CSG Systems International Inc (CSGS) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you for standing by.

Welcome to CSG Systems International's first quarter 2009 conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation, the conference will be opened for questions.

(Operator Instructions).

This conference is being recorded today, Tuesday, April 28, 2009.

Now I'd like to turn the conference over to Ms.

Kathleen Marvin, Director of Investor Relations.

Please go ahead, ma'am.

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

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 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 call and we undertake no obligation to revise or publicly release any revisions 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.

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

We use this non-GAAP information in 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 an event enables us, as well as investors, to consistently analyze the critical components of our operating results and to have meaningful comparisons to prior periods.

For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release on our website which will also 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.

I'm pleased to report that CSG continued to perform very well during the first quarter of 2009 posting revenues of $123 million and non-GAAP EPS of $0.41per share for the quarter.

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

Our solid financial performance for the first quarter provides a good start to 2009 for CSG.

This quarter was one of demonstrable progress and achievement as we continued to execute upon our initiatives for business growth and operational excellence on behalf of our clients and shareholders.

We made notable strides in expanding our market share within cable, increasing adoption of our innovative solutions, diversifying into new verticals and delivering state-of-the-art products to the marketplace.

All of this, while maintaining our solid financial foundation, characterized by revenue visibility, a sound business model, stable capital and prudent expense management.

While we do see clients still evaluating various areas where they have discretion in their spending, we find that clients continue investing in their businesses to maintain the value of their customer relationships.

Overall, we feel that these important factors will keep us well positioned for success in 2009.

Now I'd like to take a few minutes to review our first quarter in more detail.

Certainly one of the highlights of the quarter was the newly expanded agreement with Charter Communications.

Nothing speaks louder to excellence and reliability of our solutions and the customer service we provide than our clients showing their confidence in us with additional business.

We were very pleased to share with you back in mid-February that Charter decided to broaden the use of CSG solutions to support its video, high speed data and telephony services across all of Charter's markets.

CSG currently provides customer interaction management solutions to approximately 60% of Charter's customers.

Under the new agreement, Charter plans to convert its remaining customers to CSG solutions beginning later this year.

Despite Charter's recent bankruptcy filing, which Randy will speak about shortly, we still feel that this partnership provides both parties with good long-term benefits.

We look forward to assisting Charter in expanding the use our of solutions to deliver quality customer interactions, launch new products, increase customer value and achieve operating efficiencies across their operations.

Also as previously mentioned to you in the fourth quarter of last year, we will be converting an additional 1 million subscribers onto our Advanced Convergent Platform on behalf of a variety of our clients.

These conversions, along with those for Charter, equate to over 3 million additional subscribers coming onto our Platform over the next 12 months.

This is an 8% increase in our customer base or subscriber base when compared to year-end 2008.

We view these market share wins as significant validations of our products, reliable service, and innovative solutions.

While the realities of the marketplace create obstacles to displacing incumbent billing and customer care providers, CSG's approach has been to earn the right each and every day to our customer's business.

We believe these recent competitive wins at Charter and elsewhere are both noteworthy and a strong endorsement of CSG's customer focused approach to doing business.

CSG delivers results that make a true impact on our client's operations and these results lead to our customers investing in our solutions and services time and again.

While cable and satellite operators are not immune to the current economic recession, they are seeing a certain degree of stability in their businesses.

Consumers are not disconnecting their video services.

In fact, TV viewing has actually been increasing as consumers opt to save money by staying home.

High speed Internet access has become a valued necessity and operators continue to gain share with their competitive voice offerings.

These favorable trends have afforded our clients the opportunity to grow and invest in their businesses during these tough times.

CSG has benefited from our clients' strengths and our solid business model has much appeal to our clients.

Our solutions generally require a low capital investment from our clients, allowing them to utilize our advanced product offerings at a pay-as-you-grow rate.

We saw validation of this in the quarter as clients invested in our solutions to deliver high levels of customer satisfaction, rollout and market new products and services, streamline operations and reduce churn.

For example, as mentioned in our press release, customers such as Cox Communications will be deploying SmartColor, our advanced print solution, to enhance monthly printed statements with high impact color to improve document visibility and customer response rates.

Color statements are becoming an important component of how our clients engage with their customers and we continue to see our clients expand the use.

