CSG Systems International Inc (CSGS) 2008 Q3 法說會逐字稿

Welcome to the CSG Systems earnings conference call.

(OPERATOR INSTRUCTIONS)

I will now turn the conference over to Mr.

Roger Metz, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Michael, and thanks to everyone on the call for joining us.

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

In particular, these will include statements regarding our projected financial results, our ability to meet our client needs through our products, services and performance, and our ability to successfully integrate and manage acquired businesses, 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 our actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements, in light of new information or future events.

In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release, as well as in our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our website.

With me today on the phone are Peter Kalan, Chief Executive Officer, and Randy Wiese, Chief Financial Officer.

Peter will begin.

Thank you, Roger.

Thanks to all of you on the call today for joining us today.

CSG continued to perform well in the recent third quarter, posting revenues of $118 million, and net income of $0.40 per share.

We also generated strong cash flows, and continued to execute on our plans to grow and diversify our business.

Randy will share more details on our financial performance after I conclude.

Now we all know that the last two months have seen some of the most tumultuous times in decades.

Despite the economic and credit market turmoil around us, CSG remains on very solid ground.

Our capital structure continues to provide us security, stability, and investment options, while other businesses might be constrained in current economic conditions.

Additionally, our clients have stable financial capital and business models that generally perform well in down economies.

History has shown that economic downturns have not resulted in any meaningful negative trends for the communication service providers in terms of customer losses.

If nothing else, consumers are inclined to keep or even increase their pay TV and information services when times get tough, as it is a relatively inexpensive entertainment option, compared to going out to dinner and a movie, taking a vacation, or other things that may get cut back in a tough economy.

Additionally, the Triple Play bundle being offered by our clients is a very compelling product offering for consumers looking for ways to save on their monthly expenses.

So the historical strength of our clients' businesses, combined with our business model of delivering key business services under a recurring revenue business model, creates visibility and consistency of results.

Our business model and strong client relationships have set the foundation of CSG's financial stability thus far and we see these client ties strengthening in the future, as we become an even more valued partner.

We have established strong relationships with our clients, which are reflected in the tenure of these relationships, and the high contract renewal rates.

We have been very successful in recent quarters in reviewing relationships with key clients, and we are actively negotiating with Dish Networks, on the renewal of our current contract, which we expect to wrap up in the fourth quarter.

We have talked to you in the past about the dramatically changing landscape that our largest vertical market, the cable and DBS providers face right now, with increased complexity of services and delivery models, and increasing competition from AT&T and Verizon.

The current economic conditions will only add to this list of challenges, and our clients will need to continue looking for ways to deepen their customer relationships.

Fortunately, CSG is well-positioned to help our clients work through these challenges, and continue on with their growth strategies.

Many of the solutions that CSG offers come with measurable return on investment propositions because they help our clients work smarter and more effectively.

For example, our interactive messaging solutions, which we win to deploy to our clients, help deliver better customer service at a fraction of the cost of using customer service reps.

Our Workforce Management solutions, including new GPS functionality, ensure that our clients get the right employee to the right home at the right time, alleviating many of the inefficiencies generally associated with managing a large base of field employees.

Our order workflow tool helps our clients interface with customers in a fast and accurate manner, cutting down on call times in the call centers, and reducing follow-up calls for further information.

Our product catalog and offer management solutions make the process of getting the highest value service offerings built, identified, sold and deployed to consumers in an efficient manner.

Our business services platform is designed to help our clients more efficiently sell to, and manage their relationships with small and medium-size business customers, an important growth vehicle for them going forward.

We recently launched our intelligent business reporting platform, designed to help service providers transform transactional data, into meaningful business information across the enterprise.

Our print and electronic statement capabilities, which are integrated with our other customer interaction management and receivables management solutions, ensure accurate and timely billing and cash collections to protect our clients' revenue streams, and we have recently implemented full color statement technology, that provides our clients with enhanced marketing and messaging capabilities, so that they can better communicate with their customers.

These are just a few examples of the way CSG's clients rely on us as a trusted business partner each and every day.

To help them maximize the value and minimize the costs associated with each interaction they have with their customers, both of these which are extremely important in today's world.

And adding to our value is that our business model allows us to turn on these new capabilities and services for our clients without high up-front capital costs or significant implementation fees, which helps to drive the financial benefits back into our client's operations very rapidly, and with low risk.

Finally, I would like to update you on several other initiatives that we have been focusing on in recent months.

As I mentioned earlier, we are working with Dish Networks on the renewal of their business relationships with us, and we remain confident that the fourth quarter will bring an extension of this long tenured business relationship.

We have also been working with clients and prospects to deploy our new capabilities, and expand the reach of our current solutions.

We recently received signed commitments from clients to bring over 1 million new customer accounts into our advanced conversion platform.

This is the result of our investments in the ACP solution, and clients seeing how the capabilities enhance their business operations.

These incremental new subscribers are from clients of all sizes, and result from clients deciding to consolidate more of their existing business onto CSG solutions, and also clients requiring customer bases.

We expect to see these customer accounts converted under our systems in the next 12 to 18 months, but most importantly, we believe that this is a strong statement about the solutions and services that we deliver to the marketplace.

