CSG Systems International Inc (CSGS) 2010 Q3 法說會逐字稿

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

Welcome to the CSG Systems Q3 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, October 26, 2010.

I'd now like to turn the conference over to Liz Bauer.

Please go ahead, ma'am.

Thank you, John, and thanks to everyone for joining us.

Today's discussion will contain a number of 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 products, services and performance, our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic and operating financial goals, and our proposed acquisition of Intec Telecom, which we announced September 24 of this year.

While these forward-looking 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 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 available in the Investor Relations section of our website.

Also we may 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 enable 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.

Finally, before I turn it over to Peter, I'd like to remind everyone that our announced acquisition of Intec Telecom is being governed by UK and regulation; therefore, we will be limited in our remarks outside of the details found in the Rule 2.5 announcement, which is posted on our website.

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 today.

I'm pleased to report that CSG continues to execute well, posting third-quarter revenues of approximately $134 million and non-GAAP earnings-per-share of $0.59.

Our revenues increased 7%, and our non-GAAP EPS increased 13% over the same period last year, and we have demonstrated a steady quarter-over-quarter growth this year.

In addition to executing well on the revenue side of the business, we continued our strong heritage of operational excellence and performance.

This quarter we expanded on our non-GAAP operating margin to approximately 20%, as a result of our focus on running our operations well, and our success in helping our clients grow their businesses.

Today, I'm going to provide you with an update on our operations, what we are seeing with our clients, and our announced acquisition of Intec Telecom.

First, we reached a significant operational milestone this quarter.

We completed our two-plus year data center migration without any major disruption, thanks to our employees and our clients.

The primary purpose of moving from you previous provider to Infocrossing was to ensure that we are providing the highest-quality operations to our clients.

The secondary purpose was to ensure that we continue to identify ways to optimize our operations.

We are pleased with the partnership that we have established with Infocrossing, and believe this will help us implement several new initiatives aimed at taking our solutions to the next level.

I want to provide you with an idea as to the scope of this project.

During the migration we set up a redundant data network, moved over 800 open system servers, and switched our high-volume transaction processing engine over to Infocrossing.

This was a highly complex project, and entailed moving almost 50 million subscriber accounts, many of which were double and triple play customers.

I can't say enough about the work that our teams did during this transition; their work is a testament to our ability to execute well.

I like to thank our employees, our clients, and our partner Infocrossing, for their hard work during this migration.

Next I'd like to review with you what we are seeing with our clients.

Simply stated, I believe our results over the past year demonstrate the types of activity that we are seeing in the communications market.

Communication service providers continue to pursue projects that have a quick return on investment.

We've had success in primarily two areas; helping our clients generate new or additional revenues, and helping our clients streamline processes and workflow to improve operational efficiencies.

Over the past several quarters we've discussed our successes in positioning our clients to rollout new products like WiMAX, and commercial services aimed at the small to medium business market.

However, our solutions provide other avenues for our clients to generate new revenues, through greater targeting and upselling opportunities.

For example, recently one of our clients shared with us the results of a trial they conducted utilizing one of our advanced solutions aimed at marketing the right product to the right customers.

Their results speak to the value of this solution, and how a provider can measure the return on investment of our products.

After the implementation of this solution, which included training for customer service reps, our client realized the following benefits.

They saw an increase of over 50% in the number of digital subscribers who upgraded to their digital DVR service.

They doubled the take rate of high definition receiver cells, and they saw their work order accuracy improve to 97%.

We couldn't have been more pleased for our client, and for our product management and development teams.

When we set out create products for our clients, these are the type of results we are seeking to achieve.

On the operational front, our clients continued to take advantage of the benefits associated with our workforce automation and financial automation tools.

With the average truck roll to a consumer's house costing a service provider almost $75, you can see how ensuring that rolling the right track with the technician with the right skills to the house is financially easy to quantify.

What's more difficult to quantify, but important to achieve, is the improvement in customer satisfaction that is experienced when a customer doesn't have to spend a four-hour period waiting for the technician to show up.

Receiving an automated call or text message from the service provider letting them know where the technician is actually going to be there is a huge value add.

These types of activities help our clients compete in a massively dynamic world, and are going to continue to be important, if not more important, in the future.

As we've discussed in the past, customers now have more ways in which to consume content and information.

All of this contributes to an increasing need to identify new business models, and new ways to service the end-user.

There's new competitors entering this market every day.