Communication providers have a strong history of expanding the capacity and capabilities of their networks and then delivering new services and equipment, taking advantage of the network.

Operators are actively exploring a variety of ways to further extend their offerings with commercial services, advanced set top boxes and mobile devices all at the top of the list.

As our clients explore these new ventures, we continue to work closely with them to understand and to find product requirements so that we are prepared to support them as we've done in the past.

An example of this is our clients' successful delivery of voice services.

Following a year-over-year growth of over 40% in 2008 for us, we currently have over 7 million voice subscribers in our system on behalf of clients, a dramatic growth in approximately four years.

While cable and satellite are certainly important markets for us, we also saw good progress in diversification efforts as we started the new year.

In the first quarter, approximately 17% of our revenues were attributed to verticals such as financial services, utilities, health care, home security and more.

We're in a unique position to capitalize on our 25 years of experience in customer interaction management by leveraging our expertise and advanced solutions into new industries.

Similar to our video clients, these new clients typically handle a high volume of recurring transactions and complex customer relationships.

Our modular-based solutions assist clients in managing interactions to better engage and transact with customers in marketing, service, or collection activities through a variety of touch points such as customer service representatives, kiosks, interactive messaging, field force management, printed statements, marketing materials or customer self-care.

Our acquisition strategy and R&D initiatives have resulted in a comprehensive, powerful combination of advanced customer interaction and management solutions.

Furthermore, we continue to be recognized as a leader in customer interaction management with the introduction of new and innovative solutions.

Just last month, CSG Interactive Messaging was highlighted in the front page of the Wall Street Journal article discussing interactive collections and the various uses of voice talent to ensure the most effective means of collecting debt in today's economy.

In summary, as we look back to our first quarter of 2009, we see it as characterized by solid achievements that demonstrate progress in our initiatives for business growth and operational excellence.

As we look forward, we see these same characteristics in place to contribute to our future success, our continued leadership position in providing advanced customer interaction management solutions, and our continued sound financial structure grounded on the foundations of a predictable business model, revenue visibility and cost controls.

We appreciate your support of CSG and we look forward to the opportunity to continue delivering results for our clients and shareholders alike.

I'd now like to turn the call over to Randy for the financial highlights from the quarter and our outlook for the remainder of the year.

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

I'm happy to share with you the financial results for our first quarter of 2009 as well as our outlook for the remainder of the year.

Overall we are very pleased with our performance for the quarter and the solid start to the year.

Total revenues for the first quarter were $123.5 million.

This represents an increase of 9% when compared to $113.6 million for the same period last year and is consistent with our revenues from the fourth quarter of 2008.

Percentage of revenues generated outside our core video market for the current quarter was 17%, compared to 9% for the same period last year.

These results are reflective of the success we have experienced in our plan to grow our revenues and achieve market diversification.

Comcast continued as our largest client comprising approximately 25% of our total revenues for the quarter compared to 26% for the fourth quarter 2008.

DISH Network continued as our second largest client and represented approximately 18% of our total revenues for the quarter, up slightly from the previous quarter.

We finished the quarter with 45.4 million subscriber accounts on our processing system, up slightly from the previous quarter.

Our subscriber levels have remained at this level for the last several years.

This makes the expected 8% subscriber growth over the next 12 months as mentioned by Peter earlier even more significant.

Before I discuss the remaining operating results I want to bring two things to your attention.

First, as Peter mentioned earlier, we announced a new agreement in February with Charter Communications, our fourth largest client, to expand the use of CSG solutions supporting Charter's entire national video, high speed data, and telephony footprint through December 31, 2014.

As many of you are aware, on March 27 Charter took the next step towards its previously announced restructuring plan by formally filing its bankruptcy and restructuring plan with the bankruptcy court.

Since then, the court ruled to allow Charter to continue to pay trade creditors in full for both pre- and post-bankruptcy invoices as they become due and payable.

Charter remains current in their monthly processing payments to us and has publicly indicated that it has sufficient liquidity to continue to operate its business without disruption.

Based on this information, we determined that no reserves were necessary for CSG's outstanding receivables with Charter.

We believe going forward, we'll remain a key partner in helping Charter achieve its operational goals.

Secondly, I want to remind you that beginning with the first quarter of 2009, CSG now reports both GAAP and non-GAAP financial results.

The required disclosures related to non-GAAP financial measures are included in our press release issued earlier today and are posted to our website.