Along with expanding relationships with our existing clients, we are actively working on strategies to improve our client and industry concentration.

In the past, we derived virtually all of our revenue from the cable and DBS market.

During the second quarter of 2008, we generated approximately 12% of our revenue from industries outside of this core video market, and during the third quarter, this improved to approximately 13%.

While much of this diversification has been a direct result of our acquisitions, we fully expect to further our diversification organically going forward.

A great example of this is the Brinks Home Security contract we announced in late July, which brought over 670,000 new statements onto our output solutions platform, and solidifies our position as a leading service provider to the home security market.

We continue to use our solutions and services to develop relationships in new vertical markets, and as we continue to invest in these types of solution, we are targeting to further diversify our business.

We continue to invest in our products, as you have seen with our research and development spending, and are very pleased with our progress, including greater focus on the modularization of our products, to provide improved flexibility to run applications independent of our core billing environment, and to serve other industry verticals.

Going forward, we will continue this focus, and also invest in new and expanded capabilities, such as advancements in customer self care applications, which elevate the online experience for customers, and we also plan to continue to explore ways to add customer intelligence and analytics capabilities, that will provide detailed information about customers, so that our clients get the maximum value out of their marketing dollars.

We also view this information as being very important to our clients, to use across their operations, to enhance how customers are serviced.

As you can see, though there is significant volatility in the world around us, CSG continues to deliver results for our clients and shareholders.

We have a solid balance sheet with plenty of liquidity, with which to make smart investments in our business.

We have very strong relationships with our clients, with long-term contracts that provide visibility to our business, and a broad portfolio of products that our clients want and need, to better navigate their ever-changing market environments.

Overall, we are well-positioned for the coming periods, and we like our opportunities.

We appreciate your continued support of CSG, especially in light of what is going on in the world around us, and look forward to having the opportunity to continue delivering results for our clients and shareholders alike.

With that, I will turn it over to Randy, to walk through our financial performance and outlook.

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

I am happy to share with you the financial results for our third quarter 2008, as well as the outlook for the remainder of the year.

Total revenues for the third quarter were $118 million.

This represents an increase of 10% when compared to $107.6 million for the same period in 2007, and up sequentially when compared to $116.9 million for the second quarter of 2008.

Our year-to-date revenues for 2008 were $348.4 million, an increase of 14% over the same period in 2007.

These results are reflective of the success we are seeing in our plan to grow top line revenues, and achieve market diversification through both acquisition and organic growth means.

Comcast continues as our largest client, comprising approximately 26% of our total revenues for the third quarter, compared to 27% for the second quarter.

Dish Network continues as our second largest client, and represented approximately 18% of our total revenues for the quarter, consistent with that of the second quarter.

We finished the quarter with 45.4 million subscriber accounts on our processing systems, which was consistent with the previous quarter.

Income from continuing operations for the quarter was $13.4 million, or $0.40 per diluted share.

This compares to $0.39 per diluted share for the same period last year, and $0.40 per share for the second quarter of 2008.

The operating margin percentage for the third quarter came in at approximately 18%, down from 19% for the second quarter as we expected.

However we performed better than the 17% we had anticipated in our previous guidance, primarily as a result of good cost management during the quarter.

Our effective income tax rate for the third quarter was 34%, slightly better than our previous expectations, with the improvement due to the recognition of higher than expected income tax benefits during the quarter, realized in conjunction with the filing of our 2007 tax return during the quarter.

The financial results for CSG include several noncash charges related to depreciation, amortization, and stock-based compensation.

These noncash charges for the second quarter(Sic-see press release) totaled $10.3 million, or approximately $0.20 per share.

As anticipated, this is down from $12.2 million for the second quarter, primarily as a result of the decrease in the Comcast client contract amortization, due to the change in the life of the intangible assets, as a result of the contract extension with Comcast this quarter.

Turning to the balance sheet, as of September 30, cash and short-term investments totaled $165 million, up approximately $17 million from last quarter.

Our net build trade accounts receivable totaled $118 million, up approximately $2 million from the previous quarter, with the increase related to normal timing items.

We are not experiencing any negative payment trends with our clients, as a result of the current economic downturn our country is experiencing.

Our days billed outstanding for the third quarter remain very good at 55 days.

This measure has been consistent across the last several quarters.

Cash flows from operations for the third quarter were $27.6 million, a decrease of approximately $20 million over the second quarter.

As you may recall, the second quarter's cash flows were positively impacted by a decrease in accounts receivable, primarily as a result of a client's delayed first quarter payment, that resulted in the payment of four monthly invoices by this client in the second quarter.

Thus the first quarter's cash flow measure is more reflective of a normal quarter.

Our cash flows from operations continue to be very strong.

We did not repurchase any shares through our stock repurchase program during the current quarter.

Before I get to our financial guidance for the remainder of the year, I thought it would be good to expand on some of the comments Peter mentioned earlier, and take a bit more detailed look at how CSG stacks up, in these difficult economic times and volatile financial markets.

We believe the financial strength of CSG and other key clients and markets we serve, puts us in a solid position to deal with the current economic conditions in our country.

CSG's financial strength is a result of our strong operating model and sound capital structure.

