CSG Systems International Inc (CSGS) 2004 Q4 法說會逐字稿

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

Welcome to the CSG Systems Fourth Quarter Earnings Release Conference Call.

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

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

If any one needs assistance during today's teleconference, please press the "star" followed by the "zero" and the conference coordinator will assist you.

As a reminder, this teleconference is being recorded Tuesday, January 25th of 2005.

At this time, I'd like to turn the presentation 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, provide products and services that meet the needs of the marketplace, manage our international operations, which by nature is much more complex and carries a higher collection risk, and our ability to successfully deliver on lengthy and/or complex implementation projects.

All of 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.

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

We have with us today Neal Hansen, Chairman and Chief Executive Officer, Peter Kalan, Chief Financial Officer, Hank Bonde, President and Chief Operating Officer, Ed Nafus, President of our Broadband Services Division.

Alan Michels, Executive Vice President of our Global Software Division.

Mr. Hansen will begin.

Well, thank you Liz, and thank you all for joining us this afternoon.

Well, it's fair to say that 2004 was a transitional year for the Company.

We ended our fourth quarter results with a great sign of the progress that we made.

For 2004, we had four very clear directives.

First, we needed to provide some visibility and clarity, relative to our relationship with Comcast.

This was accomplished in the first quarter with a new five-year contract.

Second, we needed to take $30 million in expenses out of the business, which we did.

Third, we needed to restructure our debt so that we had maximum flexibility for use of cash.

We announced our convertible debt offering in the second quarter and bought back over $56 million worth of stock this year.

And finally, we needed to have our GSS division be contribution margin positive, which we accomplished each quarter this year.

Our fourth quarter results demonstrate the momentum that we are seeing in our broadband division and the progress that we made in the software division.

In the fourth quarter, we had a very solid quarter from a revenue perspective and our earnings per diluted share net our guidance, in spite of some one-time charges.

Revenues were $136.6 million.

And GAAP earnings per diluted share were 24 cents.

One time items negatively impacted our earnings per diluted share by 3 cents.

In the last quarter we said that while the operating environment was difficult that we were starting to see increased activity in the broadband in the Asian markets.

I think our results today, in the contracts that we have signed recently, reinforce that point.

In our broadband division, immediately after the quarter, we signed a contract with Comcast to help them provide Voice-over-IP services to all of the CSG subscribers, which is two-thirds of their customer base.

Comcast now joins other CSG clients like Time-Warner, Adelphia, Susquehanna, and Wide Open West, just to name a few, been turning to us to help them rollout advanced services like Voice-over-IP and high-speed data services.

Next, Ed Nafus and his team renewed all the remaining contracts for 2004, leaving us with no significant contracts up for renewal in 2005.

In the fourth quarter, we were able to renew our contract with Bell ExpressVu, Bell Canada's direct webcast satellite arm and with Bright House Networks, an operator with over 1 million subscribers in the Southeast.

In addition, we were able to win new customers this quarter.

First, we have been selected to provide the customer care and billing for Verizon's fiber to the home project.

And we'll be working with Motorola as Verizon rolls out their new video offering.

Second, we won one more piece of business with Time Warner in Shreveport in Louisiana.

And they will convert off their old legacy billing system onto CSG's advanced converging platform, allowing them to offer multiple products and services to the customers.

And third, we won an additional piece of business with a video operator, C-bridge which is run by former Classic Communications executives.

Finally, our broadband customers continue to turn to us to help them run their operations more efficiently.

We increase the penetration of our call center products with companies like Adelphia, Susquehanna, and Time Warner and our work force automation products with Time Warner.

In fact, CSG is now the largest provider of workforce management services to the nation's broadband and DBS operators.

We support 32,500 technicians, 26 under dispatchers, and over 20 million customers nationwide by automatically scheduling, dispatching, and routing technicians as they provide onsite customer service.

All in all, this was clearly one of the best quarters that we've had in recent years in our broadband division.

And you can sense the excitement as our customers are looking to provide not just the triple play but add additional products like wireless and premium content services to the bundle.

Next, our Global Software Services division continued to be a contribution margin positive this quarter.

Our goal is to overtime, get our GSS division to financially perform more like a traditional software company with contribution margins in the 20% range.

