CSG Systems International Inc (CSGS) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CSG Systems International first quarter earnings teleconference.

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. [OPERATOR INSTRUCTIONS] I would now like turn the conference over to Liz Bauer, head of Investor Relations.

Please go ahead.

Thank you, Heidi.

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 meet the needs of the marketplace, manage our international operations, which by nature is much more complex and carries a higher collections 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-K and 10-Q.

Currently, the Company has no intention to update this information during the quarter.

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;

Ed Nafus, Chief Executive Officer; and Peter Kalan, Chief Financial Officer.

Mr. Hansen will begin.

Good afternoon, and thank you for joining us today on our call.

Although March 31 was my last day as CEO of CSG Systems, you need to know that Ed Nafus was the driving force behind our first quarter performance.

Ed formally became the CEO of our great Company on April 1.

He's a proven and accomplished leader.

He has the ability to create win-win situations with our customers, as is evidenced by his work in our Broadband Division.

And he has the ability to motivate our people to excel.

Most importantly to those of you on the phone, he knows how to create value for our shareholders.

With that, I'd like to introduce Ed and say congratulations on a great quarter, Ed.

Thank you, Neal.

I'd like to thank you for your leadership on behalf of all of the employees, customers, and shareholders of CSG.

Your legacy is quite amazing.

You took the Company from $80 plus million in revenues in 1994, to over $530 million last year.

You grew our family, as you refer to our employees, from 500 located in Omaha, Nebraska in 1994, to over 2500 located in over 20 countries today.

You invested heavily in new products, so that we could better serve our customers, and most important, you believed in and invested in our people.

Once again, thank you for your service, your leadership, and your dedication.

I'm honored to carry the torch going forward.

Believe me, you have prepared us well.

Well, let's get down to the business at hand.

I'd like to welcome you all to today's call.

We have quite a bit to cover.

First, I will review at a high level the financials for the first quarter.

Next, I will share with you some of the highlights from each of our divisions.

And then since I have not had the pleasure of meeting many of you, I will provide insight as to what you can expect from our team going forward.

And, finally, I will turn it over to Peter Kalan to go through our financial performance in more detail.

For the first quarter, we reported revenues of $136.9 million and GAAP net income of $0.17 per diluted share.

Revenues came in at the top end of our guidance, and earnings exceeded our guidance, thanks in part to lower than expected expenses.

In order to provide some context to these results, it is appropriate to talk about the results of our divisions.

First, our Global Software Services Division had revenues of $38.3 million, which is consistent with the first quarter of last year.

Importantly, the GSS division continued to be contribution margin positive, in spite of the fact that we have increased expenses in order to drive additional revenue growth.

This quarter was exceptionally strong, relative to the number of clients signing up for our next generation solution, Kenan FX.

Ten providers, including one new customer, signed up for Kenan FX.

In addition, we now have customers located in every region and every telecom vertical live on the solution.

Earlier in the quarter, Frost & Sullivan awarded CSG its product leadership award for the Kenan FX solution.

These types of awards are an important validation for our employees and our customers.

However, more important is having customers select our solutions to help them be successful.

In our EMEA region, Gary Birch and his team strengthened our relationship with British Telecom.

We added BT Accurate, which is BT's wholesale arm, to the long list of BT properties that we are pleased to do business with.

In addition, several BT residential and commercial properties throughout the European region have elected to upgrade to Kenan FX.

The team also had some very nice wins with existing customers, Votaphone Spain and Votaphone Portugal.

In Portugal, Votaphone decided to abandon their Legacy billing system for prepaid subscribers and migrate those subscribers to one billing platform, Kenan.

This is a great example of how the FX solution allows our customers to consolidate multiple functions onto a single billing platform resulting in lower costs, increased flexibility, and happier customers.

In our Asia-Pacific region, Raghav Sahgal and his team strengthened our relationship with customers like Maxis and Tata Teleservices, who are choosing to upgrade to Kenan FX.

And in our Americas region, Alan Michels and his team did a great job of driving services revenue through upgrades with customers like Embratel, CTBC, SETAR, and CANTV.

In addition, we are seeing more and more customers in this region, recognizing the importance of a strong, scalable data mediation product as we expanded our footprint with Insight Communications, AT&T, and GCI.

For what is traditionally a light quarter in the software industry, we're extremely pleased with the performance of Hank Bonde and his team.

