CSG Systems International Inc (CSGS) 2010 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the CSG Systems second quarter 2010 results conference call.

(Operator Instructions).

This conference is being recorded today, Tuesday the 27th of June, 2010 -- pardon me, July 2010.

I would now like to turn the conference over to Ms.

Liz Bauer, Vice President of Investor Relations.

Please go ahead, ma'am.

Thank you, Lorenzo.

And thanks to everyone for joining us.

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

These will include, but are not limited to statements regarding our projected financial results, our ability to meet our clients needs through our product, 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 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 our most recently filed 10-K, and 10-Q, which are all available in the Investor Relations section of our website.

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

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

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

For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K.

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

Before I turn it over to Peter and Randy, I want to encourage everyone to save the date for our Analyst Day.

We will be holding our Analyst Day, on Thursday, December 9, at the London Hotel in New York City.

We hope that you will be able to attend.

With that, I'd now like to turn the call over to Peter.

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

I'm pleased to report that CSG continues to execute well, posting second quarter revenues of $131 million, and non-GAAP EPS of $0.53 per share.

Our revenues increased 5% from the second quarter of 2009, and we experienced growth over our first quarter of this year also.

Equally impressive, we've also been able to expand our probability measures during this time frame.

As we assess the overall business environment today, we continue to see our clients spend on those areas that have a well-defined return on investment, and those areas that drive revenue growth.

However, we've not seen an increase in spending on those items that are discretionary in nature, like advertising or marketing services.

Our clients businesses are changing at a pace that this industry has not experienced in years.

This can be attributed to competition, consumer choice, and the need to simplify the complexity involved in delivering a broad and deep number of products and services to the end consumer.

In order to help our clients meet the demands of this dynamic and changing marketplace, we continue to invest in those areas that enable our clients to succeed.

We believe that our value proposition, providing highly scalable, integrated 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.

Our business strategy is three-pronged.

First, we will expand the relationships with our existing clients.

Second, we'll expand our presence in new targeted verticals through existing relationships.

And finally, we'll improve the profitability of the business.

Let me share with you some highlights from the quarter that demonstrate how we're executing against these strategies.

First, this quarter we signed a contract with Time Warner for our commercial services solution.

Our solution will enable Time Warner to enhance the roll out of their voice and high-speed data offerings to small and medium businesses, enabling increased flexibility, reporting and servicing of this market.

Our cable clients are having tremendous success at the market long-owned by the telephone companies, by providing competitively priced and feature-rich, all IP-based packages.

Second, in this last quarter, we reached a significant milestone as a result of our clients success, in providing a voice solution to the marketplace.

CSG now processes and manages the interactions for over 10 million voice customers on behalf of our clients.

Enabling our client success is a key motivator and driving force for our employees.

These solutions that we provide to our clients are aimed at helping them to drive new revenue streams, and increasing their share of their consumer spend on content, communications and information.

But we don't just focus on helping our clients increase revenues, we also provide them with solutions aimed at helping them drive operational efficiencies, and an improved customer experience.

This quarter we signed a contract with EastLink, a Canadian cable operator to deploy our Workforce, Dispatch, TechNet and Handheld GPS across it's national footprint.

And another client completed the full deployment of our Handheld GPS device across one of their regions.

Our Workforce Express solution is the most deployed workforce automation product in the cable industry.

It delivers a strong ROI for our clients, as it drives operational efficiencies and cost savings, by routing the right technician, with the right skills, to the right job through automation, and does so with highly effective scheduling to improve customer satisfaction.

Next I'd like to share with you a couple of our successes outside of our core market.

This quarter we helped launch a new service from cloud gaming provider, Onlive.

The new service is making 23 popular console games available to consumers through the Cloud.

Our content direct solution, which provides an end-to-end content management and monetization platform for content creators, is the merchandising and commerce platform behind the new service.

Onlive joins companies like Ultimate Fight Championship and Universal Sports, in providing entertainment directly to the consumer, as well as through more traditional delivery avenues.

We continue to see more over-the-top providers looking for ways to monetize their content, and create more engaging interactions with their customers.

Our Content Direct solution, provides a turnkey approach for these content and entertainment providers to make their products available to consumers, free from the restrictions of a specific device, for a specific location.

We believe that we are very well positioned in this market that is truly in it's infancy.

Another area that we continue to make progress in, is the pharmaceutical and healthcare sector.

Quaero, our customer engagement agency was selected by a leading research organization, to provide a comprehensive marketing solution aimed at increasing it's market share within the biopharmaceutical market.

