CSG Systems International Inc (CSGS) 2008 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to the CSG Systems fourth quarter earnings conference call.

During today's presentation, all parties are in a listen-only mode.

Following the presentation, the conference will be open to questions.

(Operator Instructions).

This conference is being recorded today, Tuesday, January 27th, 2009.

Now I would like to turn the call over to Ms.

Kathleen Marvin.

Thank you David.

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 clients' needs through our products, services, and performance, and our ability to successfully integrate and manage acquired businesses, in order to achieve the respective 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 call.

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 Form 10-K and 10-Q, which are all available in the Investor Relations section of our website.

Also we will discuss certain financial information that is not prepared in accordance with GAAP.

We use this non-GAAP information and our internal analysis, in order to exclude significant items, that may have a disproportionate effect in a particular period.

Accordingly, we believe isolating the effects of such events, enables us as well as investors, to consistently analyze the critical components of our operating results, and to have meaningful comparisons to prior periods.

From our information our use of non-GAAP financial measures, we refer you to today's earnings release on our website, which will be furnished to the SEC on Form 8-K.

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

I would now like to turn the call over to Peter.

Thank you, Kathleen, and thanks to all of you for joining us today.

Before I get started, I would like to welcome Kathleen Marvin to her first quarterly earnings call.

As many of you may know, Roger Metz, our former Head of Investor Relations and Treasury, accepted a CFO position with a local Denver software company in the fourth quarter.

Kathleen has been assisting in our Investor Relations efforts over the past several years, and took on these responsibilities upon Roger's departure.

We congratulate Kathleen on her expanded Investor Relations duties for CSG, and we welcome her to this call.

Now on to the results.

I am pleased to report that CSG continued to perform well in the recent fourth quarter, posting revenues of $124 million, and net income of $0.59 per share for the quarter, and revenues of $472 million, and net income of $1.84 per share for the full year.

These results included a $7 million gain, or $0.14 per share, resulting from the repurchase of some of our convertible debt during the fourth quarter.

We are pleased with our solid financial performance in 2008, and also with our execution from an operational perspective on behalf of our clients.

We also made good progress in 2008 on our plans to grow and diversify our business, and advance our product suite, which I will discuss in more detail later.

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

During the earnings call last October, I commented on the tumultuous economic and credit situations, that the world and our country were facing, and since that time the economic and financial markets have worsened, corporate restructurings have increased, and government bailouts have become more the norm.

As I look back on 2008 and also into 2009, I am appreciative of the areas of strength on which CSG is built.

These strengths include stable capital, a consistently solid business model, and clients who have strong viable businesses.

But all businesses are likely to be impacted by the current economic challenges.

The increase in unemployment, a decline in home values and personal investment portfolios, and decreases in consumer confidence, have all contributed to weaknesses in the consumer-related markets.

Our clients are not without concern for these weaknesses, and the impacts on their businesses.

And we expect that our clients will cautiously watch their discretionary spending, as they manage through this downturn.

As we look at our own business we are fortunate to have several areas of strength on which to build.

Our innovative billing and interaction management systems are integral to many of the daily operations of our clients' businesses.

Though we derive some revenues from products and services that could be more discretionary in nature, the majority of our revenues are for services already deployed, and generating value in our clients' operations.

That being said, we are being cautious in our outlook for 2009, and recognize that longer sales cycles, and discretionary spending cutbacks, may have a negative impact on our business.

We don't anticipate that our clients will undertake any large transformational projects in 2009, but will instead focus on smaller projects, that quickly generate operational and economic benefits.

CSG's products and solutions can typically be deployed without large up-front fees and lengthy implementations, and this allows for benefits to be quickly recognized in the client's operations.

We saw this in the fourth quarter with clients embracing our solutions to deliver enhanced messaging to the customer, both electronically and through print.

We have also seen internet-based ordering and customer support solutions increasing in importance, and we support the clients in these endeavors in the fourth quarter.

Products and solutions which help our clients deliver high-level of customer satisfaction, roll out and market new products and services quickly, streamline operations, and reduce churn, are going to be important going forward.

The strength of our client relationships was validated by some important renewals that occurred as 2008 came to a close.

We extended our current contract with DISH Network through the end of 2009, continuing our more than 10-plus year partnership.

We remain committed to being a trusted and valued business partner to DISH in the future, and we continue to work towards a longer term relationship, that utilizes CSG solutions to meet their business needs.

We also renewed our print services contract with Cox Communications for an additional three years through December 2011.

Cox is our largest print services-only client with over 6 million statements per month, and we look forward to being a key part of their business in the years ahead.

As part of delivering our solutions to the marketplace, we are dependent on the commitment of our employees and our vendors.

We are fortunate to have employees who have shown loyalty to CSG and our clients, investing countless years in our solutions and client relationships.

Also important to us are the vendors and supply chain partners that have built trusted relationships with us, and with whom we have built our business.

As you may have seen in our press release issued earlier today, we are planning a change in our outsourced data center service provider.

