CSG Systems International Inc (CSGS) 2006 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the CSG Systems second quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to Liz Bauer with Investor Relations, please go ahead.

Thank you.

Today's discussion will contain a number of forward-looking statements, in particular around any financial projections, our ability to meet our clients' needs through our products and services and performance, our ability to maintain good customer relations and our ability to successfully integrate and manage acquired businesses or assets in order to achieve their expected strategic, operating and financial goals.

While these statements reflect their best current judgement, they're subject to risks and uncertainties that could cause actual results to vary.

In addition to factors noted during our presentation, these risks 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, Chief Executive Officer and President; and Randy Wiese, our Chief Financial Officer.

Ed will begin.

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

Today we will review our second quarter of 2006 and share with you our expectations for the remainder of the year.

Our second quarter 2006 revenues came in at approximately $95 million, higher than our guidance of $91 million to $93 million.

Earnings per diluted share were $0.33, compared to our guidance of $0.30 to $0.31 per share.

Our results were better than expected due to a number of clients utilizing a variety of marketing services and customer care solutions at a rate greater than we had anticipated.

Randy will provide more details around the financial performance of the Company and our expectations for the remainder of the year in his remarks.

In addition, today's call should answer questions that many of you have had regarding our uses of cash and when the Time Warner and Comcast acquisition of Adelphia will close.

First, let's discuss our most recent announcement of our planned $350 million buyback of the Company's outstanding shares of stock.

This program will be implemented through a Rule 10b5-1 plan, which permits the execution of trades during periods that would otherwise be prohibited by internal trading policies.

In conjunction with this announcement, the Board has approved a 10 million share increase in the member of shares authorized for repurchase under the Company's stock repurchase program.

This brings the total number of authorized shares under the program to 30 million.

To date, the Company has repurchased approximately 14 million shares under the program since its inception, at an average weighted price of approximately $24.68.

Or decision to return $350 million to our shareholders in the form of a stock buyback was based on several factors.

First, as a result of the sale of our global software services division for over $250 million at the end of December last year, we have a large amount of cash on the balance sheet.

Next, we have a solid business model that we believe will generate approximately $100 million in free cash flow this year and beyond.

We believe that this, combined with our ability to access our revolver and other financing vehicles is more than enough to enable us to continue to pursue acquisitions and execute on our organic growth opportunities.

And finally, we believe other capital distribution methods would have increased the cost associated with servicing our convertible debt.

We expect to begin repurchasing shares under the plan in early August and expect that it will take 12 to 15 months to complete.

We will provide you with an update on how many shares of stock we repurchase under the plan on every conference call and in our quarterly public filings.

Next, it appears that the acquisition of Adelphia by Time Warner and Comcast will close by the end of this month.

We continue to work with all parties for an orderly and seamless transition.

We feel that most of the decisions have been made regarding how the Adelphia subscribers will be split between Comcast and Time Warner.

At this point, we think we know as much as we will up until the actual transaction takes place.

We also believe that we will continue to serve roughly the same number of subscribers after the closing of this acquisition that we have served before Adelphia was split between the two providers.

However, since these subscribers are being moved to larger CSG clients, they're also moving to contracts with more favorable pricing.

Our 2006 guidance contemplated this.

And Randy's future guidance will include the effect of this acquisition closing at the end of July.

Next, I would like to highlight a few of our accomplishments since we last spoke in April.

Recently, we migrated the largest cable site, Time Warner, New York City, to our Advanced Convergent Platform.

This brings the total number of cable subscribers on our ACP solution to approximately 24 million.

As our clients move to the ACP platform, they are able to more easily bundle, package and support multiple lines of business and provide a higher quality experience for their customers.

We anticipate that all of our cable subscribers will be on the solution by the end of 2007.

In addition, we continue to work with our various clients on the rollout of two new lines of business; wireless and commercial services.

We will help support one of our clients as they announce their wireless offering in two CSG sites in the third quarter.

In addition, we will help another provider roll out their business services offering later this year.

We believe that these new offerings will continue to increase customer loyalty and drive new revenues for our clients and subsequently, for us.

These activities reinforce our confidence with our decision to focus on this industry.

