CSG Systems International Inc (CSGS) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by.

Welcome to the CSG Systems first 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 April 27, 2010.

I would now like to turn the conference over to Liz Bauer, Vice-President of Investor Relations.

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

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

In particular, these will include statements regarding our projected financial results, our ability to meet our client's needs to 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 risks 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 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 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 and our non-GAAP reconciliation table, on our website which will also 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 Liz and thanks to everyone for joining us on the call today.

I'm pleased to report that CSG continues to execute well, posting first quarter revenues of $130 million and non-GAAP EPS of $0.49 per share.

Our revenues increased 5% from the first quarter of 2009, and 2% from the fourth quarter.

Our revenue growth for the quarter includes the market share wins that we had last year which resulted in adding 3 million new cable and multiplay customers onto our next generation customer care and billing solution.

We believe that our value proposition providing highly scalable integrated outsource solutions that maximize and monetize every customer interaction will help fuel our growth in the future as we continue to help our clients execute on their business objectives.

And now more than ever, our clients businesses are becoming more complex.

Operators today are continually investing in and expanding their network capabilities so that they can provide their customers with more choice in how they access their services.

We continue to see more devices introduced that give the consumer the freedom to obtain their content anywhere at any time.

Our clients are focused on providing an even more engaging and rewarding experience so that they are the source that consumers turn to for their communication and content needs.

Consumer spending on communication services are projected to increase to $200 per month in 2015 from the current spend of $130 a month according to [StrataCast].

Not surprising to us video spending represents one-third of that consumer spend.

We along with a host of others believe enabling customers to have access to content and information on a multitude of devices will be a key contributor to that growth.

Cisco expects that 9% of all Internet traffic will be video content by 2013.

Research from Retrevo reinforces how viewing habits of some demographics are already beginning to change.

Today, Retrevo estimates that 23% of people under the age of 25 watch most of their TV online versus 8% of adults over the age of 25.

And as consumers have increasing choices from which they can obtain their content, providing a superior customer experience will be the differentiator between those companies that thrive and those that struggle.

Let me give you an update as to how we're helping our clients execute on these factors, which not only contribute to their success but CSGs as well.

As you may recall, at the end of last year we announced contracts with Time Warner and Comcast to roll out their WiMAX product to their consumers.

During the first quarter we began implementing our WiMAX offering with Time Warner in several of their markets.

While the revenues coming from our clients WiMAX offerings will be nominal at first due to the fact that it's a brand new service, as consumer adoption increases we'll benefit.

And the key to increasing adoption will be enhancing the user experience through ease of use, convenience, flexibility and expanding the types of content available to the customer.

An example of this is the recent initiative in the New York area.

Comcast, Time Warner and CableVision joined forces in the New York area market to make their WiFi offerings more accessible and easier to use by allowing their high speed data customers to roam for free on each other's networks.

We believe that this type of cooperation between communication providers should accelerate consumer adoption and create a loyal and valued customer base over the long term.

Giving consumers the ability to access content in an easy and engaging fashion anywhere on any device will continue to drive opportunities for both our clients and CSG, which leads me to how we're helping providers outside of our cable and DBS industries provide for a superior and differentiated consumer experience.

Our content direct solution provides an end to end content management and monetization platform for content creators, aggregators and distributors.

One of our leading clients for our content direct solution is Ultimate Fight Championship.

UFC's goal is to make mixed marshal arts a worldwide phenomenon, much like soccer.

One way that they will accomplish this is by utilizing all distribution channels available and by creating an interactive and engaging customer experience.

During the first quarter we helped UFC launch a full screen experience delivering high definition live video to both domestic and international markets.

During the second quarter, we'll provide the core merchandising and content management platform as they launch their brand via applications for a host of devices, including the iPhone and also continue their global expansion into the Asian market.

In addition, our platform will be the backbone behind the significant advertising campaign that UFC is doing with a consumer products company aimed at driving additional UFC merchandising sales whether that be in the form of pay per view events, merchandise or other UFC content.

Our experience with companies like Ultimate Fight Championship and our recently announced deal with Universal Sports establishes us as an early participant and innovator in a large and emerging market.

We believe our solutions and people put us in a good position to help companies maximize and monetize their brand, their products and their services.