Our strong operating model has the following key characteristics, which are even more attractive in tough economic times.

First, we have the benefit of long-term service contracts, which generally range in length of term of three to five years.

Our business model provides a recurring profitable and predictable source of revenues and cash flows on an annual basis.

As a result, as we have stated in the past, we generally enter any given year with greater than 90% visibility, for expected revenues and cash flows for that year.

This type of revenue visibility into our business also allows us to plan and manage our operating cost structure accordingly.

All businesses will be impacted by the current economic downturn in some manner, including CSG.

However, we believe our recurring revenue model, ROI, proven new product roll-outs that were outlined by Peter earlier in his comments, and our strong focus on controlling costs, will help us navigate through these difficult economic times without a significant impact to our business.

Second, as a result of our continued focus on delivering superior products and services to our clients, we have developed strong business relationships with our clients.

These strong business relationships allow us to continually show value to our clients, and help them solve their business problems.

In particular, we believe our products help our clients operate more efficiently and cost effectively, and at a very competitive price point, which will be even more important now than ever during these difficult economic times.

In addition, to ensure we continue to evolve with our clients' needs, we invest a large portion of our revenues back into R&D each year.

During 2008, our R&D spend is expected to be in excess of 14% of our revenues.

The last point I would like to make on this topic, the strong business relationships we have developed with our clients are evidenced by the continued success we have at contract renewal time.

Our contract renewal rate is extremely high.

In fact, we have not lost a major client as part of a renewal event.

With the exception of the Dish Network contract Peter mentioned earlier, which we are actively negotiating at this time, and expect to get wrapped up in the fourth quarter, CSG does not face any large contract renewals for several years.

In addition to our strong operating model, CSG also has a sound capital structure, that have the following key characteristics that are vitally important in these difficult economic conditions.

First, we have $165 million of cash and short-term investments as of the end of the quarter.

These funds are held in safe and highly liquid investments with major financial institutions in the USA, that we believe are financially solid.

In addition, as I mentioned earlier, we generate a significant amount of cash flows from operations on a predictable and recurring basis, so our operations are significantly additive to our cash balances.

To illustrate this point, our cash flows from operations for the first nine months of 2008 were approximately $96 million.

Second, we have a large undrawn revolving credit facility, that is also available to us as an additional source of liquidity, if needed.

And the last point on this topic, our current debt structure is sound.

Our overall debt ratio is relatively low.

At the end of the third quarter, we had $230 million in contingent convertible debt outstanding, which matures in the year 2024.

Considering our current cash balance of $165 million, our net debt position would be $65 million as of the end of the quarter.

The coupon interest rate on our debt is 2.5%, so the annual debt service cost is only $6 million.

In addition, this debt instrument provides us a significant tax deferred advantage, as we are allowed a 9% interest expense deduction for tax purposes, even though the coupon rate is 2.5%.

There is no near-term scheduled repayment event for this debt, as the first scheduled put or call option for redemption of these securities is in June 2011.

Holders of our debt 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.

In summary, CSG is a strong company financially.

Our business model provides a recurring source of profitable revenues and cash flows.

This business model provides CSG with sufficient liquidity and capital resources, to not only weather these difficult times, but also keeps us well-positioned to fund the future growth of the Company as well.

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

Overall, our expectations are generally consistent with our previous guidance.

Revenues are expected to range between 470 and $472 million, which represents an increase in revenue of approximately 12% for 2008, when compared to 2007.

As I mentioned earlier, we continue to execute on our plan to grow revenues and diversify our business.

This guidance does represent a slight reduction in the high end of the range of our previous revenue guidance, which is reflective of the current economic conditions we all face.

As you would expect, we are seeing clients scrutinize some of their discretionary spending, such as marketing activities and the timing of the rollout of new products.

However, as I mentioned earlier, our strong business model, with predictable recurring revenue sources, minimizes the impact of the pressures from a slowing economy for CSG, and will help us navigate through these difficult economic times, without a significant impact to our business.

We expect our earnings for 2008 to range between $1.64 and $1.66 per diluted share, which reflects an operating margin expectation of approximately 18.5% for the full year 2008.

Both of these earnings measures are slightly better than our previous expectation, as a result of greater emphasis on cost management over the last six months of 2008, in response to the downturn in the economy.

This EPS guidance represents growth of approximately 10% over 2007 EPS, which reflects both strong operational results, and the effective management of our capital resources in the form of stock buybacks during 2007.

Over the years, we have proven to be good stewards of the business in both good times and bad, and you should expect the same from us going forward.

We expect our full year effective income tax rate to be approximately 35%, which is at the bottom end of our previous range, with a slight improvement related to higher R&D tax credits in the fourth quarter than previously anticipated.

We expect our cash flows from operations to range between approximately 118 and $120 million, which represents a tightening of the previous range.

This assumes there is no significant net impact, related to unexpected fluctuations in working capital items for the remainder of the year.

At this time, we expect our capital expenditures for 2008 to come in at approximately $25 million, which is towards the high end of our previous range of expectations.

We expect the total of our noncash items of depreciation, amortization, and stock-based compensation to be approximately $44 million.

We do not assume any stock repurchases in our guidance.

