CSG Systems International Inc (CSGS) 2009 Q4 法說會逐字稿

Welcome to the CSG Systems fourth quarter conference call.

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

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

(Operator Instructions).

This conference is being recorded today, Tuesday, January, 26, 2010.

I would now like to turn the conference over to our host Liz Bauer, please go ahead ma'am.

Thank you, Jeremy, and thank you 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 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 revision to these forward-looking statements in light of new information or future events.

In addition to factors noted during this call a more comprehensive discussion of our risk factors can be found in today's press release as well as in our most recently filed 10-K and 10-Q which are all available on the investor relations section on 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 by 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 the use of our 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 CEO, and Randy Wiese, our CFO.

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

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

I'm pleased to report that CSG continues to execute well posting fourth quarter revenues of $128 million and non-GAAP EPS of $0.40 per share.

For the full year total revenues were $501 million and non-GAAP EPS was $1.64 per share.

Our 2009 results demonstrate the strength of our solutions, client relationships and business model.

This year we generated over $150 million in cash flows, invested over 14% of our revenues in research and development, extended our relationship with our second largest client, Dish Network, and increased our market share in the cable space.

These results reinforce CSG's commitment to creating shareholder value.

2009 was not a year in which retreated in the face of IT budgets being cut.

We believe that our value proposition as a Company providing highly scalable, fully integrated, outsource solutions that maximize and monetize every customer interaction allows our clients to successfully execute on their business objectives.

Moving market share and securing long term relationships in this ever changing market is not easy in a business environment in which decisions have been put on hold.

However our focus and commitment to doing what is right for our clients, like continuing to invest in our people, R&D and capital expenditures continue to pay off.

For 2010, just like 2009, we are committed to creating shareholder value by growing revenues, profits and cash flows, and we plan to achieve this by executing on three strategies.

First, we'll expand what we do for our clients as the leading provider of customer interaction management solutions to North American communication providers.

Second, we plan to grow our relationships with the providers and vertical markets where we already have relationships and finally we will improve the profitability of our business.

Let me give you an update as to how we are performing on each of these strategies.

On November 30 we announced that we extended our relationship with Dish Network through December 31, 2012 for billing services and through December 31, 2014 for print and mail services.

In addition, the new agreement includes an option to extend the billing services contract for three more years through 2015 and migrate to our next generation ACP platform which currently supports CSG's other 34 million customer accounts today.

We believe that this option provides Dish with the greatest opportunity to achieve its long term objectives as its business continues to grow and evolve.

This extension provides visibility into an important relationship for CSG as there's been a lot of uncertainty, speculation and rumors surrounding our relationship with Dish.

This eliminates the major over hang on the stock and with this contract extension, CSG does not have a major contract up for renewal until December 31, 2012.

I'm also pleased to report that in the fourth quarter we converted 2.4 million new customers under our ACP platform.

With the most recent conversions, the entire charter customer base is now being processed on our next generation customer care and billing platform.

During 2009 we converted a total of 3 million customers under our solutions and so far we have 400,000 customers to convert on to our system during 2010 and we expect those to be completed by this summer.

As everyone in this business knows, converting to a new billing system is a highly complex undertaking that involves some risk.

Over the years our Company has converted approximately 30 million customers on to our solutions.

This experience allows us to put the processes in place to insure for smooth conversions.

However, processes alone do not guarantee a successful outcome.

That is where our people truly do make a difference and I would like to take this opportunity to thank our people and our clients for their hard work and their dedication during these conversions.

While our conversions represent pure market share gains, we also continue to increase our footprint within our existing client base with our complementary products and services.

This quarter Time Warner Cable signed a contract for a WiMAX solution, enabling them to roll out their WiMAX offering to their customer base.

And Comcast signed for our WiMAX and commercial services offerings.

For many of our clients, commercial services is one of the fastest growing areas of their business as they continue to successfully take market share from telcos with their small and medium business offerings.

And the rollout of a WiMAX product is an important step for our clients in enabling consumers to get their content on any device at any time.

These are significant wins for two reasons.

First they validate our strategy of continuing to invest a significant amount of our revenues in R&D even during difficult times, and second these wins reinforce the value that our solutions bring in helping our clients roll out new revenue generating services.

Next let me share with you some recent successes we've had in growing our relationships with providers in other vertical markets.

As you may recall, at the end of 2008, we acquired Quaero to help broaden our solution suite with advanced customer intelligence capabilities that help our clients predict a customer's behavior and then act upon that information.

These capabilities allow our clients to operationalize this information and engage in more timely interactions, no matter what the communications channel whether it be text, print, phone or internet based.

This quarter our customer intelligence team extended their relationship with a large media company for the third year.