And that includes more than just enabling content to be viewed.

It also includes providing a customer experience that is not interrupted thereby ensuring customer loyalty to products and services in a consistent revenue stream.

Last quarter we signed a contract to provide our interactive messaging solutions to Microsoft through our relationship with AT&T.

This contract is significant because it's the first time that Microsoft has used voice messaging for their customer contacts.

With this new contract, we'll support Microsoft's launch of an outbound calling campaign notifying XBox Live customers that their credit cards have expired.

As you can imagine, the last thing that Microsoft wants is to provide XBox customers with a disrupted service or a reason to go elsewhere for content.

And by thinking of the entire customer life cycle, from acquisition to collection, Microsoft is ensuring that customers have a superior experience resulting in a strong and loyal base.

Finally, let me provide you with an update on our efforts to continue to improve the profitability of our business.

First our data center migration continues to go well and is on track to be substantially complete by the mid summer, which should provide an economic benefit to us in the second half of the year.

Second, as is evidenced by our first quarter results, as we continue to add more customers on to our solutions, whether that's our next generation customer care and billing, content direct, or our interactive messaging platforms, scale drives operational efficiencies.

And finally, we've always had a reputation for being strong operators and being financially prudent.

With the strength that we're seeing in our core business combined with the strength of our balance sheet, we'll continue to invest in research and development to bring additional capabilities that will enable our clients to reach their business and customer experience objectives.

In a few minutes, Randy will share some of the recent activities that we undertook during the first quarter to put us in a position to have increased flexibility and opportunities to use our balance sheet strategically.

In summary, we're pleased with our first quarter results, we believe that our performance provides some insight into the quality of our client relationships, and the value that we provide to some of the leading companies in the nation.

During the fourth quarter and continuing into the first quarter, we've seen a change in the tone of businesses.

Companies appear more confident in the state of their own businesses and the economy.

As a result, we're seeing renewed interest in solutions that help drive employee productivity, provide for more engaging customer interactions and support opportunities for companies to deliver new services and generate additional revenues.

While all this sounds good, at the same time we've not seen accelerations in the sales decision making process.

Sale cycles continue to be extended which makes us cautious in declaring that the business environment has recovered.

However, based on what we are seeing into one quarter into 2010, we are confident that we have the right solutions, people and business to to be successful.

The characteristics of our business which contributes to our confidence include that we serve the leading providers in their industries through long term contracts.

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

And we continue to listen to our clients in the market to drive our R&D and mergers and acquisition investments.

We continue to generate strong operating and free cash flows and we have a strong balance sheet.

And last we continue to provide more and more solutions that help our clients operate more efficiently and effectively which translates into strong relationships and results.

We appreciate your continued support of CSG 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 the first quarter of 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 our first quarter and our outlook for 2010.

As Peter just mentioned, this quarter showed the benefits of many of the successes we had in 2009.

We are pleased with these solid results as we begin a new year.

They reflect key characteristics of our business, strong organic revenue growth, solid margins, consistent cash flows and an excellent balance sheet.

Now, I'd like to walk you through the financial results for the quarter.

Total revenues for the quarter were approximately $130 million representing an increase of 5% year over year.

There are a few things important to note when looking at these revenues.

First, this is the first quarter that reflects the full benefit of a successful conversion of over 2 million charter subscribers late last year as well as the recent renewed Dish Network contract, thus providing investors the ability to see the full impact of these two important client milestones.

Second, this 5% revenue growth is all organic and represents an increase from the organic growth rate of 3% that we experienced in 2009.

Revenues generated from Comcast and Dish Network were 24% and 18% respectively for the first quarter consistent with the fourth quarter 2009 percentages.

Our non-GAAP operating income for the quarter was $24 million or 18.5% margin.

This non-GAAP operating income excludes expenses related to the transition of our data center amounting to approximately $8 million.

This margin is slightly better than anticipated, due to the favorable timing associated with the hiring of personnel and equipment purchases.

Our GAAP operating income for the first quarter was $16 million, or 13% margin.

Non-GAAP EPS for the first quarter was $0.49 which compares to $0.50 for the same period last year.