The significance of this contract is threefold.

First, it validates our belief that helping providers make their customer and prospect data more actionable, can lead to increased revenues and profits.

Second, it reinforces our positioning with Quaero, that providing more than a technology solution is valued and needed in the marketplace.

We're delivering a comprehensive marketing solution for this Company, including the creation of a sophisticated marketing database, that can be used to determine the best and most efficient manner to acquire new customers in a multi-staged approach.

Additionally, the Quaero team is providing strategic marketing counsel, delivering valuable customer insights, and helping the client identify and market through the preferred communication vehicles, to move prospects from awareness, to interest, to desire, to action.

And finally, it reinforces the point, that every communication with a prospect or customer, is increasing in importance, and can be maximized and monetized, by creating more relevant and meaningful interactions.

We continue to believe that helping our clients understand more about how their customers interact with them, and then putting plans in place to enhance those engagements, can lead to higher customer satisfaction and increase in customer value.

Finally, CSG has always been known as a strong operator and prudent financial manager.

This past quarter, we saw a solid improvement in our operating margins.

This movement -- this improvement can be attributed to the successful migration of a significant portion of our data center to the new facility, and our continued focus on expense management.

As everyone in the tech industry knows, migrating from one data center to another is a very complex and time-consuming activity.

Thanks to our highly skilled team, and the cooperation of our clients, this task was executed in a highly organized and efficient and successful manner.

We've also strengthened the sales and marketing areas of our business with the recent addition of a proven sales leader to our team.

I'm pleased to announce that Mike Henderson has joined our management team as our new Executive Vice President of Sales and Marketing.

Mike has over 20 years experience in the communication space with companies like Telcordia, ADC Telecommunications, and several others.

He has a tremendous amount of experience, both domestically and internationally, in accelerating revenue growth, establishing strong channel partners, and expanding into new markets.

Mike adds a dimension to our management team that should position us well, as we look to leverage our solutions into new markets, and look for new ways to help our clients grow their businesses.

In summary, we're pleased with our second quarter results.

We believe that our performance demonstrates that we continue to expand our footprint with our core business, and into new markets.

We continue to improve the productivity and profitability of our operations with a major portion of our data center migration now behind us.

And we remain on track, to have this completed in full during the second half of this year.

As we look into the future, we like our position for several reasons.

We served the leading providers in their industries, through long-term contracts.

And in fact, we have no major contracts up for renewal until the end of 2012.

We continue to listen to our clients and the market, to drive our R&D and M&A investments.

We continue to generate strong operating and free cash flows.

We have a strong balance sheet.

And we continue to provide 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 delivering 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 second 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 second quarter, and our outlook for 2010.

During this quarter, we saw a combination of solid revenue growth, and continued margin improvement to yield strong bottom line results.

This quarter demonstrates the key characteristics of our business, solid organic revenue growth, increasing 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 $131 million, representing an increase of 5% year-over-year.

This 5% revenue growth is all organic, resulting primarily from the year-over-year subscriber growth in our systems, and continued adoption of our newer solutions.

Revenues generated from Comcast and Dish Network were 25% and 18%, respectively for the second quarter, relatively consistent with the first quarter.

Our non-GAAP operating income for the quarter was $25 million, or a 19.3% margin.

This non-GAAP operating income excludes $11 million of expense related to the transition of our data center for the quarter.

This represents an improvement over our first quarter comparable non-GAAP operating margin of 18.5%, as we experienced a good portion of the operational and financial benefits from operating in our new data center, following our successful migration efforts during the quarter, and continued good expense management, while still growing our revenues.

Our GAAP operating income for the second quarter was $15 million, or an 11% margin.

Non-GAAP EPS for the second quarter was $0.53, which compares to $0.50 for the same period last year.

As a reminder, in addition to the data center transition expenses we excluded in 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 for our convertible debt, any gains or loss incurred with the repurchase of our convertible debt, and new this quarter, the impact of one-time favorable adjustments to our income tax reserves.

Let me provide a bit more color on this latter topic.

For the current quarter, our effective income tax rate was 2%, as a result of the final outcome of the IRS examination of our federal income tax returns filed for the years 2006, 2007, and 2008.

Under current accounting rules, we have been required to establish income tax reserves related to the uncertainty in realization of certain of tax credits and incentives over the last several years.

Upon the successful completion of the IRS examination during the quarter, favorable adjustments to these reserves were necessary.