We are helping this company add incremental revenues by providing a more intelligent, relevant and actionable data analysis for ad sales, content development and an improved customer experience for their interactive website.

Our efforts are aimed at increasing consumer engagement, resulting in increased revenues.

Next our content direct solution continues to be a part of many firsts.

This solution delivers an operating platform, partner ecosystem and business model that helps content owners, aggregators, programmers, distributors and advertisers promote and extend their brand, monetize video content in multiple ways across the Internet and engage consumers through increasing interactivity and social networks.

During the fourth quarter, our content direct team was an important part of the merchandising system for FLO TV, Qualcomm's direct to consumer personal TV offering that was launched this past November.

Our solution allows users to activate their account, manage their device registration, the services they receive, programming and care features, as well as determine how and when they will pay their bill.

As we've stated before, working with content providers in bringing their brands and content to the online world provides a tremendous opportunity for CSG to apply our customer interaction management solutions and high volume transaction processing experience to this emerging market.

We are able to be involved in the ground floor of a large and evolving industry that is sure to shape how consumers receive their content for many years to come.

Helping these providers to monetize their customer experience differentiates CSG from other providers today.

Finally let me share with you some ways in which we continue to focus on improving the profitability of our business.

First we continue to transition many of our complimentary solutions to modular open systems applications that provide our clients with the flexibility that they require while still leveraging the cost structure of having a massively scalable high volume transaction processing engine handle the functions that do not require realtime processing.

This right sizing of our hardware and applications enables our clients to grow while allowing us to provide them with the optimal cost structure.

Today over 50% of our applications are running in an open system environment.

Next we've always had a proven reputation for being strong operators and prudent financial managers.

It's a balancing act in particular when you are faced with the business environment that we were operating in in the last year.

While many companies slashed their CapEx and R&D spend, we made the decision to continue to invest in our solutions and in our operations to position us even stronger for when the economy recovers.

We began our migration to a new data center to improve the quality of our infrastructure and reduce our cost.

This required a significant financial commitment, but one that we felt was important to provide our clients with the quality of service that they have come to expect from CSG.

This is also one of the several components that will allow us to achieve our long term operating margin targets of 18% to 20%.

And finally with outsource solutions, scale is a main driver to leveraging your cost infrastructure.

Our investments in advanced capabilities like electronic bill presentment and payment, interactive messaging and commercial services pay off as our clients add more and more customers to these solutions.

As our clients begin to provide their products and services over new devices and channels our investments in our product catalog, customer analytics and wireless solutions pay off as clients' business become more complex and they need a seamless and integrated solution.

The net result is that as our clients' businesses grows either in sheer size or complexity, we benefit from the investments we've made in these highly scalable and robust offerings.

In summary, our 2009 results demonstrate that even in a very difficult business environment our value proposition resonates with service providers looking to maximize and monetize every customer interaction.

While we believe that the business climate in 2010 will continue to have its challenges, we are confident that we have the right solutions, people, and business to be successful again.

From an investor standpoint our story is straightforward.

We entered the year with visibility into 90% of our revenues.

We have no major contracts up for renewal until the end of 2012.

This business generates strong cash flows which allowed the Company to be opportunistic, whether that be from an M&A or stock and debt repurchase stand point and most importantly we continue to work everyday to earn the right to do business from some of the largest communication providers in the world.

We demonstrated again this year that hard work and commitment pays off with contract extensions, market share gains, and an expanding footprint within our clients' operations.

We at CSG appreciate your continued support of us and look forward to continuing to deliver results for our clients and shareholders alike.

With that, I'd like to turn it over to Randy to review our financial performance for 2009 and our outlook for 2010.

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

I'm happy to share with you the financial results for the fourth quarter and full year 2009 as well as our outlook for 2010.

Overall our financial results came in either in line or better than our guidance.

We hear that many companies struggled to grow or even maintain revenues.

CSG was able to grow our business as a result of our investment in our solutions and the quality of the service that we provide our clients.

In the midst of a tough economic environment, we continue to invest in our solutions, our people and our client relationships so we will be in a position of strength when the business environment improves.

Now let's talk about the financial results.

Full revenues were approximately $128 million representing an increase of 3% year-over-year.

Revenues for the full year 2009 were approximately $501 million.

This represents a 6% increase over 2008 and exceeded the high end of our revenue guidance for the year.

Approximately one half of this annual revenue growth is a result of organic growth within our existing client base with the remaining portion due to the timing impact of our 2008 acquisition of Quaero and DataProse.

Revenues generated from Comcast and Dish Network were 24% and 18% respectively for both the fourth quarter and full year 2009 relatively consistent with the third quarter percentages.