Clearly, we are ways from achieving this goal.

However, with our investment in our Kenan FX Business Framework, and our deepening relationships with our customers, I am hopeful that we can improve the performance of this business in a steady fashion.

This quarter, we were selected by another China Telecom property, Zhejiang Telecom to consolidate its four legacy billing systems onto our Kenan FX platform.

When deployed, the FX solution will support up to 13 million subscribers in 11 cities across all of Zhejiang's Telecom services, including wire line, IP, and broadband.

Now this announcement marks the fourth China Telecom property at which CSG has been selected as the exclusive customer care and billing provider.

We've already implemented our FX solution at Beijing Telecom and we're in the process of implementing our solution at Schechuan and Shanghai Telecom.

We're working with Accenture, Zhejiang Telecom.

And speaking of Kenan FX, we had several more successful implementations this quarter, implementations including CTBC, a regional, Brazilian convergent operator.

MobileOne, Singapore's leading -- one of the Singapore's leading mobile players and Celcom, a Malaysian wireless provider.

In recognition for the investment in the progress that CSG has made with our Kenan FX platform, we were recently awarded Frost & Sullivan's Product Leadership Award.

That award citing that CSG is the market leader in software licenses for the global billing software market.

This type of recognition is an important validation of our investment.

In addition, in this quarter several more clients chose to upgrade our Kenan -- to our Kenan FX solution.

We continued to deepen our relationship with Bharti, a leading Italian -- leading Indian telecommunications provider with their purchase of FX.

This will allow them to be a true postpaid, prepaid integrated solution provider and will enable them to manage their 100% plus annual subscriber growth.

Others that are upgrading to FX include Dacom, a Korean IP provider and Cable & Wireless, Europe, an IP and wireline provider.

And finally, VinIQ an online automobile eCommerce site has selected Kenan FX to provide the billing expertise and the functionality in combination with Advanced Operations expertise of business solutions.

We have some work to do in this division to get it performing financially where we would like to see it.

But I am pleased with what our people have accomplished over the past year and over this quarter.

Next, we've added Hank Bonde as President and Chief Operating Officer.

Hank has tremendous amount of experience in the software, wireless and in the international markets.

As you know, he joined an extremely capable and qualified team here at CSG, and we're very pleased to have him on board.

As we go into 2005, CSG has never been in a stronger position.

We have a solid company that generates strong cash flows for reinvestment in growth opportunities.

We have market-leading products.

We have a customer base that frankly is the envy of most companies.

We have tremendous people that put the customer first every day.

And finally, we have a plan on how to capture more market share within our existing customers and through new customer wins.

I have great expectations for what this company and this team can accomplish over the coming years.

I've carefully considered what will be required during the next phase of our company's life cycle.

In doing so, I determined that unless I was personally prepared to make a firm commitment as CEO for another three to five years, the company and our people would be better served by me stepping aside.

In doing so, I empower this management team to put in place a plan for our next phase of growth early in the growth cycle.

While this was a difficult decision, I believe it's the right decision at the right time.

I have had the pleasure of visiting with many of you over the past several weeks, and I just want to thank you all for your support of my decision.

But more importantly, I want to thank you all for your support of my team.

With that, I would like to turn it over to Peter Kalan, our Chief Financial Officer and ask Peter to give us a update on the business from a financial point of view.

Thank you, Neal.

And thanks to all who have joined us for today's call.

I am pleased to share with you today the financial results for our most recently completed quarter.

For the fourth quarter ended December 31st, 2004, total revenue was $136.6 million and net income under generally-accepted accounting principles was $12.3 million or 24 cents per diluted share.

Net income was negatively impacted during the quarter as a result of foreign currency transaction losses, which totaled $1.2 million or approximately 2 cents per diluted share.

Processing revenues totaled $84.3 million for the fourth quarter and software maintenance revenues totaled $24.3 million.

Professional services revenues totaled $18.5 million for the fourth quarter while software license revenues were $9.5 million.

Our processing revenues were higher than we had anticipated as we experienced higher usage of certain of our products and services by our clients.

The fourth quarter revenue of the company was also positively impacted by approximately $900,000 as a result of the weakening of the dollar against foreign currencies.

For the fourth quarter approximately 25% of CSG's total revenues were derived from international markets, which is a slight decrease from the third quarter.

