CSG Systems International Inc (CSGS) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the CSG Systems third quarter conference call. [OPERATOR INSTRUCTIONS].

As a reminder, this conference is being recorded Tuesday, October 24, 2006.

I now would like to turn the conference over to Roger Metz, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Eric.

Today's discussion will contain a number of forward-looking statements.

In particular, around any financial projection, 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 our best current judgment, they are subject to risks and uncertainties that could cause actual results to vary.

In addition to factors noted during our 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 have not received a copy of our press release you can obtain a copy from our website.

Before we get started, Ed Nafus our Chief Executive Officer, recently had minor surgery.

His recovery is a taking slightly longer than anticipated so he is unable to to attend the call, but he is doing well and will be back in the office in the near future.

Ed sends his apologies for not being here with us today, and in his absence we have Peter Kalan, Executive Vice President.

Also with us today is Randy Wiese, Chief Financial Officer.

Peter will begin.

Thank you, Roger.

I thank all of you on the phone for joining us today.

Today we will review our results for the third quarter of 2006, highlighting some of our recent accomplishments and share with you our expectations for the remainder of the year.

At the end of our prepared remarks we will open the call up for questions.

I am pleased to announce that we had another great quarter at CSG.

Our third quarter 2006 revenues were approximately $98.5 million, and our income from continuing operations came in at $0.37 per diluted share.

Both of these measures exceeded the top end of our financial guidance for the quarter and are an indication of our continued solid operating performance.

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

But first I would like to share with you a few of our accomplishments since we last spoke in July.

At the end of July, Comcast and Time-Warner completed the purchase of the Adelphia business.

We continue to work very closely with Comcast and Time-Warner as they assimilate their acquisition to the Adelphia subscribers.

The first steps in this transaction have been smooth and we expect to provide continued assistance into the second quarter of next year.

As previously stated, the transaction was roughly neutral to CSG in terms of the total subscribers processed on our systems.

The acceptance and support of our products continues to widen within our clients.

We have continued to migrate subscribers to our next-generation advanced convergent platform which gives our clients the full benefit of our technology to support their roll-outs and new services.

We now have approximately 25 million subscribers on this solution, which represents over three quarters of the cable subscribers we serve, and we still anticipate having all of our cable subscribers on the ATP platform by the end of 2007.

In addition, we continue to work closely with our clients to help them find ways to improve customer convenience, decrease their cost structures and roll-out the most compelling bundles of services, all things that our clients are focused on, given the highly competitive marketplace in which they operate.

For example, we released new order work flow capabilities that streamline processes in the customer call centers, significantly reducing order entry errors while expediting call handling times.

We extended our e-care capabilities to support consumers making cash payments at walk in locations.

In an effort to strengthen the customer experience around installs, we introduced technology that automatically calls ahead to the customer before the field technician arrives, saving cable operators the expense of no shows and allowing consumers the ability to have a more narrow scheduling window.

Additionally, we've been engaged to help another large client with a variety of projects that will automate customer care processes that are currently being done manually, launched new products and rationalized certain system that tie into CSG.

Finally last quarter, we successfully helped one of our clients launch its two Beta sites for mobile telephony.

In that light, let's talk a little bit about some of the changes that's taking place in the communications industry and how CSG is evolving its solutions to ensure that our customers have the flexibility they need in their billing and customer care systems to address those changes.

You can't miss the headlines, convergence is happening.

Cable operators are becoming wireline and wireless voice companies and are targeting consumers along with small to medium-size businesses.

Traditional phone companies are offering video services.

Wireless phone companies are enabling the cable companies to offer wireless service.

Satellite providers are launching data services.

Additionally, the advancement of networks along with the digitized content is allowing services providers to consider delivering any content on any device at any time.

As a result communications product offerings are becoming more and more complex with the potential for highly customized bundles of products and services.

This is great for consumers but with these complexities, the communications providers are faced with very real business problems.

They need highly scalable, feature risk and flexible customer care and billing solutions that enable them to provide competitive product offerings while maintaining the highest standards of customer service.

To meet these needs, CSG continues to make significant investments in research and development, and we are currently working on the natural evolution of the ACP platform to incorporate the comex platform acquired through Telution earlier this year.

For example, the integrated solution will provide enhanced product configuration, offer management and order work flow functionality specifically targeting to support the clients ability to manage the complexities of both consumer and business services markets.

Additionally, we are addressing numerous enhancements to improve the call center experience and enable our customers with advanced product offering and customer interaction capabilities.