However, this increased competition has increased the sense of urgency by our clients to get even more entrenched with their customers.

As we work side-by-side with our clients in projecting what the future holds, the consumers is at the heart of our plans; the end consumer is going to be more demanding, have more choices, and want more convenience.

That combination results in increasing complexity in any provider's operations and business, and helping our clients manage that complexity is a key focus of ours.

Over the past five years, we have spent over $300 million on research and development, and over $150 million on acquisitions, aimed at helping our clients compete and succeed in this increasingly competitive and complex environment.

On September 24, we announced that we reached an agreement to acquire Intec Telecom, a UK-based international provider of business support systems, for approximately $372 million.

This acquisition is consistent with our strategy of looking for ways to get deeper into our client base by helping our clients offer more choices, convenience and flexibility to their customers, and in their own operations.

We believe that the combined capabilities of both Intec and CSG will provide a broad portfolio of products that address the ever-expanding needs of communication providers to manage their customers' interactions in real time.

For those of you who are not familiar with Intec, they are the leader in wholesale billing and mediation, and a leader in retail building worldwide.

They have over 400 customers worldwide, and serve over 60% of the world's top 100 communication service providers.

They have 1,600 professionals located across the globe in 24 countries.

In the near term, we will be integrating Intec's solutions with our next generation solution, the Advanced Convergent Platform, enabling our clients to roll out new services aimed at wireless, enterprise commercial services, wholesale billing, as well as manage transactions and data flowing through their networks, in real time.

As many of you know, our Advanced Convergent Platform solution is the most proven and deployed customer care and billing solution serving the North American cable market.

All of our cable clients are using it.

Based on conversations with our clients, we believe this acquisition of Intec will allow us to continue to be an enabler of client successes as they execute on their business plans over the next several years.

Since the two companies and their solutions are complementary in nature, our focus in the near term is maximizing our opportunities with our clients.

We believe that we have the teams in place, including employees from both CSG and Intec, to make this happen.

The acquisition is scheduled to close by the end of this year.

Finally, before I turn it over to Randy, I'd like to close with a few thoughts.

We had a very strong quarter by doing what we do best, helping our clients run their operations more efficiently and roll out new services.

We didn't get distracted by the other activities that were going on, mainly the proposed Intec acquisition, and I believe this bodes well for how the integration of the two companies will proceed.

We continue to see strong demand from our clients for our solutions aimed at streamlining their operations.

We continue to execute on all fronts, including in our operations themselves.

We continue to make investments aimed at helping our clients be more successful and competitive, and we continue to run our business in a fashion that puts us in a position of strength, allowing us to be opportunistic in our acquisitions and our product investments.

In closing, we are focused on closing out 2010 on a positive note and positioning the Company for continued success in 2011.

Now I'd like to turn it over to Randy to go through our financial performance for the quarter.

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 third quarter, and our outlook for the remainder of 2010.

Once again, we had another quarter with a favorable combination of solid organic revenue growth and margin improvement, together yielding strong bottom-line results.

Along with our consistent cash flows and solid balance sheet, we are in a very strong position to invest in new solutions that will enable our clients to more effectively compete and operate in this changing market.

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

Total revenues for the quarter were close to $134 million, representing an increase of 7% year-over-year.

This 7% revenue growth is all organic, relating to the continued adoption of our solutions and year-over-year subscriber growth on our systems.

Revenues generated from Comcast and Dish Network for the quarter were 24% and 19% respectively, relatively consistent with the second quarter.

Our non-GAAP operating income for the quarter was $27 million, or a 20% margin.

This non-GAAP operating income excludes $2 million of expense related to the transition of our data center, and $3 million of acquisition-related charges associated with our proposed acquisition of Intec Telecom, which I will discuss in more detail in a few minutes.

This represents a sequential improvement over our second quarter non-GAAP operating margin of about 19%.

This increase can be attributed primarily to the full quarterly benefit of operating in our new data center, as well as strong revenue growth and continued good expense management.

Our GAAP operating income for the quarter was $23 million or a 17% margin.

Non-GAAP EPS for the third quarter was $0.59, which compares to $0.52 for the same period last year.

This represents growth of 13% year-over-year, driven mainly by growth in our operating results since last year.

For the third quarter, our effective income tax rate was 35%.

This tax rate still does not include the positive impact of the proposed R&D tax credits that remain pending Congress's approval.