Within the world regions, EMEA contributed 15% of total revenues, Asia-Pacific generated 6%, and Latin America delivered 4%.

Revenue associated with our largest client, Comcast, was approximately 16% of the Company's total revenues for the fourth quarter.

We continue to expect that revenues from Comcast will be in line with this percentage.

Total expenses for the fourth quarter were approximately $116 million, above the high end of our expectations and an increase from the third quarter's expenses.

Our expenses increased as a result of higher than expected revenues as well as incurring expense of approximately $500,000 related to accounting benefits, accounting for the benefits that Neal Hansen will receive as part of his announced retirement.

Additionally, the weakening of the dollar against foreign currencies had the impact of increasing expenses by approximately $900,000 for the quarter.

But fourth quarter gross margin was 46.5%, which is a sequential increase of approximately 1 percentage point from the third quarter.

The operating margin for the fourth quarter was approximately 15%.

For the fourth quarter, non-cash stock-based compensation charges for $3.4 million.

Depreciation was $4.4 million, and amortization of intangibles totaled $7.0 million.

These non-cash charges totaled approximately $14.8 million for the fourth quarter or 20 cents per diluted share.

Turning to the company's divisional results, the broadband services division generated $89.9 million in revenues for the fourth quarter and produced a contribution margin of $34.5 million or 38% of revenues.

Total non-cash charges within the broadband services division totaled $5.8 million the fourth quarter.

We finished the fourth quarter with 43.5 million subscriber accounts on our processing system.

The number of subscriber accounts decreased from the end of the third quarter as the subscribers of the dial-up Internet service provider were converted off of our system at the end of the year.

Excluding the deconversion of these subscribers, we experienced normal subscriber growth for the quarter.

The average annualized revenue per subscriber for the forth quarter was $7.67.

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

Approximately 19 cents of the $7.67 is considered seasonal usage, and we do not anticipate a similar level of these seasonal revenues in the first quarter.

Excluding the seasonal usage, the average annual revenue per subscriber would have been $7.48.

As many of you may recall, Comcast Financial minimums declined to $75 million in 2005 from $85 million in 2004.

As an incentive for Comcast to use more CSG Services than they contractually committed to, we provided them with an incentive on their subscriber billing rate in 2005.

The impact to our overall average annualized revenue per subscriber from the implementation of this discount is approximately 17 cents or 2%.

Though this discount goes into effect in the first quarter, we're seeing an increased usage of our products and services by various clients, which will offset the decrease.

Therefore, we expect that the average annualized revenue per subscriber for the first quarter will range between $7.40 and $7.50.

CSG's Global Software Services Division produced $46.7 million in revenues for the fourth quarter, with contribution margin of approximately $1.8 million, which is a sequential decline from the third quarter.

The GSS division experienced a continued increase in professional services revenues for the third quarter.

The results for the GSS division included non-cash charges of $6.1 million associated with amortization of intangible stock-based compensation and depreciation.

We targeted for the GSS Division to be profitable in 2004, and it generated approximately $7.6 million of contribution margin.

This is compared to a contribution loss of $9.2 million in 2003.

Total non-cash charges within GSS for the full year 2004 were approximately $22 million.

We expect that our GSS division will continue to have positive contribution margins for 2005, and we look to further increase the profitability of the division in 2005.

Turning to the balance sheet.

As of December 31st, our billed trade accounts receivable totaled approximately $142 million, net of the allowance of bad debt - for bad debt of approximately $4.8 million.

This compares to the September 30th net-billed trade accounts receivable balance of approximately $123 million.

The billed accounts receivable increased sequentially as we had significant billings at the end of the year associated with maintenance renewals and business closed in the fourth quarter.

The billed trade accounts receivable reflected days billed outstanding or DBOs of approximately 61 days for the fourth quarter, which is better than our previously communicated target range of 65 to 75 days.

Going forward, we expect DBOs to be in the 65 to 75 day range.

Cash flow from operations for the fourth quarter were approximately $22.3 million, investment in capital expenditures increased from the third quarter, totaling $4.2 million for the fourth quarter.

Cash flows from operations for the full year were approximately $119 million, which includes approximately $10 million of favorable changes in working capital related to the Comcast arbitration.