As a reminder, in addition to the data center transition expenses we exclude on our non-GAAP operating income, our non-GAAP EPS also excludes stock based compensation, the amortization of acquired intangible assets, the amortization of the original issue discount on our convertible debt and any gains or losses incurred with the repurchase of our convertible debt.

There are two additional points worth noting on our EPS for the quarter.

First, our effective income tax rate for the first quarter was 38%, higher than our previous expectations of 35%.

This resulted in a negative impact of $0.02 per share for the quarter and was caused by a delay in the recognition of certain anticipated tax credits.

We expect to realize these tax benefits in later quarters so the difference is expected to be a matter of timing only for 2010.

Absent this impact, we would have experienced growth in our non-GAAP EPS year over year.

And second, the net increase in the interest expense related to our convertible debt transactions during the quarter was offset by the repurchase of 1.5 million outstanding shares of our common stock done in conjunction with the new debt offering, such that the combined impact of these transactions was neutral to EPS for the first quarter.

GAAP EPS for the first quarter was $0.03 which includes a book loss of $11 million per $0.20 per share as a result of the repurchase of $120 million of our 2004 convertible debt securities.

Moving on to the balance sheet.

As of March 31, cash and short term investments were $211 million up $12 million from December 31.

We continue to deliver strong operating cash flows with over $31 million reported for the first quarter.

We spent $4 million on capital expenditures in the first quarter, including $1 million related to our data center transition efforts.

As Peter mentioned earlier, we made several strategic changes to our capital structure during the first quarter.

On March 1, we issued $150 million of convertible debt due in 2017 with the primary intent to term out our previously outstanding $170 million of convertible debt before the expected put date in June of next year.

In conjunction with the new convertible debt issuance, we repurchased 1.5 million shares of our outstanding common stock.

Subsequent to our new debt offering, we repurchased approximately $120 million of our original outstanding convertible debt for $125 million.

This leaves approximately $50 million remaining of this issuance that has a put date of June 2011.

We will continue to evaluate repurchase opportunities for these remaining securities over the coming months.

These transactions allowed us to significantly reduce the level of debt that was subject to payment in June 2011 and extended the term from 2011 to 2017 on a substantial portion of our debt and at a reasonable cost.

One of CSG's strengths is certainly our solid balance sheet, fueled largely by our strong consistent cash flow generating business model.

These strategic changes to our capital structure further strengthen our balance sheet, and provide CSG with continued stable capital base as well as flexibility and resources to strategically invest in our future growth.

Next I'd like to review our full year guidance for 2010.

Overall, our expectations are consistent or slightly better than our guidance that we provided a few months ago.

Revenues will range between $522 million and $530 million, which represents growth of 4% to 6% over our 2009 revenues.

This guidance reflects acceleration in our organic growth rate from 2009 as evident in our first quarter results.

Based on the strength of our first quarter results and our visibility into the remainder of 2010 we are increasing the low end of our revenue range by $2 million.

We're slightly increasing our full year 2010 non-GAAP operating margin, again based on our solid financial first quarter results we now expect our full year non-GAAP operating margin will be approximately 19%, up from our prior guidance of the mid 18% range.

We expect our non-GAAP operating margin in the second quarter to be in line with the first quarter level.

This reflects a first half 2010 margin level that is better than previously anticipated, due to the favorable timing associated with the hiring of personnel and equipment purchases which are now expected to be at full stride during the second half of this year.

These higher costs in the second half of the year are expected to be more than offset by the positive impact associated with the completion of our data center transition efforts such that our margins are expected to expand in the second half of the year at the levels we previously anticipated.

We continue to 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 the impact of the data center transition expenses that are estimated to be $23 million to $24 million for the full year.

We incurred $8 million in the first quarter and expect most of the remaining amounts to hit in the second quarter with the completion of several of our migration efforts by mid year.

We will see a small amount of data center expense in the second half of the year as we wrap up these migration activities.

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 of approximately 14.5% for 2010.

Next we are increasing our guidance for non-GAAP EPS.

We now expect our non-GAAP EPS for 2010 to range between $2.13 and $2.19, up from our prior guidance of $2.05 and $2.13.

This increase in our full year non-GAAP EPS guidance rates to the higher than expected operating margins in the first half of the year as well as the slightly accretive impact of the combined activities related to our convertible debt transactions and related stock buy back that was completed in the first quarter.