This is a prime example of how we are able to acquire new technology and incorporate it into our current business to expand our service offerings to our clients.

We believe that there is still more we can do for our clients and we are willing to further use acquisitions and partnerships to expand our capabilities in helping communication providers maximize the interactions with their customers.

Also, we are looking for opportunities to expand into clients where we have traditionally not had relationships.

And lastly, we are seeking functionalities and technologies that the market is starting to embrace and would be additive to our offerings.

We will have more to report on this in the coming quarters.

While the market evolves and changes we advance with our clients and continue to deliver scalable operational systems and services to the marketplace.

In recent weeks, we hosted successful user conferences with two of our largest clients.

We received very positive feedback regarding CSG support of their initiatives and strong confirmation that our product roadmap is very much in sync with our clients in terms of how it supports their future requirements.

Now before turning the call over to Randy, I would like to summarize by telling you why we are optimistic about the future at CSG.

First we have an enviable client footprint in the center of an industry that is constantly looking for new ways to exploit technology to deliver entertainment and productivity solutions to consumers and businesses.

And we strive to be more than a vendor to our clients.

We are a trusted partner, and are increasingly called upon to help our clients solve problems as they grow their businesses.

Second, we have delivered the foundation of a robust and flexible platform that manages the entire customer life cycle, and we continue to invest in our capabilities to meet the future needs of our clients.

Our outsource solutions let the operators focus on what they do best, operate their businesses and execute on their growth strategies.

And finally we have the balance sheet and cash flows that allows us the opportunity and flexibility to seek new ways to support our clients' growth whether that is through research and development, or through acquisitions.

With that I will turn it over to Randy Wiese,our Chief Financial Officer, to review our third quarter financial results.

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

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

Total revenues for the quarter were $98.5 million and income from continuing operations was $0.37 per diluted share.

Both measures exceeded the high-end of our financial guidance as a result of our strong operating performance for the quarter.

Before I get into some of the more detailed discussions about our operating performance for the third quarter I would like to provide some background information on the impact of the planned Adelphia asset sale, the effects of which were factored into our guidance for the current quarter.

Adelphia completed the sale of its broadband assets to Comcast and Time-Warner on July 31, 2006.

As a result the acquired Adelphia subscribers processed by CSG were transferred to our Comcast and Time-Warner contracts in August.

There are key points reflected in our third quarter results that I would like to cover.

First, we recognized approximately $2.8 million of one time non-recurring processing revenues in the third quarter upon the closing of the transaction.

These revenues included such things as up front payments for services that were previously deferred and were being recognized ratably under the Adelphia contract.

But the transfer of the Adelphia customers to the Time-Warner and Comcast contracts, these deferred revenues needed to be recognized in the third quarter.

Second, monthly processing revenues related to the acquired Adelphia subscribers were approximately $1.8 million lower for the third quarter when compared to that of the second quarter 2006, due to the Time-Warner and Comcast contracts having lower per unit pricing than the Adelphia contract.

That reflects two months of invoices at the lower per unit pricing for these subscribers.

These two items combined resulted in a net increase in processing revenues of approximately $1 million for the third quarter when compared to that of the second quarter of 2006.

As I noted earlier this impact was anticipated in our financial guidance for the third quarter of 2006.

And third and last, although there was some movement of customer accounts between Comcast and Time-Warner as a result of this transaction, it has minimal impact on the overall number of customers processed on our system at the end of the quarter.

With this background information I will now go into further details on our operating results for the quarter.

As I mentioned earlier, total revenues for the quarter for the third quarter were $98.5 million, up 5% when compared to $94.1 million for the third quarter of 2005 and up 4% when compared to $95 million for the second quarter of 2006.

We exceeded the high-end of our total revenue guidance, primarily as a result of continued strength in revenues from marketing services and various ancillary customer care solutions.

Looking at the components of total revenues.

Processing revenues for the third quarter were $90.3 million, up 3% when compared to $87.5 million for the same period last year.

And also up 3% when compared to $87.7 million for the second quarter of 2006.

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

Comcast continued as our largest client, comprising approximately 23% of the Company's total revenues for the third quarter.

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

We finished the third quarter with 44.8 million subscriber accounts on our processing system, which is relatively unchanged from the previous quarter.

As I noted earlier, the impact of the comp closing of the Adelphia transaction had little overall impact on the overall numbers of subscribers processed on our system at the end of the quarter.

The average analyzed revenue per subscriber or ARPU for the quarter was $8.08.

This compares to the second quarter of 2006 ARPU of $7.79.