Growth will continue to be driven by our clients' successful rollout of new services like voice-over-IP, wireless and commercial services.

In addition, we're seeing increased opportunities within our client base for enhanced professional services and marketing services projects.

Last quarter, we announced that Peter Kalan, our former CFO will lead our corporate and business development efforts.

Peter is acutely aware of our objective to create shareholder value and is highly qualified for this role with his extensive industry experience in our markets.

Peter will be looking at ways to increase the breadth and depth of our services within our client base in a complementary matter, either through small targeted acquisitions or partnerships and by expanding our footprint within the video industry.

The strength of our balance sheet provides us with the flexibility to look at a number of opportunities.

The key will be to focus on those that reinforce our core strengths and help our customers be even more successful.

Additionally, Mike Scott who was previously the President of our Broadband Services Division has been named our Chief Operating Officer.

Mike will continue to focus on the day-to-day operations, ensuring that we continue to provide our clients with the best solutions and the best people in the industry.

In summary, we continue to execute on the objectives that we outlined a year ago.

We will continue to align the organization to focus on our core strengths and maximize the opportunities that are in front of us.

We will continue to help our clients be successful.

They are our primary reason for being here.

If we help them succeed, we will succeed as well.

And finally, we will continue to focus on making decisions that drive shareholder value by creating a long-term sustainable and profitable business.

I believe that our actions us this far have demonstrated our commitment to this objective.

And lastly before I turn it over to Randy to review the financials, most of you probably know by now that Liz Bauer is leaving CSG at the end of August.

And we would like to thank Liz for her many contributions over the years.

Liz is someone who represents the best of CSG, not only to our shareholders, to our employees and our partners, and she will be sorely missed.

And I trust that you will each have the opportunity to say goodbye to her along the way.

With that, I will turn it over to our CFO, Randy Wiese, to review our financial reports.

Thank you, Ed.

And welcome to all of you on the call today.

I'm pleased to share with you today the financial results of our second quarter of 2006, as well as our outlook for the remainder of the year.

Total revenues for the second quarter 2006 were $95 million, down 2%, when compared to $96.8 million for the second quarter of 2005 and up 2% when compared to $93 million for the first quarter 2006.

Looking at the components of the total revenues.

Processing revenues for the second quarter were $87.7 million, down slightly when compared to $88.6 million for the same period last year; however, a slight increase when compared to $86.4 million for the first quarter of 2006.

Software, maintenance and services revenues were $7.3 million for the current quarter, which compares to $8.2 million in the second quarter 2005 and $6.6 million for the first quarter of 2006.

Comcast continued as our largest client, comprising approximately 24% of the Company's total revenues for the sec quarter.

Echostar represented 19% for the Company's total revenues for the quarter.

The second quarter 2006 gross margin was approximately 51%, compared to the prior year's gross margin of 52% and 49% for the first quarter of 2006.

The operating margin for the second quarter 2006 was approximately 23%.

Compared to 26% for the same period last year and 24% for the first quarter of 2006.

As we had expected, the sequential decrease in operating margin reflects the full quarter impact of the Telution acquisition.

Income from continuing operations for the second quarter 2006 was $15.6 million or $0.33 per diluted share, which compares to $0.31 per diluted share for the same period last year and $0.33 per diluted share for the first quarter of 2006.

We exceeded the high end of our guidance in the current quarter by $0.02 per diluted share, primarily as a result of our strong operating performance for the quarter.

The financial results for CSG include several non-cash items.

For the second quarter;

Stock-based composition expense was $3.2 million.

Depreciation expense totaled $2.7 million.

And amortization of intangible assets was $3.8 million.

The non-cash charges, a total of $9.7 million for the second quarter or $0.13 per diluted share.

We finished the second quarter with 44.9 million subscriber accounts on our processing system.

This reflects the full impact of the previously communicated deconversion of 1 million subscribers, due to a regionalization project by one of our clients.

The average annualized revenue for subscriber or RPU for the second quarter was $7.79, this compares to the first quarter 2006 RPU of $7.66.

The sequential quarterly increase in RPU relates primarily to the continued high usage of marketing services and various customer care solutions by our clients.

