CSG Systems International Inc (CSGS) 2005 Q4 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen, and welcome to the CSG Systems fourth-quarter earnings conference call.

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

  • Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS).

  • As a reminder, this conference is being recorded today, Tuesday, January 24, 2006.

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

  • Please go ahead.

  • Liz Bauer - SVP, IR

  • Thank you.

  • Today's discussion will contain a number of forward-looking statements, particularly with respect to any financial projections that may arise and our ability to perform satisfactorily and maintain good customer relations, provide products and services that meet the needs of the marketplace and increase the usage of our additional products and services to new and existing customers.

  • While 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.

  • 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.

  • Today, we have with us Ed Nafus, our Chief Executive Officer and President, and Peter Kalan, our CFO.

  • After Peter's remarks, we will open the call up to your questions, and we will start with Ed.

  • Ed Nafus - CEO and President

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

  • Over the past quarter, our management team has been extremely busy executing on our plan to intensify our focus on the cable and direct broadcast satellite markets.

  • Today, we will go through several items, including our fourth-quarter results, what we're seeing in the marketplace and why we believe that 2006 will set the foundation for the next two to four years for the Company.

  • Our fourth-quarter 2005 revenues from continuing operations came in at 93.2 million, a 3% increase over the same period in 2004.

  • Earnings per diluted share from continuing operations were $0.09 for the quarter.

  • That includes $0.20 per diluted share associated with restructuring charges.

  • Peter will review the financial results for the quarter in more detail.

  • Importantly this quarter, we completed several activities that will help strengthen our processing position in the cable and direct broadcast satellite markets.

  • First, we completed the sale of our global software services division to Comverse Technology in mid-December.

  • The sales price was approximately 239 million in cash.

  • Next, we renewed our contract with EchoStar Communications.

  • As many of you may recall, our contract with EchoStar was set to expire in February of 2006.

  • The new three-year contract is longer than previous terms.

  • EchoStar recently announced that they have passed 12 million subscribers, and we are pleased to be their customer care and billing provider.

  • EchoStar is our second-largest customer, and we feel that it was important for us to solidify our relationship with them for the foreseeable future.

  • Our fourth-quarter results reflect two months of the new EchoStar pricing.

  • Peter's guidance will include the full-year impact from the new contract.

  • Next, we sold our plaNet Consulting Group to several members of its management team. plaNet generated approximately 11 million in revenues and 14 million in expenses during 2005 and is included in our discontinued operations.

  • And finally, we eliminated expense around corporate overhead, including the sale of our corporate aircraft and the elimination of several corporate support functions.

  • It is anticipated that these actions will save the Company 4 million annually.

  • These actions will enable CSG to focus its attention on the ever-changing markets that our clients operate in.

  • For example, during the fourth quarter, Sprint and several CSG clients announced a joint venture aimed at rolling out wireless and enhanced services to cable customers.

  • We are actively working with our clients to define support requirements for these new services.

  • The fact that approximately two-thirds of our cable consumers have migrated to our Advanced Convergent Platform puts CSG in a strong position as our clients continue to look at bundling and packaging multiple products and services.

  • ACP provides a customer-centric view of their business as they strive to increase loyalty and reduce churn.

  • Our clients are beginning to reap the benefits from the investments we have made to upgrade our platform.

  • In addition, our clients are looking to offer more personalized content offerings over multiple devices.

  • Our product management and strategic business unit teams are working closely with our clients to identify the processes, operational challenges and business intelligence required to roll out these more sophisticated offerings.

  • While these types of activities are in the very early stages, we believe that they could become significant opportunities for CSG in the next 24 to 36 months.

  • Our digital telephony service continues to grow at a good pace.

  • While this success does not result in hockey stick-type of growth for CSG, it helps maintain our core revenue base and provides some modest growth.

  • It also continues to strengthen our relationship with our client base.

  • During 2005, 17 sites migrated to our telephony solution.

  • One of the least-mentioned and fastest-growing opportunity for our customers is commercial services.

  • Today, several operators are offering a solution for small- to medium-sized businesses.

  • We are working with an existing customer on an enhanced commercial services offering.

  • We expect to roll this out in the second half of 2006.

  • As we look at 2006, we see several opportunities for CSG to help ensure that our customers are successful in rolling out new products and services, reducing churn and scaling their operations to accommodate the numerous services that are and will become available.

  • We feel these opportunities will contribute to our growth in the medium to longer term.

  • Another event that will take place this year is the closing of the Adelphia sale.

  • These subscribers will be going to larger clients, which have lower processing fees per subscriber as a result of their size.

  • This has been factored in Peter's 2006 guidance.

  • Currently, it is expected that this transaction will close in the second quarter.

  • With the closing of the GSS transaction, CSG is now sitting on an extremely strong balance sheet.

  • We have been very consistent on our intended uses of cash over the past eight to nine months.

  • We have a 10b5-1 plan in place that allows us to buy up to 60 million in stock each year.

  • If the Company chooses, we can also purchase additional stock in the open market.

  • To ensure that we have both options available, our Board increased the pool for repurchasing stock by 5 million shares.

  • This brings the total current authorized for purchase to 6.9 million shares.

  • Last year, we repurchased 73 million of stock or approximately 3.8 million shares.