We currently utilize First Data Corporation to provide the data center computing environment for the delivery of most of our customer care and billing solutions, under a contract that runs through June 30th, 2010.

Just as we do with any critical vendor, we evaluate our options well in advance of the renewal date, to provide adequate time for planning and decision-making.

Through this review process, we decided to select another partner for data center services.

After an extensive selection process, we entered into an agreement in December of 2008 with Infocrossing, to transition these outsourced data center services, prior to the expiration of the First Data contract.

Infocrossing is a Wipro Limited company, and has been in the business of providing end-to-end information technology management solutions, for over 25 years, and operates world class data centers throughout the US, for multiple computing environments and platforms.

First Data has been a valued partner of CSG since our inception as an independent company in 1994, and has been a key contributor in our ability to grow our business substantially over time.

We are thankful for the outstanding services we have received from First Data over the years, and are equally excited about our new partner opportunities with Infocrossing.

We believe that choosing a partner whose primary business is providing data center and technology services will benefit us over the long term, as we continue to evolve our business and technologies.

We will be making investments as part of this change, and Randy will speak to the costs related to these transition efforts in a few moments.

Our business model and capital structure is the strength which provides for continued stability, which is important to all of our stakeholders.

Our delivery of key services to clients, which results in revenue visibility, along with our careful focus on controlling costs, and our judicious approach to capital investment, yields strong cash flows and a strong balance sheet.

This financial foundation not only enables us to weather these difficult economic times, but also keeps us well-positioned to invest in the future needs of our clients, and the vertical markets we serve.

One of our most recent investments was our acquisition of Quaero Corporation, which closed at the end of 2008.

Quaero broadens our solution suite with customer intellegence capabilities, that will further assist our clients in maximizing the value of their customer interactions through marketing and customer service strategies.

Quaero's advanced analytics will help our clients to predict customers' behavior, and then act upon that information.

Our clients can operationalize this information by integrating the intellegence with our customer care and marketing solutions, to engage in more timely and relevant customer interactions.

Whether through customer service representatives, websites, monthly statements, interactive messaging, or direct marketing.

Quaero's customer intelligence solutions will allow clients to accelerate customer value, improve customer relationships, and increase retention through relevant and timely multi-channel customer interactions.

We welcome the employees of Quaero to our team, and we look forward to the successes of our combined capabilities.

We are also having success with Smart Color, our advanced color print solution that enhances monthly printed statements with high impact color, to provide a higher level of engagement in communications with a customer.

We are pleased with the very positive response to our investment in this print solution, and have several implementations scheduled for this year.

Investments in our business have been instrumental in furthering our goal of revenue diversification.

Revenues outside of our core video market were approximately 15% of our total revenues in the fourth quarter.

And we expect to further improve on this diversification in 2009, as we continue to build and expand relationships in these new verticals.

In closing, as we look to 2009 we approach it with a sense of caution, given the economic environment in which we and our customers are operating.

But we remain confident in the strength of our business, and the solution we bring to our clients.

We continue to work towards the long-term expansion of our products and solutions within our existing clients, and the markets we serve.

While these are challenging economic times, we look to our future with a spirit of dedication and confidence.

Our success is founded on the commitment and hard work of our employees, exemplified by their diligent efforts day in and day out to earn our clients' business.

Each of these days has added up to years of reliable service, innovative solutions, and long term relationships with our clients meeting their business needs.

We appreciate your continued support of CSG, and we 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 our outlook for 2009.

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

I am happy to share with you the financial results with the fourth quarter and the year ended December 31st 2008, as well as our outlook for 2009.

Total revenues for the fourth quarter were $123.6 million, this represents an increase of 9%, when compared to $113.5 million for the same period in 2007, and a sequential increase of 5%, when compared to $118 million for the third quarter of 2008.

Our full year revenues for 2008 were $472.1 million, an increase of 13% over the same period in 2007, and came in at the high end of revenue guidance of $472 million for the year.

These quarterly and full year results are reflective of the success we experienced in our plan, to grow top line revenues, and achieve market diversification, through both acquisitions and organic growth.

Comcast continued as our largest client comprising approximately 26% of our total revenues for the fourth quarter, consistent with that of the third quarter.

DISH Network continued as our second largest client, and represented 17% of our total revenues for the quarter, compared to 18% for the third quarter.

We finished the quarter with 45.3 million subscriber accounts on our processing system, consistent with the previous quarter.

EPS from continuing operations for the fourth quarter was $0.59 per share, compared to $0.40 per share for the same period last year.

EPS for the full year 2008 was $1.84 per share, compared to $1.50 per share for 2007.

Both the quarter and the full year 2008 results include a $7 million gain, or approximately $0.14 per share, related to our repurchase of some of our convertible debt during the quarter, which I will discuss later.

Absent the impact of this $0.14 per share gain, CSG exceeded the high end of it's full year EPS guidance of $1.66, by $0.04 per share.

Which represents approximately 13% growth over the comparable $1.50 per share results for 2007.