We expect our GAAP EPS for 2010 to range between $0.99 and $1.03 which represents a decline from our prior guidance, primarily related to the book loss associated with the convertible debt repurchase that we completed in the first quarter.

This guidance also reflects an effective income tax rate of approximately 35% for the full year, consistent with our original expectations.

Next, our expectations for cash flows from operations for the year are $105 million to $112 million.

This represents a slight increase to our prior guidance consistent with our improved operating expectations for the first half of 2010.

These 2010 cash flows expectations include a negative impact of $13 million related to the cost incurred for our data center transition efforts.

Absent this impact our 2010 cash flows would be more in line with our normal historical annual levels of $115 million to $120 million.

Our expectations of capital expenditures for 2010 is approximately $16 million with roughly $3 million of this related to our data center transition efforts, in line with our previous expectations.

To summarize, we are very pleased with the results for the first quarter.

Our business continues to operate solidly as evidenced by our increasing organic revenue growth, improved operational profitability, strong cash flows and solid balance sheet.

We are excited about the positive strides we are making and believe that the strategic moves we made to our capital structure during the quarter leave us well positioned to create shareholder value.

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

(Operator Instructions).

Our first question from Ashwin Shirvaikar from Citi.

Good quarter and guidance.

Thank you, Ashwin.

And also, nicely organized earnings, so thank you, Liz.

Thank you, Ashwin.

So one question is to what extent do you now have the data center benefit in your guidance?

And then also the tax benefit, isn't that a tax benefit from paying down the $120 million on the convert?

Is that in your guidance also?

Two things, Ashwin.

The guidance this time and last time already reflected the benefit of the data center in the second half of the year, so there's really no change in my guidance this time or last time.

It does reflect the benefit and that's why you see the increasing margins in the second half of the year.

Second thing, on your question on the tax benefit, the tax benefit really is on the balance sheet as it relates to the convertible debt, it relates to the deferred tax liabilities, it does not come through the P&L it's really just a balance sheet benefit and cash flow.

Okay.

Okay.

So in terms of the cash flow benefit, then, is that timing in 2010 or 2011, can you talk a little bit about that just to clarify where I should put that in?

What you'll see is you started to see some of it in the first quarter so you can use that as the base to look across the rest of the year.

The benefit from the convertible debt that was issued in 2004 existed because we got a 90% tax deduction versus the coupon of 2.5, as a result of us buying back much of that debt, the deferred tax liability that existed for it is pushed out multiple years but you will see less tax benefit coming through on the cash flow statement as a result of this but you saw most of that impact hitting first quarter already.

So I think if you look at the first quarter and look at the deferred tax benefit coming through the cash flow statement, you can use it as your basis of estimations for the remainder of the year and actually going into 2011 as well.

The new convertible debt that we issued in March does not have the same tax benefit conventions.

Its a different instrument, so you won't see the same type of tax benefits coming through cash flow going forward -- sorry that's a long answer, but --

Trying to digest it here.

That seems to make sense.

I mean, I think we have already had some of that benefit but not all of it in our numbers here.

So one other question I have, more on the contract side, Universal Sports and then Peter talked about USC.

These kinds of contracts, how does the pricing work, how does the contract dynamics work, because these are not your traditional kind of contract.

So could you explain that a bit, and how does it change the -- sort of stability that we've come to expect have the revenues from the company.

You bet, Ashwin, this is Peter.

The nature of the business has got similarities to what we do for other clients where we're getting paid as we deliver the service, and it's transaction oriented so we're not doing large software transactions where we're recognizing revenue up front.

Its typically related to the business we're supporting on behalf of our clients, whether that's UFC or Universal Sports.

As their businesses grow and getting consumers to engage in consume content through these non-traditional nonlinear fashions, and they grow those subscribers or consumers using that, we'll see our revenues grow consistent with that.

We're getting paid a transaction fee based on the service being delivered, it could be a charge per transaction, or a percentage of the economic stream that comes through with the client.

But it's similar in fashion to what we do on our traditional businesses, that it's directly related to the number of accounts or consumers that we're supporting.

And so you'll see a repeatable aspect to it or a recurring revenue model as our clients build sustainable business models.