  • During 2005, we issued approximately 905,000 shares of stock that vest over the next four years.

  • This year, our plan is to issue approximately 750,000 shares of stock with a four-year vesting.

  • While we like buybacks, we do not believe that they are the only answer to creating value.

  • As a result, we have chosen not to increase the 10b5-1 plan at this time.

  • We have said that we will continue to look for product add-ons that will enhance or extend our product offering and get us further into our customers' operations.

  • We have also said that we would consider using our balance sheet to market share.

  • We will look for ways to increase the potential return on our investment that fits within our operations.

  • We remain focused on maximizing shareholder value.

  • The management team and Board are committed to evaluating the various opportunities and making decisions when we believe that the time and the opportunity are right.

  • Before I turn it over to Peter Kalan to review the Company's financial performance and provide you with our perspective on what 2006 holds from a financial standpoint, I'd like to thank our employees, Board of Directors, customers and our partners for what we believe was a prosperous and successful 2005.

  • In addition, I'd like to thank our shareholders for sharing their thoughts, concerns and support for our initiatives over the past year.

  • With that, I'd like to turn it over to Peter Kalan, our Chief Financial Officer.

  • Peter Kalan - CFO

  • Thank you, Ed, and welcome to all of you on the call today.

  • I'm pleased to share with you today the financial results for our fourth quarter of 2005, as well as our outlook for the first quarter and full year 2006.

  • During the fourth quarter, we completed the sale of our GSS business and the plaNet Consulting business, and thus these are reflected as discontinued operations.

  • As a result, I will be focusing my fourth-quarter comments and 2006 guidance on the continuing operations of CSG, which consist of the broadband services division and corporate overhead expense related to CSG's ongoing business.

  • Total revenues from continuing operations for the fourth quarter of 2005 were $93.2 million, an increase of 3% when compared to $90.6 million for the same period in 2004.

  • Looking at the components of the total revenues, processing revenues for the fourth quarter were $87.1 million, up 3% when compared to $84.2 million for the same period last year.

  • Software, maintenance and services revenues were $6.1 million for the current quarter, a 4% year-over-year decrease.

  • The revenues of the continuing operations are primarily driven by the subscriber management services we provide to our cable and direct broadcast satellite clients and the number of subscribers in our processing system.

  • This business model generates highly recurring revenues with significant visibility.

  • The software, maintenance and services revenues are primarily related to ancillary software products that add expanded functionality around our processing services.

  • The largest source of revenue in this category is maintenance services associated with previously sold software licenses.

  • These maintenance services are recurring in nature also.

  • Comcast continued as our largest client, comprising approximately 23% of the Company's total revenues from continuing operations for the fourth quarter.

  • As Ed mentioned earlier, we extended our contract during the fourth quarter with our second-largest customer, EchoStar.

  • The new contract went into effect on November 1, and therefore only two months of the new contract pricing are reflected in the fourth-quarter results.

  • EchoStar represented approximately 20% of the Company's total revenues for the quarter.

  • The fourth-quarter 2005 gross margin was 47%, compared to the prior year's gross margin of 49%.

  • The operating margin for the fourth quarter of 2005 was approximately 7%, which compares to the same period last year of 25%.

  • Our operating margin for the fourth quarter 2005 was negatively impacted by $14.5 million of restructuring charges.

  • These restructuring charges lowered the operating margin by 16 percentage points.

  • The $14.5 million or $0.20 per diluted share in restructuring charges relates primarily to the following items -- approximately $6.2 million associated with the termination of the FairPoint Communications contract; approximately $1.6 million associated with the disposal of the corporate aircraft; and approximately $6.7 million associated primarily with one-time charges from the close of the GSS sale and related restructuring activities.

  • These restructuring charges will save the Company approximately $4 million in 2006.

  • The financial results for the continuing operations of CSG include several recurring noncash items.

  • For the fourth quarter, stock-based compensation expense was $7.2 million, of which $4.2 million was related to accelerated expense within the fourth quarter.

  • Depreciation expense totaled $2.5 million and amortization of intangible assets was $3.4 million.

  • These noncash charges totaled $13.1 million for the fourth quarter or $0.18 per diluted share.

  • Income from continuing operations, net of tax, for the fourth quarter of 2005 was $4.3 million or $0.09 per diluted share and was at the lower end of our guidance.

  • For the fourth quarter of 2005, income from discontinued operations, net of tax, was $9.8 million or $0.20 per diluted share.

  • Income from discontinued operations included a net pretax gain of $10 million related to the sale of the GSS and plaNet businesses.

  • Net income, which includes the results of both our continuing and discontinued operations, for the fourth quarter of 2005 was $14.1 million or $0.29 per diluted share.

  • We finished the fourth quarter with 45.2 million subscriber accounts on our processing system.

  • The average annualized revenue per subscriber, or ARPU, for the fourth quarter was $7.72.

  • The quarterly sequential reduction in the fourth-quarter 2005 ARPU is primarily related to the new EchoStar contract, which went into effect on November 1, 2005.

  • Turning to the balance sheet as of December 31, our net billed trade accounts receivable associated with the continuing operations totaled approximately $105 million.

  • The billed trade accounts receivable reflected days billed outstanding, or DBOs, of approximately 61 days for the fourth quarter.