Should the R&D tax credit legislation pass before year end, as we are anticipating, we would expect the full-year benefit of the credits to be recognized in the fourth quarter.

GAAP EPS for the third quarter was $0.35.

Our operating cash flows were $19 million in the third quarter, which is lighter than our average quarterly run rate, due to the timing associated with $13 million in client payments that were received shortly after quarter end.

Absent this timing impact, we had another solid quarter of cash flow generation.

We spent $2 million on capital expenditures in the quarter.

As of September 30, total cash and short-term investments were $212 million, down $17 million from June 30.

This sequential decline was primarily due to our repurchase of $23 million in par value of our 2004 convertible debt securities during the quarter.

As you may recall, these securities have a put date of June 2011.

As of September 30, the balance of our long-term debt had a par value of $177 million, which includes our remaining balance of $27 million of these 2004 convertible debt securities, as well as $150 million of our recently-issued 2010 convertible debt securities, which have a term of 2017.

Our strong cash flows in solid balance sheet puts us at an excellent position to invest in new solutions, such as our proposed $372 million acquisition of Intec Telecom that we announced earlier this quarter.

As a reminder, this purchase price represents a multiple of a little over one times enterprise value to both fiscal year 2010 and 2011 estimated revenues, based on IBES consensus estimates as of the date we announced the acquisition.

At this time, we believe this acquisition will be accretive to CSG's non-GAAP EPS within the first year.

We plan on financing this transaction by utilizing no less than $130 million of our existing cash, and through new debt facilities; a $200 million term loan facility and a $100 million revolving credit facility were entered into during the quarter as part of this transaction.

After the completion of this transaction, we will continue to have a strong balance sheet.

At close, we estimate the combined Company will have an estimated cash and liquid investment balance of approximately $175 million, and approximately $430 million of par value debt, with a very large percentage of this debt having payment terms extending out several years beyond the closing date.

Based on these amounts and the expected cash flows to be generated by the combined Company, we are comfortable with this level of debt leverage.

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

But before I get into the details, I want to summarize the expected impact of the Intec acquisition on her 2010 guidance.

First, our 2010 GAAP guidance includes the estimated impact of the Intec acquisition-related charges of approximately $16 million, which assumes the transaction closes before the end of the year.

This includes such things as financial advisor and professional services fees, and the cost of our currency hedge we purchased to protect ourselves from adverse movements in the exchange rate between the British pound and the US dollar between the announcement and the closing of the transaction.

Of this amount, approximately $10 million will be included in operating expenses and approximately $6 million will be reflected in the other income expense section of our income statement.

These cost estimates may fluctuate as we work through the closing of the transaction.

Just as a quick reminder, since we exclude the impact of these charges in our non-GAAP financial measures, these will have no impact on our non-GAAP financial measures for 2010.

The second point that I'd like to make on this topic, our 2010 guidance does not include any estimated impact from Intec's operations or our new debt financing costs related to the transaction, because of the uncertainty of the timing of the close of the transaction.

We expect the transaction to close by year end, and will include the impact of the Intec acquisition in our 2011 financial guidance that we will provide in January.

Now for the details of our 2010 guidance.

For the full year 2010, we are maintaining our expected revenue range of $522 million to $530 million, which represents organic growth of 4% to 6% over our 2009, and an acceleration in the organic revenue growth rate from what we saw last year.

Based on our performance for the first nine months of the year you should expect us to come in towards the high end of this guidance.

Next, we have demonstrated solid expansion in our non-GAAP operating margin throughout this year, as a result of our strong revenue growth and related scale benefits, our successful data center migration efforts, and our good expense management.

We expect this strong performance to continue into the fourth quarter, and therefore we anticipate that our non-GAAP operating margin in the fourth quarter will be comparable to that of the third quarter.

As a result, we expect our full year 2010 non-GAAP operating margin to be towards the high end of our long-term target of 18% to 20%.

As a reminder, our 2010 full-year non-GAAP operating margin guidance excludes two items; first, approximately $10 million of the Intec acquisition-related charges that I mentioned earlier, and second, our data center transition expenses of $20 million.

Since we completed the transition to our new data center during the quarter, we do not anticipate any material data center migration costs going forward.

The negative impact of these costs on our full-year 2010 GAAP operating margin is estimated to be approximately 550 basis points in total, resulting in an expected GAAP operating income margin in the 14% range for 2010.