This improvement in EPS performance year-over-year reflects our continued focus on operational performance, as well as the effective use of our capital resources, through acquisitions and debt and equity repurchases.

The operating income margin percentage for the fourth quarter came in at approximately 18.6%, an increase from the 17.9% level we experienced from the third quarter, and significantly better than the mid-17% range we anticipated in our guidance.

The strong operating performance for the quarter was the result of solid revenue performance, our continued prudence in managing our costs, and some one-time non-recurring expense benefits realized during the quarter.

As you will see when I discuss our 2009 financial guidance in a few minutes, we do not expect to be able to sustain this level of operating margin percentage performance into 2009, which is consistent with our messaging to you over the last several quarters.

Our effective income tax rate for the fourth quarter was 32.4%, and for the full year 2008 was 34.6%, which is slightly better than our expectation of 35% for the year.

Our non-cash charges related to depreciation, amortization and stock-based compensation for the fourth quarter totalled approximately $10 million, or approximately $0.20 per share.

And for the full year totalled $43.5 million, or approximately $0.86 per share.

Turning to the balance sheet, as of December 31st cash and short term investments totalled $141 million, down approximately $24 million from September 30th, primarily as a result of the Quaero acquisition we completed in December, and the repurchase of our debt and equity securities during the quarter.

Our net billed trade Accounts Receivable totalled $118 million, up approximately $10 million from the previous quarter, with the increase related primarily to the timing of certain client payments, which were largely received after year end, in early January 2009.

Our days billed outstanding for the fourth quarter remain very good at 56 days.

This measure has been consistent across the last several quarters.

During the quarter, the public convertible bond markets experienced unprecedented volatility, which resulted in the convertible bonds of many companies, trading at a significant discount to par values, including CSG's convertible bonds.

We took advantage of these deep discount opportunities, and repurchased approximately $30 million of our convertible debt, at a cost of $22.4 million.

This represents a weighted average purchase price of approximately 75% of par value for the bonds we repurchased, and represents a pretax yield of approximately 14%.

Some of these bonds were to be retired at the first put or call date in June 2011.

These debt repurchases resulted in a booked gain of approximately $7 million, or $0.14 per share, for both the fourth quarter and the year ended December 31st, 2008.

After these debt repurchases, the remaining par value of CSG's outstanding convertible bonds as of the end of the year was approximately $200 million, down from $230 million in the previous periods, or approximately a 13% decrease.

The convertible bond market has stabilized over the past few months, and thus the deep discount buying opportunities experienced during the earlier part of the fourth quarter, may not exist in the future.

We will continue to track and evaluate the trading activity, and valuations around our convertible debt, for possible future buying opportunities.

During the fourth quarter we repurchased 250,000 shares of the Company's stock, under our stock repurchase program, at a total purchase price of approximately $4 million.

We will continue to evaluate the best use of capital going forward, which may or may not include additional share repurchases.

Cash flows from operations for the fourth quarter were $19 million, and our full year 2008 cash flows from operations were approximately $115 million.

This is slightly below the lower end of our guidance range of $118 million for full-year 2008.

But the short fall related primarily to the timing of certain Accounts Receivable payments from our clients, falling into the first week of January 2009, as I mentioned earlier.

Cash flows from operations continue to be very strong.

In summary for 2008 we finished the year very strong, and we are pleased with our most recent quarterly and full-year performance.

CSG is a strong company financially.

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

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

Before I get into 2009 guidance, there are two key background matters that I want to address as they materially impact 2009.

First, as Peter mentioned earlier in his comments, we plan to transition our data center services from First Data to Infocrossing.

We expect to incur transition-related costs and capital expenditures during the time period leading up to the final transition of services from First Data to Infocrossing.

These costs are one-time in nature, and will include such things as labor and consulting costs for the transition team, and capital expenditures and related infrastructure costs, to set up and replicate the computing environment at the new Infocrossing data center location, without disruption of the current environment at First Data during the transition period.

These operating costs will be expensed as incurred.

Expected costs attributable to the data center transition project that will run through our results of operations for 2009, are approximately 17 million to $18 million, or approximately $0.32 to $0.34 per share negative impact.

These expense amounts are based on the best available amounts at this time, and may fluctuate up or down during the year, as we execute on our transition plans.

I will address the expected one-time financial impact of these transition efforts on CSG's 2009 financial guidance shortly.

The next item I would like to cover impacts our convertible debt for 2009, effective January 1st, 2009, we will change the accounting for our convertible debt, as a result of a change in an accounting pronouncement.

Historically we have recorded the entire par value of our convertible bonds as long term debt.

The accounting rule change, requires us to look back to the original issue date of June 2004, and record an original discount, equal to the amount attributable to the convertible equity feature of the debt.

The corresponding value assigned to the original issue discounts will be recorded as equity.

The original issue discount is then required to be amortized to book interest expense, subsequent to the issue date through the first put date option of convertible date debt, which is due June 2011.

The overall effective book interest rate for 2009 for our convertible debt as a result of this new accounting pronouncement will be 8% annually, which consists of the cash coupon rate of 2.5%, plus the impact of the amortization of the original issued discount.