  • Going forward, we expect that our DBOs related to continuing operations will be in the range of 55 to 65 days.

  • As of December 31, cash and short-term investments associated with the continuing operations totaled approximately $392 million, compared to $161 million from the previous quarter.

  • This significant increase includes approximately $239 million associated with the proceeds from the sale of our GSS business.

  • As of the end of the year, the Company had $230 million of incontingent convertible debt outstanding, which matures in the year 2024.

  • Holders of the securities can convert at any time after CSG's common stock trades at a price in excess of $34.80 for a set period of time.

  • The first put or call option for redemption of these securities is in 2011.

  • Consolidated cash flows from operations for the fourth quarter were approximately $15.7 million, below our guidance of $21 million for the quarter.

  • Cash flows from operations were negatively impacted during the quarter by approximately $10 million due to a key client delaying payment of an invoice until after the end of the year.

  • This amount was subsequently paid in the first two weeks of January 2006.

  • During the fourth quarter, we repurchased approximately 645,000 shares of the Company's stock at a total purchase price of approximate $15 million or approximately $23.24 per share.

  • For the full year 2005, we repurchased approximately 3.8 million shares of the Company's stock at a total purchase price of approximately $73 million.

  • As Ed mentioned, the Board of Directors has authorized an additional 5 million shares for repurchase under our stock repurchase program.

  • And therefore, the remaining number of shares authorized for repurchase under the program totaled 6.9 million shares at December 31, 2005.

  • With the strength of our balance sheet and the continuing strong cash flows of our business model, we expect to continue to repurchase shares in coming quarters.

  • Additionally, we're focused on expanding our market position and also bringing additional products and services to our clients as their business needs evolve.

  • And we will consider acquisitions to fill product needs as an alternative to using internal development resources.

  • Next, I'd like to provide you an overview of the financial expectations for the full year and first quarter 2006.

  • For the full year 2006, we are expecting flat to slightly down revenues of between 365 and $375 million.

  • Our revenue projections include the impact of our new EchoStar contract and the financial impact of the 3 million Adelphia subscribers expected to move to the Time Warner and Comcast contracts.

  • As the Time Warner and Comcast contracts have lower pricing than the Adelphia contract, we anticipate that revenues will be lower in 2006 by approximately $8 million, assuming the Adelphia transaction closes as expected in the second quarter.

  • In addition, we expect to experience a reduction in subscribers processed during the first half of the year as certain clients complete regionalization projects.

  • We expect that the near-term impact of these regionalization projects will be a reduction of approximately 1 million subscribers.

  • This is not associated with the expected transfer of the Adelphia subscribers to Time Warner or Comcast.

  • For 2006, we have no major contracts up for renewal.

  • And as a result of the highly visible and recurring nature of our business model, we have visibility into approximately 90% of our revenues for the year.

  • For 2006, we expect that the operating margin of the business for the full year to be approximately 24 to 25%.

  • We anticipate that earnings per diluted share from continuing operations for the year will range between $1.25 and $1.35.

  • This includes an impact of $0.07 per diluted share related to facilities restructuring and the 2006 operating loss from the termination of the FairPoint contract.

  • Our guidance assumes that we continue to repurchase stock of approximately $15 million per quarter, which is the amount currently authorized under our existing 10b5-1 plan.

  • And we expect that we will average approximately 46.5 million diluted shares outstanding for the full year.

  • Included in the projected results from continuing operations are amortization charges of approximately $17 million, depreciation expense of approximately $10 million and stock-based compensation expense or charges of approximately $11 million.

  • Non-cash charges are projected to total approximately $38 million or approximately $0.52 per diluted share.

  • We expect that the 2006 effective income tax rate for continuing operations will range between 36 and 37%.

  • And for the full year 2006, we expect that cash flows from operations will be between $90 million and $100 million and that capital expenditures will be approximately $12 million for the year.

  • Next, I'd like to provide you an overview of the financial expectations for the first quarter of 2006.

  • We are expecting that revenues for the first quarter will range between $90 million and $92 million.

  • For the first quarter of 2006, we expect that the average revenue per subscriber will range between $7.55 and $7.70.

  • This includes three months of revised pricing associated with the new EchoStar contract.

  • We expect that the operating margin of the business for the first quarter will range between 23% and 24%.

  • And we anticipate that income per diluted share from continuing operations for the first quarter will range between $0.31 and $0.31.

  • Included in the projected results from continuing operations are amortization charges of approximately $3.7 million, depreciation expense of approximately $2.5 million and stock-based compensation charges of approximately $2.8 million.

  • Noncash charges are projected to total approximately $9 million or approximately $0.12 per diluted share for the first quarter.

  • We expect that the first-quarter effective income tax rate for continuing operations will be consistent with our full-year expectation of 36 to 37%.

  • And we are also projecting diluted shares outstanding of approximately 47.5 million shares for the first quarter, which include the impact of the projected stock repurchases in the quarter.

  • We expect that cash flows from operations for the first quarter will range between 16 and $18 million, which include an estimated working capital change of negative $6 million.

  • The working capital changes include the impact of receiving the late payment from a key client in the first quarter, offset by payments being made in the first quarter associated with prior restructuring activities and annual bonus payouts.