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

We now expect now our non-GAAP EPS for 2010 to range between $2.22 and $2.27, up from our prior guidance of $2.16 and $2.22.

This guidance increase relates primarily to our stronger than previously expected operating margin in the second half of 2010.

We expect our GAAP EPS for 2010 to range between $0.93 and $0.98, which represents a decrease from our prior guidance, caused mainly by the Intec acquisition-related charges expected to be incurred in 2010.

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 expectations in previous quarters.

This income tax rate 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.

Assuming the tax credit passes, our fourth-quarter tax rate for purposes of calculating our non-GAAP EPS will be approximately 30%, which will result in a full-year rate coming in at approximately 35%.

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

These 2010 cash flow expectations include a negative impact of approximately $18 million related to the cost incurred for our data center transition efforts, and Intec-related acquisition activities.

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

One last item on our guidance, our expectation for 2010 capital expenditures is approximately $16 million.

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

Furthermore, we believe that our combination with Intec will create a combined Company that is financially strong, generates strong operating results and cash flows, has greater operating skill, and is well capitalized with a strong balance sheet.

We are excited about the opportunities for CSG.

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

(Operator Instructions)

Our first question comes from the line of Tom Roderick with Stifel Nicolaus.

Please go ahead.

This is Chris [Cohen] for Tom.

Good job on the quarter.

Obviously, the margin performance was pretty good, and I think Randy mentioned that you attributed it to operating performance or expense control as usual.

But just as far as your long-term, like not including the Intec guidance of 18% to 20%, would you say that going forward, if we kind of exclude any Intec costs, like 20% would have been like a reasonable run rate going forward?

Could you maybe bump up your long-term operating margin target for the core business?

I would say for the core business, Chris, what I would say is what I have said in the past, is the range of 18% to 20% was intended to be a range, at times we may operate above or at times we may operate below it.

Going well above 20% it really is not part of our target, because we will believe we will continue to make lots of investments in his Company, and therefore an expectation of operating between 18% to 20% we believe makes more sense.

Okay, so you guys would have plowed it back into your product R&D investments or something like that?

We will do what we have done historically, which is continue to invest in the opportunities we see in front of us, in the form of R&D and M&A and other investments we believe are appropriate to grow the Company.

Great, and then as far as discretionary spending, I think you mentioned this last quarter that it was still a little bit soft; I was wondering if you have an update on that?

We still don't see an uptick in our clients on some of their marketing efforts of what we have seen in the past, Chris, and those we view as some of the discretionary spending of how they communicate on the fringe of their business.

So it hasn't picked back up; we are cautious with still the choppy economy, and consumer spending still being somewhat restrained.

So we didn't see it return in this quarter, and we are still cautious as we look forward.

Got it.

So as far as just the overall tone of spending, it's pretty much the same as it was last quarter?

Yes.

Great.

And then just a mechanical issue, on the portion of the data expense that was attributable to COGS, I was wondering if you could break that up for me?

All the $1.8 million that we spent this quarter was all COGS, there was no depreciation in that.

Okay, thanks.

Thank you.

Our next question will be from the line of Scott Sutherland with Wedbush Securities, Inc.

Please go ahead.

Thank you, and good afternoon.

Good job on the quarter.

Just a couple of housekeeping questions first.

Can you give us the number of subscriber accounts that you had on the system?

Maybe some color on numbers taking multiple services, and also what is the amount of revenue excluding -- outside of broadband?

The revenue outside of broadband, I think outside of cable, the way we describe it, our-non cable was about 14%, which was consistent with the previous quarter.

The number of subscribers I believe was 48.8 million I believe.

One second, we will get it for you.

48.8 million is correct.

I'm sorry, what was the third portion of your question?

Could you give some color on the number of those subscribers maybe taking multiple services, and how that has been trending?

We don't give specific numbers on that, Scott, because we don't think it is appropriate to share those numbers relative to how our customers are performing any of their specific numbers, either in total or by individual customer, but it has clearly been growing.

Some examples are we are over 10 million voice accounts on our system in total, and that has been growing over time, and then the same thing with data services, you look any of the industry analysis and it shows those are continuing to grow as well.

Okay.

A couple of more questions.

You talked a little bit about some of the functionality Intec brings to you and integrating ACP; do you bring any functionality maybe on the video side to Intec customers, and have you heard any feedback there so far?

We are in the early stages on that, Scott.