The impact of the one-time tax benefit related to the adjustments to these tax reserves, is not reflective of our normal recurring income tax rate.

Therefore, for purposes of calculating our non-GAAP EPS for the second quarter, we used a normalized tax rate of 38%, which excludes the one-time benefits related to this matter.

The 38% effective income tax rate used for our non-GAAP EPS calculations for this quarter is higher than our previous expectations of 35%, due to the continued delay of Congress' approval of the R&D tax credits for 2010, as was the case in the first-quarter.

This higher effective income tax rate of 38%, versus our 35% expectation, has negative impact of approximately $0.03 per share on our non-GAAP EPS for the quarter.

GAAP EPS for the second quarter was $0.35.

Moving onto the balance sheet, as of June 30, cash and short-term investments were $230 million, up $19 million from March 31.

We continue to deliver strong operating cash flows, with over $24 million reported for the second quarter.

We spent $3 million on capital expenditures in the quarter, with approximately $1 million related to our data center transition efforts.

As of June 30, the balance of our long-term debt had a par value of $200 million, including $50 million of our 2004 convertible debt securities which have a put date of June 2011.

Following the end of the second quarter, we repurchased $23 million in par value of these current liabilities.

We will continue to evaluate debt repurchase opportunities for the remaining $27 million still outstanding over the coming months.

The term on the remaining portion of our $150 million par value convertible debt sits at 2017.

Our solid balance sheet, coupled with our strong consistent cash flow generating business model provides CSG with a continued, stable capital base, as well as the 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 relatively consistent with the guidance we provided last quarter.

For the full-year 2010, we are maintaining our expected revenue range of $522 million to $530 million, which represents organic growth of 5% to 6% over our 2009 revenues, and an acceleration in the organic revenue growth rate from what we saw last year.

We have a strong business model that provides us with good visibility into our recurring revenue sources.

As Peter mentioned, we still have not seen a return in discretionary spending on marketing and advertising related services to pre-recession levels by our clients.

And we believe this guidance range takes this continued uncertainty into consideration.

Moving on, as a result of the slightly better than expected margin performance for the second quarter, we expect our full-year 2010 non-GAAP operating margin to be in the lower 19% range, which is a slight uptick from our previous guidance of approximately 19%.

Our margin estimates for the second half of 2010 remain consistent with our prior expectations.

We experienced a good portion of the operational and financial benefits from the data center migration during the current quarter, and anticipate the balance of the full quarterly benefits coming through in the third quarter.

We expect these benefits to be offset by our planned investments in personnel, hardware, and software purchases to pursue our long-term revenue growth opportunities.

As a result, we anticipate our margins in the second half of this year will be relatively consistent with the non-GAAP operating margins reported in the second quarter.

This shows significant progress in our strategy to expand margins during 2010, and 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 approximately $21 million for the full-year.

We incurred $18 million of these expenses in the first half of the year, and expect to see the remaining amount in the second half, as we wrap up these migration activities.

The negative impact of these costs on our full-year 2010 GAAP operating margin is estimated to be approximately 400 basis points, resulting in expected GAAP operating income margin of approximately 15% for 2010.

Next, we are making a slight increase in our guidance for our non-GAAP EPS.

We now expect our non-GAAP EPS for 2010 to range between $2.16 and $2.22, up from our prior guidance of $2.13 and $2.19.

This guidance increase relates primarily to our strong second quarter results.

We expect our GAAP EPS for 2010 to range between $1.15 and $1.20, which represents increase to our prior guidance, caused mainly by the one-time GAAP income tax benefits we experienced for the current quarter.

Our non-GAAP EPS guidance reflects the use of an effective income tax rate of approximately 35% for the full-year 2010, consistent with our previous expectations.

This income tax rate ignores the one-time tax benefits we experienced in the second quarter, that I mentioned earlier in my comments, and assumes that Congress approves the proposed 2010 R&D tax credit legislation before the end of the year, as it has done so consistently in the past.

Next, our expectations for cash flows from operations for the year remain unchanged from our prior guidance of $105 million to $112 million.

These 2010 cash flow expectations include a negative impact of approximately $12 million, related to the costs incurred for our data center transition efforts.

Absent this impact, our 2010 cash flows from operations would be more in line with our historic annual levels of $115 million to $120 million.

Our expectation for 2010 capital expenditures is approximately $16 million.

This estimate includes the $2 million spent on our data center transition efforts, and we do not anticipate any further meaningful CapEx requirements, as the migration comes to a close over the coming months.