So, and we can follow-up later on this, because I don't want to hog the call, but do these contracts then sort of less, give you less visibility than your traditional cable contracts?

In the near term, absolutely, because these are developing business models for people like Universal Sports and UFC.

They have multiple channels, Ultimate Fight Championships provides their content through cable providers and satellite providers on pay per view events, they're getting distribution through cable channels such as Spike and I believe a few others so they have other revenue models they're getting today for the distribution of their content, and they're using this as a direct to consumer model which is in its early stages of growth for consumers who want to really circumvent around their other traditional ways of getting content.

So it doesn't have the visibility just because our clients haven't built the revenue models up, they don't have the strength of consumer acceptance to the same level they do through their traditional distribution.

But as their business models kind of build kind of repetition with consumers we're going to benefit through that and we'll get that visibility as their business models mature.

Okay.

Got it.

Thank you.

Thank you.

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

Hey guys, this is Chris (inaudible) for Tom Roderick.

Hey Chris.

Good afternoon, good job on the quarter.

Thanks, Chris.

No problem.

You mentioned that content product or Ashwin touched on it, so to piggy back on that, I don't know if I missed this but did you guys give out a percentage of your non-cable revenue this quarter?

Approximately 16% for the quarter.

16% okay, great.

So it looks like revenue was a little bit higher than we were modeling and also street consensus.

Would you say it's fair to say that a lot of that beat was due to, was it just normal timing issues on the processing side or were there actually a noticeable pick up and demand for whether it be interactive messaging or content products.

Two primary things for that, Chris, one is this this is the first quarter in which we had the full benefit of the subscribers that we converted on in the second half of last years, so that's probably the largest item, but we also had some good demand on some of other other products, IM.

Some of the marketing services.

So it was a good quarter from a demand standpoint but also the benefit of the successes we've had in converting those subscribes in the second half of the year really came through in the configuration quarter.

Chris we've got such a broad offering whether it's what we do on paper, electronic, through work force management solutions or interactive messaging as Randy mentioned, we've got a broad platform of products that are, that can really speed demand pick up or consumption, so there's not typically one or two items in this quarter that we've seen, it's pretty broad, that's just general consumption that's been a benefit to us.

That's definitely good to hear.

And then as far as, I was wondering on Amdoc's they've been pretty bullish on the cost -- I don't know about cost of processing, but cost of hardware with their new CES8 release.

Have you seen any change in the competitive environment based on CES8 yet?

I don't know about their efforts to bring CES8 to the marketplace.

From a hardware perspective, I don't think that's a key piece that we look to be competing in.

Probably most importantly, Chris, is that we've had some very good wins with our assets, our ACP application, our commercial services, our wimax offerings that are an extension of our existing next generation platform.

So, from a competitive position, we continue to see wins and good foundational relationships with our clients that we continue to build from.

Great.

Last and most importantly, when do you think ten people mix it on the field.

I think spring training starts or the summer camps start in July, so I think you'll be at the practice facility at this that point.

That's certainly been a hot topic in recent weeks.

Good to know it's a big topic in San Francisco.

Hey man, that's what ESPN does, that's what cable does, right?

National distribution.

And congratulations an your guys merger with Stifel Nicolaus.

Stifel, man.

I don't how many times I've tried to correct it.

Thanks.

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

Great, thank you, good afternoon and congratulations on the improved revenue growth.

Thank you, Scott.

So sorry about the background noise.

I'll ask a couple of questions and then go back on mute.

First of all, can you, you've been migrating subscribes over from cable operators, is there anymore existing operators that can migrate over anything else in the pipeline on the broadband marked.

Secondly, you've got the capital structure now redone with the new debt structure what's your thoughts on getting more active on the M&A market again.

Well, first of all on the M&A market, we continue to keep our eyes open for opportunities on that.

We're not active in 2009.

And part of our decisions around what we wanted to do on our convertible debt as Randy termed it, "term out that debt" early so that we had really flexibility and stability in our capital base and not have to worry about whether the markets are open next year, that was something we felt was important to us as we planned for how we invest in the business both from a R&D perspective, as well as an M&A perspective.

So we have teams outlooking for opportunities that are natural extensions and fit for what we need as businesses.