We will continue to evaluate the best use of our capital through the remainder of 2008, which may or may not include additional share repurchases.

In summary, we had another solid quarter.

Our operating model and capital structure provided some necessary stability, and financial strength to operate our business during these tough economic times.

We are committed to and focused on continuing to grow the revenues and profitability of our Company, and creating value for both our customers and our investors.

We look forward to reporting on our year end results in January.

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

(OPERATOR INSTRUCTIONS) Our first question is from the line of Tom Roderick with Thomas Weisel.

Please go ahead.

Hi guys.

Thanks.

Good afternoon.

Peter, you had briefly touched upon about 1 million subscribers you had coming onto the ACP platform here in the next year, can you give a little bit more granularity, where are these share gains coming from, and how do they sort of impact the way you think about organic growth in the year 2009?

Thanks.

Well, Tom, first, I am not at liberty to disclose which clients those are for, and where they are coming from, but they are coming from competitors' platforms.

I would tell you the bulk of those subscribers are driven by clients who are consolidating their business operations from competitors' systems, at least parts of their business off of competitors' systems onto ours.

And as I mentioned in my comments, we think this is a strong statement and testimony to how our clients view our solutions, but we feel very confident, that by having more of our client subscribers on us, that our business solutions will help them run their business more efficiently and then we will also be able to sell some of our ancillary additional products to drive them some more.

What is the organic growth rate?

Any time that we add subscribers, it is additive to us.

The timing of how those subs come on is going to have an impact, because we have to do migration efforts and bring those subs over, and speaking for Randy, and he can chime in, since we haven't given specific guidance for 2009 yet, we are reticent to say anything more about how this would change any of those kind of previous to high level targets that Randy had laid out.

Randy, you got anything to add?

I think you said it very well, Peter.

Well, you know, I try.

One last question from me, just in terms of talking to your customers, and thinking about the pace of some of their transformation projects, and the way that they are building their business.

As we look at the telco businesses and talking about hearing them slowing down their CapEx, are you hearing the same thing from your cable customers, and is this building into your plans for next year, or do your customers view this as a chance to gain more share from the likes of the telcos, and the wireline side?

Well, I think that it is a very interesting dichotomy of what is going on in the marketplace.

In a down economy everybody wants to watch their spend, and I think we see that cautious spending starting to arise in any of the communication service providers, including the cable and DBS.

But at the same time, the competition will only accelerate and probably be accentuated during this time, and so certain projects we think will continue to be pushed, and we hope will be pushed, whether it be marketing, whether it be some of the ancillary services that enhance customer service, but we don't know for sure until we see how things play out.

But because our products don't have large lead times to deploy, large capital that has to be deployed, and generally can be flipped on fairly quickly, relative to big kind of implementation projects that other software solution providers have, we think we can be there ready to serve them when their needs arise, and we continue to pitch those capabilities, and expanding our capabilities as part of our core business.

And we don't see this as a time for us to back off necessarily.

Randy, do you want to comment any about, as we think about 2009 around this?

I would say for 2009, as Peter mentioned earlier, we haven't provided any guidance.

I provided some high level targets back in July, to kind of help people understand the impacts of the most recent client renewals on two of our large contracts.

But I would say as I look at 2009, I look at some positive factors to consider in our business, and then some that are not so positive.

On the positive side, as we mentioned earlier, we do have additional subs coming on over the year, a very positive factor for us.

We have additional businesses that we acquired over the last 18 months that provide additional service opportunities, and cross-selling of services.

So that is a very positive factor for us.

And also we additionally rolled out new products that our business services platform, our order management, and our PC.

So we have a good group of products, looking at some positive factors as we look at our 2009 outlook, but then you got to overlay that with the macroeconomic concerns about the economy.

And I think the biggest concern that I think that it raises to CSG, is whether or not we see some cutbacks and discretionary spending from our clients, which are probably mainly around some marketing activities, as Peter mentioned.

So I think there are a lot of positive factors going into 2009 for CSG, but we also have to consider the macroeconomic factors that are going on as well.

And Tom, from the some of the variable discretionary expenditures that our clients may have, the good part is those parts of our business also have variable expenses, so that we don't have a significant risk to the bottom line of how these play out.

Yes, I think the other thing to mention, and I mentioned it several times in my comments, as you look at CSG going into 2009, the recurring revenue model is a theme that we continue to explain to people, that as we head into the year, a large percentage of our revenues, we usually refer to greater than 90% are basically under contract, and really not subject to a lot of risk.

The remaining portion of our revenues have some degree of discretion around them, but it is a very small portion of our revenue.

Certainly we can't predict what is going to happen, but again, the macroeconomic factors are something to consider.

And as Peter mentioned, the nature of those revenues have a very direct correlation to the variable costs, so if the revenues come in short, you can manage down the costs very well.

I think we feel pretty optimistic going into 2009 in light of the economic environment.

Got it.

Thanks very much.

Thanks, Tom.

Thank you.

Our next question is from the line of Peter Jacobson with Brean Murray.

Please go ahead.

Thanks.

With respect to 2009, is it fair to say that your growth targets are unchanged from the last conference call?

