CSG Systems International Inc (CSGS) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the CSG Systems Q4 conference call.

(Operator Instructions).

The conference is being recorded today, Tuesday, February 8, 2011.

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

Liz Bauer, Vice President of Investor Relations.

Please go ahead, ma'am.

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

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

These include, but are not limited to statements regarding our ability to meet our financial expectations, as a result of an increased dependency on software sales which are subject to greater volatility, 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, operating, and financial goals, and our ability to successfully conduct business in the international marketplace.

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 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 financial 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, I would like to remind you that our Analyst Day is coming up on Thursday, February 24, at the London Hotel in New York City.

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

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

I'm extremely pleased to report that CSG had a very strong fourth quarter and full-year 2010.

In addition, since our last call, we've completed a couple of significant events for our business.

As most of you know, we closed the acquisition of Intec Telecom Systems, a leading world-wide provider of mediation and wholesale and retail billing solutions on November 30.

As a result, our performance for the quarter and for the full-year, includes one month of Intec's results.

I am going to let Randy go through in detail our results for the quarter and for the year, but I'm pleased to report that when you isolate the CSG business from the total numbers presented, we exceeded our revenue and non-GAAP earnings per share guidance for 2010.

And with only one month of Intec's results, Intec was $0.01 accretive to our non-GAAP EPS.

Shortly after the close of the year, we announced that we extended our relationship with DISH Network to 2017.

With this agreement, DISH intends to migrate to our Advanced Convergent Platform, or ACP, the most deployed next-generation customer care and billing solution serving the North American cable and satellite markets.

By moving to this platform, DISH will now have access to ACP's ancillary products and services, which are aimed at increasing revenues, and reducing operational costs.

We're pleased to count DISH Network among our extensive list of clients, serving the communications industry.

Both of these activities demonstrate our continued execution on the objectives that we established for 2010.

I'd like to summarize our accomplishments over the past year.

First, we said that we were going to expand what we do for our clients in the North American cable and satellite market.

This year, with our help, our clients expanded their small to medium business communications and content offerings.

They continued their focus on enhancing their customer satisfaction by improving the overall experience with their products and services.

And they streamlined and automated many of the processes in their own operations, to help manage or reduce costs and drive new revenues.

In addition, as a result of the DISH Network renewal, we have solidified our relationship with our second largest client for seven more years.

By moving to ACP, we have more solutions available to help DISH achieve its business objectives.

This extension provides visibility into a significant revenue stream, with solid growth opportunities for many years to come.

We're a trusted partner to some of the largest providers of communication services in North America.

By continuing to get deeper and broader into our client's operations, and continuing to secure long-term contracts with our clients, we've established a very strong foundation for the entire business.

For our second objective, we stated that we wanted to grow our relationships with providers in complementary, vertical markets.

We made great strides in the content space, with clients like the Ultimate Fight Championship, Universal Sports, OnLive Gaming, and other major content and entertainment providers.

This area of our business, while small, provides us with great insights as to how the direct-to-consumer business models are playing out in the content world.

While there's been a tremendous amount of speculation about the impact that the over-the-top providers will have on cable or satellite providers, our first-hand experience shows that this form of distribution is more complementary than competitive.

We also continue to make great strides in the area of analytics.

We've always believed that service providers have a tremendous amount of data that can be leveraged across their business, to provide more intelligent, immersive, and intentional interactions with their customers.

Our Quaero solution continues to help providers in the media, content, health care and retail spaces, operationalize and monetize all of the data that they have.

In fact, just this January, we were recognized by Forrester Research as one of only eight firms that can help customer-intelligent professionals, not only capture and analyze data about their customers, but actually do something with that data.

Our third objective we outlined for 2010, was to improve the profitability of our business.

Well, in addition to executing well on the revenue and client side, we continued our strong heritage of operational excellence and financial performance.

During 2010, we continued to successfully convert subscribers to our platforms, and expanded the share of the market we support.

We also deployed new capabilities to enhance our clients' marketing and offering of their products and services.

This is important, as clients continue to add new services to an ever-demanding consumer marketplace.

In 2010, we completed our two plus year data center migration without any major problems or client disruptions.

This operational undertaking provided us with a strong financial results on the expense side of the business, as is evident in our increasing non-GAAP operating margins throughout the year.

In addition, by leveraging our operational infrastructure with the addition of new customers, whether that's through market share gains or adding new types of services, like voice, Wi-Fi or business services to our platform, we're able to drive additional efficiencies in our operations.

Finally in 2010, thanks to our ongoing strong cash flow generation, we put a capital structure in place that will enable us to continue to invest in our people and our products, so that we'll even be better positioned to help our clients be successful for many years to come.

In 2010, we generated $107 million of free cash flow, while continuing to invest in our products and services, with over $78 million in research and development.