As we've been working on integration, we believe a lot of the modularization that we've done on our assets could have applicability in the foreign markets, but there are restrictions of how much work we can do under the 2.5 arrangement of kind of business planning relative to clients, and so we are being cautious on that so we don't step in any type of regulatory hole.

But we do believe that there is a very broad suite of products that we've developed over the years to help our clients manage those interactions, and that's an area where Intec historically has not invested.

They have been much more around the billing and rating, and mediation assets, which are probably closer to the network.

We've been closer to the customer extension, and so what we've got to figure out is in some of their foreign markets as well as the markets in the US, if there is an ability to extend our capabilities to them, as we think we can take their assets to our clients.

Okay.

And lastly, have you seen any more wins or momentum on the content business?

I know you've had a couple of wins there already.

We have had some good traction over the quarters; we didn't have anything that we can announce at this point, but we continue to see strong pipelines in that business.

Great, thank you.

Thank you.

Our next question is from the line of Howard Smith with First Analysis.

Please go ahead.

Good afternoon, and I echo the comments on outstanding execution here.

Thanks, Howard.

I want to follow-up on Scott's question, if I may.

You seem to be growing the processing and related services line pretty well without subscriber growth, and with the non-cable business as you described as somewhat flat, it does seem, without giving specifics on how many are taking new services, it does seem that that is -- the engine of growth is these multiple and add-on services, and I'm curious, is there anything trial or otherwise that wouldn't be repeating into future quarters on a recurring basis ?

I think what you see indicative of our growth in our business within the cable and satellite customers is indicative of how they are focused on their growth, and that is to get closer to their end customers to buy more products, whether it is buying products such as more DVR services, high-definition channels and packages, voice services and so forth.

They are extending into small businesses and medium businesses, they are looking to extend their networks through wi-fi and WiMAX, and those are things that we are helping them work on.

The absolute organic growth in the number of households in the US who are taking broadband services, the full suite of services, is really not on an accelerated basis; it is holding pretty constant, because we have had -- we are reaching almost a saturation state in North America for that.

So our clients are focused on those next services that are going to really bring value and depth to their relationship.

And as we help them do that, whether it's by delivering a service or delivering how they provide customer service and responsiveness, which really adds to a better customer experience, that's what's driving our profits.

So we are really aligned from a business offering to be consistent with what our clients are focusing on, and what challenges they face.

The good thing is that our clients are focused on the type of new services, they recognize their networks are going to evolve, they are going to be consumed in different ways, and that gives us an outlook that we think -- we believe there's going to be a sustainable spending pattern with us to support their businesses as they evolve.

I would one thing, Peter, is that I think it also demonstrates kind of the broad set of the applications that we provide, is that there is no single one item that really is driving that; it is lots of smaller product pieces that we -- are having a lot of good success.

I think the amount of investment we have done in R&D over the years is showing some payback on this, since we have such a broad suite of products to deliver.

Howard, the other thing I would add is, as we not just pay attention to our clients' operations, but as they report their results every quarter, you would see that they recognize single-play accounts that are primarily basic analog, or potentially digital subscribers that aren't focused on expanding their relationships, are areas that they recognize have a higher chance of churn, and they want to add services to those.

And when they don't, they see a loss of those accounts.

So they recognize the value of those relationships of building depth is really important.

They report every year they're absolute basic video subs go down in number, but their RGUs are going up for all the others, and that gives -- I think it really gives a foundation for them and for us to have good growth from those.

That is a very comprehensive answer.

That's great.

Is that code for long-winded?

No, not at all.

It means thorough, you really answered the question, which is great.

Depreciation, I just want to make sure I kind of understand, since it jumped around a little bit maybe more than your property and equipment base.

I just want to understand, is there anything that makes the $4.9 million current number in that quarter not the run rate going forward we might be building off of?

They way I would look at it, Howard, is there were some unique adjustments as a result of the data center migration.

What I would probably tell you to probably do is look at the last two quarters; I think Q2 was $5.5 million, and I think this quarter was right at $5 million.

Look at those kind of on an average basis and use it on a go-forward.

That's helpful.

Thank you much.

Thank you.

Our next question will be from the line of Shaul Eyal with Oppenheimer & Co.

Please go ahead.

Good afternoon, and congrats on the third quarter.

I think Peter, in your prepared remarks, if I'm not mistaken, you have mentioned the words "newcomers to the arena".

Anything new, anything specific, or just a general commentary?

It's nothing new.