Turning to the balance sheet.

As of June 30, cash and short-term investments totaled approximately $414 million, compared to $385 million from the previous quarter.

Our net billed trade accounts receivable totaled approximately $96 million.

This is a sequential quarterly decrease of approximately $13 million, which relates primarily to normal fluctuations in the timing of invoicing and payments between quarters.

The billed trade accounts receivable reflected days billed outstanding, or DBO's, of approximately 63 days for the second quarter.

Respectively, we expect that our DBO's will range between 55 to 65 days.

As of the end of the second quarter, the Company had $230 million in contingent 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 our co-option for redemption of these securities is 2011.

Our recently-announced 10b5-1 stock repurchase plan does not have any impact on the terms of our contingent convertible debt.

Cash flows from operations for the second quarter were $38.7 million.

This is stronger than we anticipated, primarily as a result of the working capital benefits in the quarter, which relate primarily to the $13 million reduction in our accounts receivable balance, I mentioned earlier.

During the second quarter, we repurchased approximately 241,000 shares of the Company's stock, at a total price of approximately $5.9 million or approximately $24.41 per share.

The numbers shares repurchased in the second quarter was less than previous quarters as we hit the limit on the number of shares authorized for repurchase under our then-existing 10b5-1 plan in early May.

The process necessary for the Company to implement the new 10b5-1 plan to repurchase up to $350 million of our outstanding stock was recently completed.

And therefore, we did not repurchase any stock during the majority of May and all of June and July.

As Ed mentioned earlier, we expect to begin repurchasing shares under our new 10b5-1 plan in early August and expect to complete the plan over a 12 to 15 month period.

Next, I would like to provide with you an overview of our financial expectations for the remainder of 2006.

However, before I get to the numbers, I would like to provide some background information on the expected impact of the Adelphia asset sale.

The following guidance for all periods assumes the sale of Adelphia assets to Comcast and Time Warner will close as expected on July 31.

There are three key points related to this transaction reflected in our guidance for the remainder of 2006.

First, although there is expected to be some movement of subscribers between Comcast and Time Warner as the specific terms of the transaction are worked out; we expect the closing of Adelphia transaction to have minimal impact on the overall number of subscribers processed on our system.

Second, as we have discussed in previous quarters, because the Comcast and Time Warner contracts have lower per unit pricing than the Adelphia contract; due to the relative size of Comcast and Time Warner when compared to Adelphia, we anticipate that processing revenues related to these subscribers will be lower beginning in August 2006.

Third, we expect to recognize certain one-time, nonrecurring revenues in the third quarter upon the closing of the transaction.

These revenues include such things as up-front payments for services that were previously deferred and being recognized randomly over the Adelphia contract, which now need to be recognized as the Adelphia subscribers are transferred to our Time Warner and Comcast contracts.

These one-time revenues in the third quarter of 2006 more than offset the impact of lower per unit pricing for these subscribers in the third quarter.

Impacts of the Adelphia transaction end in the third quarter and as a result, our fourth quarter results will be the first full quarter in which the ongoing effect of these subscribers is reflected.

The last point I the would like to make regarding this topic is that the above items related to the Adelphia transaction were contemplated in our previous full-year guidance.

And therefore, didn't have an incremental impact to our current full-year guidance.

With this background information, I will now provide our guidance for the remainder of 2006.

As a result of our strong operating performance for the first six months of 2006 and the visibility of business we have into the second half of 2006; we are raising the lower end of our revenue.

We now expect the full-year revenues will range between $377 and $381 million.

In addition, based on our expected level of operating performance for the year and considering the impact of our recently announced $350 million stock repurchase plan, we believe our full-year income from continuing operations will now range between $1.34 and $1.38 per diluted share.

The accretive effect of the new stock repurchase plan over previous expectations for the remainder of 2006 was not significant, due to the fact that we didn't repurchase stock for almost a full three months from May through July, as I mentioned earlier.

Other key information related to our full-year 2006 guidance is as follows;

Our operating margin for the full year will be approximately 23%.

Our full-year effective income tax rate will range between 36% and 37%, which reflects our expectation of lower effective income tax rate for the third and fourth quarters as we anticipate certain tax benefits being realized during this six month period.