To summarize, we are very pleased with our results for the second quarter, and how we are positioned for the second half of the year, as evidenced by our good organic revenue growth, improved operational profitability, strong cash flows, and solid balance sheet.

We believe that we are well positioned to continue to create shareholder value.

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

(Operator Instructions).

And our first question is from the line of Ashwin Shirvaikar from Citigroup.

Please go ahead.

Hi, thanks, and good quarter guys.

My first question is just a clarification on the tax rate.

Randy, did you say what the cash tax rate was, I might have missed it?

I did not say what the cash tax rate is, just the book rate.

Okay, so what is the cash tax rate?

(Laughter).

I would say, Ashwin, I would say cash tax rate is probably the closest to the book rate.

Okay.

If you look at the cash flow statement, there's not much activity board for income taxes which indicates that the book and the cash rate are probably pretty close to each other.

Okay, so the cash flow impact of the tax settlement is -- how should we think of that?

It's a non-cash event.

Ashwin, the way you should look at it, it's just a release of a previous income tax reserve.

So it has no impact on current cash.

Okay, got it.

I just wanted to step back and ask a couple of sort of macro type questions.

One was Comcast NBC, do you see any impact from that, and I don't just mean negative impact, but also what else could you be doing for a combined company?

And then, I had a separate question on the pricing of the offerings, and how does the pricing work, for some of the USC and other media property and gaming offerings.

Okay, Ashwin, this is Peter.

I will take both of those.

First of all, from the Comcast NBC Universal transaction that's bringing those businesses together.

In the near to foreseeable future, we don't see anything really impacting us negatively or positively through that, just because of the nature of Comcast bringing the businesses together, and really thinking about managing different types of business.

When you look at long-term though, you have to believe that there will be continuing ways of -- our clients will continue to evolve and investigate new ways to distribute, and really engage with the consumer with content.

And we think that will all be part of, what we've said in the past, that consumers will be given more choice in about where, when, and how they consume.

And we think this will provide some of the vehicles for those new models to be explored.

In the nature of what we do for our clients, we think that creates opportunities, changing business models, complex business models for our clients, is what we've shown a good history of being able to help them as they bring new ways to monetize their networks and monetize the content that they have rights to distribute with.

So, we think long-term it's an interesting opportunity, and we think it could provide opportunities.

But it's difficult to say right now, the size, scope and whether we really will have a chance, but the change we think is good.

In regard to our Content Direct and the services that we provide to content owners like USC, and the gaming Onlive, and Universal Sports, first it's important to understand that we provide the solution in the same way that we do our core business to our cable customers, and that it's a -- an outsourced processing business that we provide.

It's not a pure license and software business, so we're getting paid as we deliver services to them, and as they build their business on our platform.

Think of it, that we get paid a fee based on the number of accounts or transactions that we're managing for our customer.

They're not -- since this is kind of the early stages of a marketplace, in some cases it may be tied to revenue sharing, sometimes it may be a fixed fee per account.

We really work with our clients to make sure that we're helping them, as they try to grow these businesses, as well as work with our ecosystem partners to be successful in that as well.

So first it's a similar business to what we do domestically, from a business model.

And secondly, it's similar to what we do for our cable and satellite transactions, times number of -- times the unit price.

Make sense?

Yes, that makes sense.

Is it going to be possible at some point in the future to get the sort of underlying sort of transaction metrics maybe?

Well, as we think about this it's early.

We want to be careful about what we maybe show in the number of transactions, and what any unit prices or revenue could be, because some of that maybe showing too much information about what these new entrants are doing.

And we got to be careful that we're not kind of betraying any of their information, in a way that they wouldn't want us too, even if we did it in total.

But it's in the early stages.

This is not material to her current financials.

But when you look at the marketplace, we do believe that it will have a bigger impact.

And I think, as it gets to those levels, we will be looking to give you more pieces to help understand.

Okay, got it.

Thank you, guys.

You bet.

Thanks, Ashwin.

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

Please go ahead, sir.

Hi, this is Shateel Alam filling in for Karl.

Thanks for taking my question.

You bet.

My first question is around the business tone, last quarter you said the sales cycles were extended.

But you had a slightly more positive tone, in that you noted that deal discussions were starting to pick up.

This quarter you're saying that clients continue to spend, but not so much on nondiscretionary items.

I am just trying to reconcile these comments, and just figure out which way the wind is blowing.

ARe sales cycle still extended, and has there been any change in how your viewing the business since the beginning of the year?

Shateel, I would tell you that there's a consistency to what we are seeing today, versus the last two quarters and that's our clients are still cautious on their spending.