Now onto the numbers.

Our GAAP operating income for the first quarter was $21.6 million or 17.5% operating income margin compared to $23.3 million, or 20.5% operating income margin for the same period last year.

Our non-GAAP operating income margin for the first quarter was $23 million or 18.6% operating income margin.

Our non-GAAP operating income excludes $1.4 million of expenses related to the transition of our data center services from First Data Corporation to Infocrossing which began this year.

Our 18.6% non-GAAP operating income margin for the quarter is relatively consistent with the comparable measure from the fourth quarter of 2008 and is significantly better than the approximate 17% range that was implicit in our full-year previous 2009 guidance.

Our stronger than expected operating performance for the first quarter is a result of our prudent cost management in light of the current economic conditions.

Non-GAAP EPS for the first quarter was $0.41compared to non-GAAP EPS of $0.43 for the same period last year.

Our non-GAAP EPS excludes the expense related to our data center transition efforts, the noncash interest expense related to the amortization of the original issue discount for our convertible debt securities and the benefit related to the gain on the purchase of our debt.

GAAP EPS for the first quarter was $0.37 compared to $0.39 for the same period last year.

As noted in our press release today, we adopted a new accounting pronouncement effective January 1, 2009 that impacted our EPS calculation.

Although the application of this new pronouncement appears to be somewhat complex on the surface, the net effect can be viewed simply as an increase in our diluted number of shares outstanding from 33.7 million in the fourth quarter of 2008 to 34.5 million shares for the first quarter.

Our effective income tax rate for the first quarter was 35%, consistent with our expectations for the full year.

Our noncash charges related to depreciation, amortization and stock-based compensation for the first quarter totaled $10 million or approximately $0.19 per share impact.

Turning to the balance sheet, as of March 31 cash and short-term investments totaled $120 million, down to approximately $21 million from December 31, primarily as a result of our capital expenditures and the repurchase of our debt and equity securities during the quarter.

CSG spent $10 million on capital expenditures in the first quarter, which includes infrastructure items required to set up and replicate the computing environment at the new Infocrossing data center location and investments in new color print technologies.

Additionally during the quarter, we repurchased $15 million of our convertible debt at a cost of $13.2 million.

This represents a weighted average purchase price of approximately 88%, of par value, the bonds we repurchased and represents a pre-tax yield of 9%, assuming these bonds were to be retired at the first put or call date in June 2011.

After these debt purchases, the remaining par value of CSG's outstanding convertible bonds as of the end of the quarter was approximately $185 million, down from $200 million as of the end of the year.

Also during the quarter, we repurchased 250,000 shares under our stock repurchase program at a total price of $3.8 million.

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

Our net billed trade accounts receivable totaled $130 million, up approximately $10 million from the previous quarter, primarily due to an $11 million client payment that was received after quarter-end on April 1, 2009.

Our days billed outstanding for the first quarter remain very good at 58 days.

This measure has been consistent across the last several quarters.

Cash flows from operations for the first quarter were $16 million which were negatively impacted by the $11 million client payment that was received on April 1, as I just mentioned.

We view this as a timing matter only between quarters and as you will see when I provide cash flow guidance for 2009 in a minute, we do not expect this to have an impact on our full year cash flows from operations at this time.

Next I'd like to provide an update to financial expectations for the full year 2009.

Overall our expectations are generally consistent with or slightly better than our previous guidance.

For the full year 2009, we expect the following.

Revenues will ranged between $488 million and $498 million which represents a slight increase from our previous range.

This guidance represents an increase in revenue growth of approximately 3% to 5% over 2008.

We believe we have good visibility to well over 90% of our revenues for the remainder of 2009.

However, we remain somewhat cautious regarding areas in which our clients can exercise scrutiny in their discretionary spending such as money spent on marketing activities, custom development work, software and professional services-related projects and on some of our newer solutions.

While we acknowledge that all companies may still be negatively impacted to some degree by the current economic conditions, we believe that our revenue guidance adequately takes these factors into consideration.

We have confidence in the strength of our business and the revenue opportunities ahead of us.

We expect our non-GAAP EPS from continuing operations for 2009 to range between $1.50 and $1.56 per share.

This represents a slight increase to our previous guidance.

This non-GAAP EPS guidance excludes the impact of the following key items.