Our average diluted shares outstanding for the full-year will be approximately 46.3 million shares.

Cash flows from operations will be between $110 and $114 million, absent any unusual fluctuations in our working capital.

And capital expenditures will range between $8 and $10 million for the year.

Included in the projected results for 2006 are the following non-cash charges;

Amortization expensive of approximately $16 million.

Depreciation expense of approximately $10 million.

And stock-based compensation charges of approximately $12 million.

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

This full-year guidance can be further broken down into our expectations for the third and fourth quarters of 2006 as follows;

For the third quarter of 2006, we expect the following;

Revenues will range between $95 to $97 million, which reflects an RPU range of between $7.80 and $7.95.

As mentioned earlier, part of the reason we expect an increase in third quarter revenues in RPU when compared to the second quarter measures is a result of the one-time, nonrecurring revenues we expect to record in the third quarter 2006, associated with the closing of the Adelphia transaction.

Our operating margin expected to be approximately 23%.

Our effective income tax rate will be between 34% to 35%, which reflects the expected income tax benefits in the second half of 2006 that I mentioned earlier.

Income from continued operations for the third quarter will range between $0.34 and $0.36 per diluted share.

Diluted shares outstanding for the third quarter will be approximately 46.6 million shares.

Cash flow from operations will range between $25 and $27 million, absent any unusual fluctuations on our working capital items.

The capital expenditures will range between $2 and $3 million for the quarter.

Included in the projected results for the third quarter are the following non-cash charges;

Amortization expense of approximately $4.1 million.

Depreciation expense of approximately $2.5 million.

And stock-based compensation charges of approximately $3 million.

Non-cash charges are projected to total approximately $9.6 million or approximately $0.13 per diluted share.

For the fourth quarter of 2006, we expect the following;

Revenues will range between $94 to $96 million.

As I mentioned earlier, the full impact of the Adelphia transaction will be included in our fourth quarter results of operations, which is one of the reasons why our revenues for the fourth quarter are expected to be less than that of the third quarter.

Our operating marriage is expected to be approximately 23%.

Our effective income tax rate will be between 34% and 35%.

Income from continued operations for the fourth quarter will range between $0.34 and $0.36 per diluted share.

Diluted shares outstanding for the fourth quarter will be approximately 43.9 million shares, with the benefits of the stock repurchase plan really beginning to show through in the fourth quarter.

Cash flows from operations will range between $24 and $26 million, absent any unusual fluctuations in working capital.

And capital expenditures will range between $2 and $3 million for the quarter.

Included in the projected results for the fourth quarter are the following non-cash charges;

Amortization expense of approximately $4.2 million.

Depreciation expense of approximately $2.4 million.

And stock-based compensation charges of approximately $2.9 million.

Non-cash charges are projected to total approximately $9.5 million or approximately $0.14 per diluted share.

In summary, our business continues to perform very solidly and we are well positioned to continue to support our clients as they expand their business.

Our decision to return $350 million of our excess cash to our shareholders through announced stock repurchase program shows confidence in our business model and our commitment to enhancing shareholder value.

Returning the cash will result in a more efficient capital structure for our Company.

In addition, the combination of remaining cash balance, our estimated future cash flows and additional capital available to us due to our underleveraged balance sheet will provide significant capital resources to grow our business through continued investments in R&D projects and complementary acquisitions.

We look forward to reporting continuous successes in the coming quarters.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Ashwin Shirvaikar with Citigroup.

Please go ahead.

Hi, thanks for taking my question.

Did you change your name, Ashwin?

Yes.

It was close enough.

Ed, is it through that Liz is leaving because you made this a very predictable and boring business?

I think that's it.

I wanted to delve into the marketing services a little bit because it seems as if, really, you guys didn't say that was a one-time affect, first of all.

So, are these marketing services related to, say the triple-play sales effort example, are they likely to continue?

Ashwin, they're more related to what I would call expansion of services such as print mail and things that we're doing to support marketing around the rollout of new services.

So, it's things around that and also the other, the other piece of that is some of the project work that we have engaged in as a result, again, of expanded services with the clients.