We strengthened our balance sheet with the issuance of $150 million in new convertible debt that will come due in 2017, coupled with the repurchase of $140 million in convertible debt that was scheduled to mature in 2011.

With the strength of our business and our balance sheet, we financed the $376 million Intec acquisition using cash from our balance sheet, and issuing $200 million in term debt, and drawing upon a new $100 million revolving credit facility.

And we ended the year after all of that, with $216 million in cash on the balance sheet, which is an absolute increase year-over-year.

So with that, I'm going to stop here for a few minutes, and ask Randy to go through our financial performance for 2010.

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

I'm happy to share with you the financial results for our fourth quarter and full-year of 2010.

This is the first quarter containing one month of financial results from our recent acquisition, Intec Telecom Systems.

Underlying these results is another strong quarter for our core business, with revenues and margins exceeding expectations, which resulted in the solid earnings growth for the full-year.

Now I would like to walk you through the financial results for the quarter and the year.

Total revenues for the quarter were $154 million and $549 million for the full-year, with $18 million attributed to the Intec operating results for the month of December.

For our historical core business, total revenues for the quarter and full-year were $136 million and $532 million, exceeding the high end of our $530 million revenue guidance for the year.

This represents 6% revenue growth for the year, with our historical core business, all organic, relating to the continued adoption of our solutions, and year-over-year subscriber growth in our systems.

To give you some perspective on Intec's results, you will see that the revenues for the month of December of $18 million were very consistent with Intec's monthly average revenue for 2010 reported in our 8-K filing yesterday.

Revenues generated from Comcast and DISH Network for the fourth quarter were 22% and 16% respectively, which are lower than the third quarter levels, due to the inclusion of Intec revenues in our results.

Our non-GAAP operating income for the quarter was $31 million or a 20% margin, and $107 million or a 19.5% margin for the full-year, which includes the impact of Intec's non-GAAP operating income of $200,000 for December.

Absent Intec's contribution, the non-GAAP operating income for the historical core CSG business exceeded 20% for both the quarter and full-year, which was an improvement over 2009's comparable measure of 18%.

The expansion of our non-GAAP operating income margin between 2009 and 2010 can be attributed to our strong revenue growth, continued good expense management, and solid operational delivery, including the benefits related to our recently completed data center migration.

For the full-year 2010, these non-GAAP operating income results, exclude a total of $32 million of expense, with $20 million of this amount related to the transition of our data center, and $12 million related to various acquisition-related charges associated with our purchase of Intec.

As a result, our consolidated GAAP operating income for the quarter was $21 million, and was $74 million for the year, yielding a 14% GAAP margin.

Non-GAAP EPS for the fourth quarter was $0.69, which compares to $0.48 for the same period last year.

For the year, we reported our non-GAAP EPS of $2.30, as compared to $2.00 for the prior year.

This represents year-over-year annual non-GAAP EPS growth of 15%, driven in large part by the solid organic revenue growth, and our improved operating performance over last year.

The overall impact of the Intec acquisition to our non-GAAP EPS was accretive by $0.01 for the quarter and the year.

GAAP EPS for the quarter was a loss of $0.05, and $0.67 for the full-year.

The significant difference between our non-GAAP EPS and our GAAP EPS measure, relates primarily to the exclusion of the expenses related to our data center migration project, and various Intec acquisition-related charges incurred in 2010.

The data center migration expenses were $20 million for the year or $0.40 per share impact, and the Intec acquisition-related charges were $26 million, or $0.52 per share impact.

As a reminder, $12 million of this $26 million of acquisition cost hit operating income, and the balance of $14 million was below the operating income level, in the other expense section of our income statement.

Our 2010 GAAP effective income tax rates were impacted by several unusual tax items, including the different book and tax treatment of certain Intec acquisition-related expenses, and the income tax benefits we recorded in the second quarter upon the completion of our IRS examination.

Therefore, for purpose of calculating our non-GAAP EPS measures, we used a normalized income tax rate of approximately 35% for the full-year 2010, and 31% for the fourth quarter, with the fourth quarter being lower due to the catch-up recognition of our R&D tax credits which were approved by Congress during the quarter.

These tax rates were in line with our guidance expectations.

Moving on, we ended the year with a cash balance that was relatively unchanged from our September 30, 2010, balance.

Let me walk you through the big items related to our cash movements for the quarter.

First, we spent close to $400 million during the quarter for the Intec business, and all the related acquisition expenses.

We funded this with $235 million of new bank debt, with the remaining amount funded from our existing cash balances.

Intec had $110 million of cash and short-term investments on hand, as of the closing date of the acquisition.

So the net cash outlay related to the Intec acquisition was around $300 million.

And second, we continued our strong cash flow generation from operations.