Before we talk about the Broadband Division, let's talk about the most recent event that everyone is talking about, the acquisition of Adelphia by Time-Warner and Comcast.

Before we start pondering about what could be, let's review some basic facts.

We do business with all three providers.

We service a little over half of the Adelphia customers, we service approximately half of the Time-Warner customers, and we service approximately two-thirds of the Comcast customers.

So I'm sure the questions you have include, what does this mean to CSG?

Could you gain some new business?

Could you lose some business?

And I guess I'd answer in this way, too early to tell.

Yes, we could.

And, yes, we could.

But, seriously, let me put this in perspective.

We have great relationships with all three providers.

Combined, we have over 21 million of their customers on our solution.

We cannot provide, nor would we have the time to cover a list of all the possibilities of what could or could not happen in today's call.

Our strategic business units each understand where our customers are and are strategizing as to how they can increase our footprint within the new entities.

You should expect us to do that, and I'm sure others are probably doing the same thing.

The fact is, it's very early in this process.

And we have watched our customers be acquired.

We have watched them acquire others, we have been in this position before.

We hope that we're a trusted and important partner to our customers.

We will continue to focus our team's attention on working hard every day to help our customers be successful.

We believe that it is our job to earn more business, and that is what you pay us to do.

Next, the Broadband Division had an exceptionally strong first quarter with revenues of $98.6 million, versus $92 million a year ago.

Much of this strength was attributed to an exceptionally strong software quarter and another strong performance from our marketing services and statement processing groups.

To help provide context to these results, I'd like to share with you what we heard at the National Cable Show last month.

First, operators clearly understand that the 90 billion they have invested in their two-way network will drive their revenue growth and provide a way to compete with the RBOCs.

In addition, operators understand that in order to win the battle of the pocketbook for consumers' communications purchases, they must provide a superior customer experience.

This pleased me for a number of reasons.

First, the major investment in our advanced convergent platform continues to reinforce that we are the market leader.

With ACP, our clients not only have a single view of their customer, they can manage and bundle several communications products in a number of ways tailored to that individual's needs.

To date, we have helped six different communications providers launch multiple services on this platform, including internet or digital telephony services, high-speed data, Video-on-Demand, and digital cable just to name a few.

Our product management and product development teams led by Dwayne Ruffin and Tom Hagen (ph) have really hit the mark with this solution.

In addition, over 25% of the customers that we process have migrated to our next-generation platform.

We anticipate that by year-end, the majority of our customers will have migrated to ACP.

This effort is led by Gloria Osborne's migration team and our strategic business units.

These teams, and including employees throughout the entire Broadband group, have spent practically every weekend helping our clients with their migrations.

They have done a phenomenal job.

Next, we're seeing operators start to shift where they spend their capital.

In previous years these dollars went toward upgrading the network.

Now we are starting to see these dollars go toward maximizing the customer experience.

As a result, we continue to see companies like Comcast, Time-Warner, Charter, Adelphia, and others invest in applications like our Workforce Automation or call center products, which create a superior and differentiated customer experience.

In addition, our clients are using the monthly invoice, rather it be print or electronic as a communications vehicle with their own customers.

Pam Sellenrick (ph) and her team have continued to lead the way in turning the invoice into a marketing tool for our customers.

And it is even better when the financial results demonstrate the point I'm trying to make.

This quarter we had 4.6 million in software license revenue for the Broadband Division.

This is our highest software quarter for this group since 2002.

We experienced the same type of growth in our ARPU for the past couple of quarters, including our most recent.

We feel that our investments and our products are paying off and our results reinforce this belief.

And finally, I'd like to share with you what you should expect from our team going forward.

It can be summed up pretty simply.

The more things change, the more they stay the same.

There's not going to be any radical change in what we do here.

We have a wonderful business model that generates strong cash flow; we are not going to change that.

We have a blue chip client list, that is venturing into new areas and growing.

We are going to continue to service them well and grow with them.

We have the most broad and deep product offerings in the industry.

We will continue to invest in our products and services.

We have constantly looked for ways to create leverage in our business.

We will continue to evaluate and improve the performance of our company to create shareholder value.

And finally, we've been through what appears to be quite a bit of change here in our management team.

While looks can be deceiving, our short-term goal will be to maintain our focus on the business at hand and allow this team to continue to perform at a high level.

We have added strength to our team with the addition of Hank Bonde, as President of our GSS division.

His experience in the telecom and technology industries at companies like IBM, BellSouth, and JD Edwards will be instrumental in helping us continue to build on the strong foundation that we have established.