This will result in additional interest expense of $9.4 million for 2009, or approximately $0.18 per share.

Additional interest expense is a non-cash expense, and therefore will not impact CSG's historical or expected future cash flows from operations.

Even in light of the negative impact on our results of operations going forward, this continues to be an attractive debt instrument for us, due to the low cash coupon interest rate of 2.5%, and the tax advantaged treatment we are allowed for this instrument.

I will address the expected impact of this new accounting pronouncement on CSG's 2009 guidance shortly.

Because of the complexity of this matter, we did provide details on this topic in our press release issued earlier today.

Additional information on the adoption of this new account pronouncement was included in our most recent Form 10-Q, for the quarter ended September 30, 2008.

With this background information, I would like to now provide you with an overview of our financial expectations for 2009.

Our 2009 guidance includes non-GAAP EPS, which is a non-GAAP financial measure.

The required disclosures related to this non-GAAP financial measure, were included in our press release issued earlier today.

For the full year 2009 we expect the following, revenues will range between $486 million and $496 million, which represents top line revenue growth of approximately 3 to 5% over 2008.

This growth is almost entirely related to the year-over-year timing impact of the DataProse acquisition, which closed in April of 2008, and the impact of the Quaero acquisition, which closed on December 31st, 2008.

The relatively flat year-over-year organic growth that is implicit in this guidance, is reflective of the uncertainty that exists in today's economy.

While we still believe we have good visibility to over 90% of revenues in 2009, we are cautious in those areas in which our clients can exercise some scrutiny in their discretionary spending activities, such as money spent on marketing activities, special project work, such as custom development work, and software and professional services related projects.

We remain confident in the strength of our business, but acknowledge that all businesses will be negatively impacted to some degree, by the current economic conditions.

We expect our non-GAAP EPS from continuing operations for 2009 to range between $1.47 and $1.54 per share.

This guidance includes estimated dilution of approximately $0.03 per share, related to the Quaero acquisition.

This estimate is preliminary, and may change as we complete our purchase accounting for the acquisition of finalizing intangible asset amortization during the first quarter of 2009.

This non-GAAP EPS guidance excludes impact of the data center transition expenses of approximately $0.32 to $0.34, and the amortization of the convertible debt original issue discounts of approximately $0.18 per share, both of which I discussed earlier in my comments.

The total of these two items for 2009 is approximately $0.50 to $0.52 per share negative impact.

Putting the impact of these items, we expect our GAAP EPS from continuing operations for 2009 to range between $0.97 and $1.02 per diluted share.

We are providing our guidance in both GAAP EPS and non-GAAP EPS form, to allow investors to not only focus on the expected impact of these two items individually on our results of operations, but also so investors can understand the underlying performance of our core business operations.

Continuing on, this guidance reflects an operating margin percentage expectation in the low 13% range.

The negative impact of the data center transition costs is approximately 350 basis points, in addition, the operating margin reflects a negative impact of approximately 70 basis points, related to the GAAP dilutive impact estimated for Quaero for 2009.

Absent the negative impact of these two items, the operating margin would be in-line with the low 17% range that we previously communicated.

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 of us going forward, which will include a continued strong emphasis on cost management, in response to the downturn of the economy.

We expect cash flows from operations to range between $98 million and $102 million, assuming no significant net impact, related to fluctuations in working capital for the year.

This cash flow estimate includes the negative impact of two items worth noting, first, the negative cash flow impact related to the data center transition costs is approximately 9 million to $10 million for 2009.

Second, we are required to make an approximately $5 million cash payment for income taxes in the first quarter of 2009, related to the repurchase of our convertible debt we completed in 2008.

At this time, we expect our capital expenditures for 2009 to be approximately $30 million, which includes approximately $15 million, related to the hardware and related infrastructure items, necessary to set up and replicate the new computing environment at Infocrossing.

We expect the total of our non-cash items of depreciation, amortization and tangible assets, and stock-based compensation, to be approximately $45 million for the year.

This guidance reflects an effective income tax rate of approximately 35% for the year, generally in-line with our 2008 effective rate.

We do not assume any significant changes in our outstanding shares in our guidance.

In summary, we closed out 2008 with a strong quarter to complete another successful year.

We are committed to continue to grow our business, as demonstrated by our continued investments in R&D, the 2008 acquisitions of DataProse and Quaero, and our key client renewals during the year.

Although we are operating in challenging times, we believe the financial strength of CSG, and the key clients of markets we serve, puts us in a solid position to deal with the current economic conditions.

And we believe the financial guidance we provided for 2009 is reflective of the strength of our business.

We know that difficult economic times provide many challenges heading into 2009, yet we look forward to meeting these challenges, and the opportunities that lie ahead, and reporting on continued success.

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

Thank you, sir, we will now begin the question-and-answer session.

(Operator Instructions).

Our first question comes from the line of Ashwin Shirvaikar with Citigroup.

Please go ahead.

Hi.