First, non-GAAP EPS excludes the 2009 expected data center transition expenses of approximately $17 million to $18 million, or $0.32 to $0.34 per share.

The data center transition expenses are expected to ramp up over the remainder of the year from the $1.4 million incurred in the first quarter as we move from our heavy planning phase and into the execution of our transition efforts.

Secondly, non-GAAP EPS excluding amortization of the convertible debt original issue discount of approximately $9 million or $0.17 per share.

And, thirdly, non-GAAP EPS excludes the first quarter gain on the repurchase of our convertible debt securities of $1.5 million or $0.03 per share.

As I mentioned earlier, we will continue to evaluate whether additional debt repurchases make economic sense for us, but at this time our guidance for the full year 2009 assumes that there will be no additional debt repurchases.

The total of these items for 2009 is approximately $0.46 cents to $0.48 per share negative impact.

Including the impact of these items, our GAAP EPS range for 2009 is $1.04 to $1.08 per share.

Continuing on, this guidance reflects non-GAAP operating margin percentage expectations in the mid-17% range.

Our non-GAAP operating margin excludes the impact of the $17 million to $18 million, the data center transition expenses that I mentioned earlier.

The negative impact of these costs on our operating margin is approximately 350 basis points resulting in an expected GAAP operating income margin of approximately 14%.

The improvement in our operating margin percentage and EPS guidance reflects the strength of our first quarter results and our spending expectations for the remainder of the year.

At this time, we anticipate increased investments in our business as we continue to roll out new product capabilities and convert additional subscribers onto our system.

As a result, we anticipate that our operating margins will decline from our first quarter levels through the remainder of the year which is consistent with our previous guidance.

Over the years, we have proven to be good stewards of our business in both good times and bad and you should expect us to manage our expenses prudently as we gain greater visibility into our revenue opportunities.

We expect cash flows from operations to increase slightly to a new range between $100 million to $104 million assuming no significant net impact related to fluctuations in working capital items for the year such as the client payment issue we experienced at the end of the year, or at the end of the quarter, sorry.

The cash flow estimate includes a negative impact of approximately $9 million related to our data center transition efforts for 2009.

Including the impact of this item, our 2009 cash flows from operations would be relatively consistent with our 2008 operating cash flows.

We continue to 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 noncash items of depreciation, amortization of intangible assets, and stock-based compensation to be approximately $44 million.

This guidance reflects an effective income tax rate of approximately 35% for the year, unchanged from our previous expectations.

We do not assume any significant changes in our guidance to our current 34.5 million diluted shares outstanding.

To summarize, we are very pleased with our results for the first quarter and the solid start to 2009.

Our business continues to operate solidly during these challenging times as evidenced by our consistent operating performance, our strong balance sheet and the 2009 market share wins.

We are excited about the gains we are making and believe that we are well positioned to report on continued success in future quarters.

I'll now turn 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 Citi.

Please go ahead.

Thank you.

Seems like a nice quarter here.

The question I have is, the 8% subscriber growth that you mentioned, Peter, when will it start flowing into your numbers?

And, is that part of the reason that's leading to maybe a back-ended improvement in EPS for the, for the full year?

Let me first give you some color, Ashwin, around the perspective of the timing of what we expect on the conversions and then Randy can talk about the financial impacts.

We're expecting these to be more back-end loaded from a timing of when they would actually be on our system as we go through planning and preparation with the clients to migrate these subscribers onto our system.

So it'll be after the halfway point of the year before we really start seeing anything of significance and more back-end loaded in the year.

But from a financial perspective, Randy, maybe you might want to comment on the impacts of that?

Ashwin, since these are going to happen the latter part of the year they don't have a big impact to our full year 2009 guidance.

And they're, I think if you look at our guidance, there's no implicit ramp-up in any of the quarters, it's relatively consistent across the remaining three quarters.

So as Peter mentioned, I think as we make more progress on this and we get closer to the dates, we can probably give you more information.

Okay, that's helpful.

And with regard to DISH, any thoughts on when we might, I mean, they have a one-year option that they exercised which would probably imply that you guys are continuing to negotiate with them for maybe a longer-term deal here.

So when might we hear about it?

Is it also going to be really late in the year?

Would you hold out any hope for an earlier than that decision?

Well, Ashwin, after putting my shoe in my mouth in the second half of last year and expressing the strong confidence that we'd have something at the end of the year, I'm hesitant to try to predict timing.