Mike Scott, who has been a key senior leader in the Broadband Division for six years, takes the helm for this group as EVP and General Manager.

This team has been in place for several years, and they are seasoned and proven leaders.

And Peter Kalan, our CFO, as all of you know has been a stable and steady leader throughout some pretty challenging times.

I'm pleased to have Peter continue to be a key senior executive at CSG.

Which seems to be the perfect time to hand it over to Mr. Kalan so he can review with you in more detail our financial performance.

Peter?

Thank you, Ed.

I'm pleased to share with you today on the call the financial results for our first quarter, as well as our outlook for the second quarter of this year.

For the three months ended March 31, 2005, revenue totaled $136.9 million, which is at the high end of our expectations for the quarter, and is a 5% increase over the same period last year.

Net income under Generally Accepted Accounting Principles, was $8.6 million or $0.17 per diluted share.

In our fourth quarter earnings call, held on January 25, we told you that we would accrue for the retirement benefits of Neal Hansen over the first six months of this year.

The retirement benefits expense accrued for the first quarter was $4.2 million, or $0.05 per diluted share.

We also incurred approximately $700,000 in restructuring expenses, primarily related to some staffing realignment, which is the equivalent of $0.01 per diluted share.

Processing revenues totaled $83.4 million for the first quarter, which was greater than expectations, as certain processing related fees were higher than we anticipated.

Software maintenance revenues for the quarter, totaled $24.5 million, while professional services revenues totaled $17.9 million, and software license revenues were $11.1 million, all in line with our expectations.

The geographic mix of revenues for the Company continued at levels consistent with prior quarters.

For the first quarter, approximately 24% of CSG's total revenues were derived from international markets.

Within the world regions, EMEA contributed 15% of total revenues, Asia-Pacific generated 5%, and Latin America delivered 4%.

Comcast continues as our largest client, comprising approximately 15% of the Company's total revenues for the first quarter.

For future quarters, we continue to expect that revenues from Comcast will be in line with this percentage.

Total expenses for the first quarter were $121.7 million, which includes approximately $700,000 in restructuring charges.

Our first quarter expenses were below expectations, due to our focus on expense management, and the delay in timing of staff hires related to certain programs.

The first quarter gross margin was 46.3%, which is consistent with the gross margin of the fourth quarter of 2004.

The operating margin for the first quarter was approximately 11%, which includes the impact of previously mentioned accrued retirement benefits and restructuring charges.

These expenses lowered the operating margin by approximately 4 percentage points.

The financial results of CSG include several recurring non-cash expenses.

For the first quarter, stock-based compensation expense was $4.3 million, depreciation expense totaled $3.8 million, and intangible amortization expense was $7.1 million.

These non-cash charges totaled $15.2 million for the first quarter, or $0.19 per diluted share.

Turning to the Company's segment results, we reorganized certain components of our operating segments during the first quarter.

The reorganization consisted primarily of moving the Planet Consulting division, which includes the ICMS assets, from the GSS segment to the Broadband segment.

Planet Consulting was acquired in 2001, and the majority of their work is around our Broadband Division clients and the ICMS North American Service Business offering.

In addition, they do work around making transactions secure for e-commerce.

This reorganization was done after evaluating the business plans and relationship of the Planet division with the Broadband Division, along with the way that the Planet business is evolving to a business model based more on recurring revenues.

The first quarter segment financial results reflect this reorganization, and the 2004 segment results have been restated to conform to the new reporting structure.

The impact of this move from the first quarter of 2005 was to reflect an additional $6.6 million of revenue and $9.2 million of expense in the Broadband segment.

As for the specific results of the reorganized segments, the Global Software Services segment produced $38.3 million in revenues for the first quarter, with a contribution margin of approximately $2.3 million.

The results for the GSS division included non-cash charges of $4.2 million, associated with the amortization of intangibles, stock-based compensation, and depreciation.

For GSS, the first quarter revenues are typically the lowest of the four quarters of the year.

We continue to believe that the contribution margins of the GSS segment will expand as we grow the revenues of this business.

We are continuing to focus on expanding our revenue opportunities within existing clients, and we are also focused on achieving greater penetration into newer geographies in adjacent markets.

The Broadband Services Division generated $98.6 million in revenues for the first quarter.

Software revenues were extremely strong in the first quarter as our clients purchased ancillary software applications, including our Workforce and call center applications.