Congratulations on the good quarter.

Thanks, Ashwin.

The first question is, the cold billing service that you guys provided, that is relatively stable for the managed services part of it, but it also includes like you mentioned, marketing services, a portion of that can be discretionary.

But can you actually break out what proportion of the overall, is this kind of marketing services?

And also for the acquisitions that you made over the past couple of years, could you go through a sort of similar exercise of discretionary versus required?

You want to take the first piece of that.

Ashwin, we typically don't break that out into the various components of the processing revenues.

So that information is not available.

I would say, as I said in my comments, we have good visibility into our revenues each year of about 90%, which includes revenues under contract, and it is dependent upon the continued usage of some of the items, such as statement production.

So we feel very good about the 90%, the remaining 10% that you are referring to is very discretionary in nature.

It is generally special projects that can be additional marketing services, and things of that nature, software and professional services.

So do you want to take the second part of that?

Just to follow-up on the first component, where there is discretionary spending we believe many of these discretionary spend dollars that our clients have do generate value for them, whether it is the marketing services where they are sending messages to their consumers, either on their behalf or a third party, we believe that there is value that is derived from it, and there would be an impact to their business, but we don't project to say that our clients may have to think about some of those things, as they run their business in 2009.

But we still have a fairly good confidence on many of what we viewed the discretionary items that they have, based on the success that those components brought to the business in the past.

Relative to the acquisitions, if you think about DataProse and Comtech that we acquired in the last 12 to 24 months.

Much of that business is associated with sending out core invoices to customers on behalf of service providers.

We believe that is very sustainable.

We don't believe there is a lot of discretionary income in those businesses, that we have in those parts of our business.

There is a piece where we work for non-profits, and we do recognize the non-profit organizations sometimes may struggle in a down economy in some of their solicitation work, or their work with their sponsors and we recognize that could be soft, but that is not a big piece of those overall businesses that we have for our print services or marketing services businesses.

From the interactive messaging business that we acquired from Prairie back in 2008, that business has been, was that 2008?

Yes, 2008.

2007.

I am sorry, 2007.

The interactive messaging business is a key part of collections management, appointment management, fraud detection services, and we don't see those as really being so much discretionary now.

A client could come back, and say I view collection management as not being poor, but in a down economy, we believe that those are pretty critical to the operations.

And then lastly, Quaero is primarily a marketing services analytics, and kind of the marketing programs advisor for companies, and in some cases that could be viewed as more discretionary, as clients decide whether or not they want to push for retention programs, or new prospect programs, but so far we still believe that there is a good stickiness to that business, as well.

So your 90%-plus comment was for the overall business, wasn't it?

Correct.

That is correct, Ashwin, yes.

Okay.

One question about the move to Infocrossing from First Data.

You mentioned the cost side of it, of course.

What is the cost benefit, over what time period, and is it going to lower your operating cost in 2010 onwards?

I will respond first, Ashwin.

We do believe that for our business as it evolves, and how we bring products to market, and how we deliver our products in a processing model, we thought it was important to have a partner whose core business really is working with companies like CSG, to make sure their products evolve from a data center perspective, and we believe that it was important to have someone whose sole business was providing data center services, and also IT services, as well.

So we felt, one, is that we would be able to build upon the success that we had with First Data, but lift it up even further from where we have been by having that type of partner.

We are clearly making investments, Randy can talk about the investments, and how that can have some value back to us in the future, and I will let you comment on that, Randy.

A couple of things, Ashwin, on this topic here.

I think first of all on the pricing, the specifics of the pricing are something that we are not going to disclose or comment on going forward, just because of the competitive nature and the confidentiality that is needed around such items.

What I can tell you though from a financial perspective, we believe that there are financial benefits we will realize over the five year term of this agreement, the financial benefits come in many different forms, it can be pricing, it can be different hardware needs, different network needs.

We think there are financial benefits that we will have over the life.

We are comfortable the financial benefits will more than recoup the amount of investment it will take for us to transition to the new data center.

From an operating margin perspective, what you can look at Ashwin is, as I mentioned in my comments, that there will be a 350 basis point reduction in our operating margin for 2009 as it relates to this, when we make the full transition over to Infocrossing, that 350 basis points should come out of our business, and beyond that we would expect over the five-year period, for the additional lift on the operating margin, as it relates to this contract to be slightly additive.

Does that answer your question?

Yes.

Can I have one more question?

Sure.

Any thoughts on DISH, why they chose to sign up the one-year option, as opposed to a longer time period, which might have been more beneficial to them?

Well, Ashwin, as we kind of came through our third quarter earnings call we had confidence about our renewal activities, and we renegotiated with the management team and leads at DISH through the fourth quarter on a longer-term renewal.

And as we approached the end of the year, we couldn't come to an agreement on all of the terms, and so we thought it was best, both parties to agree to one-year renewal, since the agreement was expiring on 12/31.

I don't want to go into any of the specifics, but we do believe that we can use 2009 to build on our history, and hopefully complete a longer term, an extension, and we still have confidence that that is doable.