  • We expect that capital expenditures will range between 2 and $3 million for the quarter.

  • In summary, the financial condition of our Company continues to be extremely solid, and we will continue to focus on improving the financial performance of the Company.

  • We have a market-leading position with our business solutions and with our client relationships, and we are looking to expand this position, which we believe will deliver shareholder value.

  • We look forward to reporting continued successes during 2006.

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

  • Operator

  • (OPERATOR INSTRUCTIONS).

  • Michael Turits, Prudential Equity Group.

  • Michael Turits - Analyst

  • Actually, this is [Sylvia] for Michael Turits.

  • I was hoping to get maybe some more visibility into the restructuring charge that you have in your guidance for '06.

  • Peter Kalan - CFO

  • Yes, Sylvia.

  • This is Peter.

  • The restructuring charge is primarily related to some facility consolidation that we will be doing as a result of the consolidation of space after the GSS sale to Comverse.

  • So that's one piece of it.

  • The other piece is as we wind down the work on the FairPoint contract, there is some costs associated with that that we're showing as restructuring for the year -- primarily some people costs.

  • And so those are the two pieces that drive the restructuring costs.

  • Unidentified Audience Member

  • And then if I could have a follow-up.

  • I might have missed it, but can you reiterate some of the numbers on amortization and stock comp for this quarter?

  • Peter Kalan - CFO

  • For the first quarter?

  • Unidentified Audience Member

  • Yes.

  • Peter Kalan - CFO

  • You bet.

  • Let me switch to it.

  • The stock-based compensation for the first quarter is $2.8 million.

  • Amortization of intangibles is approximately $3.7 million.

  • And depreciation is projected at $2.5 million.

  • And the sum of those three should be $9 million or $0.12 per diluted share.

  • Operator

  • Ashwin Shirvaikar, Citigroup.

  • Ashwin Shirvaikar - Analyst

  • Given that you guys have done a pretty good job of divesting and discontinuing money-losing businesses and units, what might the eventual margin profile look like for the future?

  • I mean, how much better than the 24, 25% operating margin can you get?

  • Peter Kalan - CFO

  • Ashwin, this is Peter.

  • As we think about our business, a couple things to consider.

  • We think the gross margin with the business model and what we are facing is probably going to stay somewhere in the line of our most recent quarter, which was approximately 47%.

  • And as we look going forward, we would expect that we will invest more into our products, based on the activities that are going on with the broadband clients and the new products and services they are looking to offer.

  • So you should expect that our R&D will increase going forward, both in an absolute dollar and probably a little bit as a percentage of total revenues.

  • But where we believe we are well-positioned is in our operating expenses, to be able to hold those fairly constant and get some leverage on that, which will help offset the R&D increases we have.

  • And so, as we look at all that, our full-year guidance shows margins of 24 to 25%.

  • And that's what we would give for the kind of intermediate timeframe of what we would expect to see.

  • Ashwin Shirvaikar - Analyst

  • Given that a final product/service for the core cable wireless collaboration and the core playback of product isn't necessarily going to happen until 2008, 2009, what's the nature of investment in 2006 and '07 look like, that you have spent so much?

  • Peter Kalan - CFO

  • Well, one of the things that we are doing, Ashwin, is we are focused on IP services and the way that new content is going to be delivered, not just the things that are going on with the partnerships with Sprint and the cable operators.

  • We continue to look at opportunities to help our clients deliver, help them in their marketing of their products and services, as well as delivering their services.

  • And those are some of the areas where you would expect to see that.

  • We are focused along the Web, and we're looking to do more things to help our clients become Web-enabled on our platforms, because we believe that will be a good way for the consumers to access the service providers, as well as be a cost-effective means of providing services, whether through the MSOs' services or the consumers.

  • Ashwin Shirvaikar - Analyst

  • So that's less provisioning and more of this planned interaction type of stuff?

  • Peter Kalan - CFO

  • It could be that.

  • It could be customer service, where you could self-serve -- from a consumer perspective.

  • Ashwin Shirvaikar - Analyst

  • And if you thought you were going to be let go without a cash flow question, you are sadly mistaken.

  • Peter Kalan - CFO

  • All right, Ashwin.

  • I think this one must be for Ed, then.

  • Ashwin Shirvaikar - Analyst

  • This one may be for Ed.

  • With almost 400 million of cash, and I can understand the R&D as a percent of sales going up a little bit and you do perhaps need to invest or buy property and cable OSS and things like that, but that still is a lot of cash to just keep on the balance sheet and not do something more actively with it.

  • So could you explain sort of your rationale behind not doing a tender offer or increasing the size of the 10b5-1?

  • Ed Nafus - CEO and President

  • Well, first of all, Ashwin, I think we are in the early stages of analyzing and debating that, both internally and with the Board.

  • It hasn't been in our account that long, so we are certainly faced with a -- it's a nice problem to have, but we understand that we need to continue to look not only at the repurchase program, but at ways to add to our product, either through acquisitions, partnerships or investment internally into things that we can build for ourselves.

  • I think all of those things, including up to incentives for customers or noncustomers to use our system, would be all of the things that we would consider.

  • And I think all of those are, if you will, fluid in nature.

  • We are not locked into, at this point, in our minds to a solution that is in our minds the answer to all the questions.