I would say that the growth targets for 2009 that I provided back in July, I think they are still a reasonable estimation of what we can do right now.

Again, I would predicate that on some of the other comments that I mentioned.

We are still going through our planning for 2009.

The full impacts of the economy on our business is not fully determined yet, so I think it is difficult to be definitive on that, but as of now, I would say it is still a reasonable estimate for the Company to target those for 2009.

Okay, and can you just describe a little bit your methodology for forecasting the number of subscribers that are going to be processed on the CSG system for the upcoming quarters, particularly relative to, not specifically, but sort of general thought process and methodology associated with your larger customers?

Sure.

We do a couple of different things.

One is history is the best indicator of the future, if you look at the last couple quarters, and you look at the trends of what is going on in the environment.

And the subscriber base of many of our clients, our larger clients, which most of those are publicly traded, you can see that their subscriber base is relatively flat to slightly declining.

It is not real difficult to predict out four quarters to five quarters as to what our expectations are.

And I guess, Peter, the other thing that is important to recognize about our business is we have continued to drive incremental ancillary products that we can deliver to our customers.

This has become much more than an organic subscriber growth, or market share growth business, and it is one that by continuing to add to our suite of interactions management that we do on behalf of our clients, drives incremental revenue as well.

And I think the traditional model of where we were probably five or six years ago, organic sub growth was one of the more dramatic foretelling aspects of the business is no longer relevant.

I think that is a good point, Peter.

As I mentioned, you see some of the basis subscriber levels of our clients staying relatively flat, but they have had great success in their RGU growth, and RGU growth generally for us means additional services that our clients are vying for, even though the sub base is relatively flat, there is generally some additive revenue from the RGU growth.

Okay.

Very good.

That is all I had.

Thank you very much.

Thanks, Peter.

Thank you.

Our next question is from the line of Karl Keirstead with Kaufman Brothers.

Please go ahead.

Yes, hi.

Good afternoon.

Couple of questions.

The first on the EPS guidance revision for 2008, I am wondering, Randy, if you could just confirm that the upward guidance revision, has nothing to do with the intangible asset amortization change given the Comcast renewal, that that was already baked into your prior guidance, so that this change is entirely due to other factors.

And I guess part 2 of this, is if you could just offer a little bit more color on what cost management efforts you made, to enable you to boost the EPS as much as you are.

Thank you.

Sure.

First one, Karl, the answer is that all of the amortization change related to the Comcast contract has been in my guidance all year, so there has been no change at all during my guidance throughout the year for that.

I think the math is pretty easy if you look at the improvement in the EPS.

Our overall operating margin for the year went from 18 to 18.5.

That half a percentage point is worth about $0.05 a share, so if you do the math, you can see it is coming from really the improvement in the operations, which has nothing to do with the amortization.

Okay?

Okay.

The second part, if you look at where we had some good cost controls for the quarter, you focus on your biggest expense items obviously when you do that.

Our employee base, our costs, and wages is our biggest.

So we did a pretty good job managing our head count levels during the current quarter, and I think you look at some of the other things that people do in this situation, which is control your travel costs, control your seminar costs, control those areas in which you can defer costs one or two quarters, maybe you buy some equipment one or two quarters later.

It is really just being prudent in managing your business, without a detriment to the business itself.

Okay, great.

And then just a follow-up to that, in terms of '09, you have answered the question around whether you feel comfortable with that 4% target by saying it is still reasonable, although early.

And just to be perfectly clear, you also indicated, if I am not mistaken, that you felt comfortable with a rough target range of 17 to 18% operating margins in '09.

Do you still feel that that margin range is reasonable?

I still think it is a reasonable target, with the caveat of two things.

One is that there is no significant change to our business, such as a large acquisition or something of that nature.

And also again, predicated on the fact of the economic conditions in the environment that we are operating in.

But again, as a reasonable basis going into the year, it is a good target for us to focus on.

Okay.

And Karl, as Randy and I both commented on earlier, typically if there is any economic weakness, and that affects our business, we have shown ourselves to be prudent managers, and would look to try to manage through the optimum levels, for both our shareholders and clients and employees.

If you look at the somewhat implicit guidance that would be in our fourth quarter based on the full year guidance, you'll see we'll be in the 17 to 17.5% operating margin range as an exit rate going into 2009, so we would be probably gravitating towards more to the bottom end of that 17 to 18% range, Karl.

Okay, great.

If I might sneak in one more, it looked like your CapEx in the third quarter bumped up a little bit to somewhere close to 10 million and I think you have admitted that your full year CapEx is going to come out at the high end.

Just wondering if you might offer a little bit of color on what went on in the third quarter to cause that?

Absolutely it actually rose to one of the comments that Peter mentioned in his statements, as well as a message we delivered back in July, is that we are getting to the full color printing capabilities.

We bought several machines, some equipment at the end of the Q2, but we bought a lot of that equipment in the third quarter.

So a very large percentage of that $10 million relates to color printing capabilities, Karl.

Okay, great.

Nice job.

Thanks.

Thanks, Karl.

Thank you.

Our next question is from the line of Todd Rosenbluth with Standard & Poor's.

Hi, thank you very much.

Thanks for having the call.