But I have confidence that as we continue to work with DISH, they'll be, we'll need to have some type of extended agreement beyond this year.

Most importantly, we're very focused on building a long-term agreement with them.

And if there's a chance to do it earlier than later, we'll be very willing to do that.

There's no benefit for us to take a slow rate on this.

We'd like to find something that's very beneficial to them and to us in the terms of what both of us need.

So conversations continue and we continue to service them as we go through our contracts -- kind of relationship management.

And we've been delivering incremental service to them in the first quarter and feel good about what we're doing for them.

Okay.

Are there -- this is a separate question -- are there any triggers or criteria that you guys are looking at for the debt or stock buyback going forward?

Just to make sure we heard the question correctly.

Are there any triggers from the stock buyback that would cause us to --

No, no.

Are there triggers or any kind of criteria you look at as to when you'll do incremental debt or stock buybacks?

Debt or stock buybacks?

No, I think, Ashwin, if we look at it, we've said this over the last several quarters, we have three primary uses of our capital that we look at.

One is investment in the Company, either through acquisition or R&D investments.

And the second is, second and third are the debt and equity opportunities.

I think of those three, we still believe that the investment in the business is still the primary use of our capital going forward.

And we will evaluate each quarter kind of some opportunistic, opportunities, I guess, to buy back debt and equity based upon our visibility of that current quarter plus several quarters out.

As I said in my comments, that may or may not include additional buybacks in the future periods.

So there are no specific triggers.

I think from the debt perspective, we likely are facing a refinancing event in June of 2011, so we continue to evaluate the debt, the cash buyback that is a dollar-for-dollar exchange on that refinancing risk.

But if we can continue to get returns of 9% or 10% pre-tax and also get the benefit of the gain being deferred for multiple years because of the recent federal stimulus package, it makes it that much more attractive.

So long answer is that we continue to look at different opportunities dependent upon what we see for the next several quarters.

I'll just add, Randy, we do see and continue to believe in these economic times an extremely strong balance sheet is important to us.

You'll see us be prudent how we use our money both from how we spend it in the business and how we deploy the capital.

But we're still focused on growing the business and we'll spend money when we find those right opportunities from an acquisition perspective.

But as evidenced by our debt repurchase, we saw that as a very solid return and an opportunity for us, for really optimizing our balance sheet in the near term.

In other words because it's opportunistic, it's not in your guidance, there's nothing explicit in your guidance?

That's exactly right, Ashwin.

There's no implicit buybacks of debt or equity in my guidance, correct.

Okay, thank you

Thank you, and our next question comes from the line of Shyam Patil with Raymond James and Associates, please go ahead.

Hi, good evening.

My first question is around what drove the revenue upside from an internal perspective this quarter and if you could help us understand how much of the 9% growth was organic versus inorganic?

Let me make sure I understand your question.

So your question is, say it again on revenue, please.

It looks like the revenue came in a little ahead of what I was looking for.

And I was just wondering if it was also ahead of sort internal projections as well and what might have driven that?

And then separately, if you could give us a sense of what organic growth was in the quarter versus acquired growth?

Sure, I think from a revenue standpoint, it is relatively consistent with our expectations, probably slightly better than some of our expectations.

That's mainly because of some very strong print, print revenues for the period.

Many of our clients have rate increases in the first quarter.

That gives us very strong print revenues as well as we had one client that we did some mailings for around some income tax matters that they take care of.

And I think it's, from an organic versus acquisition-related revenue growth, if you remember from our guidance, we were essentially projecting flat organic growth for the year.

Most of our revenue growth was going to come from acquisitions.

That really is the source of the growth in the first quarter.

Got it, okay.

You talked a little bit about operating margins being down throughout the year, which you also mentioned last quarter as well.

I was wondering if you could go through the various factors that are going to impact margins again, and if we should expect that to improve in 2010?

So on the margins itself, I think that the key things that could impact the margins, as I've laid out in our guidance are first investments in human capital.

I think we continue to evaluate investments in certain areas.

I think the second is the timing of hardware and software purchases and also the next one is probably continued investments in print, color print technologies.

Those are the primary variances around the -- expectations around expenses and also if we remember from the previous call last quarter we indicated that our guidance does include various scenarios around a DISH renewal.