Our non-GAAP operating income for the quarter was $23 million or 17.6% margin and for the full year 2009, was $90 million or 18% margin, both in line with our guidance.

This non-GAAP operating income excludes expenses related to the transition of our data center amounting to approximately $6 million for the quarter and $15.5 million for the full year.

As we anticipated, we saw a slight decrease in our fourth quarter operating margin percentage from the third quarter level.

As I will discuss in a few minutes we see margin expansion opportunities during 2010.

Our GAAP operating income for the fourth quarter was $16 million or 13% margin and $75 million for the year or 15% margin.

Our effective income tax rate for the fourth quarter was 35% in line with expectations.

Non-GAAP EPS for the fourth quarter was $0.40 which compares to $0.44 for the same period last year.

Non-GAAP EPS for the full year was $1.64 which is in line with the high end of our guidance.

This compares to $1.65 for the full year of 2008.

Just as a reminder, this non-GAAP EPS measure relates to continuing operations only and excludes the expense related to our data center transition efforts, gains from the repurchase of debt securities, and the non-cash interest expense related to the amortization of the original issue discount for our convertible debt securities.

GAAP EPS from continuing operations for the fourth quarter was $0.24 and $1.22 for the full year.

Turning to the balance sheet.

As of December 31, cash and short-term investments were $198 million, up $41 million from September 30.

This sequential increase can be attributed to strong cash flows generated from operating activities, including positive changes in our working capital items primarily as a result of favorable timing from client payments at year end.

Our year-to-date cash flow from operations were $153 million which well exceeded our guidance of $120 million to $125 million.

Absent the impact of the favorable timing items I just mentioned, our full year cash flows would have been in line with our guidance expectations.

We spent $6 million on capital expenditures in the fourth quarter bringing our full year total to $40 million.

Included in these amounts were CapEx related to our data center transition efforts of $3 million in the quarter and $16 million for the full year both consistent with our expectations.

During the quarter we did not repurchase any of our convertible debt or outstanding shares.

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

Next I'd like to provide you with our initial full year guidance for 2010.

Overall our expectations are consistent with initial planning targets that we provided a few months ago.

For the full year 2010 we expect the following.

Revenues will range between $520 million and $530 million, which represents growth of 4% to 6% over 2009 our revenues.

This guidance reflects an acceleration in our organic revenue growth rate from 2009.

As we look out to this year, despite the continued uncertain economic environment, we feel confident in continued solid growth in our business, reflective of the benefit of the successful subscriber conversions completed in 2009 and continued adoption and use of our advanced customer interaction management solutions.

Continuing on, we expect our full year 2010 non-GAAP operating margin percentage to be in the 18% range.

The mid 18% range.

This represents a 50 basis point improvement over 2009.

We expect our non-GAAP operating margin in the first half of 2010 to be comparable to last half of 2009 and then improve in the second half of 2010 after we complete our data center transition efforts and continue to gain scale in our business and rollout new product functionality.

We believe our operating margin exit rate heading into 2011 will demonstrate significant progress towards our long-term goal of sustained 18% to 20% operating margins.

Our 2010 non-GAAP operating margin guidance excludes impact of the data center transition expenses that currently are estimated to be $22 million to $25 million for the full year.

This represents an increase over 2009 as we further intensify our efforts leading up to our planned migration in mid 2010.

These expense amounts are based on the best available estimates at this time and may fluctuate up or down during the year as we continue executing on our transition plan.

The negative impact of these costs on our 2010 GAAP operating margin is estimated to be approximately 450 basis points resulting in expected GAAP operating income margin in the range of 14% for 2010.

Next for our non-GAAP EPS, beginning in 2010 we have modified our calculation of non-GAAP EPS.

Going forward, in addition to excluding the non-cash amortization of the original issued discount for our convertible debt security and excluding non-recurring items, such as our data center transition expenses and the repurchase activities related to our convertible debt securities, the calculation of our non-GAAP EPS will now also exclude the non-cash impact of stock-based compensation and the amortization of acquired intangible assets on a tax effected per diluted share basis.

We expect our non-GAAP EPS for 2010 under this new method to range between $2.05 and $2.13.

Using the same methodology, the comparable measure for 2009 actual results is $2 per share.

We expect our GAAP EPS from continuing operations for 2009 to range between $1.13 and $1.16.

Next our expectation or cash flows from operations are $100 million to $110 million which includes a negative impact of about $13 million related to the cost incurred for our data center transition efforts.

As CFO, this is one of the things I love about our Company.

We have a great business model with highly predictable and recurring revenues which results in strong steady cash flows year after year.

Our expectations of capital expenditures for 2010 is in the $15 million range with approximately $3 million of this related to our data center transition efforts.