The Broadband segment produced a contribution margin of $33.6 million, or 34% of revenues, with total non-cash charges within the Broadband segment totaling $7.4 million for the first quarter.

The impact of the transfer of the Planet business into the Broadband segment was to lower the contribution margin by approximately $2.6 million in the first quarter.

We finished the first quarter with 43.9 million subscriber accounts on our processing system.

The average annualized revenue per subscriber, or ARPU, for the first quarter was $7.63.

The ARPU was higher than we had anticipated, as we worked on activities that generated one-time fees from our Broadband clients, as well as higher than expected marketing services revenues.

We expect that we will generate additional one-time fees in the second quarter, which will cause our annualized revenue per subscriber to be elevated.

We expect that ARPU for the second quarter will range between $7.45 and $7.60.

We have very strong visibility for the Broadband business, as we have successfully renewed all the client relationships scheduled for renewal in 2005, and we expect that as we support our clients in their rollouts of new services, that the Broadband revenues will continue to grow.

Turning to the balance sheet, as of March 31, our net bill trade accounts receivable totaled approximately $143 million, which compares to the December 31 balance of approximately $142 million.

The bill trade accounts receivable reflected days billed outstanding or DBO of approximately 68 days for the first quarter, which is a sequential increase from the fourth quarter measure of 61 days.

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

Cash flows from operations for the first quarter were approximately $18.9 million.

This is less than our previously communicated operational cash flow expectations of 24 million to $28 million.

Our cash flow from ops were negatively impacted during the quarter due to a delay in the payment of a monthly invoice from one of our domestic clients.

This invoice was subsequently paid this month.

If the invoice had been paid as anticipated, our cash flows from operations would have been at the high end of our expectation range.

Investment in capital expenditures totaled $3.9 million for the first quarter, a slight decrease from the $4.2 million of the fourth quarter.

During the first quarter, we repurchased 1.3 million shares of the Company's stock in the open market, at a total purchase price of $23 million, or approximately $17.88 per share.

We expect to complete the implementation of our previously announced 10b5-1 plan for the purposes of repurchasing shares of the Company's common stock and expect to complete this during the second quarter.

We plan to allocate up to $15 million per quarter for repurchases within the plan.

As of March 31, 2005, the remaining number of shares authorized for repurchase under the repurchase program totaled 4.4 million shares.

Next, I'd like to provide you with an overview of our financial expectations for the second quarter of 2005.

We're expecting that revenues for the second quarter will range between 132 and $139 million.

We anticipate that processing revenues will be between 83 and $84 million, as we expect to generate some one-time revenues in the second quarter.

We expect that software revenues will range between 24 million and $25 million.

And professional services revenues will total between 17 million and $19 million.

We are projecting that software license revenues will range between 8 and $11 million, and while this range is consistent with our first quarter guidance, we do not believe that the Broadband segment will generate the same level of software revenues as it did in the first quarter.

As of March 31, our software and services backlog totaled approximately $110 million, which is an increase from our December 31 reported software and services backlog of $107 million.

In the second quarter, we will accrue an additional $4.2 million of expense related to the benefits that Neal Hansen will receive as part of his retirement.

Also during the second quarter, we will incur restructuring expenses of approximately $4 million primarily associated with the adjustment of an abandonment reserve for one of our leased facilities.

This reserve is being adjusted as we have completed the reconfiguration of the facility space, allowing us to decrease our occupied space in the building to an amount less than we had previously expected.

We are projecting that the expenses in the second quarter, including the restructuring and retirement benefits, will total between $124 million and $126 million.

Absent these charges of the retirement benefits and the restructuring charges, total expenses would range between approximately $116 million and $118 million.

Included in these projected expenses are amortization charges of approximately $7.2 million, depreciation expense of approximately $4 million, and stock-based compensation charges of approximately $4.3 million.

Non-cash charges are projected to total approximately $15.5 million, or approximately $0.19 per diluted share.

Based on these targeted revenues and total expenses, we anticipate that earnings per diluted share for the second quarter will range between $0.09 and $0.15.

The accrual of the retirement benefits and the restructuring charges has the impact of reducing the earnings per diluted share by approximately $0.10 for the second quarter.

We continue to expect that the effective tax rate for 2005 will be in the range of 38 to 40%.

We are also projecting diluted shares outstanding of approximately 48.8 million shares, which include the impact of the projected stock repurchases in the second quarter.