  • We are very actively engaged in terms of trying to analyze and trying to look at what are the best ways to employ the cash as we go forward.

  • So as soon as I get my voice back and I get over the flu bug, I will be happy to sit down with you and we will discuss this at great length.

  • Operator

  • Liz Grausam, Goldman Sachs.

  • Liz Grausam - Analyst

  • You remarked one of the potential uses of cash is to gain market share.

  • Can you share with us -- I know you don't have any contracts up for renewal this year, but in the competitive landscape in North America, do you see significant market share up for bid, and/or do you see anything internationally that makes you think that there are some significant market share gains in the future?

  • Ed Nafus - CEO and President

  • Well, if you just look at our overall market share, there's clearly opportunity, and I'm sure all of the players in the game would say that.

  • But we certainly view -- there's several opportunities that are out there.

  • We feel comfortable in our position in terms of the relationships and the status of our contracts with our current clients.

  • And obviously, we are in a good, strong position if the opportunities do present themselves to capitalize on them.

  • Liz Grausam - Analyst

  • Is there still an expectation -- can you grow this business internationally?

  • Or are you going to be very focused on the domestic market?

  • Ed Nafus - CEO and President

  • Initially, our attention is going to be on the domestic market.

  • I don't think we would rule out in the longer term if the opportunity -- if the situation was right, an international venture.

  • Liz Grausam - Analyst

  • And then on the kind of expansion of the product portfolio, I know we talked about OSS in the past.

  • Is that still the direction that you think you would take the product in through acquisitions?

  • Ed Nafus - CEO and President

  • Yes.

  • Operator

  • Scott Sutherland, Wedbush Morgan Securities.

  • Scott Sutherland - Analyst

  • This last quarter, you grew 3% year over year and you are guiding to a flat to modest decline.

  • As you look longer term, do you see this as a company that you're going to try to maximize the cash flow, or do you see a return to growth?

  • And as you just mentioned, do you see that moving into new products?

  • Do you see it as market share or moving international -- could you put that kind of in the order of the focus to grow revenue maybe out years, 2007, 2008?

  • Peter Kalan - CFO

  • Scott, this is Peter.

  • I think that's a good question for us to comment on.

  • This is a very strong cash flow business.

  • And it is a business that allows us a lot of investment opportunities with that cash.

  • As we think about cash versus growth, we would be shortsighted if we didn't invest back into the business to support the activities that our clients in the space are rolling out because it would really, we believe, long term put a potential risk of our core cash-producing opportunities that we have by servicing these clients.

  • So we are going to be balanced on generating cash.

  • But at the same time, we will put money into products and services, whether they be self-developed or through acquisition, to make sure that this market-leading position we have with our clients and products doesn't get dissipated or deteriorated.

  • So if I had to focus, you'll look at number one is being first a cash-producing, but we still believe that this business can grow on the top line.

  • But we won't be so shortsighted not to invest in this business.

  • Scott Sutherland - Analyst

  • I think you said EchoStar is 20%.

  • What was Comcast in the quarter?

  • Peter Kalan - CFO

  • 23. 23%.

  • Scott Sutherland - Analyst

  • It looks like you've got your renewals locked up for quite a while now, but I know some of these new contracts either have lower minimums or nonexclusivity.

  • I know you've said in the past you're going to work every day to defend those contracts.

  • Can you talk about, going forward, how you expect to continue to defend those with the nonexclusivity?

  • Ed Nafus - CEO and President

  • I think that is probably a normal part of our, if you will, day-to-day fabric in terms of concentrating on the relationships with the clients, concentrating on the products and services that they are rolling out, and being responsive throughout our organization to their needs.

  • And that's, as you say, we are in a decent position at this point in time with no major contracts on the near horizon.

  • But that doesn't mean that we are just going to sit on our hands and wait.

  • I think it's important to be out in front of the situation, as far as you can possibly be.

  • And that comes down to the relationships which we feel are important to work on a day-to-day basis.

  • Scott Sutherland - Analyst

  • My last question is on the cable side as they go after quadruple play and the relationship with Sprint.

  • What do you see as the opportunity -- would it be a certain percentage increase per subscriber from the $7.80 you're doing now to some incremental increase if they attach wireless to that?

  • Can you guys kind of give some color there, what the opportunity is?

  • Ed Nafus - CEO and President

  • Yes, at this point, Scott, it doesn't really look as though they are going to treat these as, if you will, new subscribers.

  • It would be probably more of a line item, which would present itself, if you will, on our statement at the end of the billing period.

  • And in that case, there's not a great deal of upside from the revenue perspective.

  • We would hope that the advantages of being able to combine onto our statement and continue to grow the other services would certainly help.

  • But in terms of a big spike, I don't think the operators are considering this a big revenue uptick for them.

  • I think they are considering it more a product development opportunity.

  • Operator

  • Donna Jaegers, Janco Partners.

  • Donna Jaegers - Analyst

  • Two quick questions.

  • The [Bright Newhouse] agreement that you announced today -- is that -- Bright Newhouse is already a customer.

  • So is this an expansion of the relationship?

  • Or is it just the rollout of ACP?

  • Ed Nafus - CEO and President

  • It is an extension of the relationship and a rollout of ACP.