A portion of the sequential increase and processing revenues in ARPU between the second and third quarters of 2006 relates to the $1 million of higher revenues from the Adelphia subscribers in the third quarter that I mentioned earlier or approximately $0.10 of ARPU impact.

However, more importantly, a greater portion of the sequential increase in our processing revenues and ARPU is due to continued high usage of marketing services and various ancillary customer care solutions by our clients, which includes such things as professional services, systems interfaces and reporting tools.

You will see continued demand for such products and services due to our ability to help our clients execute on their ever increasingly complex business operations.

The third quarter 2006 gross margin was approximately 49% compared to the prior year's gross margin of 50% and 51% for the second quarter of 2006.

The operating margin for the third quarter 2006 was approximately 23%, which is in line with our expectations.

This compares to 26% for the same period last year and 23% for the second quarter of 2006.

Income from continuing operations for the third quarter 2006 was $17.4 million or $0.37 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 second quarter of 2006.

We exceeded the high-end of our earnings guidance, primarily as a result of better than expected revenues for the quarter.

Financial results for CSG include several non-cash items.

For the third quarter, stock-based compensation expense was $3.1 million, depreciation expense totaled $2.6 million, and amortization of intangible assets was $4.1 million.

These non-cash charges totaled $9.8 million for the third quarter, or approximately $0.14 per diluted share.

We did experience some activity in our discontinued operations this quarter.

We made a $6 million payment to Comverse during the third quarter related to the settlement of a dispute over a joint tax election associated with the sale of our business to Comverse in December of 2005.

This payment to Comverse was considered a reduction in the purchase price that was previously paid to us by Comverse and thus was reflected as part of our discontinued operations.

As a result we recorded a loss from discontinued operations net of taxes for the third quarter of 2006 of $3.8 million or $0.08 per diluted share.

This settlement payment had not been anticipated by us and we do not expect any similar purchase price adjustments in future periods.

Turning to the balance sheet, as of September 30th, cash and short term investments totaled approximately $415 million compared to $414 million from the previous quarter.

Our net trade build accounts receivable totaled approximately $108 million.

This is a sequential quarterly increase of approximately $11 million, which relates primarily to normal fluctuations in the timing of payments from certain clients at or around quarter end.

Billed trade accounts receivable reflected days billed outstanding or DBOs of approximately 62 days for the third quarter which is within our target range of 55 to 65 days.

As of the end of the third 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 or call option for redemption of these securities is in 2011.

Cash flows from operations for the third quarter were slightly higher than we had anticipated at $28.6 million.

In August, 2006, we implemented our $350 million 10-B-5-1 stock repurchase plan.

During the third quarter, we repurchased 820,000 shares of the Company's stock at a total price of approximately $21.9 million, or approximately $26.69 per share.

This leaves $328.1 million of share repurchases still authorized under our 10-B-5-1 plan as of the end of the quarter.

The number of shares repurchased under our 10-B-5-1 plan is based upon a predetermined factors that were established when we implemented our plan in August.

Over time, there will likely be some variability around the share repurchases based upon changing market conditions.

We remain committed to completing our $350 million 10-B-5-1 stock repurchase plan, but the time period to complete the plan may extend beyond the original estimate of 12 to 15 months due to various market factors that may impact the pace at which we buy back our shares.

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

For the fourth quarter, we expect the following: Revenues will range between $95 million to $97 million, which reflects an ARPU range of between $7.70 and $7.85.

Expected decrease in revenues in ARPU for the fourth quarter when compared to the third quarter 2006 relates primarily to the closing of the Adelphia transaction that I mentioned earlier.

Impacts of the Adelphia transaction ended 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 customer accounts is reflected.

Expected decrease in revenues between the third and fourth quarters related to the acquired Adelphia customer accounts is approximately $3.5 million, or approximately $0.30 of ARPU.

In addition , although there is expected to be some additional movement of subscribers between Comcast and Time-Warner as the final terms of the transaction are worked out, we expect this to have minimal impact on the overall number of subscribers processed on our systems.

Our operating margin for the fourth quarter is expected to be approximately 22% which is a slight decrease sequentially from the third quarter and slightly lower than our previous expectations for the fourth quarter.

This decrease is primarily due to slightly lower sequential revenues and an expected increase in our R&D and support functions expenses in the coming months in order to address the opportunities we see with our customers' changing business needs.

Our effective income tax rate will be approximately 35% for the fourth quarter.

This rate reflects certain income tax benefits that will be realized in the second half of 2006.