It's -- the message you see in the marketplace all the time these days is that there are new entrants, whether it's AT&T and Verizon, and they're really not that new anymore, they've been pursuing this for two to three years, they are coming in and have built a reasonable amount of skill that allows them to compete in certain markets very aggressively with our traditional clients.

You see the satellite operators with their single play solution getting very aggressive to retain their clients, and then equally important is you have different channels of content consumption, whether it is Hulu who is coming in and trying to find ways to monetize their distribution and access to content, or in some cases people who don't want to package through an aggregator like Hulu but they want to go directly.

All that is creating a different dynamic for the consumer than what has been seen before, and if you add to that what I see as a broadening of the pipe for distribution of this, and an accessibility to these network pipes, that is only going to drive more optionality to the consumer.

As I think about it, Shaul, the iPad came out, it's actually surprising, I think it's only been out in the market six months, and you've got Dell and Samsung and a bunch of others who are all coming out with their tablets; and all of these tablets have the ability to present content and information in a flexible, robust way, where it's mobile, whether it's in the house.

And all of those things are adding to the depth of content that can go across the networks, and that is creating an interesting competitive dynamic.

Whether all those play out, we don't know yet.

We know our traditional clients have a very strong business from which to continue to evolve and service the consumers that they have, but it's clearly causing every player to think differently in how they play in this marketplace.

Got it.

Sorry for another comprehensive answer.

That's all good.

One quick housekeeping for Randy, just want to make sure that I get it right.

As it relates to this tax settlement, and potential impact capital, that is basically a non-tax event, correct?

Say that again.

A non-tax event, the tax settlement, potential settlement.

Are you talking about from the second quarter?

Correct.

From the second quarter, it was a non-cash adjustment to a tax reserve, correct.

Okay.

Thank you very much, and good luck.

Thank you.

Our next question will be from the line of Lauren [Ye] with JPMorgan.

Please go ahead.

Hey guys, this is Lauren for Sterling Auty.

The first question is around I guess Intec.

I know that you guys can't say much because it is UK-related but maybe -- we've also dealt with other companies who have done deals in the UK, and there usually is milestones maybe that we can watch out for?

Are there any you can talk about in terms of what to expect next in terms of, I guess, regulatory approval and such?

There are some stages that I think are published at this point around the stages, Lauren.

There is a shareholder vote that comes up in the month of November, in the early part of November, November 3rd.

November 3rd, and then there is -- a scheduled court date dependant upon the results of that vote is in the latter part of November, around November 25.

So those are probably the two big milestones to look for.

Okay, great.

I guess the question is, the relationship at Time Warner and Charter, were those below 10% this quarter?

No, they will not be below 10%.

They won't, okay.

Any -- will you give that out?

That will be in the 10-Q.

You would expect quarter-over-quarter that the revenues of the top four clients do not fluctuate all that much.

I think you could probably look at the second quarter levels, and anticipate them being very comparable from percentage standpoint.

It will be in the 10-Q, though.

Last quarter is, I think last quarter you mentioned you are continuing to kind of invest some in R&D and operations; did you guys meet your goals in the quarter?

We continue to invest in the areas that I mentioned in the past, and will continue to do so going forward as well.

I guess what about in the quarter, did you get to the headcount that you wanted to, or was it other areas that you are --

We met the goals that we were looking to do.

Your next question would be why did we do better on our operating margin, and what I would say is across the board we had a very solid operational quarter, such that the benefits from the full quarterly impact of the data center came through to the bottom line.

If you recall, we had moved our data center mid-Q2, so there was only about half of quarter of benefit.

So the full quarterly benefit came through in Q3, and really solid operational performance allowed us to invest, and also see that come to the bottom line.

Okay.

Great.

I guess not related to data centers but just people-wise, I think last quarter you guys also mentioned there might be a slight uptick in Q4 the back half of the year, second half; is that going to continue in Q4, just headcount-wise?

I believe so.

Also in my prepared comments I mentioned that I expect the fourth quarter margin to be very comparable to the third quarter, so you are not going to see something that's going to move the numbers, I guess.

Got it.

Great, thank you very much.

Thank you.

(Operator Instructions)

I am showing no further questions at this time.

John, I will take it from there then.

I just want to thank everyone for participating on the call today, and we look forward to reporting our full-year results in late January of 2011.

We will keep you updated as we make progress on the Intec acquisition.

Have a great day.