  • Donna Jaegers - Analyst

  • So more subs when you say extension?

  • Ed Nafus - CEO and President

  • No, an extension of the contract period.

  • Donna Jaegers - Analyst

  • I see.

  • And how long was the contract period on this?

  • Was that in the release?

  • Ed Nafus - CEO and President

  • I am believing it is like to 2012, I believe, or '13.

  • Donna Jaegers - Analyst

  • And on your plans for rolling out ACP over the rest of the footprint, can you give us a little more detail for 2006?

  • You have is sort of over about 50% of the footprint now.

  • Ed Nafus - CEO and President

  • Actually, we are at about two-thirds now of the cable subscribers.

  • For the most part, what we are waiting on is a lot of the Adelphia transaction to be completed, a lot of the other property swaps that are taking place at the same or similar timeframes.

  • So there's a bit of a holdup there, not because of the product -- the product rollouts have gone extremely well -- but more from a perspective of probably getting the properties in there in their next resting place before they complete the move-over to ACP.

  • In terms of a forecast, we originally had hoped to be done by the middle of this year.

  • That's probably optimistic, considering when the Adelphia transaction takes place, a lot of this will go on hold until the properties get moved.

  • Operator

  • Peter Jacobsen, Kaufman Brothers.

  • Peter Jacobsen - Analyst

  • Just more on the ACP conversions.

  • Is there any evidence now that you are getting additional business on the more sophisticated and functional platform that would be helping ARPU near term?

  • Or is that perhaps maybe more in the 2007 timeframe that will start to happen, in your view?

  • Peter Kalan - CFO

  • Peter, this is Peter Kalan.

  • Your follow-up question, I think, from your question last quarter is valid.

  • We have done work to see the behavior of our ACP clients versus our non-ACP clients.

  • And we're not really seeing a marked difference between those market and systems that are on ACP and what they spend with us versus others.

  • And we see that consistently across all our clients.

  • They are focused on pushing additional marketing services and marketing efforts in front of the consumers.

  • And so we're seeing that be an uptick to our ARPUs, as well as we see our overall -- some of our reporting tools being used at a greater level of work.

  • We continue to look that voice will be an area where we will get uptick.

  • But that's -- we still need volumes to come from our clients to be a more significant driver on that.

  • So in summary, ACP by itself is not an ARPU driver from those that are not on ACP.

  • Peter Jacobsen - Analyst

  • And then could you kind of summarize or characterize your view of the competitive landscape now as a stand-alone service-based supporter of the cable DBS space as opposed to others that are providing license solutions and also selling to other markets such as the wireline market?

  • How is this playing out, in your view?

  • Ed Nafus - CEO and President

  • Well, certainly, we feel that our model allows us, and certainly, as Peter has stated, to invest and reinvest heavily back into our product, back into, if you will, joint projects with our clients.

  • So as you would expect us to say, we certainly believe in our model as one that is very easy to sustain.

  • In terms of the competitive landscape, we have made a conscious decision, if you will, to refocus and intensify our focus on our core strengths and on our core product, which has carried us well.

  • And we think there's a lot of work to do with regard to expansion of the current product, expansion of the relationships with our clients and continued growth.

  • So not being people who would comment on behalf of our customers, but we feel as though we have good relationships and we have good, strong contracts with them.

  • And also probably not to comment on our competitors, but we feel that we are in a very good, strong position as the incumbent and a good provider for our client base.

  • Operator

  • Tom Roderick, Thomas Weisel Partners.

  • Tom Roderick - Analyst

  • I wanted to ask a question here about some of the restructuring efforts that you've engaged in throughout the quarter.

  • As you look forward into next quarter, you've taken a nice little cut out of the business for some unprofitable pieces like the plaNet Consulting and the [IGTN] contract that you had.

  • Do you see any room to further trim some fat, or is this pretty much the end of the restructuring as we have seen it in the wake of the Keenan divestiture?

  • Ed Nafus - CEO and President

  • We've tried to approach it as trying to get as much done as we could, if you will, when all of the wheels were in motion.

  • So we will always strive to be as efficient and as cost-saving in terms of our approach as possible.

  • But in terms of the large chunks of movement, I think we have tried to get everything as much completed as possible for the short term for sure.

  • And I'll let Peter add his comments.

  • Peter Kalan - CFO

  • Tom, the one thing, as you'll see in the press release and that I had in my comments, is that there is some activity still going on in 2006 that we are projecting.

  • One of them is just facilities consolidation, and the other one is the wind-down of the FairPoint contract termination that has some restructuring costs associated with it.

  • But those are identified, they are underway, and are quantifiable in our numbers for you.

  • And they are about $0.07 for the full year.

  • Tom Roderick - Analyst

  • Great.

  • Wanted to ask you a little bit more about wireline opportunities.

  • It's been awhile since you've talked at all about the Verizon fiber-to-the-home deal that you won back last year.

  • Any update you can offer on that deal and/or any additional commentary you can offer on the wireline pipeline?

  • Ed Nafus - CEO and President

  • It's pretty hard to comment on -- certainly on their behalf.

  • We are kind of a subcontractor, if you will, behind the prime on that.

  • And I would say that we are ready to roll.

  • In terms of the startup and the rollout of the service, has gone quite well.

  • But in terms of an update on that, we would probably not comment.