Going forward in the near term we would expect our effective income tax rate to be more reflective of our historical rates of approximately 37 to 39%.

Income from continuing 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 46.4 million shares.

This estimate assumes that we will purchase shares, we will purchase a similar number of shares in the fourth quarter under our 10-B-5-1 plan as we did in the third quarter.

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

And capital expenditures will range between two and $4 million for the quarter.

Included in the projected results for the fourth quarter are the following non-cash charges: Depreciation expense of approximately $2.5 million; amortization expense of approximately $4.3 million stock-based compensation charges of approximately $2.9 million, non-cash charges are projected to total approximately $9.7 million, or approximately $0.14 per diluted share.

Based on our fourth quarter guidance and our actual results to date, our guidance for full year 2006 is as follows: Revenues will range between $381 million to $383 million, and income from continuing operations per diluted share will range between $1.36 and $1.38 for 2006.

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.

We are focused on strengthening our business performance while continuing to leverage shareholder value.

We look forward to reported continued success in the coming quarters.

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

[OPERATOR INSTRUCTIONS].

Our first question comes from Ashwin Shirvaikar, Citigroup.

Thank you, nice quarter and also please convey to Ed that I hope he gets well soon.

I will do that, Ashwin.

First question is on how discretionary is the use of marketing services by your clients because it's been about five quarters now I think that they have surprised to the upside.

Well, the decisions of how much marketing services our clients use is dependent upon how they want to communicate, how much they want to communicate and what they want to communicate to their consumers through their statements and that can take a variety of different forms, Ashwin, and depending upon what programs they want to push to their consumers within a period will impact what the scope of revenues are that we can generate for the quarter.

I would tell you that what we see happening in the business even though it is discretionary by our clients with the increased competition in the marketplace coupled with the need to make consumers aware of the expanding products whether it's the incremental voice services that are being offered, new video products and capabilities, there is a great demand to push products into the consumers and make sure that they are aware of what those are.

So we've seen steady increase in it but it has the ability if a client chooses to back off on their promos to reduce or if they choose to use other avenues to communicate with their clients.

So it does have a lot of variability in it.

We've just seen continued strength from period to period.

Okay.

And another question, last one on margins, is you indicated you expect about 22% operating margin in the fourth quarter, but in the past you indicated you can sustain and get to a mid to even possibly high 20s operating margin level.

Can you help me bridge that gap?

I think we are seeing, Ashwin, right now in the near term we are investing funds in R&D projects and some of the support functions of the new products rolling out.

I think in the near term we are seeing a little bit of pressure on our most recently quarterly performance of 23%.

So 22% for the fourth quarter.

Now we do have a business model that we can leverage as we do grow the business so our long-term goals do not, if we still have a good chance to grow our margins in the long-term.

So more importantly, as I look at next year, can I expect in the mid 20s at least, 24.5?

I think you should look more at the fourth quarter as probably a good indication of what 2007 is going to look at, most recent two quarters of 2006, the 22 to 23 is probably a better estimation for '07.

So these are long cycle projects?

Exactly.

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

Scott Sutherland, thank you, good afternoon.

First of all on the gross margins, they came down a little bit, can you talk about how much of that was from Adelphia and how much of that was from something else in the gross margin?

Adelphia really didn't have I think that big of an impact.

We will see some variability in our gross margin quarter over quarter mainly because of the change in the revenue mix and also the second quarter -- I'm sorry, the third quarter did have a couple of one time items in there.

If you look at the first quarter of this year we did about some a similar amount that we did in this quarter, 49%.

So nothing indicative of this quarter as it relates to Adelphia.

When you look at this migration to Comcast and Time-Warner, is Time-Warner becoming a 10% customer you think when it's all done by the fourth quarter, first quarter next year they are becoming more significant?

It should be.

If they do the math they were at 10% before the Adelphia transaction and they are taking on a good portion of the Adelphia customers that we had so they should go north of the 10%, yes.

My last question is, you've been buying back a lot of shares with the cash and you talked about being active in M&A.

Should we think some of these new areas like customer care are some of the areas that you are going to look at or are there some other areas that you are looking at for acquisitions?

From a growth perspective, Scott, we are looking at opportunities that we can leverage into our existing client base because we think we've got with the footprint of clients and the scope of operations that we already support, we think there is a very strong business model to continue to bring more feature functionality to them.

But as we bring new capabilities into our business and new functionalities into what we own, we look outward to see if there's tangential markets we can go to.

But we look first at our ability to leverage into the strength of our marketplace as it is today.