The marketplace we're supporting today is going through significant change, the communication providers are really seeing an expansion of consumer choice that they have to prepare for, letting the consumers choose both the content, device and the place in which they consume it.

And so we are looking at how we're positioned for that to make sure that we are well positioned with our clients as their businesses evolve.

From a sub perspective, we're also looking to pick up more market share from our clients and from prospects but there's not much to talk about at this point.

I think that would be early to give any type of reference on those topics.

Okay.

Great.

Thank you.

You bet.

Our next question comes from the line of Sterling Auti with JPMorgan.

Thanks, high guys.

First a couple of housekeeping one.

Tax credits you mentioned, is that specifically related to R&D tax credits that you are waiting to come back on?

Exactly, you got it, Sterling.

So basically if we wanted to be on the safe side should we think about 38% until we see some movement on getting that reestablished?

Depends how fast Congress gets at it.

I think the, you should expect it to occur in the second or third quarter.

Okay.

And then in terms of the data center migration, I think we talked about the idea that you'll be rolling over in some of more and more processes will come up on the new data center as you kind of phase into the new one and off the old one.

Is there actually some of the processes actually up and running on the new data center, and how quickly should we think about adding additional processes in each of the next couple of quarters.

I think the way to look at it has been a phased approach where we've moved some of the open systems prior to the main frame migrations scheduled for the second quarter so we've made a lot of progress to date.

When we complete the migration in the second quarter, we will be substantially done so you'll see the major benefit of the transition occurring in the first half of the year.

There are some wrap up activities we would will do on some of the smaller systems that will happen in the third quarter, but the first and second quarters will be essentially be done.

The vast majority of our benefits will be recognized starting third quarter.

Yes, the costs related to the transition are really quite heavy in the second quarter.

You can see that from my guidance.

So the cost to transition will be mainly done in the second quarter and the benefits from the transaction will be mainly in the second half of the year.

Okay.

And then on the customer interaction deal you talked about with Microsoft.

If you said it I missed it.

I'm kind of curious, how long was the gestation period for that deal given that it's kind of a new segment and obviously I think for them it's a new entray in terms of the way they're interacting with the customer.

You are right.

Absolutely a new way them to think about engaging with consumers.

Historically they haven't been really in the forefront of acting with the consumers.

It's interesting dynamic because we've had a business relationship with Microsoft for several years because of the platforms that we use as part of our solution set.

We worked closely with them as part of our content direct offering so we've had some business offerings there.

And we've been able to build off of that as well as the AT&T relationship that we have to help bring our offering to them as they've seen a broader working relationship with us.

So I don't want to say this was a long sell cycle that went through it but it's not that we had to walk through the door and they had to get to know us for this first time and we brought this together.

Last question from my end you talked about kind of a bit of a change in tone, not ready to say listen it's all behind us, but in terms of when you look at your core cable customers and look at the conversations that are going on, is that change in tone just around the fact that they're ready to increase the activity in certain projects, or is it because they feel more comfortable on the subscriber base.

What's kind of driving that change in tone and when were you hopefully that leads to increased signing on the dotted line for new initiatives?

I would kind of relate it to what they're seeing in their business, that their interactions with their customers, with how they think about enhancing the customer experience in the competitive environment, how they think about new services they're going to bring, whether it's wimax or any type of new content offering is causing them to think about how do they manage that relationship differently.

So we're seeing an increased focus in their business operations around things that we can help them with, and hence the conversations are picking up associated with that.

I'm hesitant to say I think it's a three, six, nine, 12 month period, because there still need to be comfort on their side that the investment is going to get the immediacy of return that they typically seek in these type of economic times.

Thank you.

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

This is [BJ Coy] filling in for Shyam.

Hey BJ.

My first question is how should we think about software and services gross margins going forward?

I think you should look at the historical margins, they probably are anywhere from 25% to the low 30% unless there's a large software transaction that occurs in the quarter and then they pop up, but we don't foresee that, so I think if you look at what's it's down historical I think you're pretty safe.

Okay, great.

My second is how big do you think the market services will get over the next few years and are there any other areas that they are marketing services in which you are not currently involved in but see opportunity?

Just to make sure from a definitional perspective, when you say marketing services, can you help define what your using as that?