Just real briefly, if you could touch a little more on the gross margin and the impact, either the acquisitions that were made, that we are seeing more of a calendar effect in the second half of the year, or the contract renewal, which of those two puts and takes is more really having an impact on the sequentially lower gross margin?

You are talking about the gross margin on going from 48.1 to 46.7 in the quarter, correct?

Yes, correct.

Yes, a of couple things.

I would first point you to look at the overall change in our operating margin.

It went from 18.7% to 17.9%.

And look at the factors there, and then we can see how those relate to the gross margin.

If you look at the change in the operating margin, there are two primary pieces.

One is Q3 was a full quarter in which DataProse was included.

That had a slight dilution to the operating margin.

And also, we have our employee wage increases that take place in the second quarter in August, so those two combined are a major portion of the decrease.

If you look at the gross margin, a large percentage of DataProse is the expenses are in cost of goods sold.

So those have a downward pressure point on the gross margin.

And also, a big component of the cost, within cost of goods sold are wages as well.

So I think if you looked at those two things, I think the other thing, if you look at the operating margin, you would have seen depreciation jump up a little bit this quarter.

And that relates to the statement I just mentioned to Karl, is that we bought some equipment towards the end of the second quarter, in the third quarter, which is the other factor.

Okay.

And then on the other hand, the cash balance of about 165 million, nearly $4 a share, is that a level you are comfortable with, in this economic environment?

Could there be cash usage for acquisitions, or are you just wanting to see how the macro environment plays out?

I love having $165 million of cash in the bank, but I don't think we are here to sit on the cash.

We are looking to deploy it through many different ways.

We are going to be very prudent because of the economic times, but we are still looking to grow the company.

We are looking for opportunities for acquisitions.

We are looking for opportunities to deploy capital maybe back through stock, stock repurchases.

So it is good to have a large cash balance.

It is good to have a business that throws off a lot of cash, but we are not looking to sit on our hands here during these times.

We are looking to grow the Company.

Okay, thank you.

Thanks, Tom.

Thanks.

Our next question is from the line of Ashwin Shirvaikar from Citigroup.

Please go ahead.

Hi guys.

Congratulations on the quarter.

Thanks, Ashwin.

I have always liked the Peter and Randy show.

I don't know what to think about that.

(laughter)

I know this question was asked, but just to confirm the incremental 1 million subs, that wasn't in your 2009 guideline back in July, so the offset is your caution due to the environment?

First, I will say Ashwin, that this was not something, we typically don't try to project out market share wins, which this is clearly a market share win, and so we are more cautious of trying to project out wins that are somewhat at the discretion and timing of our clients agreeing to do that.

Randy, from the financial side, do you want to--?

I would just say what I said earlier, which is this there are many positive and negative factors that go into consideration for 2009, this clearly is a positive factor.

As Peter mentioned, they are coming over 12 to 18 months, so we will not get the full benefit of these subscribers during 2009, so they will come on ratably throughout the year, maybe some of those are actually back ended in 2009.

So I guess that's--

I guess the net is, we didn't expect that or know that we would have that for 2009, but as you said, Ashwin, we don't know how the full economic factors are going to play out to us, and with the timing of these subs over a period of time, we are going to remain optimistic, but at the same time, cautious as we look at 2009, as we kind of come to the year end of 2008.

Okay.

We can't be too careful now, so let me ask, where your $165 million is invested?

I mentioned it earlier.

Most of it is, I would probably say 95% of it is in investments that are AAA rated or higher, some commercial paper, some money market accounts, some overnight investments, very low risk, highly liquid.

And you have not had any kind of trouble, any hiccups in placing that commercial paper?

We have had no problems.

Our Treasurer, who is sitting here, Roger Metz, can chime in if he likes, but he keeps in close contact with our financial institutions, and we feel pretty comfortable with where we are at.

Yes, we are very lucky to have good people working that money for us, Ashwin.

And for instance last year when there were issues with auction rate securities, they were smart enough to get us out of a couple of those that we had, well before it hit the headlines of the Wall Street Journal, so we are very lucky there.

Okay.

Now once you sign Dish, you won't have any major contract up for renewal for several years.

Now in this kind of an environment, what should we, and I'm talking beyond even 2009, longer term.

What should we expect with regards to your margin structure?

I mean can you get back to your historical margin levels of a couple of years ago?

So, Ashwin, just to make sure we understand, your question is once we have all of our clients under contract, and any type of adjustments that come through those renegotiations, where do we think we can drive margins to?

Yes, I mean can you get back basically to the margin level of a couple of years back?

I think, Ashwin, it is going to be difficult to get back to the margin level of a couple of years.

A couple of years ago, we were probably in the low 20s.

Yes.

I think in today's environment, it is very competitive, it would be difficult for us to get back to that level.

I think we have mentioned this on the last couple calls, that we are going to be at an exit rate of 17% for Q4 of '08.

But it is not unrealistic for us to target a couple hundred basis points improvement over the next three to four years.

Okay.

So you do couple hundred, you can head in that direction, but you won't get to 20.

I think it would be difficult.

I would love to get there.

We are also going through a period of time in which we are growing the Company through acquisitions, and I think the acquisitions, just because of the nature they come in with the amortization, and so forth, I think it will be difficult to get back in the low 20s.