But they have challenges that they're facing, and they try to bring in new products, and face new competition.

So they're looking at solutions, but they have to be ROI driven, they have to generate kind of something that's very visible to the operations, because there's a lot of demand that they have with their business operations.

What we've said, is that discretionary spending that -- maybe in the past clients have been more willing to spend money on things that didn't have a definitive short term ROI, we're not seeing that right now.

But we are seeing interest in products.

But the decisioning process is just very judicious in our clients these days.

Okay.

That's helpful.

And then, another question is, we're hearing from one of your rivals that of big billing upgrade project that Comcast is experiencing some delays, and actually may even be terminated.

For the 60% or subs that you handle at Comcast, could there be any impact for you?

Could there potentially be some upside?

Well, let me first kind of say what we do for our clients, and the scope of services we provide for clients, and Comcast being one of those, is difficult, complex work.

Our systems are complex.

And our clients businesses are evolving, what they're trying to do against the competition and across their network, is causing really them to rethink what's happening with their core infrastructure, so the core infrastructure is evolving as well.

And any type of change you bring into a business can be difficult to be successful at.

What we're really proud about, Shateel, in our businesses is that we've been successful first of all, bringing our clients onto our next generation platform, ACP, which has allowed us to put our clients in a position to be more competitive in a way they package and price, and bring new products to the marketplace.

It's helped us over time, as our clients have brought data services, and voice services, and now moving towards the commercial services, and wi-fi and WiMAX.

These are all things that, we feel like we've been successful building on our core platforms to help them drive, really an evolution of their core infrastructure without doing significant uplift.

So we think we've got the right platform in place.

We're very proud -- I'll tell you, I'm very proud of what our teams have done both in developing and delivering these platforms to our clients.

But what we have to do is see if there is desires and opportunities for our clients to really expand the footprint of services that we provide to them.

Anytime that we're in a client, and have a portion of their business, whether it's a product or a portion of their regions at we support, we always view that as an opportunity for us, regardless of the state of what a competitor is doing.

And I think our competitors would expect the same thing.

So I will leave it at that.

We'd like our marketplace position and we continue to be very focused on expanding it.

Okay, thanks.

That's helpful.

I guess you can't specifically comment, but could you say if the opportunity is any greater, due to some recent events, or is that beyond what you are able to comment on?

I don't think that would be appropriate, just because the nature of our solutions are ongoing everyday.

And I think what we'd like to do is everyday, build upon our position with our clients, regardless what's happening in the competition.

Okay, great.

Thank you for taking my questions.

You bet.

Thank you, and our next question is from the line of Shyam Patil with Raymond James.

Please go ahead.

Hi, there, this is Vijay Kori filling in for Shyam.

Hi, Vijay.

Hi, there, my first question is do you think you could talk a little bit about your M&A strategy?

You bet, Vijay.

From an M&A perspective, we're really looking at responding to much of what I was just talking about in my comments about the marketplace.

We're very focused about how we provide feature and functionality to our broad solution set as it is, that's really going to help us, help our clients manage the complexity of choice that consumers are demanding and that our clients are looking to bring to the consumer set.

So, anytime you bring more complexity to what the consumer has a choice of, it adds complexity to how you service and market and really respond to them.

And within that, we see a lot more being done in the network, we see the network getting a lot of attention to one-off transactions, and one-off offerings of products.

So when you think about what we're trying to do, we're really looking to make sure that we can be responsive to those clients, and the new types of services and the things that are going to be happening closer to the network.

And additionally, what we look at is, assets that help us make us stronger and markets outside of our traditional, outside of the traditional cable and DBS.

So when we see solutions sets that can be additive to those two aspects, and can accelerate our ability to come to market versus building it ourselves, that is what you would look for us to do.

Okay, thanks.

And just to kind of follow on that question, what additional verticals you think you'd like to get into specifically over the next two to three years?

We talked about that we're doing some investigation work around the utility market in North America.

We are doing some work today around some of the pharmaceuticals.

But if you look at it on a broad-basis, Vijay, we really want markets where the service offering to the end customer is changing, or the business is becoming more complex, and that there are a large number of possible clients, and end use customers, because that means that the business is more complex.

And through that we think technology can be a real value add for them.

So, we've been able to build that in our traditional cable and satellite market, and we're looking to do a similar type of growth and build out of capabilities in some of these more diversified market.

Okay, great.

Thanks.

Thank you, our next question comes from the line of Scott Sutherland with Wedbush Securities.