I think we have probably been surprised ourselves at the sustainability of it.

We thought it was probably kind of a one or two quarter push and while pleasant, we haven't done a great job of forecasting it but it's a nice surprise.

Okay.

And just stepping back and looking at the stock buyback, does the size of the announced buyback preclude you from doing anything that you might have done otherwise from an operational perspective?

No, we feel pretty comfortable with the fact that we will still have adequate resource available for our stated objectives of targeted, smaller acquisitions.

We have a great deal of work underway in terms of the integration of Comex, the Telution assets.

And certainly, we're well positioned to fund that as well as other ventures that we may get into as time goes on.

So, I would answer that has definitely worked.

We feel very comfortable that we will be able to sustain and grow our initiatives under the plan of buying back $350 million worth.

If I may add to that, Ed, the beauty of the business is that it generates a lot of cash.

And so even though we're distributing a large amount of cash over a long period of time, we'll be generating a substantial amount of cash, so that provides substantial capital for us to invest in the business.

Understood.

Okay, thank you.

Our next question comes from Tom Roderick with Weisel Partners.

Please go ahead.

I just wanted to dig in a little more on the Telution integration.

You're getting further and further down the road with the acquisition here.

I wonder if you can identify some of the early delivery points that you had set?

And what sort of successes you have had from an engineering standpoint there, putting the two products together.

And then second part of the Telution question, it seems like you're using that technology to be the underpinnings for how you enable your customers to roll out new applications or new services.

Where will those applications and services come from?

Would you be looking out to the M&A market again for further technology there?

Thanks.

First of all, the integration has gone smoothly so far.

We probably, as you would find with any project of this size, some things have shifted around a little bit.

But in general, Tom, we feel very comfortable with the progress that we're making.

I think you need to back up and maybe look at this in kind of a two phased approach.

The first phase being the implementation and rollout of ACP, the Advanced Convergent Platform, which really changed the framework, if you will, to allow a much more elegant way of doing multiple products on the platform.

The addition of the Telution assets enhances our ability for commercial services primarily in the early going.

And I think as we go along, we will probably find other applications and other synergies that will come out as a result of the further work of the integration.

But at this point, that is pretty much what we have got our sights set on.

Being a pretty conservative bunch, we try to set out some targets that we can reach in the short-term and learn as we go.

But I would report to you that we're very comfortable with where we have gotten to at this point.

And that's not to say we're an end to the job.

As always, these are fairly extensive projects.

But we're pretty happy with the view of what it will look like when completely done and certainly early results in terms of the checkpoints that we're trying to hit along the way.

Okay, good.

And if I could just ask one more question.

You're -- building off of Ashwin's first question there, seems it as though the print business might be getting more visibility.

And for those folks who are down in "billing world", would have seen a lot more face of the Company representing the billing business, which we haven't talked that much about historically.

Is that business becoming more strategic to you?

Are you thinking more about it?

Do you want to grow that business?

Can you talk a little more about the print business here?

Sure.

It's always -- it's very a interesting.

It's always been very strategic to us in that we really feel that having the ability see the process through from the beginning of a relationship, clear through to the end of the process to deliver a bill electronically or in paper to the end client is something that -- there are many points along the way that we can be of great help, not only in design and where we can go in terms of taking the customer statements to a higher level.

It ties in very closely at a time like we're in now, as I mentioned earlier with the marketing of new products.

The statement is still seen as probably the primary communication tool with the clients of our providers.

So, I think we have been fairly low-key about it in the past as it -- on the surface it would appear something is quite the commodity.

And it's a very well-run operation that we have.

But I think we have been very happy with some of the results that we have gotten in terms of the extensions in the marketing aspects of add-on services there.

In addition, we have changed the focus while it was a -- not to use a bad term here, but it was down in the -- buried in the organization of the kind of the IT side of the broadband operations and we have really changed that by moving it.

Peter Kalan has responsibility along with a lady who does a great job, Pam [Sellernik] in running that operation.

And so we have kind of moved it out into its own sunlight.

And I think that's some of the other reasons why we're seeing great results.

Very good.

Thank you guys.

Our next question comes from Michael Turits with Prudential.