Okay, and on Dish specifically to the extent you can answer this question, how are you looking at what you might offer them in return for the renewal, and obviously it was a different situation a few years back when Dish was actually growing quite fast, you could anticipate that volume growth and give them a discount, but now they are not really going that fast, so how do you think of that?

I would kind of frame about how we think about our negotiations with Dish in this way, is that their business continues to evolve.

They are looking to do some things in their business that we want to be a part of, and which will cause us to continue to invest in the platforms that support them, and so I think you should expect us to be really cementing a relationship that is going to kind of show a real partnership going forward.

I don't want to get into what we think is going to happen into the economics of that contract, because I think that right now we feel pretty confident that we set some early guidelines out of where we thought we would be when Randy set guidance, and we feel pretty confident we are tracking in the general direction of that, and so if we can meet the expectations that we internally set, and really end up with a structure that provides a good system solution set for EchoStar for the coming years, that is a huge win/win for us.

And if really cements the tenure of this relationship, we think that would be a win/win for us.

Okay, and my last question is on the new business, the non-cable business, can you break that out into sort of how much is more stable processing versus discretionary?

Well, I guess it goes into what is discretionary versus what is more stable.

If it is presentment of customer invoices that go out to consumers in other verticals, whether it is home security, financial institutions, and so forth, you would say that was very kind of stable business.

It is not likely to go away.

If you say it is doing collection management services, appointment management services, surveys, fraud notifications, anything like that, you could say that that is discretionary, but at the same time, I think the businesses that we support view those as being core and critical of how they run their business.

We do have some business that is around some marketing services, and around some nonprofit businesses.

Those could be subject to kind of discretionary, because of the nature of how consumers are behaving.

So I can't give you specific percentages, because we don't look at the business that way, but I would tell you that overall, we think most of that business is pretty sticky, even though it doesn't have some of the core assets that we use in the cable and DBS space.

Okay, thank you.

You bet.

All right, thank you.

Our next question is from the line of Scott Sutherland with Wedbush Morgan Securities.

Please go ahead.

Great, thanks.

Good afternoon.

Hello.

First question I have for you guys is the 34% tax rate you had this quarter, is this something you expect Q4 and going forward through 2009, or any changes there?

I think if look at my guidance for the full year, Scott, I think it would equate to about a 33% tax rate in the fourth quarter, and that is really down from our normal run rate, mainly because the R&D tax credit bill was passed by Congress in October, so we are able to bring R&D credits through.

I would say on a normalized basis going forward into 2009, you should look at generally something that is in the range of 35 to 37%.

Okay, great.

DataProse and Prairie, you only had it for part of a quarter in Q3 of '07.

But DataProse, how much was that in the quarter?

Well, we haven't disclosed the specific amounts of those businesses after we acquired them.

I think we provided some general guidance early on, as to the size of those businesses, but we haven't reported specifically those subsequent to the acquisition, and it is not really our intention to do so, Scott.

Great.

Would you just say performed in-line with expectations?

They are generally performing in-line with our expectations, yes.

Okay.

Last question I had is kind of following Ashwin's question there.

With DataProse, Commtech, you are on bill printing and presentment business.

Obviously this is becoming a fairly decent part of your business, more than 10%, maybe close to 10%, can you talk about how material it is to the business, a little more detail on the margin structure, and how that is growing compared to the rest of the business?

First of all, Scott, from the perspective of the presentment business, whether it is paper or electronic, when you produce 70 million statements a month on behalf of our clients, we are talking hundreds of millions a year.

I guess if I did my math, that is 840 million a year, you would say that is a pretty decent sized piece of our business.

But I think what is important is that that business is really not just stand-alone by itself, because there are things that we have done to tie the business in with how mail is traced through the postal system, and then it is reported back to the customer service reps of where payment cycles are.

It is tied into how you do collection management through interactive voice messaging.

It is tied into the marketing services that can go into the bill that is tied into the web when you do presentment of the statement, then how do you do upsell selling, or how do you do customer services, so the business is very interrelated, and we believe that as we have been able to expand that platform of kind of print relationships and E-bill relationships, that we can now bring more of these other capabilities to it, and we look at this very holistically as a business.

The acquisitions that we have done have been in general, their history has been that they have grown faster than what our traditional business had been growing, and in many cases, some of those acquisitions were double-digit growth, but on a much smaller revenue base than what we would have seen before.

Overall, Scott, it that it has some maybe faster growth models for us, but probably the greatest value is how do we start tying these capabilities together to this new group of clients, so that they get kind of more and more of a broader suite of products from CSG.

The second part of your question, Scott, is kind of what kind of margin do we realize on this type of business, and I would say there is really no disparity between the print and mail capability of the Company, and the rest of the general core processing business.

They have very comparable margins.

And last question, you might have kind of the same answer for this last question.

You gave us a metric on nontraditional verticals.

I think it was 12, maybe 13% of your revenue.

How about nontraditional products?

I mean you have moved into work phone management.

You have moved into managing the workers, and the advertising and marketing and the print billing.

How much would you say is nontraditional products from what the CSG was a few years ago now?