Well, more on your for your main business in cable and satellite.

Well, in our marketing services business just to help kind of define it from our perspective, that's really a scope of capabilities that we provide to our client to help them deliver messages, traditionally through the paper forms, and through their statements to put information in the statements to help them and their partners bring brand awareness and awareness of product.

It's difficult to define that market because we've had great success on the paper side but we believe there's the ability to extend that to the electronic side and the web side as well.

But when we look at it we've got a large client base in which we're doing quite a few statements and we'll just continue to look to broaden those interactions both within the paper based medium as well as the electronic mediums where we are today.

So we think it's got some growth opportunities but there's not a way for us just to fully define how big the market is because a lot of it electronically is untouched today.

Thank you.

You're welcome.

(Operator Instructions).

The next question comes from Karl Keirstead from Kaufman Brothers.

Hi, this is [Shakeal Long] filling in for Karl.

Thanks for taking my question.

You bet.

I have a question on your margins.

So you increased your margin assumption from mid 18% to 19%.

Can you give as you little more color what's driving some of that market expansion, you repriced a big part of your book with Comcast and Dish.

I would think it's some sort of price concessions.

What's helping you exactly on the margin line that's giving you that confidence there?

Sure, couple of things, one is the benefit of the additional subscribers we converted last year, you get some scale from that and we're seeing the full scale of that happen in the first quarter.

Also on the Dish renewal, there was no price concession, if you recall from last year, we talked about this, that the expectations year over year is it would not be impactful to our margins as all.

These are two factors I think you touched on.

The other is we didn't anticipate making investments in the first half of the year that have been a little bit pushed out to the second half of the year so our expectations of performance for the second half of the year are very consistent with what we had before, we just performed better in the first half than we anticipated when we gave the guidance a couple of months ago.

Okay.

Just reinforce that this is the first full quarter of the new Dish contract and the Dish revenues were 18%.

Pretty consistent with fourth quarter last year.

Okay.

Thanks.

That's helpful.

Okay.

Thank you, our next question comes from the line of Shaul Eyal with Oppenheimer and Company.

Thank you, hi, good afternoon guys, good quarter, good guidance on wrap.

Thank you.

Quick question, two quick questions.

Next month obviously the National Cable Show, anything new and again not trying to front that event, any new products announcement, anything that we could be expecting during that event?

Shaul, this is Liz, obviously.

(Laughter).

You'll be seeing us show some of the (inaudible) assets that are focused around much of our customer using their data and helping them operationalize that data and use it more effectively so I think that will be one of the key things you'll want to look as well as the entire interaction management suite how it's integrated together.

I think the most interesting thing will be how we're looking at those marketing analytics and allowing our customers use their data in a more efficient and effective manner.

Got it.

Again, kind of for the sake of front running fiscal 2011 you are sitting down with your customers, kind of long term planning, what are they telling about their thinking about 2011 from a product, from a strategic perspective or is it too early at this point?

Well, I would tell you that what we see is the same thing you hear in the marketplace today.

They're talking about small to medium size businesses and how they look to take advantage of that marketplace, how they look to expand their networks through what their doing with wimax and you see it happening with wifi hot spots that they're putting up.

They are looking for ways to extend the accessibility of their networks and through that that's going to give them the ability to reach their customers in different ways and then continue to layer on products that reach out to their customers to deliver content and information.

So, we see that as a build from where they are today, and it's not a big bang new product, it's a natural extension of what they have already started with their network extensions and what they're doing with the small to medium side businesses.

Got it.

Thank you very much.

Good luck.

Thank you.

(Operator Instructions).

Okay.

I show no further questions in queue, I'd like to turn the call over to management.

Thank you, Douglas.

I want to thank you know, everyone on the call for their support.

We are very excited about what we were able to do in the first quarter as we continue to come through a down economy, and we feel good about our outlook for 2010.

And we look forward to future reporting of results as we get through the next quarter.

Thanks a lot.

Thank you, ladies and gentlemen, this concludes the CSG first quarter conference call.

If you'd like to listen to a replay of today's conference, please dial (303)590-3030 or (800)406-7325 and enter the, the access code 427-1380.

ACT would like to thank you for your participation and you may now disconnect.