We expect that cash flow from operations for the second quarter will range between $26 million and $30 million, and that capital expenditures will range between 3 and $4 million for the quarter.

In summary, the financial results for the first quarter were very strong, and we were pleased that we were able to manage expenses while delivering strong revenues.

We are focused on continuing to grow the revenues and look for the expansion of margins to occur.

We believe we are well positioned to take advantage of the strong products and services that we have brought to market.

And we are focused on exploding our market leading position.

Our business model will continue to generate very strong cash flows, and we are committed to improving our financial performance to enhance shareholder value.

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

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Tom Ernst with Deutsche Bank.

Please go ahead.

Good afternoon, thank you.

A quick question on the total pipeline.

You mentioned -- you're reporting your tick-up in the backlog.

What are you seeing in terms of the opportunity pipeline as you look out longer term?

Is that growing as well?

In terms of the longer term right now, I would say we've seen some slight increases in terms of activity over the first quarter.

So, I would say that, yes, slight improvement.

Okay.

Great.

And specifically with the adoption of ACP, remind us again how complicated is it for a customer of yours to do a migration to the ACP?

And then what is the revenue opportunity for you?

Is it primarily service support training?

Or are you finding ancillary sales around ACP?

First of all, the transition is a migration.

It builds on the basic system that the client has been using.

So probably the prep time and the process which leads up to the migration weekend, is probably something like 60 to 90 days.

You have some operator training involved and then, of course, on the migration weekend some follow-up in terms of making sure that everybody settles in nicely.

It has not been our experience to date, even though you cannot say that you can do these things problem-free, but it has been our experience to date that it's caused any serious disruption in any of the accounts.

And, typically, by the middle of the week following, things have settled pretty much into normal.

So, it's not a big distraction.

As to the second part, there's really no revenue that is generated from the transition to ACP.

The upside will be over the course of time, the platform offers the ability for them to add multiple services for their customers.

You mentioned you've had a number of customers already migrate to ACP.

Are you finding that those customers are out of the gate adopting some of the add-on or ancillary products or additional services from you?

Yes, initially, of course, the primary service that is being cranked up is the voice-over-IP internet telephony.

And, we're in the early days of that.

But, as we bring them across on ACP, that has been the first product that has come up.

And so far the results have been very good.

Okay.

Just to summarize though, it's very, very minimal in terms of revenue creation thus far off of ACP?

That's correct.

And one other question, and I'll let others ask.

You've had some significant -- by the way, welcome and congratulations.

You've had some significant changes to the top of the organization.

Are there changes yet to happen in the layers beneath on the organization in terms of the management, or do you feel you're past the majority of the changes now?

At this point, first of all, thank you for not giving condolences here. [ Laughter ] I think for the most part, we are completed with the significant changes.

It's very nice that the people that have taken the new roles for the most part have good experience and background for the roles that they've filled.

And I would hope that there would be very little disruption from a -- if you will, organizational change going forward.

Great.

Thank you again.

Thank you.

Thank you.

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

Please go ahead, sir.

Hi, guys. this is Bill Dosnick (ph) for Tom Roderick.

Hi, Bill.

How are you?

Good.

Good.

Just a couple of questions here.

The restructuring charge in the second quarter that you mentioned, will this be an ongoing restructuring effort or is it just a next quarter effect?

It's just a next quarter effect, Bill, in that this was a space that we had previously taken a restructuring charge on.

But we subsequently modified how much space that we were going to occupying and we decreased it, and therefore had an increase in the amount of the reserve that we needed to book.

So, we don't see that there will be any type of ongoing restructuring charges similar to this that we can foresee at this point.

And again, this is just a revision to a charge that we -- a reserve that we originally built in the middle of last year.

Okay, great.

And good results on Kenan during the quarter.

Specifically, in regards to Kenan, can you comment on the environment in Europe during the quarter?

Was there anything positive or negative in Europe?

And any commentary on pricing for the Kenan product?

I think the European group had a good quarter.

I think they've -- their results were very good.

Some nice, nice penetration with the FX product.

I don't think we've see any real shifts or any other changes that would be worthy of note at this point in time.

Okay.

Great.

Thanks a lot, guys.

Thank you.

Our next question comes from Ashwin Shirvaikar with Smith Barney.

Please go ahead with your question.

Hi, first I just wanted to say thank you to Neal.

And second wanted to say congratulations to you guys all on the results.