So our margin, both on the revenue and the margin would also take that into consideration.

That's another potential factor to the margins in the out quarters.

I think also from a 2010 perspective, we haven't provided guidance for 2010.

I would just reiterate what I've said in the past which is we're always looking for ways to improve our operating performance whether it be operational, improvements in efficiencies and processes or cost-cutting measures.

So I would say that going forward, we're looking for ways to improve the margin over what we would expect to do in 2009.

And, Shyam, as we've commented in the past, there will be some benefits associated with the data center as one-on-one component, but as we've said, it's enough to help pay back what we're putting up front.

That should be some benefit back to the operating margin.

Okay, and my next question is around DISH which you talked about briefly earlier.

Can you talk a little bit about what hurdles might have led to not getting a multiyear deal as you expected in the previous renewal and things you might be able to do this time, or your level of confidence in getting a multi-year renewal this time around?

And then also along wit that are there any other areas within DISH that you think you could also win with this potential renewal?

Shyam, I would say our number one focus is just cementing the core relationship that we have today and building on what's really been close to a 14-year relationship in supporting their growth.

The specifics of what items were challenges to us at the end of the year I don't really want to go into any specifics, but it's just that some of the terms and conditions that both sides were needing.

We just couldn't come to agreement at that point.

As we've come into this year, we continue to be very focused on continuing to service them and look for those areas where we can be in agreement of how we can service them for the long term.

And then those discussions continue, but the pressure of the year-end timing that was in front of us back in December of 2008 has really been removed so it's given us more time to make sure we take a prudent process on this.

I will tell you we were actively engaged in supporting them in several projects in the first quarter that were key to the way they run their business.

We've been active in rolling out color statements to them.

We've been very proactive to make sure that we're supporting them as their business continues to evolve.

And I think that is what we will build our long-term relationship on is the types of daily customer focus we bring to them as well as our advanced solutions.

In regard to what could be added onto it, I think it's premature to talk about those types of items at this point.

Okay, thank you.

You bet

Thank you.

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

Please go ahead.

Hi, good afternoon.

I just had a quick question on Charter.

You answered one of the prior questions around the impact of those Charter migrations late in 2009 on revenues and indicated it wouldn't have a significant impact.

What about on the cost side?

Are there costs that you need to incur to get ready for those migrations that might need to be absorbed by your operating margin guidance?

Thanks.

Karl, there are some that are included in there that were related to some of the conversion efforts in preparation of that.

So there are some in there, yes.

Okay, and a second question, just on the overall environment, following some of the companies that serve the carriers, listening to them on their recent earnings calls, it doesn't sound as if the carriers are increasing their discretionary IT spend in the last couple of weeks or last couple of months.

I'm wondering on the cable-satellite side, is there any sort of thaw in terms of the spending cutbacks that you've seen in the last couple weeks or month, let's say, if you don't mind commenting?

Thanks.

You know, Carl I don't know if I'd say there's been a thaw.

We continue to be cautious around this just because the length of this recession and when that's going to come out is still in question.

But I will say that as evidenced by first quarter, and we have some strong one-time discretionary revenues, what we call discretionary around some of their rate management and other types of services like that, has shown the importance of that kind of customer service and managing the interactions that has helped us continue to have a strong business model and relationship with our clients.

But we're not seeing anything significant.

We still don't think there are large transformational products that are ready to be initiated.

The only thing that would run counter to that is when we have over 3 million subs of customers saying "I want to migrate and consolidate" that would somewhat run counter to that.

But because of the nature of how we roll those projects out for our clients, it's not a large capital cost for our clients and we can do it, and bring them operational efficiencies with relatively low operational impact to our clients.

So we don't see large transformational projects underway that really are going to kind of be a behavioral change versus what we've really seen for the last three to six months.

Okay, good.

Thanks for the color.

Thanks.

Thank you.

Our next question comes from the line of Tom Roderick with Thomas Weisel Partners.

Please go ahead.

Hi, guys, thanks, and good afternoon.

Hi, Tom.

Hi, Tom.

I wanted to return to the issue on operating margins here.

I was hoping you could provide some detail around what role acquisitions are playing on the overall operating margin structure for the Company.

So if we look at more recent ones, Quaero, Prairie and maybe even going back to the Comtech acquisition, to what extent are the acquisitions fully integrated?