Okay.

Thanks.

You bet.

Thank you , sir.

Our next question is from the line of Tom Roderick with Thomas Weisel, please go

Hi guys, good afternoon, this is Chris for Tom Roderick.

Hi, Chris.

Hi, guys.

Following up on Ashwin's question.

On the discretionary spend that you mentioned, the 10% that you didn't have, or you don't have visibility going into a year, how did that come out going into Q4, i.e., what did you bake in as far as discretionary going into Q4, and did that come in better than you expected?

What is the trend there on the discretionary spend?

I will go first on this, Chris.

We didn't see, and I will answer it this way, we didn't see any meaningful change in the fourth quarter on some of these categories, where clients may have more discretion on how much they spend with us.

We saw fairly consistent behavior in the fourth quarter versus the third quarter, and so inherently what we were expecting was in our guidance, more or less came through.

That being said, we are cautious because we know that as our clients start to see our own customers' behavior, that they may start taking a different tack, as they move forward into 2009 and how they manage their business.

So we are being cautious as we go into 2009 to see if there is any softness that comes through that, and that would be across, not just our cable and DBS clients, but really across all of the different pieces that we talked about with Ashwin, whether it is on some of the activities we do on interactive messaging across our broader marketplace, some of our statement services, our non-profit work we do across.

But overall in the fourth quarter I think we more or less came in-line on those.

Randy, do you have any other comments?

I think you covered it well.

One other thing on your comment, Chris, we don't have visibility into the other 10% of revenues that you referred to.

We do have some visibility on what our prospects are to achieve that additional 10%, but it obviously doesn't have the same degree of certainty, as what we had talked about in the other 90%.

It is not like we enter the year to have good prospects, some good prospects to fill the remaining 10%.

We are just being cautious because of the current environment we are seeing in front of us.

Right, right, understood.

I was just trying to get an idea of how you guys were approaching the risk to that 10% obviously I know you guys have some visibility into it.

Just on the margins here.

You guys broke it out nicely on the data center costs, and thanks for that.

That was helpful.

But as far as given that the DISH extension wound up only being for '09, I guess maybe I would have expected, and let me know if this was incorrect, I might have expected a bit of a margin boost from where you guys had previously guided, given that you would expect pricing to be a little bit stronger on a one-year renewal, as opposed to what might have occurred on a longer term deal.

How should we think about that?

Is that just more conservatism on your part as far as margin assumptions?

As we set our guidance, Chris, we look at many different aspects.

There are a lot of moving parts and various scenarios that we build into our guidance.

As Peter mentioned before, it is our expectation to continue to look for a longer term renewal with DISH during the year.

We think it is to the benefit of both parties to get something in place, and because of that our guidance for 2009 reflects not only the one-year renewal, but also some expectations of us able to get a longer-term renewal with DISH during the year.

So your '09 guidance does reflect some assumption of a longer-term deal?

It has a wide range of scenarios that we put into play, one scenario is the renewal, and the other is we expect some longer-term renewals for the year.

Oh, okay, got it.

Okay.

That is actually very helpful.

It does provide for the possibility of a longer term deal.

Thanks, guys.

You bet, Chris.

And our next question comes from the line of Karl Keirstead with Kaufman Brothers.

Question on the data center move.

I want to understand if I am thinking about it the right way.

I think in your latest K, you indicated that your annual spend with First Data ran about 45 million to 46 million.

So it seems to me that you would have to reduce your annual spend by over 10% a year, in order to breakeven over a 5-year period, and cover the 17 million to 18 million up-front transition costs.

So is that 10%-plus price cuts each year, sort of the right way to look at this?

I would say, Karl, looking at it which I stated and I think your math is not so far off, which is again we are not going to specifically talk about the price, but we will recover those costs that we will incur to transition, and the math you went through has some logic to it.

Okay.

Great.

The second question also for you, Randy, the share count beginning in the March quarter, I would presume would be a little lower, given that you bought in some of your convert.

Could you walk us through that, please?

No.

The convert, Karl, the convert currently are the strike price on the convert is $26.77, so there is no dilution in our EPS calculation, as it relates to our convert until it gets to $26.77.

There is no impact on EPS going forward because of the buy-back.

Got it.

Thanks very much.

You bet, Karl.

(Operator Instructions).

Your next question comes from the line of DeForest Hinman, Walthausen & Co, please go ahead.

I had a couple of questions on the mechanics of the transition.

When we talk about that First Data contract ending in mid-2010, if we had the implementation finished with the new vendor ahead of time, would we buy out that contract in some way, or impair the remainder of that contract, something along those lines?

Well, I think, first of all, those are pieces that would have to be determined of options, and how things would work out with the current vendor in our existing contract, so I don't want to go in and speculate of how that would play out.

Right now we are targeting a conversion that would be in-line with the ending of our contract with First Data, and the way that Randy looked at his financials, I think he could comment to say that was in tune with the scheduled agreement that we have with First Data.

I agree with Peter.