This guidance reflects an effective income tax rate of approximately 35% for 2010.

An increase from 2009's full year rate of 34%.

At this time, we do not assume any significant changes in our guidance for diluted shares outstanding from the level that we experienced in 2009 or in our current capital structure.

To summarize, we are pleased with our results for the fourth quarter and full year of 2009 and look forward to another strong performance in 2010.

Our business continues to operate solidly during these challenging times as evidenced by our increasing revenue growth, operational excellence and profitability, strong cash flows, solid balance sheet and market share wins.

We are excited about the positive strides we are making and we believe that we are well positioned to create shareholder value.

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

Thank you, sir.

(Operator Instructions).

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

Please go ahead.

Thanks.

Hi Peter.

Hi Randy.

How are you doing?

Clearly, you are doing quite well in your core cable billing business, no question about that, gaining share and so on, but I just want to step back and look at it on a full company basis and given your current market position, how do you view your realistic market opportunity?

What kind of growth rate can you get to and if possible, separately for the core billing as well as all the businesses you acquired over the last couple of years.

This is Peter.

Just to make sure I understand your question.

What you are asking is when you look at our business what type of growth rate should we be striving for based on the market opportunities we have in our traditional market and the growth in the new markets that we are in.

Right.

You already have significant share in the core cable space.

So the growth you can get there, my understanding is it's relatively limited, so maybe you can get 5%, 6%, 7% growth there.

Can you get that consistently and then how can you super charge it by doing more with the non-cable side?

I think to start on this is that naturally you don't have the traditional subscriber organic growth in the communications space in North America like you would've ten years ago when we saw both on the wireless businesses that were out there as well as just the growth and the video penetration and then high speed data on top of it.

It's a market place for a traditional market that is really driven by our clients evolving their businesses and the new types of products that they deliver which still we believe have lots of upside to it.

When we think about what is going on with WiMAX, what is going on with commercial services, what is going on with new really business model changes and the types of consumption by consumers around products, we think there's growth there.

I can't tell you that it's rocketship growth because one is our business model is one that grows at a rate consistent with our clients as well as because we get paid on a per drink model you get a different type of growth rate than if you were a pure software model.

But in that market we still believe that there's -- when we look at it, we still target to get high single digit growth numbers in there and dependent upon how that market evolves, and what happens with market share gains, there could be opportunities to accelerate it, but right now we like participating in that space and it is one that we continue to seek to get more from our clients both in the footprint that we do it for, as well as the types of services that we provide for them as well.

Now naturally when we look at markets outside of cable and DBS, we look for markets where we don't have as much market share or there is not a dominant provider like CSG is in the cable space and we look for things that could have higher growth, but you are also trying to grow a smaller base that has to overcome the large base that we have on the cable market.

So we think that there's growth on those, but today we don't have the sheer credibility in those spaces like we do in the cable space and those will take longer to build.

We like our chances in there because we have proven ourselves with our clients to be able to be strong providers of solutions that help our clients solve problems, and that's what we are looking to do in these other vertical markets.

I don't have a number to tell you because we haven't given long-term growth rate numbers, but when you look at what we are doing in a tough economy and Randy has got us with guidance showing 6% on the top range, we feel good that there is chances with stronger markets, that this is a business that people should be around.

Okay.

That's a fair answer.

I just wanted to dive a little bit deeper into the businesses that you acquired, and seems as though the performance in those businesses took away a little bit from your cable growth in your cable market share gain.

Was that cyclical?

Just trying to understand it.

So should we expect to see sort of a cyclical rebound as well as we head into recovery?

When you are saying that our growth in our acquired businesses had an impact of reducing the overall growth rate of the Company and dissipating what we did on the space in cable, and I don't think that's true.

We had higher growth rates in our acquired businesses than what we did in the cable space.

Did those businesses have some challenges because of the markets they serve and maybe not growing as fast as what we have seen on a telecommunications market, that has very significant dynamics going on that has been able to draw up on our needs, yes, we haven't seen the same type of growth rates we would have expected, but they are higher than what we had out of cable and satellite and ones that we still believe have great promise for us and ones that we continue to support and invest.

This is Randy.

Just a couple of data points for you.

The percentage of revenue generated outside of our core cable business in the fourth quarter was about 15% of our total revenues which is up from 13% in Q3.

For the full year 2009, it's about 15% and it was about 12% last year.

So we are seeing some growth there.

To Peter's point, there still is some good growth there and this is even in the down market.

So if the economy turns, these are the types of businesses that we believe can accelerate their growth as the economy gets better.

Let's leave it at that.

Maybe offline; I was kind of talking about organic growth, but a couple more questions.