Are they still providing a little bit of a drag on margins or would you say that some of these are already ahead of the corporate average here?

Thanks.

Tom, I would say that some of the ones we did back in 2007 are performing at better levels than initially when we bought the companies.

The more recent ones that we did in 2008 we're still working on a lot of the integration on the revenue side and expense synergies such that they're not performing at the same level.

Right now, if you looked at year-over-year, the first quarter operating margin and the first quarter operating margin of 2009, I think the majority of that decrease you could attribute to the drag that the acquired businesses are putting on that.

But, again, I think going forward those businesses are reflected in the first quarter margin of 2009.

As we make improvements on that, they should be additive to the margins.

Tom, this is Peter.

There have been some components of our acquisitions that have been initially fairly easy to integrate from a product perspective and others that are more complex.

We have a strong focus this year, building on what Randy said, to drive cross-sell of our products and we're starting to see that in multiple ways where, in the case of our fourth quarter acquisition of Quaero, we're starting to see our, some of our traditional modular products be presented to the Quaero clients and there are discussions and activities that are taking place around the Quaero capabilities for some of our cable clients.

Not ready to say that we have significant wins to announce anywhere around that, but early stages now are that we can come out and start talking cross-sell capabilities, and that takes a little bit to go.

We've been fortunate with Quaero and some of the other acquisitions to get those going in 2009.

Great, thanks.

One last question from me.

When you talk about growth opportunities, maybe it gets lost that there are opportunities outside the cable space.

Can you maybe reflect on what you've learned from the Quaero and Prairie acquisitions and provide an update as to which verticals you think there is a good opportunity to move into over the next 12 to 18 months here?

Well, I'm hesitant to point to any single vertical, but what I'd tell you is those that have consumer characteristics similar to what we've experienced around the capable and DBS space, a large number of consumer accounts, complex services or more complex services, a lot of engagements and interactions are ones that we think can trigger a broader use of our products.

But I will tell you that some of these new markets that we've been exposed to and that we now have clients in are being impacted by the economic downturn and are being cautious of how they spend money.

We're seeing stability, but it's -- some of them aren't growing at the same rate of what we maybe had thought in our earlier stages, but we still have confidence that there's things going on long term in these other markets, whether it be utilities, financial institutions, home security and so forth.

So with our cross-selling activities, I think we still have confidence that there'll be opportunities, but it's hard to say the timing of it with the impacts of the economy.

Great, thanks, guys.

Nice job.

Thank you

Thank you.

And our next question comes from the line of Shaul Eyal with Oppenheimer.

Please go ahead.

Thank you very much for taking my question.

Good afternoon, guys, good quarter.

Thank you.

Thank you.

Quick question for you, Pete.

You've been around probably for the past many, many years.

You've seen the Company in the early 2000s, if I recall correctly, and I did cover you guys at that time.

At that time, weathering the storm seems to be much more challenging than it is now.

Not to say that today it's an easy task, but regardless, you guys have been fairing very, very well over the past couple quarters.

In your view, what's the major difference between the early 2000s and probably late 2000s now as we start 2009?

Is it a product strategy?

Is it a shift or is it something where the customers have it?

What has changed over the past, let's say, five, six years or so.

I think there's probably a couple considerations.

Back in the early 2000s, we had the international software business of Kenan which had a lot more volatility in the nature of the business model.

That was one piece.

I think the other thing that's probably even more core to us these days, when we look at our business model, we have clients that have elevated their focus on the customer, their consumer experience, their customer care, the engagement with those customers.

And that's multifaceted both, one, because our clients have more competition than they have had in the past, which elevates that importance, and then, secondly, the scope of services that our clients now can deliver to the consumer has grown so significantly that the complexity of servicing those customers has become an increasing issue for our clients to be able to do it in an effective way.

As we've rolled out a variety of products to be able to manage those touch points across the Web, the paper statement, the call centers, every place there is a customer interaction, it's made us really valuable to our clients in those aspects and it has helped find those small incremental ways to grow that maybe weren't there back in the early 2000s for our traditional domestic business.

I think it's probably as much an impact of the more macro dynamics of what our clients are facing and what we've evolved to as a product set and then that coupled with we've taken a lot of the Kenan business we had back in the early 2000s by the disposition of that in 2005.

Fair enough.