The plan right now is to make the cut-over in the most effective and efficient manner as possible.

Our biggest concern is that we make sure that our clients are taken care of in this situation.

We do not impact their business in any way at all.

That is job one.

The timing of the cut -over we will take that into consideration, as well as the economics of that.

All right.

Can you explain for me the CapEx component of the transition, I guess?

The one thing,

You didn't finish your question, go ahead and finish.

I am a little bit confused on the cash component versus the income statement.

Two different things.

Let us take the CapEx first, the purpose of the CapEx which is about $15 million, as I stated in my comments.

One thing that we are going to do which I think is pretty consistent with how people transition data centers of this nature, is that we will build out the computing environment and replicate it in it's entirety in the Infocrossing data center, as it sits in First Data, and therefore there is no impact to the First Data computing environment whatsoever, as we set this up.

That allows us to test the environment totally before we make any cut-over, so you really have duplicate hardware in both locations for a period of time.

So that is the big capital outlay, it includes mainly servers and really network gear is what makes up the $15 million.

On the 9 to $10 million, if you look at the 17 million to $18 million, there is a small amount that is depreciation in there, it is a pretty insignificant amount, but we will get a tax deduction for that 17 or $18 million.

If you back out 2 to $3 million of depreciation and tax effect it, that is how you get the 9 to $10 million.

All right.

And then on the legacy contract with First Data, how long have we had an agreement with these guys?

First Data has been our provider ever since we were an independent company in 1994.

Prior to that when we were a division of First Data, obviously First Data was providing the services.

So we have been there for a long time.

Ever since the business has been in operation.

And the most recent contract that would be expiring in June of 2010--

It was a five-year.

It was a five-year agreement.

Okay.

And then separately can you guys talk about the trends in the other verticals that we are in?

We did win that Brinks business, and we started to go after some utilities, and also the financial vertical, can you give us an update on that business and outlook going forward?

Well, within the different verticals where we have client relationships, it is primarily driven around print services and interactive messaging services today.

Those businesses have been steady.

We have seen no degradation of their relationships with us from any economic impact so far.

We believe those are areas that we can bring more services to in the coming years, as we bring out some more of our capabilities, that currently haven't been sold to those.

But we expect that the soft economy and down economy that we're facing in 2009, won't drive the opportunities that we originally thought in the near term, just because of longer sell cycles and where people are watching how they spend their money, and whether they want to make changes in any of their service providers at this point.

We still believe there are opportunities for both in there, but as reflected in the guidance that Randy gave, we are cautious to think that we are going to make significant inroads in 2009 in any of those areas.

All right.

Thank you.

You bet.

Thank you, sir.

And our next question is from the line of Shyam Patil with Raymond James and Associates, please go ahead.

Good evening.

I was just wondering if you guys can provide a little bit more color around your earlier comments about your assumptions for DISH in guidance?

I wasn't very clear on what exactly you guys have assumed?

I will take that one, Peter.

What I said earlier was that we take into account many different scenarios when we establish our guidance, and that is why we provide such a large range on the revenue side.

And the current guidance reflects one year renewal, and as well as the possibility of a longer term renewal that may happen this year.

So just to take a different kind of way to think about that is, within that range, if we don't do a long-term agreement with DISH, we believe we could still perform within that range, if we did a longer term deal we believe the range also would anticipate and include any discounts that could be given to DISH as part of that.

So we tried to build that in as part of our broad assumptions of the multiple facets that go into running the business, and the places where we generate revenues.

Okay.

And along the lines of that, what kind of timing have you assumed in terms of a possible longer-term renewal with DISH?

I am not going to try to suggest that we have an idea of and when a longer-term agreement would be done in our financial modelling.

As Randy has built his financials, he can share on this in more detail, but he has taken many different ideas and scenarios of how we generate revenue, where it comes from, what the possibilities are, not just from DISH but from all of our clients, and therefore there is no one single assumption in our guidance.

I would agree.

I couldn't have said it better.

Okay.

And then I was wondering if you guys might be able to provide a little bit of guidance around gross margins in '09?

I think I would say looking at '09 if you look at Q4, I think there are a couple of things to consider, and I think Peter mentioned it before, we had a very strong fourth quarter.

Revenues came in at the high end of our range, and a lot of that revenue was very good margin revenue.

You see a pretty good uptick in our gross margin in Q4 versus Q3 it is about 200 basis points higher.

I would say that as we go into 2009, obviously as we commented, we are not likely to sustain that level of profitability going into next year, showing that the different operating margin levels that I had gone through.

So I would think Q3 is probably a better range for you to look at, Q3 of '08 is probably a better range for gross margin as you go into 2009.

Okay.

And the next question is around the cost structure.

You guys mentioned that approximately 90% of revenue is booked heading into the year.

But if you were to experience some softness in that 90% number, how should you think about your ability to maintain your cash flow guidance, or stay within a tight range of that?

I will take that one.