Please go ahead.

Hi, guys, good morning.

First of all, I guess I could back into it but what would the RPU be for the fourth quarter and any thoughts on it going forward?

Yes, you can probably back into it Tom -- Michael, I'm sorry.

We typically only provide RPU out one quarter.

You can easily do the math, I think.

The question is directionally.

Do you continue to be confident that you're going to get growth out of the incremental services?

Any thoughts on the longer-term trends in RPU from that point forward?

I think we will continue with the growth in those services but the one thing you have to consider is the third quarter has one-time revenues in there related to Adelphia and all of those go away in the fourth quarter.

Right.

So it will come down naturally from that standpoint.

And then -- but I think from the perspective of being able to stay in the marketing services and the customer care solutions that we have seen, I think we're having very good traction on those and expect those to stick in future quarters.

Is there a sense that you could get RPU growth off of whatever that fourth quarter run rate is going into '07?

Yes.

Yes.

On then on the cash flow, you had a $13 million reduction in accounts receivable, which benefited the cash and all you got some upside.

And then you got, it looks like about a $3 million benefit from an increase in taxes payable.

So, $15, $16 million against it, creates the upside.

Why shouldn't that reverse over the next couple of quarters as you move into the back half of the year?

It doesn't look like it does, based on the guidance for cash flow.

We wouldn't expect it to reverse.

The timing around the receivables is somewhat difficult to predict.

The range of $96 to $100 million has been historically kind where of we're at.

I think we were running just a tad bit high the last couple of quarters.

So, whether or not it moves another $5 million either way is difficult to predict.

But we think it will stay.

And on the tax accrual, that somewhat relates to the timing of the accruals and the quarterly payments on the taxes.

So, I think, over time that that somewhat normalizes itself out as well.

And if could just squeeze one last one in.

The very nice numbers on the processing gross margins, which look like they bumped up about 2 points.

So, all the upsides to revenue, it sounds like the income from services looks like it floats straight through the gross profit.

Is that -- any kind of any color on that?

Is that right or is it just that was -- there was no real no marginal costs to you guys on that?

And how we should look at the RPU going forward in terms of the ability to drive gross margin upside?

Two things, one is, that a lot of the revenues did flow through but you also see that our expenses quarter over quarter went down slightly so.

So, some of that is cost control as well as the revenue coming through.

So, not much marginal cost to the incremental RPU that was delivered?

There is a time but I think the mix depends upon the various portions of that.

In this case, probably a small portion of it had incremental costs, so therefore a lot of it came through.

All right, guys, thank you very much.

Our next question comes from Peter Jacobson with Kaufman Brothers.

Please go ahead.

Thank you, and good afternoon, everybody.

With respect to -- you've got about of your subscribers have converted over to the ACP platform.

And with that level converted over, are you seeing anything evidence of generating new incremental revenues associated with ACP or is that still pretty small?

Well Peter, at this point, we actually have 75%, approximately, of our cable subscribers, which is really the targeted audience for audience for ACP.

So it sounds better than 50 because we take out the DBS guidance and don't hold our fight to the fire.

Because it's really a different application at this stage.

Okay.

So we're making good progress there in terms of moving forward.

In terms of the revenue aspects, we didn't increase the cost of the processing per se to our clients.

When we implemented ACP, that done on our dime intentionally.

Right.

To get them where we wanted them to be.

I think the -- while we might be downplaying it a little bit, obviously the new services that are being added are helping.

It's just that I think your statement of fairly minimal to date, is correct.

But the RPU would indicate that there is some uplift there in the various areas.

But we would target, right now, from what we see, it's definitely coming more from the marketing services and some of the others consulting types of things that we're doing versus just pure added ACP voice subs, for example.

Okay, thank you.

And then, AMDOCS has talked about having some key cable billing deals in their pipeline.

Can you describe any changes in the competitive environment post AMDOCS' acquisition of DST?

Well as always, we won't speak ill of anyone.

We respect them very much as a competitor.

And obviously, our focus is on our client base and on our product.

And the nice thing is that we have completed and rolled out the first days of the ACP product.