Okay.

Great.

Thank you.

Next question comes from Donna Jaegers with Janco Partners.

Please go ahead.

Three questions, I guess.

On acquisitions, Peter since you're on the call, can you talk about any sort of increased urgency on making acquisitions?

I wouldn't say that there's been an increased urgency from as we view the business.

But we recognize that there are a lot dynamic things happening in the broad marketplace and the competitive environments for our clients are getting more and more competitive.

It's just getting increased in the way that they have to position themselves to sell their products.

So as we look at this, Donna, we believe that there is windows for us to be able to meet our clients needs and we look to do this in these open windows.

But there's not been a need identified in that sense we've got to do something on a more aggressive behavior from being able to conduct a transaction.

But there are unique opportunities in the broader marketplace that we want to take advantage of.

Just sort of as a follow up to that since you start talking about competition that your clients are under, [Andox] is now, they have been in charge of DST for the past three to 3.5 quarters, I guess, or maybe just three quarters, can you talk any about your confidence in retaining your customers versus the DST or the Dock seven platform?

Well, we like our position with our clients.

We think we do a very good job with them at a very balanced price point for our clients.

As we think about new competition coming in, we respect the competition and recognize that they have skills that they like to bring to the market.

But it hasn't changed how we look at the market.

We continue to invest from an R&D perspective and do things like we did with the Telution acquisition in the first quarter to make sure our product stays as the industry leader.

[Andox], I think has owned, the DST ends of this business since July of 2005 and so they are working to bring their next-generation platform out to the cable market.

We like that we've got over 75% of our cable customers converted and using our ACP platform that we can then continue to evolve to their business needs as we go forward.

So overall, we respect the competition as they come in and with their skills but we think we've got a very strong position that we can defend and expand most importantly by continuing to bring new features and function facilities and serve our clients moving forward.

Thanks a lot.

Next question comes from Tom Roderick of Thomas Weisel Partners.

Please go ahead.

Hi, guys, good afternoon.

So I wanted to just ask a little bit more about ACP and I think Peter you just mentioned, was it 75% of your customers have now migrated to the ACP platform?

I said 75% of the cable subscribers on our systems have migrated.

So the strength of ACP is multi-service bundling and packaging and traditionally the satellite providers have not had that although they are going down the path of delivering incremental types of services as EchoStar is looking to do with Wild Blue.

But as you look at it we give this report as a percentage of cable subscribers.

Great.

Can you just refresh my memory on how that 75% compares to the last couple of quarters?

It seems like we've been at that threshold for a little while now, and to the extent that we have, what's the pushback that you are getting from the last 25 to 30% of your customers on actually upgrading to ACP?

I don't know if it's so much push back.

The closing of the Adelphia transaction had to take place because the Adelphia, the subscribers didn't want to convert them to ACP before the transaction closed but now that it's closed we expect to see some good movement on the remaining 25% over the net two or three quarters.

Wonderful.

Shifting gears over Telution, can you comment on how the technical integration has gone obviously a big component of what you brought Telution on board to do was to provide enhancements to the capability to roll-out new services.

So some update on the technical integration would be helpful.

Absolutely, Tom.

The technical integration of bringing the product strength of Comex into ACP has gotten underway.

Our teams are working together and are integrating the capabilities and the next-generation capabilities have been discussed with our clients and they are seeing the future of what this is going to bring and we are confident that we will be able to bring this solution together at a time point that our clients are ready to accept and for their next stages and operations.

So both from a personnel perspective as well as the integration of the assets that we've been very pleased in the quality of these components both the people and the technology and the ability to integrate them into what we are doing and into our existing product set.

Okay.

It's been very well embraced and we are seeing a lot of excitement both internally and externally about how these two businesses are coming together.

Okay.

Great.

And, Randy, last question for you on the buy back.

I think you mentioned that the company bought back around $22 million in stock this quarter with the anticipation that next quarter will look pretty similar.

Is there any reason for being relatively prudent on that buyback program and should we still expect that the Company will be able to or will track to the entire $350 million buyback plan within 12 to 15 months as was indicated?

We are clearly committed to completing the program.

As I said in my comments earlier that the variability in market conditions is probably going to cause some variations in the timing of when we buy back stock and it's very likely that it could extend beyond the original estimate of 12 to 15 months.

And again as the market conditions change they will drive the number of shares that we purchase.

Thank you.

[OPERATOR INSTRUCTIONS].

The next question comes from Ben Abramovitz with Icap Equity Research.

