank you.

Thank you.

Our next question is from David Schneider with Hoover Investment Management, please go ahead.

I was wondering if you could repeat a couple of the numerical things, like what was amortization in the quarter?

Amortization was $6.8 million.

6.8.

And stock compensation in the quarter?

$3.5 million.

Okay.

All right.

That's about it for me.

Thanks.

Thanks,.

Thanks, David.

Ladies and gentlemen, if there's any additional questions please press the star followed by the one at this time.

And as a reminder if you're using speaker equipment.

You will need to lift the handset before pressing the numbers.

The next question is a follow-up question from Marianne Wolk, please go ahead.

Just a quick follow on the broadband rollout of Voice over IP, 5 accounts there, were these all members of your top accounts or your top 5 cable customers?

Or --

Are you talking about a ACP or Voice over IP, or both?

You know what, I thought that the ACP subscribers and ACP was primarily for the Voice over IP roll out.

Is that not the case?

Not completely but ACP is part of the activity that is in place prior to bringing up the voice product.

So if we just look at the Voice over IP roll out, were there five major customers that you used you for processing there or was it fewer?

No, it's fewer.

In terms of the major customers they're all in earlier stages of roll out at this, probably with the exception of Time Warner.

Okay.

That's what I thought.

Thank you very much.

Bye, Marianne.

Our next question is a follow-up from David Schneider.

I think I answered my own question.

The licensing is basically synonymous with the software line.

Yes, it is.

Okay.

Thank you.

All right, David.

Thank you.

Our next question is from Peter Jacobson with Kaufman Brothers.

Please go ahead.

Thank you.

In Neal's earlier comments he mentioned that there was a trend towards outsourcing.

Was that in the context of externally procured system of any type, or was it in the context of specifically service bureau offerings?

This is Neal, Peter.

Hi.

You're seeing people take hard looks in both areas.

As Al mentioned earlier, China has gone through and is going through, and significant transformation in terms of looking at packaged software from the outside world and, of course, we're being very effective in that area.

In other parts of the world, you're finding accounts who are in varying degrees wanting to take a standardized solution such as ours, wanting to get us to commit to some long term activities and relationships with that account, and then determining that they may not be best suited to do all the activities around supporting that application.

We have seen that in EMEA, I think we talked earlier about British Telecom.

We've seen that in Asia-Pacific with a third-party partner of ours, and we're seeing more and more indications that I think just as we predicted a year or two ago, people are realizing they have a lot more on their plate than taking responsibility for updates, and taking responsibility for running these things on a day-to-day basis.

So I think it's a general trend.

Okay.

Thank you very much.

Thank you.

Thank you.

We do not have any additional questions at this time.

If there aren't any more questions, what I'd like to do is wrap it up, and say once again thank you to all of our investors for your inquiries and keeping us on our toes, and your patience, and we're very excited about what we've just done this quarter, and we're very much looking forward to the rest of the year.

So thanks again, and we'll see you in three months.

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

If you would like to listen to a replay of today's conference, dial 303-590-3000, followed by access number 11010076.

Once again, we thank you for your participation.

Have a great evening.

You may now disconnect.