The question I have is, can you go through the financial impact over the next few quarters of the Kenan FX signings and the flow-through that you see from there.

From the Kenan FX upgrade, there's -- this is a version upgrade for our clients that for almost all clients when they agree to upgrade from their existing version, is paid for through their maintenance fees.

I -- that they have the right to migrate to a subsequent version by paying their annual maintenance fees to us.

That being said, we will generate professional services revenues as we assist our clients in the migration from an existing version to the FX version.

That will give us some ongoing visibility into our professional services revenues as we deliver those services for our clients.

Secondly, what we look to have occur from the Kenan FX upgrades is the ability for our clients being on the newer version of the product, to purchase ancillary product modules that would be preintegrated into the system and through that, we'd expect to receive license fees as well as ongoing maintenance fees on those modules, and in some cases help our clients in the rollout of those products as they run them into their IT operations.

But those are built over time after our clients are migrated onto the new version of Kenan FX.

So, you wouldn't expect that in the near-term.

You would expect that after the actual conversion or upgrade effort is completed.

So in the near-term, you would look at the revenue impact to be visibility into our professional services revenues.

Okay.

And a separate question, could you provide an update on the 10b5-1 filing; where does it stand?

When will it actually take effect?

And, also, I would like to understand why you prefer to do the 10b5-1 as opposed to paying out a dividend? [inaudible] not accounting shareholder [really].

Well, Ashwin, first of all on the 10b5-1 plan, we are very close to having it finalized.

We were hoping to have it done in the open window in the first quarter, but there was some documentation that didn't get completed in time for us to have our 10b5-1 implemented.

And as you're aware, 10b5-1 has to be implemented during an open window.

So, when that time frame was not hit, we needed to wait until the open window, which will come about two days from now.

And so we would anticipate that we'll have our 10b5-1 implemented within the next week or so.

Secondly, on why do we prefer the share repurchase over the dividends?

We believe it's for our business the most effective way for us to bring back shareholder value to the shareholders by removing the number of shares and increasing what is effectively the EPS, and the returns of the company to the shareholders in the open market.

It's -- we've looked at other areas of how to do this, and we just believe that this is the most effective way in the near to intermediate term.

Okay.

Thank you.

Thank you, sir.

Our next question comes from [Liz Grossom] with Goldman Sachs.

Please go ahead with your question.

Good afternoon.

This kind of links up to Tom Ernst's original question.

The strength in the Broadband Division on the software line, is that at all correlated with rolling out the ACP platform to your customers?

Actually it's not.

It just happened to be a very good quarter in terms of sales of both our Workforce Automation and call center products.

And I know going forward, you said into the second quarter, not to expect kind of a repeat out of the Broadband Division.

But are we in a new stage of spending out of the cable providers, where they're focused on customer management that we may see that software line in Broadband be stronger than the kind of $1 million a quarter run rate we saw in 2004?

You know, that would certainly be our hope based on what we see happening in the early part of the year.

You know, the signals in terms of the shift in focus from upgrading networks to trying to improve the experience of the customer and to broaden the range of products being offered.

Chiefly, you know, the voice products at the head of the table there.

But that certainly would be our hope.

And we think that we are preparing and building our products to attain that type of improvement.

Okay.

And then just one last question.

Can you just give us a ballpark sense of what CSG as an organization is spending on behalf of their customers to upgrade them to the ACP platform?

That would be -- that would be tough to put a number to it right now.

In terms of the bulk of the huge expense, it's really been expended over the past two-and-a-half to three years in our development departments and our product management areas to, if you will, create the vision for the product and to actually write the code to do it.

So, the expenses that we're incurring now are really two-fold.

One to migrate and secondly to support the ongoing product, you know, implementations and new products that will come as a result of switching over to the new platform.

Okay.

Thank you.

Thank you.

Our next question comes from Donna Jaegers with Janco Partners.

Please go ahead.

Hi.

I just have two questions on Kenan.

First the change with the PlayNet Software Division.

It looks like, if I got the numbers right during the call, you said the depressed margins for the Broadband side by 2.6 million or so.

So if that would have stayed in the GSS division, you guys would have been -- you would have had negative operating margins; is that correct?

That's correct.

Contribution margin; that's correct.

Okay.

And then on the timing of -- how long does it take to migrate a customer to Kenan FX?

Is that several months or six months or can you give us some feel there?

I think that there is a -- that certainly depends a lot on what the client -- because a lot of the work has to be done on their side in preparation, so I'm going to say 3 to 6 months.