With the enhancements that are -- will follow with the acquisition of the Telution assets, we feel like we're in a very nice position but we will always be mindful of the need to stay ahead.

I can't speak for them.

I don't know of anything that I could add to that.

Okay.

Thank you very much.

Thank you.

Our next question comes from Elizabeth Grausam with Goldman Sachs.

Please go ahead.

Hi, just trying to get a better sense what have your long-term topline growth goals are.

There has been a lot of movements in 2006 with EchoStar's repricing and now with Adelphia's subs moving.

What do you looking for internally for kind of topline organic growth?

And then on top of that, what are your targets internally on how to use your balance sheet to potentially enhance that growth either through customer acquisition or acquisitions of technology?

We will probably -- first of all, Liz, thanks for acknowledging the multiple things that we've really kind of gotten behind us with regard to some of the transactions that we have gone through in the last year, which has really got us in the position that we wanted to be in.

That we have been talking about being able to clearly focus on this industry, on this section of the marketplace because we do feel there are opportunities there.

I will defer to Randy in terms of any specifics, otherwise, I will be probably talking to the legal department right after the call, in terms of some of our projections.

But our goal certainly in 2006 was to stabilize and reset the foundation from what we think the base business will look like.

And I think we have had a very good result in being able to get to that point.

Certainly, by the time we complete the fourth quarter, as Randy mentioned, we're gotten a lot of the noise out of the way of the things that have -- we have all been waiting for.

What are you going do with the cash?

And when is the Adelphia transaction going to close?

And what will be the impact of your decision and the impact of their decision with regard to the Adelphia piece as we go forward?

So, taking that as the first step of trying to make sure we're stabilized and we understand where we're at.

As I mentioned, and I will refer to Randy here for any comments on the growth rates.

I would summarize what Ed said, is that there was a significant transition of the business in 2006.

And the fourth quarter is a good reflection of what the business should look like going forward.

We have from an organic growth standpoint, targeted a 5% to 6% range.

And that can be broken down into three basic components.

We typically have, on a historical basis, gotten 1% to 2% growth from the number of subscribers on our system.

We've gotten 2% or so from price escalators on a year-to-year basis.

And have been able to penetrate our clients with more services and more products to the tune of about 2%.

So, if do you the math, our target would be from a goal of 5% to 6%.

So, I think if you look at that, that is probably a good indication of where we're can go organically.

And on that organic growth, the 2% that you're getting from additional that services you're adding on, what if anything -- is there any difference in the margin that you expect in those incremental serves, either higher or lower?

Particularly in light, I think that you mentioned some of the incremental services were coming from print and mail and what those margins may look like?

I think you should expect the historical margins to hold on those new services or maybe slightly improved.

But I think the history is a good indication of the future on those.

And then in terms of the acquisition pipeline, you're certainly going to have plenty of cash still left in your balance sheet, post the repurchase.

Are there still kind of active deals that you see in your pipeline and how, at all, if can you categorize it, do you think that may enhance your total revenue growth as an organization?

We would certainly agree, we're in a pretty nice position with regard to the flexibility financially to be able to do that.

And that is certainly on our radar screen in a significant way but it's not something that we're banking on, that is has a do-or-die strategy for us.

We feel there are some definite opportunities out there that would be additive to either expanding our product footprint or our expanding our customer base.

And we'll continue to be aggressive in that area in the range we're comfortable with.

And lastly, on point of potential acquisition of customers rather than complementary technologies, are there major contracts you know of from your competitors that are up for the bid and next year or two, the you're that you're taking a serious look?

Well, we would pretty much always take a serious look and be active in the marketplace regardless of the contract situations.

So, I have nothing specific to report on that other than, we'll be out there.

Okay, good.

Thank you.

Thank you.

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

Please go ahead.

Thank you, good afternoon.

I had a lot of the same questions the last caller.

But kind of looking at the organic growth, if you kind of knocked out the noise of Adelphia in Q3 and Q4; would your guidance have been pretty much the same thing for the second half of the year?

I know it probably would have been more Q4 than Q3.

What would your guidance would have looked like organically?

Scott, are you asking, did our guidance change?