Please go ahead.

Two quick questions, one on the deferred revenue we saw a little bit of a decline here.

Could you give any color around that?

The other component you said there was only a mild impact from the Adelphia customers moving over to Comcast and Time-Warner.

The first two quarters of this year we saw customer migration or deconversions that went on, we saw another slight loss.

Could you give any color around when we start to see some positive net additions going on to the system, what it might look like going forward on a consistent basis?

Thank you.

I will take the first quarter.

On the deferred revenue as I mentioned on my comments we recognize deferred revenue related to Adelphia as the transaction closed.

That was about $2.8 million so that would have come out of deferred revenue so that's probably the biggest movement causing that to change.

Then on the impact around our sub counts, earlier in this year we saw some mild impacts from regionalization as our clients decided to optimize the platforms in which they run their operations and that has offset some of the traditional organic growth that you expect to see from us.

When that organic growth returns we have expectations that when the offerings that our clients are bringing to the marketplace that it's going to help them garner market share just through their organic activity and we are hopeful that in the coming quarters from market share wins of being able to effectively snatch some subscriber markets from our, from the competition we don't give predictions on that so that we will leave on the side and say look for, if our clients continue to show good strength in their offering of new products then subscriber counts should be something that we see some benefit coming into our operations.

Thank you, guys.

All right, Ben.

Our next question comes from Keith [inaudible], Time Square, please go ahead.

Hi, guys, just to kind of follow up on the buy back.

If you guys only bought back enough stock, the cash that you generated in the quarter, if the market conditions, varying market conditions , is there another way that's more efficient to kind of give back that cash, 400 million seems like a lot, what about the special dividends, have you guys looked at other things on the buy back.

We did when we implemented the buy back for last quarter we went through pretty extensive analysis looking at different options and concluded that the buy back was the most efficient.

A special dividend or one time dividend has a cost on the convertible debt so it makes it less attractive so we did go through a pretty good analysis of different options and concluded that the buy back was the best.

What did that cost, the convertible debt?

It seems like it changed a little bit so maybe what was right when the Board looked at it was not necessarily right right now.

I would say there's an anti dilution provision in the convertible debt that would have the same impact today as it would have maybe to a differing degree but the same net impact would have made it very unattractive to do a special dividend.

Don't you feel like a $2 dividend then a conversion price went down by $2.

I don't know if it's quite that linear but it has an impact, the anti dilution impact in the codes if you dilute the holders, the calculation is such that they are made whole.

Next question comes from Shaul Eyal with CIBC World Markets.

Please go a head.

Thank you, hi, good afternoon, guys, Shaul Eyal. just if you can go back and discuss the reason for the slippage in gross margins this quarter over the second quarter.

Go back to that, it's kind of a mix in revenues and also a couple of one time expenses that hit this quarter.

But I also made reference to the fact that our gross margin was also 49% in the first quarter.

So you could have also looked at Q2 as possibly being slightly higher than the normal.

Got it.

Okay.

Thank you for that.

Good luck.

Okay.

Our next question is a follow up from Donna Jaegers.

Please go ahead.

I was just curious could you since you helped one of your cable companies with their wireless roll-out, can you just detail what CSG's role in the wireless billing is, how much do you do the rating engine or is it mostly does Sprint do the rating engine and then you guys just post the bill?

Donna, we are managing the consolidated representation of the charges to the consumer as well as carrying it in our system but the specifics around the wireless offering are being done on the Sprint side.

Okay.

So as far as an ARPU impact for you guys, if Time-Warner and Comcast longer term are successful in rolling out wireless is it, can you put a ballpark number on it, is it like $0.10 increase to ARPU a month, how much does it help?

Because it's still in the Beta stage we are hesitant to try to project out both from what our services are being compensated for as well as what the impact of the subscriber roll-out by our clients is going to be.

But think of it as a lesser scope of service than what we would do around VoIP services.

All right.

Thanks.

Gentlemen, at this time there are no further questions in the queue.

Please continue with your presentation.

Well, we would like to thank first of all our employees for their continued efforts in delivering the types of services we do for the clients in the marketplace.

And importantly we want to thank our clients and our shareholders for their continued support as we manage this business.

We wish Ed Nafus a quick and healthy recovery and look forward to him being back in the office.

And lastly we look forward to reporting our future successes and we will talk to you next quarter.

Thanks a lot.

Ladies and gentlemen this does conclude CSG Systems third quarter earnings conference call.

You may now disconnect and thank you for using AT&T teleconferencing.