Investment in capital expenditures totaled approximately $10 million for the year.

We finished the year with approximately $158 million in cash and short-term investments.

During the fourth quarter of 2004, we did not repurchased any shares of the Company stock in the open market.

For the full year of 2004, we spent approximately $56 million on repurchases of the Company stock.

Going forward, we will be implementing a 10(b)5-1 plan for the purposes of repurchasing shares of the Company's common stock and are allocating up to $15 million per quarter for repurchases within the plan.

As of December 31, 2004, the remaining number of shares authorized for repurchase under the repurchase program totaled 5.7 million shares.

In December, we made an irrevocable election to settle the $230 million principal portion of our convertible debt in cash.

We 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 exceed the current effective conversion price of $26.77.

Now, I would like to provide you an overview of our financial expectations for the first quarter of 2005.

For the first quarter, we are expecting that revenues will range between 130 and $137 million.

We anticipate that processing revenues will be between 81 and $82 million, and that software maintenance revenues will range between 24 and $25 million.

We expect that professional services revenues will total between 17 and $19 million, and software license revenues will range between 8 and $11 million.

As of December 31, our software and services backlog totaled approximately $107 million, our software and services backlog increased sequentially from the third quarter as a result of strong sales within the fourth quarter.

In the first quarter of 2005, we will accrue approximately $4.2 million of expense related to the benefits that Neal Hansen will receive as part of his announced retirement.

We will also accrue a similar amount in the second quarter as well.

The payment of the retirement benefits for Mr. Hansen will occur over 18 months after his retirement date.

We are projecting that the total expenses in the first quarter will be between 122 million and $124 million, which include the accrual for retirement benefits.

Absent the retirement benefits accrual, total expenses would range between approximately $118 million and $120 million.

For the first quarter, our projected expenses include an increase in stock-based compensation of approximately $1 million over the fourth quarter.

We also anticipate that our expenses will be higher due to the weakened dollar against foreign currencies, which will increase expenses by approximately $400,000 versus the fourth quarter.

Included in these projected expenses are amortization charges of approximately $7.2 million, depreciation expense of $3.8 million, and stock-based compensation charges of approximately $4.4 million.

Non-cash charges are projected to total approximately $15.4 million or approximately 19 cents per diluted share.

Based on these targeted revenues and total expenses, we anticipate that earnings per diluted share for the first quarter will be between 8 and 14 cents.

The accrual of the retirement benefits has the impact of reducing earnings per diluted share by approximately 5 cents for the first quarter.

The effective tax rate for 2005 is expected to be between 38 and 40%.

This is an increase from 2004, which is primarily the result of the completion and resolution of certain tax matters in foreign jurisdictions during 2004, which resulted in a lower effective tax rate for 2004.

We are projecting diluted shares outstanding of approximately 50 million shares, which include the impact of projected stock repurchases in the first quarter.

We expect that cash flow from operations for the first quarter will range between $24 million and $28 million, and that capital expenditures will range between 3 and $4 million for the first quarter.

In closing, we are pleased with the financial results for the fourth quarter.

And going forward, we are very focused on taking advantage of the market position we have achieved.

We will continue to generate very strong cash flows and are committed to using our cash to enhance shareholder value.

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

Thank you.

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

If you would like to ask a question on today's presentation please press the "star" followed by the "one" on your pushbutton phone.

Would you like to decline from the polling process please press the "star" followed by the "two," you will hear a three-tone prompt acknowledging your selection.

Your questions will be polled in order they are received.

If you are using speaker equipment, we do ask that you please lift your handset before pressing the numbers, one moment for the first question.

Our first question comes from Tom Roderick with Thomas Weisel Partners.

Please go ahead with your question.

Hi.

Thank you.

Good afternoon.

Just wanted to ask maybe a bit of a follow-on question here regarding the Comcast deal, and obviously, this is something that folks have been waiting for, for a while, so a great deal there.

Can you offer any additional details?

And I recognize this is the first time you're talking about the rollout here, but can you offer any additional details around what the rollout plan would look like by region and what sort of timeframe we can think about that, some of the new functionality rolling to Comcast subscribers there?

This is Ed Nafus.

The rollout has actually started.

The first region was rolled out in late December.