One is I wanted to ask you about sort of the fourth quarter cash flow, there was a pull forward I assume from the fourth quarter.

Right?

There is some.

There was two things.

There was probably over $30 million that really timing add-ins is what I would call them.

One was a large prepayment from a client, that's really a pull forward from several years out.

We've received prepayments in the past, but this is somewhat unique, it's very large, so there's about $20 million of that and I would say there is about $10 million of pull forward from 2010.

So what does that make your 2010 cash flow guidance?

I didn't see that.

I had it in my comments.

It was 100 to 110 and on top of that is that there's about a $13 million drag on that number for the data center transition cost so you have to add that back if you are trying to normalize it and then if you want to try to take into consideration some of this timing, you have to take that if you are trying to normalize it year-over-year.

On a normalized basis there is growth in cash flow?

Yes.

Historically if you look at our cash flows, it's very predictable from the operations portion of the business, there's fluctuations in the working capital because we have large clients and if one pays early or late at a quarter end, it can cause a significant fluctuation in working capital.

But if you look at over a long period of time, the working capital changes for CSG as a Company are pretty insignificant and we generally have cash flows from operations that average in the 115 to 125 range.

And that questions timing of the data center transition, what's the second half benefit or the annualized benefit from that?

Can you talk about it now that we are closer to it?

Well, a couple of different things.

As we do with any material client, or supplier contract, we are not going to talk about the specific pricing aspects, but I will tell you a couple of data points I think you can look at.

One is that there's going to be both operational benefits and pricing benefits that would lend themselves to our operating margin and what I will say is we'll probably spend close to $40 million investing in this transition over 2009 and 2010.

And I will tell you that the benefits that we will get financially over the five year period have a positive return on capital, so you can look at it from that perspective.

Also in my comments I indicated that we will have an expansion in margins in the second half of 2010, a large portion of that margin expansion relates to the financial benefits from the data center, which are both operational and financial in pricing.

Great.

Sounds like I should look for an upside as usual to your estimates, then.

We'll move on to the next question.

Thank you, sir.

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

Please go ahead.

This is Chris Coe for Tom.

Hi Chris.

Good job on the quarter.

Just a couple of performance versus expectations for the quarter.

If you look at the 2.4 million submigrations, or conversions that look pretty speedy there versus what you had originally said about being done by the first half of 2010.

I guess that still holds.

Relative to your expectations, did you happen to convert those guys faster than you had hoped?

I would say that they are pretty much on schedule.

We anticipated we would get a lot of those done at the first part of Q4, with the remaining amount -- number we had in our backlog will take place in the first half of 2010.

Okay.

So that's pretty much on plan.

Chris, one of the things when we do conversion guidance, we are always cautious because the dynamic has to be our operational readiness in conjunction with our clients and so we don't want to get ourselves out beyond just what we think we can do.

We have to get in front of what we think the clients are ready to do.

So you may find us giving a broader expectation there and outperforming what you think we can do.

That sounds completely reasonable.

And then on the data center transition cost for 2010, similar type question there.

That 22 to 25, how does that compare against your plan?

I don't remember if you provided guidance before as far as what you expected the cost to be in 2010, but that seems like it's higher if my memory serves me correctly.

Was there something unexpected there?

We had not previously provided any insight into 2010.

So it's the first time we've disclosed and it is consistent with my expectation in the original business case that we put forth when we made the decision to move.

It's accelerating over 2009 mainly for two reasons.

One is that the efforts will intensify as we get closer the migration date and also as we get closer to the migration date there might be one or two months of redundant data processing costs that we have to purchase, so that will cause the cost to be higher.

That makes sense.

Just to clarify on the question Ashwin had, as far as the margin goes, you had mentioned earlier that it's going to be both operational and data center cost savings.

So is it fair to assume that in the back half when margins pick up a little bit that there would be a COGS benefit and OPEX benefit?

A cost and OPEX?

COGS.

COGS.

Yes.

I'm sorry.

Yes, exactly.

The benefits will come mainly through cost of goods sold.

Got it.

As far as 2010 you mentioned Comcast and Dish 24% and 18%.

Can you provide any color as far as what you expect Dish to be for 2010 as a percentage of revenues?

Haven't really provided guidance on that, but I don't think we would expect it to fluctuate significantly.

We did provide guidance (multiple speakers) to the contract.

We did indicate that we expected revenues to be relatively consistent year-over-year from Dish from 2009 to 2010.

So you can do the math.

The percentage shouldn't change significantly and you shouldn't expect it to change significantly for Comcast either.

Thank you.

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

Please go ahead.

Great.

Thank you.

Good afternoon.

Hi Scott.

The first question I had in your 4% to 6% growth guidance for next year, is the majority of that is organic or how much is organic growth?