I think a couple of different things you have to look at our cost structure, about half of our cost structure is people costs, so that is not necessarily variable in nature, but a lot of our other costs have a high degree of variability, our data processing costs are on a per usage basis, our paper envelopes of all of the production type of equipment, the toner and all of the supplies that go with that are variable in nature.

As the revenues come down, the usage of, the third party cost of that nature come down as well.

There is a certain degree of variability in our cost structure that allows us to manage that down.

That is somewhat reflective in the EPS guidance you gave.

It has got a fairly tight range for a broader revenue range, that shows that we think we can manage our expenses down, for those variable costs that are associated with the business.

Okay.

And then just my last question.

I mean, you guys renewed your contract with Comcast, but it appears that it still includes similar declining minimums as the previous contract, and it looks like one of your top competitors, just won a very large strategic upgrade for their existing business, and has been gaining share in other areas.

Can you just comment around your relationship with Comcast, and what gives you guys confidence, that you can maintain your subscriber share there going into 2010 and beyond especially as the minimums start to decline?

There are a couple of points on that, Shyam.

One is, we have had a good history when we had declining minimums in the past with Comcast, to be able to outperform the minimums, as we continue to deliver solutions to them, we provide a very wide range of services to Comcast, and as we know Comcast, and we do have a good relationship with them, the technology needs of Comcast will evolve over time, and we have had a very good history of evolving our products and services to support our clients, not only Comcast, but all of our clients as their businesses evolve.

You can see this going back to all of their services that they have rolled out, and how we have helped them.

The specifics of Comcast and whether, what our large competitor against us is commenting on of where they stand, I am not going to try to speculate of where things really stand on that, but we do recognize that the plans of Comcast, include evolving their systems that support their business, and they plan to do this over time.

They do have long-term plans to develop a solution that would be viewed more of a Best-of-Breed.

And we believe that we have several capabilities and solutions that can be deployed across the Comcast enterprise in this Best-of-Breed solution, which allow us to generate value for our shareholders, as well as delivering services to Comcast as part of that.

So even though we typically see our solutions offered in an integrated fashion, we have been modularizing our components, the capabilities that we have been bringing to market, are standalone in nature, where they can tie-in with other components of other system providers on behalf of our clients.

And we see in our relationship with Comcast, that they are embracing these new things that we come out with, whether it is their commitment to migrate to full color statements, their rollout of our order work flow tool that we came out with in 2008, the use of workforce or interactive messaging, we have deployed technology with clients that really sit across billing systems, regardless of who the underlying biller or components are, that really facilitate everything from web care, and others.

So we think that we have means to continue to compete.

Our business solutions to our clients do continually evolve, and we recognize will likely evolve with Comcast, and our history has proven that we have great success of doing that.

Randy?

Peter, those are great points, and I would say a fact to illustrate that is the revenues for the fourth quarter for Comcast, if you do the math on all of the disclosures, you will see that the revenues from the fourth quarter from Comcast, were the highest quarter of this year.

So that indicates a huge endorsement of our products, and this is subsequent to the contract renewal, so I think that is a good endorsement, and illustrative of what Peter just mentioned.

Okay.

Just a follow-up on that.

When you talk about Comcast migrating to more of a Best-of-Breed approach, does that mean ideally when they implement the Best-of-Breed strategy, that they will be a single billing vendor, maybe the same or different OSS vendor, but a single one, and then maybe a single CRM vendor, is that what you mean by Best-of-Breed?

Not necessarily.

Just where they are going is that they will look at different components that they will look to manage the integration points, versus historically a company like CSG manages many of those integration points.

It doesn't mean that there will be a definitively a single solution provider for any one component.

So from whether it is statement services, interactive messaging, workforce, any of those pieces that we provide, billing services, rating, any of those could come from multiple platforms, if they so chose.

And so I think the biggest piece on when you think of a Best-of-Breed is that they are really looking for much of the integration management, but the key is that, as we have been rolling out our services, and as we have been doing this, both with Comcast and other clients in the space, we work with others in making sure that our solutions integrate and work with other providers.

We had a large, as an example, in the fourth quarter our product catalog has been rolled out for a large client, to effectively manage and really deliver upon all of their web-ordering and customer service, across multiple platforms and across multiple billing systems, that is reflective of what we have been doing with our systems.

We do believe that there is value in our integrated solution sets, but we also know that we will evolve and meet the needs of our clients with standalone components as well, and integrating with other solution sets.

That is what that all means when you think about Best-of-Breed.

Great.

Thank you very much for the details.

You bet.

All right.

Thank you, sir.

And once again, ladies and gentlemen, (Operator Instructions).

All right.

And I have no further questions in the queue, I would like to turn the call back over to management for any closing remarks.

Thanks, David.

I just want to thank all of our investors who are on the call, and our clients and employees who with the work that we do with each other, really builds the foundation of our business, as well as making their businesses successful.

We look forward to sharing our future successes with you in 2009, and we are hopeful that the return to stability in our economy, and the world economy, happens quicker than what some of the pundits are saying.

Hold on tight, we look forward to 2009, and continuing to perform for everybody.

Thanks.

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

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