  • Tom Roderick - Analyst

  • Fair enough.

  • Just one last question for you here around your guidance, it sounds like that includes the impact here for '06 of Adelphia and any situations that can arise there.

  • What sort of pricing assumptions are you making and what sort of discount pricing assumptions on the Adelphia subs are you making within your guidance?

  • Thank you.

  • Ed Nafus - CEO and President

  • Tom, what we have done is we have looked at, based on our understanding of how the subs will split between Comcast and Adelphia, what those contract rates will be versus what the Adelphia contract rates will be.

  • The impact to our revenues for 2006 are estimated at 8 million, assuming that the transaction closes in the second quarter.

  • And we believe that that's about the impact that we will see coming through of the larger clients' contracts being applied to the subscribers being consolidated.

  • Operator

  • Larry Berlin, First Analysis.

  • Larry Berlin - Analyst

  • I just wanted to clarify one thing.

  • On the guidance for the cash flow for the first quarter of 16 to 18 million, now, am I subtracting the 10 million prepayment from that to get to the actual cash flow for the quarter?

  • Peter Kalan - CFO

  • Let me walk through that.

  • And I will do it kind of the inverse way.

  • If you started for what would be more of a normalized cash flow, you would expect normalized for the first quarter to be around 22 to 24 million.

  • But we have about $16 million worth of outflows going out in the first quarter that will reduce that.

  • That's everything from severance and paying expenses out on past restructurings, the payout of the management and employee bonuses in the first quarter and such.

  • So we have some -- about $16 million worth of outflows, but we have the 10 million incremental inflow for the delayed invoice payment that we received in the first quarter that we normally would've expected in the fourth quarter.

  • So the net impact of those is about a $6 million impact to working capital -- a negative impact between those items.

  • So our 22 to 24 needs to be adjusted down because of the working capital, down to about 16 to 18.

  • Operator

  • Marianne Wolk, Susquehanna.

  • Marianne Wolk - Analyst

  • I just had a couple of quick questions.

  • The timing of the charge -- it sounds like, based on your last comments on cash flow, that that $0.07 charge is going to be in Q1, or the bulk of it.

  • I just want you to clarify that.

  • And also, can you explain the timing of the lost subs from redistricting?

  • I'm assuming that 1 million is Comcast-related and that maybe it's in the first half?

  • And then finally, since you did open the door to discuss M&A, are you still interested in moving outside of the cable satellite business if it fit with your business model?

  • Thanks.

  • Peter Kalan - CFO

  • Okay.

  • I think I probably have the first two and then you have the last one.

  • So the timing of the charges on the $0.07.

  • Marianne, those are going to be -- actually, the $0.07 more or less ratably or fairly ratably through the year -- the facilities restructuring charge you would look to happen to about midyear.

  • The remaining of the restructuring charges that we intend to take will be more ratable during the year.

  • So in total, our restructuring charges are between 4 and $5 million of expense.

  • Of that, a little bit over 1 million is facilities and the rest is restructuring and management of the FairPoint.

  • And the FairPoint will be ratably during the year.

  • The items I talked about on cash flow are payment of commitments under restructuring from restructuring activities we did in 2005.

  • The other piece that's in there is -- one of the payment is part of Neal Hansen's retirement benefits.

  • That's not technically a restructuring, but it's a cost that we're paying out in the first quarter of 2006 as part of his retirement benefits committed to in the summer of 2005.

  • Your second question on the subs -- we are not commenting on who those are -- of who they are attributed to.

  • But the timing is going to be generally over the first six months of the year as our clients go through the regionalization.

  • And those will shift from period to period based on their readiness.

  • And so we think in general will be completed by the first half.

  • And then on the M&A side, I -- Ed, do you want to (MULTIPLE SPEAKERS)

  • Ed Nafus - CEO and President

  • Other than the -- it would probably not be something that we would make a large change in focus, certainly during 2006.

  • I think there's a lot to do for us in the space that we're in right now.

  • Clearly, if we change our mind on that during the course of the year, we would certainly update you.

  • But at this point, we see plenty to do in terms of the projects and in the opportunities that we see in the market that we are in.

  • Operator

  • Steve [Zogas], [Okimas] Capital.

  • Steve Zogas - Analyst

  • In the 2006 cash flow from operations forecast, what is the total amount of one-time cash uses that are included?

  • Peter Kalan - CFO

  • We have the one-time benefit of the delayed invoice of about 10 million coming in.

  • And then there is about $8 million worth of one-time items going out.

  • So the net effect is about 2 million of one-time item benefits.

  • The bonus piece neutralizes out during the year.

  • Steve Zogas - Analyst

  • So it was 10 coming in and 18 going out?

  • Peter Kalan - CFO

  • 8.

  • Not 18, 8.

  • So it's a net 2.

  • It's about a push between the two. (MULTIPLE SPEAKERS) none.

  • So when we give our full-year guidance of 90 to $100 million on full-year cash flow from ops, that's pretty clean on a full-year basis.

  • Steve Zogas - Analyst

  • And then for the 2006 earnings per share forecast of $1.25 to $1.35, does that include the $0.07 from the loss on the FairPoint contract as well as the restructuring costs?

  • Peter Kalan - CFO

  • Yes, it does.