That is all organic.

There is no acquisition to assume in that, and there is no longer any timing from the past acquisitions.

So it's all organic.

Great.

When you look, you talked about the content provider opportunities out there, and if you look at other verticals that data processing platforms can be applicable to like utility, what is the size of materiality or timing of the vertical opportunity that you see out there?

Well, the markets will be dependent, our sizing of the markets will be dependent upon the application of our solutions to their business needs and not everything we see of our product offerings have applicability to the markets that we are looking at.

So that could have an impact of how to size it and we are going through that stage right now, evaluating the full scope of where we think those opportunities are to exploit.

But when you look at the sheer size of the utility space and you see the number of consumer accounts and the number of service providers, we see it as a large market place that is going to go through change and with that change will would be a need for new types of systems whether they're how you service a customer over the web, how you interact with them through the different electronic channels or even how you have the AR management and billing platforms.

The world is going to change in that space as well as what we saw happen in the communication space and it's one that we think has a great interest for us to see if we can exploit.

Okay.

My last question.

You mentioned in the last question that most of these subs were brought over early in Q4.

Obviously there is some timing of subs being brought over, but looks like pricing has come down per sub a little bit more this quarter than previous quarters.

Can you talk about pricing?

I know you renewed some contracts and you were gaining share from other customers.

Is that from pricing of a combination of things or is it just timing out there?

Scott, I'm not sure where you are coming from with the lower price per sub.

Help us understand how you are coming up with that metric because that is something we don't disclose.

Right.

Your revenue went up a little bit less on the processing side by 2%.

Your subscriber count went up about 6% from the previous quarter, your subscriber account.

One aspect of the subscriber conversions that we went through, Scott, was the Charter subscribers, we were already doing some of the print and bill presentment services for them and so the incremental revenues that we were going to be getting from Charter were for a lesser scope incrementally than what we were doing for other clients.

So incremental revenue per sub coming on would be reflective of a smaller number than what you would have seen on an average, but I don't think it's reflective of a downward pricing pressure.

It's a component of services that we were delivering would probably be the biggest piece that you would see coming through there.

Another thing to add Peter, is there is a bit of timing.

They were not all on the first day of the quarter.

So there is some timing as well.

They are coming late in one of the months in the quarter, so it's difficult to make that comparison without that information.

Right.

Absolutely.

That explains it and it's good to hear.

Thanks.

Thank you.

Our next question comes from the line of Shyam Patil of Raymond James.

Please go ahead.

Hi this is [BJ Corey] filling in for Shyam.

I just had a couple of questions.

In terms of visibility, you mentioned your next major contract renewal in 2012 or December of -- 12/12.

Do you have any specific color as to what are your contract expiration dates for your three to four largest customers and if you've ever had a customer that terminated early?

The major accounts that we talked about in the past and several are publicly filed as well.

The Comcast contract goes to the end of 2012.

The new Dish contract we just signed goes to the end of 2012.

The Time Warner contract goes through March 2013.

And Charter is through the end of 2014.

And in the Dish contract the 2012 is for the processing portion, the print and mail goes through the end of 2014.

Right and from a perspective we've never in my 13 years with the Company had a major client say they want to discontinue doing services with us and move to some other platform.

We've had surprisingly strong retention rates when you look at what happens in other markets and what other service providers do and it just really goes to the quality and the level of services of what we provide to our clients.

I think the other point that is worth mentioning is that in each of those four contracts there is some degree of guaranteed payments regardless of whether they are processing on our system.

There's on every one of those -- the most recent was the Dish.

We announced that there was guaranteed commitments under that contract for the full 2012 time period.

One of the most important things is when you look at the type of services and products that we provide to our clients and how it's embedded in their operations and the strength of what they have to do for their end consumer and you add to that the quality of service that we deliver, that is probably the strongest point for us as we think about the sustainability with those business and those clients wanting to partner with us as we go forward.

Great.

You talked a little bit about how Comcast and Time Warner are expanding into WiMAX coverage.

Can you talk more about your wireless strategies for 2010 and beyond?

Our focus on the near term, when we see our clients like Comcast and Time Warner really evolve the networks that they are going to deliver their products over.

We will be in sync and in line with where they are in the near term.

We are not positioning ourselves to try to go out and become the customer interaction management platform and AR management for a Cingular or AT&T Wireless or Verizon.

That is not where we believe our strength positions.

But we have great strength in helping our clients as they evolve forward into their business models and their networks that they deliver services over and the type of services that they deliver, and we have done that through the years.

And we believe for some of the next generation providers like a FLO TV, they'll approach the business very differently than the traditional distributors and providers of those services would and we think we are well positioned to help them as well with a very different distribution model especially with a web-based offering like they are doing.