Please go ahead, Mr.

Sutherland.

Great, thank you.

Good afternoon.

Hi, Scott.

Randy, a question for you.

I'm not sure if you gave it out, how much of your revenue is out of your non-core business?

It was about 14% for the quarter, Scott.

What was that last quarter, just to remind us?

It was about 16% last quarter.

Okay, so it definitely looks like your core business had a better.

I am seeing the subscribers down quarter-to-quarter, but the revenue sounds like it is up.

Can you talk about kind of some of the moving pieces, and how the plays out over time, as triple play services cause more bundling, but maybe you are offering more services to less subscriber accounts?

I think, Scott, there's a couple different things, and Peter actually touched on a couple of them in his comments.

We continued to really provide additional solutions to our clients in really two areas.

One is in helping them roll out new services, so it's not one specific application.

There's many applications that were delivering, so it's hard to point to one item.

The second category is really around how do we make her clients operations more efficient.

We had a couple of pretty good software transactions in the quarter.

Peter touched on one, was Workforce Express which is a workforce automation tool so it helps our clients be much more efficient in the dispatch of their technicians.

So it's really those two categories.

Just additional products that help roll out new services, and really help our clients operations be more efficient.

Okay, about six or nine months ago you saw some market share gains in the broadband markets.

Are you seeing any more opportunities to gain market share, or do you have to push to other international or other types of markets to gain share?

Scott, this is Peter.

You're referencing our success that we had in in Charter, where we picked up the other half of charter that we didn't have previously, and some other unnamed subscribers that I think at the time were estimating in total about 3.5 million between all those, and have been very successful in getting those migrated over to us.

We always look at initially, any time we have a client where we don't do 100% of the business with them, especially for our core billing IT services, we think if -- as we've proven ourselves with our clients, we look to expand, and take a bigger share we did with Charter.

Those opportunities are Comcast and Time Warner, and BrightHouse, are larger clients that we don't have a 100%.

But we know that's very lumpy, and you don't forecast that in the short term, because those are significant commitments that make -- that clients make.

So we do look at those as opportunities, the other clients where we don't have a large footprint like we do with those name, we look to get more product in.

And there is some clients, or prospects that we really have no relationships with, that we are always looking to get in.

But where you have been proven, and you work with the clients everyday is probably your highest probability of just market share wins.

But we know we can't just subsist on what's happening in North American cable and satellite, because it's a business that's going through, offering change, not subscriber penetration of just new organic growth or subs.

So that's why we're looking at some of the new verticals in North America.

And we're keeping our eyes open for expanding our footprint from a geography perspective to see if there's things that we can take.

But as we talked about before you have to make sure you have scale as you go out for new markets, whether it's verticals or geographies, because organic growth can be a long tail on that,and you want to make sure that you have scale to make it successful.

Okay, great.

Thank you.

You bet.

Thank you, our next question comes from the line up Tom Roderick of Stifel Nicolaus.

Please go ahead.

Hey, guys, this is Chris Growe for Tom.

Boy, how about the new name --- well, I guess it was last time or so.

Oh, yes, we've had a lot of fun doing the transition, as you can imagine.

(Laughter).

I am sure you guys are experts at that, with all of your tuck-ins, although we're probably a little bit bigger than a tuck-in But I -- yes, I just wanted -- I have a feeling, I know what the answer is to this is, but just as far as the revenue mix, obviously you mentioned that you have a couple good software deals in the quarters in the processing.

Unusually though, I would say was down sequentially, can you kind of give us a little color as to why that occurred, and you expect a bigger than normal bounce back in Q3?

I think what you're seeing is pretty strong Q1 for some specific statement and marketing work that we've done, that was somewhat seasonal that hit in the first quarter.

So I don't think it's anything to be concerned about.

I think if you look last year, you saw up slight spike too, nothing of great significance, just a little seasonality in a couple of print jobs that we were doing.

Okay, so going forward though, you would expect a fairly steady, pretty much keeping in with historical trends?

I think our history would show, that there's a lot of consistency in our quarterly revenues on the processing side.

Got it, sounds good.

And then, as far as the -- you guys talked a little bit about Quaero, and then also that the marketing budgets that don't really seem to be filling up right now.

So is Quaero the exception ,or is that something you're trying to get able to listen to?

Can you talk a little bit about how much success you actually having, trying to get the message across.

Well, a couple things about Quaero.

They've -- we've known Quaero for about 18 months.