Just one final question, you talked about market share gains within your press release, given that there aren't too many traditional, or there are just a few traditional players within your market segment.

Is it basically on the expense of these guys, or are you taking share on the expense of some of the internal R&D of your customers or is it all of the above?

Well, just looking at the share, market share that we have and what the traditional competitors have to move what is effectively 3 plus million shares says is that we've picked some up from our competitors and so, that's what's the drive on this.

You can see that with 2 plus million subscribers coming from Charter, that's clearly coming from a competitor's solution set and we just like the endorsement that Charter's giving us for what we deliver on a day -to-day basis and what we can do for them long term.

Got it.

Thank you very much, and good luck.

You bet.

Thanks, Shaul.

Thank you.

Our next question comes from the line of Donna Jaegers with D.A.

Davidson, please go ahead.

Hi, guys.

Thanks for taking my question.

I got two quick ones.

You guys, I think, do the billing for Time-Warner Cable in Beaumont and that's where they've been testing their bandwidth caps.

I was just curious if that necessitates any other services from you?

You know our solution set, Donna, can support out clients as they go to those variety of services, whether it's -- if they ever want to go to a rated type service, which I know is a very hot button with Time-Warner these days after some of their discussions they had a couple weeks ago as well as the caps.

But we're capable of supporting our clients as they evolve the types of ways to go to market with their product sets.

That really kind of goes to my prior comment that I made before.

Our clients' offerings are only going to become more complex and we think we're very, very well positioned to support that as that happens.

Okay, and then just on your guidance on the operating margins, is it mostly the spending on the data center transition that's really pulling down margins going forward?

No, Donna, if you look at the margins that I provided, I gave one on a non-GAAP basis, which really excludes the data center altogether.

So if you look at the 18.6% non-GAAP operating margin for the first quarter, that excludes the data center and the guidance of approximately 17% going forward, non-GAAP, excludes the data center.

The data center has no impact on that.

If you look at it from a GAAP perspective, absolutely, it has a significant drag on it.

Okay.

But the investments and the people and the timing of the hardware and the software and the investments in the print business that would be the main culprits behind the margin declines then?

Yes.

We look at those investments not as culprits.

(laughter)

Sorry, and then just one last quick one.

The data center transition, you guys expect to finish that up by the end of the year?

No, consistent with our expectations as we mentioned when we first announced this, Donna, last quarter, is that the agreement with First Data runs through the end of June.

So we're working through the time frame of 2009 and the first part of 2010 to transition off.

It is June of 2010 that our relationship with First Data runs through.

Okay, great, thanks guys.

Thanks, Donna.

(Operator Instructions).

Our next question comes from the line of Scott Sutherland with Wedbush Morgan Securities, please go ahead.

Hi, this is [Sahil] sitting in for Scott.

Thanks for taking the question.

Most of my questions have been answered, but any thoughts and do you have any plans using your cash flow given that you mentioned investment in the business as priority one in the current environment?

We don't, we continue to look at M&A opportunities.

We are, as I mentioned earlier, and as Randy commented, we're looking to be prudent with the use of our cash, but we do believe with our footprint of, and broadness of what we can do from touch points for customer interaction management coupled with our desire to grow into additional markets, we will look for areas that will help accelerate and accentuate that, but nothing to comment or give direction on at this point.

Thanks, and if I have time for a quick follow-up.

What services, you mentioned a few, but what do you see having the most increasing signs across the verticals?

One of the things we've seen some early signs of interest in is the building out on top of what we do from an invoice presentment and how that extends to the Web care.

We've had success with our cable clients and our communication providers around really managing and extending the capabilities to self-care and e-care for the consumer.

We're going to explore to see if that has merit to drive in the markets.

But it's still somewhat early, so we'll see how that plays out.

We have some of those capabilities today and we can build upon those.

Thank you.

You bet

Thank you.

(Operator Instructions).

One moment, please.

I show no further questions in the queue.

I'd like to turn the call back over to management for any closing remarks.

Thank you, David.

I'd like to close on behalf of the management team and all the constituents of CSG to say thanks for the support.

We continue to be very focused on managing this business for strong operational performance on behalf of our clients, meeting their future needs of services, both from their delivering new products and services and their ability to do it efficiently.

We look forward to continued success as we go into the second quarter and the rest of this year.

Look forward to reporting next quarter.

Thanks

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

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