Thanks a lot.

Thank you.

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

Please go ahead.

Thank you.

A question for Peter.

Just to get at least me more comfortable with the assumed uptick in the organic growth rate in 2010.

Can you give us color on the demand back drop you are seeing from the core cable satellite clients?

As you may know, Amdocs last week talked about the carriers beginning to pick up some what their discretionary IT spend.

I am curious what you are seeing from your client base on the IT and marketing discretionary costs?

You bet.

Without a doubt there's still cautiousness in the marketplace, but as evidenced by what we did in the fourth quarter which is signing Time Warner and Comcast to use services for their next generation of offerings, both business and WiMAX, we think that's a sign that they continue to invest in their business and position themselves to deepen their relationships with their end customers and build new end customers.

And the competitive marketplace that they face is causing them to think about how they prepare themselves for that and we've always been a good partner that allows them to invest as they are successful versus having to take large up front capital expenditures to try to build something brand new.

And so we are seeing demand, but it's still cautious demand.

It has to be things that they know they will get near term return on and in those cases where they have that business need and our business model matches up, we think we have good opportunities to drive the growth.

The other piece in the nature of our business model is that as we have success in 2009, it feeds our growth rate for 2010 and as we talked about the sub growth that we achieved and brought on at the end of 2009, those 2.4 million subs, those help drive 2010 growth rates for us.

So we have the benefit of being rewarded for the work that we did in 2009.

They turn into revenue units in 2010 which is just the sheer nature of this business.

You are always planting seeds that are going to grow into revenue the next year.

If I can ask a follow-up to Randy.

Randy, to hit your call it 18.5% 2010 non-GAAP margins when the first year you said it would approximate the back half of 2009 which is 17.5% to 18%, it means your second half 2010 non-GAAP operating margins, if my numbers are right, are 19% to 19.5% and I would like to ask you as we look out into 2011, is there any reason to believe that that wouldn't be a good starting point for our 2011 non-GAAP margin assumption, the 19% to 19.5%?

I don't think I specifically mentioned the exit rate, but your math makes a lot of sense and I think based upon our business and how predictable revenues and the predictable cost base is going into 2011, I think some of your analysis makes sense to me.

We try not to get too far out ahead of ourselves in what our projections should be, but your math is logical, but we will look for areas that we can invest that could help accelerate the top-line growth.

The reason we try to stay one year out is if we see opportunities, we'll want to invest in those.

We don't know what those are today, but we try to be very smart in the way that we invest and drive returns that elevate the overall business.

I agree Peter.

We have shown even in this most difficult economic environment that we will continue to invest and you should expect that going forward.

Some of your logic that you put into your numbers makes sense.

Okay, maybe I can sneak in a third.

You have almost $6 of share in cash now and you indicated that during the quarter you didn't buy debt or stock.

Can you give a recap of your, what you intend to use your cash for in 2010?

Absolutely.

I guess first I would preface we see the cash balances that we finished the year with as really reflective of the strength of our business and the cash flow generating capabilities of this business which you referenced.

First of all we continue to believe that having a strong balance sheet is important in these times both because of the economic instability and what that provides as opportunities for us to think about how we invest, both from organic investment as well as acquisition investments because we really do believe first and foremost that we are in a position to grow the opportunities of this business and capabilities in the markets we serve.

So first and foremost we are going to look to invest and acquisitions continue to be a viable means for that for us and we are going to preserve a strong capital base for that.

At the same time we'll look at as a secondary measure what are the opportunities for us to really give us the best capital structure and whether that means to take advantage of stock repurchases or debt repurchases, we'll do that as well.

But first and foremost is growth in the way that we really expand the opportunities of this business from a market and capabilities perspective.

Thank you.

Thank you.

Our next question comes from the line of [Kerry Kelly] with Ironworks Capital.

Please go ahead.

Thanks for taking my question.

For the 2010 differences between GAAP and non-GAAP, could you just break out the EPS impact of the various exclusions?

You bet.

It's in the press release, but I'll go ahead and give you the components if that would be beneficial for you.

The GAAP EPS was 113 to 116 was the GAAP EPS.

The reconciling items, I'll give you on the high and low range to help yourself out here.

The data center transition expenses are $0.42 on the low and $0.47 on the high.

The amortization is --

I got it there.

I see it now in the back.

I'm sorry for wasting everyone's time.

A follow-up to that.

Recent comments from AT&T management have been bullish on their IPTV.

I don't know if you have any insight as to what is happening in the field in the market shift between cable, satellite and IPTV and how you will position yourselves to try to capture some IPTV as well.

Could you comment on that?