We have been spending the time, going through the integration work, and we're very comfortable with where the integration is.

They didn't have the brand recognition in the traditional cable and satellite space.

And quite honestly, CST didn't have a recognition of being really, kind of having strength in the traditional marketing departments within our clients.

And so we're continuing to work and build relationships there, and show what our opportunities are, but we haven't made the type of success that I would say, is driving that part of our business right now.

From the Quaero perspective they continue to build as I talked about this biopharmaceutical firm success in nontraditional cable and satellite markets for us.

Remember, it was a very small tuck-in business for us.

And they are helping bring some of our products to their clients.

And as we continue to build out what's really our value proposition of marketing intelligence, coupled with how do you bring it to the actual consumer, we think that will continue to build credibility for the satellite and cable customers as well.

And Chris, I just add one point, when we talked about the discretionary spending and marketing services and advertising, it's not just limited to Quaero.

We have quite a few products and services that are more marketing in nature, whether it's our interactive messaging, or some of our e-care applications, or any of those interaction management.

Oftentimes when budgets are being more cautiously applied, those are some of the areas in which spending doesn't go gangbusters.

So when we talk about the marketing stuff, it's just not limited to Quaero.

Great, thanks for the clarification.

And then just a couple housekeeping questions.

One, as far as the -- the amount of the data center expense that was in depreciation?

Randy, I don't know if you broke that out for us?

I can give it to you.

It's about $700,000 for the quarter.

And then as far as Peter, I don't know, maybe Randy might of mentioned this, but as far as the personnel investments that you talked about in Q3, can you just go into a little more detail as far as what type of investments you are making there?

And then I just wanted to make sure I heard correctly, did you say that the second half margin will be roughly in line with the second quarter?

Thanks.

We'll tag team this, Chris.

I'll talk about where we're focusing in our investment.

We're putting dollars and people into R&D and operational roles, in those areas where we are projecting growth and investment in our products.

And that could be anything from our Content Direct group, to things to support our commercial services that our clients are rolling out.

So you see areas in that is where we're looking to put our people -- from the second half of his question, Randy.

If you look at my guidance, it would indicate that there is a lot of consistency between Q2 in the second half of the year, probably a slight uptick if you do the math, to get where my full-year guidance is.

So, a lot of consistency possible, slight uptick during.

Great, thanks, guys.

Thanks, Chris.

Thank you, our next question comes from the line of Shaul Eyal of Oppenheimer Funds.

Please go ahead.

Pardon me, Shaul, your line is open for questions at this time.

I'm sorry, good afternoon, and good quarter.

Thank you, Shaul.

Two quick question on the heels of the maybe the R&D and kind of hiring plan.

Can you guys maybe kind of quantify to us in hard numbers, what are the plans for the second half of 2010?

And maybe as you start thinking down the road to 2011, and then I have another follow up.

I don't take your probably didn't see a significant shift in the R&D and a percentage of revenue in the second half of the year.

I think you can, based on how you look at modeling our revenues, you should probably assume that things are going to be consistent with what we've done in the past or.

No, I would say you are right.

There should be a slight uptick in the R&D, but the operational personnel you will probably see them come through the cost of goods sold line.

So it's not going to all come through R&D.

Does that help you quantify it, Shaul?

Yes, that's fair, not a problem.

And the other thing I want to go back to one of the earlier questions, where you kind of talked about Comcast and NBC.

And I know Peter that you said you're seeing no changes in the near and midterm.

But maybe from a broader perspective, are you hearing or you seeing about any kind of reassessment, not necessarily with respect to your relations, but generally speaking, when a new guy comes to town he wants to think about kind of reassessing his investment strategy, anything along these lines that you might be seeing?

As it relates to, and if, Shaul, you are talking about impacts from a Comcast, NBC Universal, nothing that I can really think of at this point that we've seen.

They're is a -- there is a separate management teams.

And, of course, as we all know, Neil Smit was brought in to Comcast from Charter to run the cable operations.

And Steve Burke has Neil Smit focused on that.

And then is going to have the head of NBC Universal reporting, running that business separate.

I think there is still a lot to play out between what type of obligations that they are going to have protect the distribution agreements they have from one type of network operator, versus another, and such.

And so, they're really distinct businesses at this point.

But we believe long-term, that there is going to be the opportunity to be creative, and think about distributing product in a long way.

That's not Comcast speaking, that's just our perspective looking at the marketplace.

And how the plays out, to whether they accelerate investment in one area, versus another, it's yet to be seen.

We know this though.