No, I'm asking if you had knocked out all the noise in Adelphia, would you have had similar back half of the year outlook for total revenue or would you have had a little bit better organic growing, excluding what happened with Adelphia and the one-time benefits, including the pricing reductions?

So, if Adelphia wouldn't have gotten acquired by Time Warner and Comcast, would our numbers have looked different?

Yes, and how would they have looked different.

I think you could have expected organic growth to be somewhat in line.

He's asking how much is the financial impact of Adelphia.

Let me take a difference.

I understand, now.

To help you understand kind of how Adelphia impacts the quarter over quarter.

As I said in the comments, there is only one month of processing fees at the higher rate in Q3, which is the month of July.

And then it falls off in August and September.

And then that decrease was offset by the one-time revenues that I mentioned to the tune of -- if you net the two together, revenues were approximately $1 million higher in Q3 versus Q2, as it relates to Adelphia.

So, if you take that one step further into Q4, Q4 has no months that have the higher processing fees.

So, there is the one month differential from Q3 to Q4 and the one-time fees are gone.

So, if you look at those Q3 to Q4, revenues drop by about $3 million related to Adelphia.

Great, that's perfect.

Exactly what I was looking for.

Sorry, I didn't understand your question.

That's exactly what I was looking for.

Okay.

How many subs do you have on Adelphia right now?

Approximately 3 million.

Yes, about 3 million.

About 3 million?

And lastly, any key renewals you guys have over the next 1.5 year right now you that need to win back?

No, there is no significant renewals on the horizon for the next 18 months.

Okay.

Great, thank you and good luck.

Our next question comes from Donna Jaegers with Janco Partners, please go ahead.

Hi, just one quick followup.

I know DirecTV is not your customer, they're on DST.

But given all the rumors out there with Charlie Ergen of Echostar reportedly talking to Rupert over at DirecTV, do you have any knowledge of when that contract is up on DirecTV?

Sure we do, Donna, but I don't have it at the top of my head in terms of what the situation is there.

Okay.

And any sort of -- obviously you have 3 million subs on Adelphia now.

Those are going to get parceled up between Time Warner and Comcast.

Any -- you want to hazard any guesses as far as how many -- if you'll win -- or if you'll gain or lose subs?

We end up pretty much the same as where we are now, Donna.

In terms of -- after it's all sorted out, as near as we can tell, from everything we have been told so far.

And we think we have a good handle of it.

In the end, it's pretty much awash.

Okay, thank you.

Thank you.

Our next question comes from Shaul Eyal with CIBC.

Please go ahead.

Hello.

This is actually Yair Reiner for Shaul.

Quick question, you mentioned in the back half of the year, you're going to have the opportunity to support a couple of customers in both wireless and commercial services.

Can you give us a sense of how the services going forward might impact RPU?

It's probably too soon to tell.

It's a -- we're still feeling our way in terms of what the extent of the service levels that we will be asked to provide will be in the various scenarios.

So at this stage, it's too soon to tell.

We're still trying to get a good handle on what ACP voice will be.

Just trying to track those services.

So, it takes a bit of experience with it before we can really fine-tune it.

Fair enough.

To take that question in a slightly different direction, I think we all know what we mean by wireless services.

Can you give us a little more color on what some of the commercial services that you looking to support are?

Sure, if you look at what some of our customers are looking at for initiatives in to 2007, they looking at using their network to pass small and medium homes.

And their really killer product is going to be the high-speed data and the voice-over-IP services.

Financially, since we're helping our customers roll those out to the residential side, they also looking to us to help them on the business side, which includes much more of a account hierarchy, much more sophisticated reporting tools, much more sophisticated pricing and packaging of plans.

So, that's what we'll be helping them with.

That's very helpful.

Congrats on the great quarter.

[OPERATOR INSTRUCTIONS] At this time, management, there are no further questions.

Okay, thank you all for joining us today.

I would like to just one more time extend my heartfelt thanks to Liz for all of her services to CSG over the years.

She's a great friend and I trust she will remain a friend of many of you as well.

And also, I would like to say thank you to all of our employees who are working very hard every day and every night to keep our customers happy.

So, thanks again for joining and talk to you next quarter.

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

You may now disconnect.