Okay.

Has that been -- I mean, I'm just, you guys were on this nice upward path, and hopefully you can get back on that sort of upward path with the margins over at GSS.

But, has the migration since you're not getting paid new license fees on that, is that depressing margins near term?

Donna, this is Peter.

The main reason why the margins are depressed from where we were in the second half of 2004 is an item that we brought up on the earnings call last quarter, and that's for 2004 we had the benefits of some lower expenses in the business heavily related to the Kenan or GSS business that we did not foresee coming into 2005, that we did not think they would recur.

With that, when we gave guidance, we had raised the expectations of expenses for the first quarter of 2004, though we beat them, they were still up over Q4.

They were anticipated because of the nonrecurring aspects of some of these benefits we received in 2004.

That being said, the focus on GSS is to expand the revenue reach of that product and drive incremental margins, and that's what will be the driving force in picking up the improvement in that business.

Okay.

Thanks, Peter.

Thank you.

Our next question comes from Mike Latimore with Raymond James & Associates.

Hi, this is Shawn Batill (ph);

I'm filling in for Mike Latimore.

Hi, Shawn.

Got a couple of questions here.

You might have mentioned them on the call.

But, could you give me the number of VOIP subs and subs for your Broadband business?

I think what we gave you was total subs on the processing system.

We really haven't -- and probably won't be breaking them out by product line.

Okay.

And the total subs on our system is 43.9 million accounts, which is inclusive of a variety of different types of consumer accounts that we support.

What was the backlog for software and services and the operating margin?

The software and services backlog as of March 31 was $110 million.

That compares to $107 million at the end of December.

Uh-huh.

The operating margins of the business from a percentage basis was 11%, which was negatively impacted by the accrued retirement benefits and restructuring charges by about four percentage points.

Okay.

Thank you.

Our next question comes from Mere Bethen (ph) with Ridally Capital (ph).

Please go ahead.

Hi, Peter.

Two quick questions.

What do you anticipate your cash flow from operations for Q2 now?

We're expecting cash flow from operations will be 26 to $30 million in the second quarter.

Okay.

So that includes the 9 million that the customer paid recently?

You know that's a great question.

We did not -- because there was a delay over quarter end, we did not assume for our guidance that we would effectively get four months of payments in the second quarter.

To the extent that that happens, if the customer does not have any other further delays in subsequent invoices, we'll have higher cash flow from ops.

But we're not assuming any significant working capital improvement from where we are as of the end of March 31.

Okay.

So what should we assume for the full year for cash from operations and for CapEx?

Well, CapEx we're running between 3 and 4 million a quarter.

So, you could expect somewhere between 12 and 16 million for the full year.

From a cash flow from operations, when you look at the level of numbers that we have for Q2 that we're saying 26 to $30 million, we have such visibility in our business, you'd expect that we should be able to duplicate those types of cash flows going forward and be looking at something in the cash flow from ops of roughly, -- I'm doing this in my head real quick -- on the high side -- roughly about 110 million on the high side and on the low side you'd expect that to be roughly about $12 million below that.

What I'm trying to understand is, with almost $2 in free cash flow per share of stocks trading at a 12, 12.5% free cash flow yield, obviously the market is not giving you credit for your recent performance, especially on Broadband.

Do you think it's reasonable that the company should be more aggressive in its buyback, given the valuation where the stock is trading?

Well, one of the things that we look at in our use of cash is three priorities.

One is is that we've been very committed to stock buyback as reflected in what we did in Q1 as well as our statement of what we're going to do in Q2.

We did in Q1 buy back more stock than we had given guidance on because we thought we'd buy 15 million, and you can see that we bought almost $23 million worth of stock back into the market.

At the same time, we want to make sure we have cash available, one to look to move market share, and to use our balance sheet to our strength in the event that we see opportunities within the Broadband where we have already got a great position.

As well as if there were any type of acquisitions we wanted to do, we want to leave some strength on our balance sheet for that as well.

But I think our buyback behavior for Q1 shows that what we think about where our valuation is and our willingness to buy back stock.

Okay.

Great job on the quarter.

[OPERATOR INSTRUCTIONS] We have a question from Peter Jacobson with Kaufman Brothers.

Please go ahead with your question.

Thanks, good evening everyone

Hello, Peter.

You mentioned earlier initiatives to broaden your business into other geographic areas.