I probably won't satisfy you on this answer, but the business has been evolving really since 1997, when I joined the business, and probably before.

We started doing E-bill presentment, which was something very different from the paper billing in the AR management side.

We came out with Workforce in probably 1999 to 2000, and these are capabilities that have been out there, and we have bundled so much of this together, that it really does drive kind of a broad relationship, and we don't look at it as these are nontraditional products.

We have done some acquisitions recently, which are truly something incrementally new to us in the last 12 to 15 months, but I would say those are pretty identifiable based on what we did from the acquisitions.

But so much of our other capabilities have been part and parcel to what we have been doing for some time.

It is very difficult for us to try to carve that out.

No, I understand.

Great.

Thank you.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question is from the line of Shaul Eyal with Oppenheimer and Company.

Please go ahead.

Thank you, hi.

Good afternoon guys.

Quick question, the credit facility that Randy mentioned during his remarks, where do you guys keep it, who is the provider?

What is the bank or banks that provide this credit facility?

Are you talking about the revolving credit facility?

Yes.

There is a syndication of approximately--

Six banks.

Six banks, and they all have a different degree of commitment to the revolver.

Got it.

None of them have any financial issues as of late, I would imagine?

There is one in there that's a small percentage of the overall.

It is a $100 million revolver.

There is a potential of about 10% of that which may be difficult to draw on, but again, it still would leave about $90 million that we are very confident that we could draw on, and we haven't drawn that revolver ever since I have been at CSG, so it is kind of a safety net for us.

Great.

That is fair enough.

Back in the summer, in July, you guys have extended your contract obviously with Comcast.

Back I believe in late September, one of your major competitors was awarded a different contract by Comcast.

Were you guys bidding for the second contract as well, or was it kind of Comcast's decision to award the initial part, to extend the part with you, and then award Amdocs the second part of it, or a different part of it?

Well, if you look at it, the Comcast business is divided up between CSG and Amdocs.

We do about 60% of the subscribers in a defined set of markets, and Amdocs is doing the other 35 to 40%, is the rough estimate of the numbers.

And our applications today do not cross over the top of each other, and as Amdocs, I think has set forth with their relationship with Comcast is to, they are in the process of displacing their existing assets that are deployed at Comcast.

The business they bought from DST Innovis with their latest solution set, and as they have been working on this to get this done I think over the last three years, to get their new solution out there, and we have been waiting for this to happen, because they made a significant investment in buying that business from DST, as well as investing in the new platform that we are looking to bring forward.

So it is as much as we had already upgraded our solution set to Comcast over the last few years, we see Amdocs doing this on their share of the business that they support.

We are excited to see that Comcast continues to embrace the products that we deliver, and whether it be color statement services, or some of the additional products that we have set forth in my comments earlier, and what we have reported in previous quarters, and we think we have a very fruitful and valuable relationship with Comcast, and we are not timid at all to be able to compete in that space against Amdocs.

Fair enough.

Peter, more of the maybe personal question to you, you have been around, you have been with CSG for the past many years, you have been around.

I think you have seen the tech crisis, the bubble burst of 2001, 2002, maybe at that time it was fair to say that it was more maybe capacity, Flash technology driven.

From your own perspective and view, what is kind of the difference that you are seeing right now in the marketplace, between '01/'02 and, 2008, as we go into 2009?

I would say probably the biggest thing in the communications space that I view as different than in other times we have had economic changes, and kind of the impacts from the stock market, and any type of economic changes, is that there is a level of competition that never existed before.

And I think that level of competition for consumer and small business accounts, will cause providers to have to make sure that they don't underinvest during these times.

It doesn't mean they won't have to be prudent and rational in how they roll out projects, and how much money they deploy to different areas, but that competition, I don't think they can sit back and especially with well-funded competitors, they can't sit back and just say I am going to kind of just hunker down and go through this economic time.

We have to see that bear out, but I don't know if I have seen the competition in the communication space broadly as what we have seen in the past on the wireless side, but you haven't seen it as broadly on the wireline, data and video services, as what we are seeing today.

And we think as a provider to the marketplace, that is good for consumers.

It is good for service providers, and it is good for companies like CSG.

All right.

Thank you very much.

Good quarter.

Thank you Shaul.

Thank you, gentlemen.

There are no further questions at this time.

Please continue with any closing comments.

All right.

Well, I want to just in closing, I want to thank all of our investors, those on the call, and those who may happen to listen on the replay, our clients, who we work tirelessly for, to make sure that we help them run their business, as well as our employees who just do a phenomenal job every day, to make sure that our clients can run their businesses at a level, and at a level of professionalism to their end consumers, and advance their business.

And we really look forward to sharing our future successes for you, because we are excited about where we sit.

We will talk to you next quarter.

All right, thank you.

Ladies and gentlemen, this does conclude the CSG Systems Q3 earnings conference call.

If you would like to listen to a replay of today's conference in it's entirety, you can do so by dialing 1-800-405-2236 or 303-590-3000, input the access code 11120296.

Those numbers again, 800-405-2236 or 303-590-3000, input the passcode 11120296.

ACT would like to thank you very much for your participation today.

You may now disconnect.

Have a very pleasant rest of your day.