  • Steve Zogas - Analyst

  • So then your clean EPS would be $1.32 to 1.42?

  • Peter Kalan - CFO

  • We are not allowed to say those type of things under new SEC rules, but your math is correct.

  • Steve Zogas - Analyst

  • And then, that 770,000 or so in the fourth quarter from the FairPoint revenue write-down, is that processing revenue or software revenue?

  • Peter Kalan - CFO

  • It was processing.

  • Steve Zogas - Analyst

  • So what would your ARPU have been if that was added back?

  • Peter Kalan - CFO

  • If you looked at -- if you'd not had the impact of the FairPoint, as well as we had not done the Comcast -- I'm sorry, not Comcast -- but the EchoStar new contract, we would have been between approximately 785 -- somewhere around 785 or north of that from an ARPU basis.

  • Steve Zogas - Analyst

  • And what was the ARPU for Q4 last year?

  • Peter Kalan - CFO

  • I don't have that easily handy.

  • So I think we'd have to get back to you on that.

  • You're talking back for December of 2004?

  • Steve Zogas - Analyst

  • Yes.

  • Peter Kalan - CFO

  • I don't have that handy.

  • Steve Zogas - Analyst

  • Okay.

  • And then my last question is just in terms of the cash allocation priorities.

  • I guess one thing I don't quite understand, and maybe I can get some more color on it, is if you are going to still keep your 15 million per quarter, so you'd have 60 million of buyback for the year, and you'll be generating somewhere around maybe 80 to 85 million of free cash flow, which would more than take care of that, and there are so many good things that are going to be happening in '06 -- you have 90% revenue visibility and there's no one-time contract things that are coming up, why would you not do a large buyback now in advance of all those good things, when presumably the stock price would be much higher, and sort of capture the discount that today the market is placing on that?

  • Ed Nafus - CEO and President

  • I don't think we're ruling anything out at this point in time.

  • And I think what we are really trying to say is we understand there is an interest in what we are going to do with the cash.

  • But at this point in time, once again, we've only had this experience for a very few weeks here.

  • And we are certainly assessing should we increase the buyback, what are other possible uses for the cash, and we will owe that to you as we go along.

  • But at this stage, we don't have a definitive -- here is what we are going to do with all $392.5 million.

  • Peter Kalan - CFO

  • And Steve, this is Peter.

  • We clearly recognize that buybacks are accretive by themselves.

  • But we also believe that there's ways for us to potentially get better returns than just a pure buyback for this business, both for the short term and the long term.

  • And so that's why we are wanting to explore where we are, focused on the cable space, to make sure that we identify all those places where we think we could get better returns.

  • But at the same time, we are still committed to buybacks.

  • And if we determine that there's not better places for us to deploy it, we can expand our 10b5-1 or we can do trades in the open market beyond that.

  • So we are not relegated to or constricted by not having raised the 10b5-1 at this point.

  • Steve Zogas - Analyst

  • Okay, but I agree with you that investment in the business is most likely the highest ROI.

  • And I am not suggesting to do a buyback just because it is accretive.

  • All I am saying is you're sort of sending a message that we need a heck of a lot of cash on the balance sheet because we are going to be doing a lot with it, whether that is M&A or whether that is moving market share or investing in the business.

  • But if there is going to be so much generated, you're sort of implying that you need 300 million or maybe 350 million to pursue these strategic objectives.

  • And that just seems quite in excess of what will actually be needed.

  • So the implication is that that there is a lot of excess cash, which is just going to be sitting around for the duration.

  • Ed Nafus - CEO and President

  • I would say, message received.

  • We understand.

  • And it's certainly on our list of -- write it up on top of actions that we have to take.

  • Operator

  • Shaul Eyal, CIBC World Markets.

  • Shaul Eyal - Analyst

  • Just a quick question, going back to the cash utilization issues, but again, from the M&A side.

  • Where do you see yourselves mainly complementing your existing suite of products?

  • Is it provisioning, mediation, quality of service, root cause analysis -- what do you see yourselves kind of lacking, so to speak, if at all?

  • Peter Kalan - CFO

  • This is Peter.

  • There are several areas.

  • You know, we look at the OSS and BSS side.

  • We look at what's happening with the commercial services that our clients are rolling and how can we play there in a deeper way.

  • What's happening with the changing content and going to IP?

  • We'll be looking at that.

  • We also have some very strong processing services that we would like to complement and that we are evaluating adding to that we think could be good for our business, as well as good for the services we offer our clients.

  • So it's not any one narrow space we are looking at.

  • We are really trying to look at all the things that are happening in our clients' operations and how we can help them deliver better services to their consumers, which we think if we do that, we will be value-adding to our shareholder returns.

  • Shaul Eyal - Analyst

  • Got it.

  • Thank you very much.

  • That's all for me.

  • Good luck.

  • Liz Bauer - SVP, IR

  • We have time for one more question.

  • Operator

  • We have no more questions at this time.

  • Liz Bauer - SVP, IR

  • Okay.

  • Ed Nafus - CEO and President

  • Well, thank you all for joining us today.

  • Thanks for your support.

  • And we will talk to you soon.

  • Operator

  • Ladies and gentlemen, this concludes the CSG Systems fourth-quarter earnings teleconference.

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