And the schedule follows basically through the balance of this year and the first part of 2006.

And as we rollout, we roll out the ACP platform and follow closely behind with the Voice-over-IP capabilities.

Okay.

Great.

And as we think about the rest of your broadband customer base, there has been a big push to rollout ACP to that base.

Can you give us a sense for what percentage of your broadband customers are now on that ACP?

As of today it's about 8% of the total subscriber base.

Okay.

Fantastic.

Maybe, one last question here related to Comcast.

It looks, Peter, like your guidance for expenses -- operating expenses are set to go up a bit next quarter.

What percentage or what portion of that increase should we attribute to this fairly aggressive rollout and support necessary here for Comcast?

Tom, you can't really look at when you are in a service world attributing to any one client by the nature of the shared services that we provide, so I can't give you a breakout of the increase associated with one client versus another.

But I will tell you that Ed's team has built the infrastructure and the people to make sure that we can support our clients going forward.

And it's in the general rollout of voice and ACP that you would see the increased cost on this side of the business.

So is it fair to attribute the increase here in operating expenses to optimism in the business and support for that?

You can't look at the expense increases that we're projecting and attributed solely to Ed's business.

As I said, we have several items -- we have the increase in stock base comp associated with new grants that will be taking place in the first quarter of this year towards employee base.

You will see that we have some FX increase attributed or causing an increase in our expenses.

And then in the fourth quarter we got certain benefits around our cost or fringing related benefits primarily on the GSS side that would have attributed to some of the increase of first quarter over fourth quarter.

But there will be increases on Ed's business as we continue to build-out the support for the ACP operations.

Okay.

Great.

Thanks for the details.

I will turn it over to others here.

Thanks.

Our next question will come from Ashwin Shirvaikar with Smith Barney.

Please go ahead with your question.

Thanks for taking the question.

It's on gross margins -- is the first question.

Could you go through some of the factors that are impacting, in particular -- that seemed to be impacting processing gross margins?

Is the full impact of the salary increase and all that stuff in there now?

What are the other factors?

I will take this one.

Ashwin this is Peter.

The increase in costs associated with the processing businesses is related to additional staffing and costs that we put into place in the fourth quarter associated with the ACP and voice support that we're doing for our clients.

Additionally, as we took some of our resources off of R&D projects as they became completed, we redeployed them to more of maintenance and support side and that would have contributed to that as well.

Cause as you see, our overall R&D declined sequentially.

And some of that is a shift from R&D up in the cost of the product.

Okay.

And as we look you look at the last four quarters, obviously processing gross margins have declined sequentially each quarter.

Do you think that is starting to bottom out now?

And what kind of trend should we see -- as we see some skill coming from the new clients?

I believe we're -- Ashwin that we're starting to see what would be the end of the decline on the margins.

We had to add staff in the second half of the year as well as we implemented are Merit increases in August, which would have cost some degradation of our gross margins around the processing.

We now would look over the coming quarters and primarily heavily more into 2006 to the processing revenues associated with new services start to pay for the investments that we made in the fourth quarter and third quarter of 2004.

So I think when you look at a time frame, we're really looking at 12 to 24 months to start seeing the returns on those margins back up to what you've seen in the earlier parts of 2004.

So 12 to 24 months before we get to the 53 or 54%?

I think that's a reasonable range to look for Ashwin especially when you consider the rollout of voice services and zapping one of the areas we'll be looking to drive revenues or receive revenues.

And many of our clients are taking an 18 months or 24 months rollout perspective on their offerings.

Okay.

If I could have just one more question with regards to management's selling of stock.

Is that -- would it be fair to say that the bulk of the selling is now behind us?

That's obviously an area of great concern to investors, particularly new ones who are interested in stock.

Could you perhaps near comment on that?

Well, I could comment on -- obviously I can't relay my personal plans over the phone, but you can look at what I have got, you can look at what I sold, and you can draw your conclusions.

Ashwin, this is Peter.

What I would add is that, remember that for a substantial amount of time the company and its managers were prohibited from selling any stock whether it was related to the Comcast arbitration and the pending new contract.

We had closed windows for approximately about two years at least, if I recall.

And when you look at the second half of 2004 that was the first opportunity for the management team to consider selling any of their shares.