We don't have relationships with AT&T or Verizon, either one of those traditional telcos for their IPTV or FIOS offerings and I can only comment their strength from what I read in the trade rags because I can't give you anything from a proprietary information from our clients.

We do know that they are increasing number of absolute subscribers that are buying their service, but there's an equal probably impact backed by our clients, the traditional cable and satellite operators, in driving extended product into the end consumer and then attacking on the business services side and going against the traditional telco.

IPTV we believe has an overall evolution whether it's going across the traditional line with almost a subscription package like AT&T and Verizon are going to do and that is traditional of what the cable operators provide as well.

But IPTV also elevates and brings forward a way for the content owners to come to market directly and we think we can play in that space with our content direct offering.

And as you look back and see some of the success we talked about earlier on the call today, what we are doing with FLO TV and others like that are ways for us to play in that IPTV space.

Great.

Thanks.

Good quarter.

Thank you.

Thank you.

(Operator Instructions).

Our next question comes from the line of DeForest Hinman with Walthausen and Company.

Hi, I had a couple of questions.

One was on the expense expectations in terms of the data center transition.

We announced that almost six -- about four quarters ago.

Has that expense come in line where we thought it was as a whole or has it been a little bit less?

And then I have a couple other ones.

It's pretty close, I mentioned this earlier, that it's pretty close to our initial business case that we did to substantiate the move.

There have been no surprises.

And then on the strategy with the cash flow being cognizant of the fact that we let our revolver expire.

We have a convertible that is putable in June of next year.

We are in a net cash position, I believe, at this time.

How do we look at refinancing opportunities and then that being said, how are we looking at share repurchase opportunities given the fact that we've greatly improved our contract outlook, at least for the next three years, and the fact that in 2007 we were buying the stock very aggressively at prices that were higher than it is right now.

Well, first of all, I thank you for your summary of the strength of our business.

I like the way you said it.

First of all, we do believe overall in having a strong capital structure and being in a net cash position effectively with our outstanding debt that we have and net those down, puts us in a position to be very, very strategic in the way we think about making sure we build even a stronger capital position as we go forward.

I'll let Randy comment about some of the things he considers on it.

Before he does, when we think back to some of those repurchases we made two years plus ago, that's when we were redeploying the proceeds from the sale of a division that we had, and we didn't have immediate need for that capital at that point and there was so much capital we thought it was most prudent to return to the shareholders even at a higher price.

Randy, I'll let you add on to that.

Just to finish that point, that is exactly right.

If you look at the stock repurchases after we completed that 2007 buy back is more in line with what you would expect from us, which $500,000 or $750,000 is more of a normal year for us than buying back $350 million in two years.

From a capital perspective on the revolver that did expire last September.

We have not renewed it yet.

We are looking at options as to whether or not we do it.

We do not have an immediate need for the capital so we are taking our time in making sure we do the right thing with the revolver.

With respect to the convertible debt, as you mentioned it is putable to the stack -- or it is putable to us in 2011.

We have substantial cash on hand and cash to be generated that we can service that if we let it run its course, but we are looking at opportunities.

We mentioned this in the last couple of quarters that there are tax advantages for us to refinance the convert during 2010.

We're able to defer some of the taxes on that if you take out the existing convert with a new convert.

So we are looking at different options.

The beauty of this business is it's a very strong capital base, so we have many options to look at different capital structures and the timing in which we put them in.

Okay.

That being said, if acquisition multiples that you are looking at are higher than the multiples of our stock, are we willing to hold off on acquisition opportunities and repurchase our own stock?

Can you help us understand that?

Our goal is to do accretive transactions and that is our primary goal, but dependent upon what the aspects of the transaction may be, there could be situations we would consider doing something that would be slightly dilutive on the front end, but that we could quickly drive to accretion.

But those are two broad ranges and I am very conceptual at this point, but we have to keep our minds open because we have a business that we think can be added to and today we don't always like our valuation metrics that we have for the strength of this underlying business that you outlined earlier.

And so, we'll look at things that can help optimize those valuation metrics and at the same time if we can't get performance through that, and we continue to have the strength of the balance sheet, we have shown in the past our willingness to return those monies to the shareholders through stock repurchases and that is something that we'll continue to keep as an option and a priority for us absent the chance to grow the business from an acquisition perspective.

Thank you.

Thank you.

Thank you.

And Mr.

Kalan, I show no further questions at this time.

Please continue.

Thank you.

I just want to stress to everybody again we are very proud of what we accomplished in 2009.

We like our positions for 2010 and we are excited for the next four quarters and we'll come back and show the type of plans that we have and executing on those plans.

So thank you for your support and we look forward to future reportings that we have in the coming quarters.

Bye.

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

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