We believe very strongly, that the -- that the business model will continue to evolve, and the way that products get delivered to end consumers will continue to evolve, which will require investments by the traditional network operators like Comcast, and Time Warner, and others.

And so we do -- we don't see them backing away from investment because the business models in the competitive marketplace continues to evolve, and new threats are brought to them everyday.

Got it, that's very helpful.

Thank you for that.

(Operator Instructions).

Thank you , our next question comes from the line of Lauren Ye with JPMorgan.

Please go

Hey, guys, this is Lauren for Sterling Auty.

How are you?

Good, how are you, Lauren?

Good.

Just a couple questions here, you mentioned that Time Warner commercial services relationship.

Does this extend your entire contract with them or anything like that?

And how does that affect the ARPU with that account?

Let me just first talk about the contractual terms of this -- think of this as a new product service that would be an amendment to the existing master agreement that we have.

We write master agreements that really kind of provide an umbrellas structure that clients can then commit to new products and services, without changing the underlying term and scope of the basic T & C's of the contract.

This should still be viewed as part of that lengthy term that we have on the contract through 2013.

From an economic perspective, from an ARPU, do you want to say more on that.

Yes, Peter, I would say, it's like many of our products when we first roll them out.

It really is highly dependent upon the success of our client's use of the product.

Initially, since there will be a small rollout until they get fully implemented.

it won't have a lot of impact.

And then, it really highly dependent on how successful they are on their endeavors on the commercial side, as to how impactful it is there to our revenues.

And Lauren, if I was just to add some color, and not specific to commercial services, but I think to add to what Randy was talking about.

The nature of our business model is that we provide a platform for our clients to drive out there incremental services, just like we drove the -- provided a platform for clients to bring voice services.

In the early stages we had very few subs, and it wasn't very incremental to our revenue.

And now as we talk about earlier on the call we got 10 million subscribers on our platform, which have really provided long-term incremental growth for us on the revenue line.

And you have to think about the commercial services in the same way, it builds over time.

And hopefully one day, we'll have 10 million small and medium businesses on our platform driving revenue.

But you are going to see an impact in the near term, we build for the long haul.

Okay, great.

Just my next question, I think you mentioned that non-cable revenue was 14%, and looks like it's down a little bit from March quarter.

Anything going on in those verticals?

No, I would say you should expect some small fluctuations between quarters, our goal of long-term is to grow this portion of our business so in the 60% in the first quarter to 2% last year and we're looking to grow as we go forward.

Okay, and just the last question is of your top four customers, just kind of curious in terms of what their activities, are in each of them.

Where do you think the opportunity is, or the most opportunity is from Comcast, Time Warner, Charter?

Our number one focus, Lauren, is that as they deliver new services that we facilitate them, because that makes us a critical partner.

As well as making sure that we can help them, really get more efficient in the way they operate their business, and drive not just more efficient operations, but operations that enhance the customer service, so that the end consumer has a positive experience, both in service and the end product they receive.

That's where our near-term focus is, and how that evolves over time, we think is going to help us continue to get deeper and deeper with our clients as it has in the past.

I guess I'm going to ask that question a different way, of the four, is there one of them that is more active in their investment these days.

Are you asking for a pipeline report?

(Laughter).

Well, let's just -- as you think about the four major clients are Comcast, Time Warner, Dish and Charter.

Three of those four clients are traditional cable operators that are actively focusing on rolling out new services across their networks.

And those I think would all have fairly consistent focuses on how they continue to invest to evolve their businesses.

While Dish Network is continuing to compete very aggressively in the marketplace, but with a different business needs than what the others are.

So, I am not to going to say one is more aggressive than other in their investment.

But they all have different dynamics going on, and our focus is we are going to invests in all four to make sure that we're successful.

Has that changed since last quarter?

I think when you look at the broader dynamics happening in the marketplace, I think every one of our clients is seeing a similar type of focus in their business, and I don't think there's really been any significant change.

Okay, great.

Thank you.

Thank you.

At this time, there are no further questions.

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

Thank you, Lorenzo.

I want to thank everyone on the call for your continued interest in support of CSG.

And importantly, I want us thank our employees who successfully continue to deliver on behalf of our clients, new products as well as the data center migration that we've been successful through the first half of this year.

We continue to perform, and we look forward to continuing to perform in upcoming quarters.

And we'll talk to you in about three months.

Thanks.

Ladies and gentlemen, this concludes the CSG System's second quarter 2010 results conference call.

Thank you for participation.

You may now disconnect.