And I think that has to be taken into consideration when you look at the activities in a narrow window.

For me, I've closed for over two years and most of the stock that was sold, that is, the stock that was sold or either owned for 10 years or the stock that I exercised options and held four or five years ago.

So I don't feel very guilty about selling.

Okay.

Thank you.

Thanks Ashwin.

And your next question comes from Thomas Ernst with Deutsche Bank.

Please go ahead with your question.

Hi.

Good afternoon.

This is Joseph Beuys calling for Thomas Ernst in Deutsche Bank.

My question is more on a generic level on the pipeline.

I would like to know whether you are finding because of these convergence of the cable space and the telecom space, etc, you are finding new competitors, other vendors that are coming from a telecom space, getting into the cable space, etc.

And if that's the case if you are foreseeing that you are finding other competitors are coming more from the Telecom space and getting into the cable.

Are you seeing bigger margins are going to squeeze in the short term?

Thank you.

If you look at North America, pretty much you're seeing the same old competitors.

And I think what we're seeing is the product is put together over the last year-and-a-half or two years are extremely competitive.

So I would think it's going to be very difficult for someone to grab much of a toehold there.

If you look on the international basis, we see one particular -- one competitor particularly making lot of noise about the broadband environment.

But, there is a lot to be done to implement successfully in broadband.

Its much more complicated process, and so, I think we'll hold our own there.

Okay.

Thank you very much.

Thank you.

Our next question comes from Jeff Porter.

Please state you company affiliation followed by your question.

Hi.

I am from Wedbush Morgan Securities.

Regarding the China Telecom properties, can you give us some idea of how the pricing on those differs from your other contract or how maybe how it affects our too or anything like that?

I will take this first, Jeff.

This is Peter, and then Al Michels can chime in as well.

Our pricing is China is going to be less than what you would see from a license perspective; less than what you find in other margins just because of the nature of the size of revenues that they get for their offering to their consumer.

And therefore, that there are -- effectively lower, and therefore the value of the software gets diminished within the local marketplace.

We don't give specifics of what we get paid on one client versus another purely for competitive reasons, but based on how we're delivering the service and working with partners, we feel like even with a lower local market price that we have to compete in that can still be profitable and be competitive at the same time.

Al, do you have anything to add?

Yes.

I would agree with Peter.

Certainly, the size of the market -- certainly, we think at this point in time could possibly underpin and support the license pricing today, plus we have price upgrades a little bit differently than we normally would price.

And in the China market, we don't provide upgrades in the value of maintenance.

So, therefore, that might give us additional revenue opportunities going forward.

And Jeff, I -- this is Liz;

I just want to make one point in clarification.

I want to make sure that you understand that when we provide our proved guidance on the $7 amount that that is just the broadband business.

Thank you.

Thanks.

In terms of the GSS contribution margin going forward, I mean, you said you want to get up to around 20%.

Anything --anyway we should look at that going forward in sort of trending this year or any timeline for getting to those levels?

I think this -- if you look in '03 we had a minus contribution.

I you look at 2004 we had a positive contribution every quarter for the year, and you should look at that trend line continuing.

I'm not going to give a timetable or give you a specific number.

But we have the trend going the right way.

Within that trend-- so that you know -- I reserved the right strategically to decide that we're going to spend little more money at some point in time or less money at some point in time, because we see opportunities out there.

But I think the net of that trend is definitely going the right way, and we anticipate it to keep going that way.

Okay.

Great.

Thank you.

Thanks.

Thank you.

Our next question comes from Michael Turits from Prudential Equity Group.

Please go ahead with your question.

Hi everybody.

It's Mark (ph) for Michael.

Hi Mark.

Hi guys.

Going back to China, I have a question.

These are all part of China Telecom.

Is there an overall framework agreement with China Telecom and then each one of these guys, each one of these provincial regional ones, do they sign on?

Let me, this is Neal, let me jump in.

As usual, I imagine I've got seven competitors on the phone, so we will not give you any information about the overall agreements.

No, I am actually wondering about the structure of China Telecom.

Is it kind of like AT&T in 1982 where they had all these regional bells that were separate companies but yet they all reported to the mother ship are these separate entities are they loosely affiliated with China Telecom?