Was that directed towards the Kenan product, and how would you characterize the geographic concentration now and how that might change -- or what areas would you pursue to diversify that more?

Peter, this is Peter Kalan.

My point was in my comments that we continue to look for expanding in the geographies where we already have some strength.

We're strong in EMEA and importantly we're strong in Asia-Pacific.

But have always stated that we believe that there is growth opportunities for us in those markets.

So those are areas where we will be looking to expand our reach internationally.

No specific guidance of what we think those will evolve to.

But it's a business that, with the footprint that we have, we would look if we're successful to increase that.

We are hopeful, though, that that growth in those markets will be somewhat from a percentage basis minimized by growth in our North America Broadband business.

Because we believe that it's got great opportunities to gain market share over time, and as that occurs, it will somewhat dissipate any of the growth that we get out of our international markets, and could leave us at some of the same percentages are that we're at today.

Okay.

Thanks.

And going back, I think about a year ago, Neal described, I think, initiatives to do some new creative things with customers.

I think implying maybe some large deals in the works and possibly incorporating greater use of professional services.

Can you comment on kind of how that's played out and what things you're doing today in that context?

Well, I think it probably was -- Neal was probably referring to some of the things that we were doing at the time in Asia-Pacific, and we did complete a fairly sizable transaction in India, as a result of that.

But I think probably more so he would have been referring to the major product, if you will, transitions that we were in the process of making and what that would lead to in the longer-term.

And that is upgrading our platforms, both Kenan FX and the Advance Convergent Platform that we have in Broadband, which is, I guess, probably our signal to you is that we are clearly going to continue to invest in our products and continue to improve our service to our clients.

Okay.

That's helpful.

Thank you.

Uh-huh.

Thank you.

Our next question comes from Donna Jaegers with Janco Partners.

Please go ahead

.

I was just wondering if you could comment on the competitive climate?

Especially given Portal's financial situation.

Are you seeing them still competing aggressively?

Or are you having luck with trying to sway some of those system's integrators to push the Kenan software instead?

Might as well get started right on this one.

I will be very reticent to comment on activities of competitors.

Neal, are you still there? [ Laughter ]

Just a minor [change].

We put a gag over his mouth.

He'll be happy to talk to you afterwards.

You know, obviously we watch those very close, Donna, in terms of movement that is happening.

And once again, you know, we're just going to be pretty close-mouthed in terms of telegraphing what our thoughts are about competition.

Okay.

Actions speak louder than words anyway.

Thank you.

Our next question comes from Glenn Primack with Broadview Advisors.

Please go ahead.

On the Broadband side, is that 100% North America, is that the revenue?

Yes.

Okay.

Are there opportunities outside of North America in that division?

Well, we have not really pursued opportunities as you probably would expect, the movement to the new platform is taking up an awful lot of our attention and time.

Our first priority is to get our current clients moved over to the ACP platform.

We would probably prefer to focus the Broadband ACP product in North America, certainly for the foreseeable future and focus the Keenan product in both North America and the other international locations.

Okay.

And Neal, if he's still there, what's he going to do on his spare time.

I mean he built a fantastic model.

Congratulations on that.

And I was just wondering what's next.

Not a great deal.

And certainly nothing that has to do with quarterly reports or outside investors. [ Laughter ]

Thanks.

Thanks, Glenn.

Thank you.

Gentlemen, at this time we have no additional questions.

Do you have any closing remarks?

Well, I think Peter had a clarification that he wanted to make.

Before Ed gives his closing remarks I just want to make sure that there is clarity about the second quarter guidance that I gave.

Because I believe I misspoke on one piece.

I just want to reiterate that our processing revenue expectations are 83 to $84 million.

Our software maintenance revenues are 24 to $25 million.

Our professional services revenues are 17 to $19 million.

And our software license expectations are 8 to $11 million for total revenue expectations for the second quarter of 132 to $139 million.

With that I'll give it back to Ed.

Thank you, Peter.

Thank you all.

Appreciate you joining the call.

I look forward to putting some faces with names here in the upcoming months.

And in closing, I would just like to say once again, heartfelt thanks from all of the employees, clients, and investors of CSG to Neal Hansen.

I think the numbers and performance of this company speak for themselves.

Neal, I hope you find yourself a good ranch.

I hope to come riding with you real soon. [ Laughter ] All the best.

Thank you.

Ladies and gentlemen this concludes the CSG Systems International first quarter earnings teleconference.

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