Both would be --you can characterize both of your comments as being accurate.

Okay.

And just how many other affiliate's of China Telecom are there out there?

I mean is it 30 affiliates or is just four that are somehow related to China Telecom?

Just trying to get a basis.

I mean if you are in some part of China Telecom, I just did not know how big it was.

There are at least five or 10 more and there is a couple of very, very large provinces that are more component of China Telecom.

5 to 10 more in addition to the four you've signed?

There is about 10 more and if you look at the amount of population in each of the provinces, there's probably 80% of the population covered by China Telecom probably can fit within two or three of the provinces.

Okay.

Great.

Thanks a lot guys.

You bet.

Thank you, sir.

Ladies and gentlemen, if there are additional question at this time please press the "star" followed by the "one" if you are using speaker equipment we do ask to please lift your handset before pressing the numbers.

One moment please, for the next question.

Our next question comes from Marianne Wolk.

Please state your company affiliation followed by your question.

You talked a 2-cent currency adjustment.

What tax rate are you using there?

Or can you give me a sense of what pro forma net income should be?

And then secondly in terms of the return on investment of the voice ramp, I mean should we start to see sort of a gradual improvement in margins in the second half of '05?

I mean is it going to get worse before it gets better?

Give us some sense there.

Thanks.

Marianne, this is Peter.

First of all on the tax rate that we used for the fourth quarter is 32%.

It is what we used for GAAP and also used for the 2-cents per diluted share of calculation on the foreign- currency transactions also at $1.2 million.

From the voice-over-IP in return on investment as our clients' rollout the services we will start seeing the revenues.

And we think that it will have positive contribution margins to us on that piece of the business as we go into 2006.

So Peter, does it get worse before it gets better?

I mean should we be looking at sort of a further erosion in the margins and in the second and third quarter, before we start to see things improved?

Just soft of give us a pattern or a trend we might look at?

Marianne, I think I'd understand your question.

As we look at it, we have the expense structure in place to support our clients voice-over-IP offerings.

And therefore as they start adding more subscribers on to our systems and we start getting the economic benefits of that, then what we will see is a positive -- positive impact to the contribution margins of the broadband division.

And so we don't see any further degradation...

Perfect.

Thank you.

Your welcome.

Thank you, Marianne.

Our next question comes from Donna Janco with Janco Partners.

Please go ahead with your question.

Donna Jaegers from Janco Partners.

Hi Donna.

Hi Donna.

I guess I have say them both wide, so that way nobody gets confused.

Congratulations, Neal on your retirement.

Thank you, Donna.

Just one quick question.

I was curious what you're saying as far as the cable operators looking more at wireless.

And any sort of conversations you can share as far as if there will be using your billing system?

I know, I think Time Warner Cable is trailing this in Kansas City so far with Sprint.

I think we all have stories.

But then, Ed could probably give us the best...

I cannot really give you a lot of detail other than from our perspective what we have tried to do with our ECP (ph) product or platform is to prepare for those realities when they're finally rolled out.

We are certainly in early stages of discussions with several of our clients on that.

But rest of all, there is to report right now.

You turn the clock back, it's probably like talking about that VOIP two years ago.

Should we build into our models then a similar sort of expense ramp up, when we can make our guesses about when they might role wireless?

Are you going to see the same sort of expense hit by helping them role that out?

No.

We've really put in place the foundation for being able to service that with the ACP platform.

So you would not see the same types of investments that we have had to make to get to this point.

Donna, I think our product people and our operating people have done a terrific job with what they put in.

There will be some additional things we do, but what they put in give us a great base to operate from.

Okay.

Thanks.

Thank you, sir.

Ladies and gentlemen if there are additional questions at this time please press the "star" followed by the "one" and if you are using speaker equipment we do ask that you please lift your handset before pressing the numbers.

Well, if there are no other questions, I know you are all busy, you've got other earnings call at this point in time.

Let me just say thank you very much for your support and thank you for all the kind words that many of you have put forth personally.

And in advance, thank you for the wonderful support that I know you are going to continue to give this team.

Many of you told when we put together the one of the best management teams in the country.

And I really believe this.

And it is time for the old guy to get out of the way and turned them loose and we'll see, what they can.

So thanks a lot.

Thank you, sir.

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