During the quarter, our operating cash flows were $47 million, resulting in full-year 2010 operating cash flows of $121 million.

This exceeded the top end of our full-year guidance by $9 million, with a better cash flow performance attributed to favorable timing of working capital items at year-end.

These activities left us with a cash balance of close to $216 million as of the end of the year, and a long-term debt balance of $410 million, leaving us with a debt balance net of cash of a little less than $200 million.

Our adjusted EBITDA for the full-year was $158 million, or 29% of total revenues.

As of year-end, this represents a gross debt to adjusted EBITDA ratio of 2.6 times, and a net debt to adjusted EBITDA ratio of 1.2 times.

Based on our solid financial position and our strong cash flow generating capabilities, we are very comfortable with the level of debt that we have on the balance sheet, and the flexibility our capital structure provides us, to manage and grow the business going forward.

I would now like to turn it back to Peter to discuss our business going forward.

Thanks, Randy.

As I look at 2011, I can't help but get excited.

As we've discussed before, the communications world is highly dynamic, and becoming much more complex.

Services, technology and networks are converging, and increasing the complexity involved in meeting the end consumer's needs.

And consumers are demanding a more simplified, reliable, and personal customer experience.

Communication service providers are looking for new ways to leverage and monetize their increasing investments in networks, and their products and services.

Our acquisition of Intec Telecom will even better position us to help our clients meet their needs today, while preparing for tomorrow's challenges.

The Intec Singl.eView solution offers one of the leading real-time charging and billing solutions designed from the ground-up for converged markets.

It supports some of the largest communication service providers in the world, including Reliance in India, the Hutchinson 3G properties globally, MTN in Africa, Virgin Mobile in the UK, and Telecom New Zealand, just to name a few.

The Total Service Mediation platform will help us participate in helping operators manage and monetize the massive growth they're experiencing in mobile data and new subscriber additions, especially in emerging markets.

Today this is one of the most utilized mediation platforms in the industry, with over 150 installations around the world.

Finally, the Intec InterconnecT product is the most deployed wholesale settlement solution in the world.

It's currently used by more than 200 service providers.

InterconnecT is the core of our wholesale business management solution, which provides a full suite of applications to enable service providers to maximize the value of their partner interactions, and include solutions for roaming management, trading and routing, and content partner management.

We believe that these solutions have applicability to our North American cable and satellite clients, and that we will also benefit from the recovery in spending that we are seeing in spending in certain parts of the world.

We'll discuss our solutions in more detail at our Analyst Day in New York City on February 24.

In summary, I like what we've put in place for our clients.

We've continued to expand and enhance the breadth and depth of our solutions servicing the communications industry, with products like analytics, mediation, wholesale billing, pre-paid post-paid rating and charging, workforce applications, and our product catalog.

We've expanded our domain expertise to include voice, data, content, and convergent services.

And now we have multiple delivery capabilities for our global list of clients, including licensed and software-as-a-service solutions.

In closing, I like our position.

We've solidified our core business.

We've continued to generate strong cash flows, which can be reinvested in the business to help our clients be successful.

We have a sizable international infrastructure that provides us with the scale to take advantage of the opportunities that we're seeing in the market, especially with activity picking up in certain regions of the world, like Asia Pacific, South America, Africa, and some parts of Europe.

And we have an extensive and broad product portfolio that will allow us to continue to be a meaningful partner to service providers around the world.

I would like to thank our employees for their hard work and dedication.

We've had a lot going on over the past year, and they've stayed focused, and executed on everything that has come their way.

It bodes well for this year.

Now I would like to turn it back over to Randy, to go through our financial outlook for 2011.

Thanks, Peter.

But before I do that, I thought I would spend a few minutes on some key matters for you to consider heading into 2011.

First, we recently announced that we entered into a seven-year extension with our second largest client, DISH Network.

We are proud to continue to be a trusted business partner of DISH.

The contract provides us with significant revenue visibility going forward, as we've earned the right to be their exclusive provider of customer care and billing services for their satellite customers, and it includes annual financial minimums through the term of the agreement.

DISH also agreed to migrate to our ACP platform, which is an important milestone for us, as we will now be able to sunset the legacy platform currently utilized by DISH sometime in the 2012 time frame.

While this will require some vast additional resources toward this migration project in the near term, this provides us with a longer-term opportunity to be more efficient in our operations, and better leverage our R&D investments into a single processing platform.

We also believe by migrating DISH to the ACP platform, we will have greater opportunities to deliver some of our newer products to help them continue to evolve, and operate their business.

Second, we plan to continue our long-term standing commitment to making R&D investments in our products going into 2011.

We have historically invested approximately 14% of our revenues into R&D, and expect this to increase in 2011.

We see significant opportunities for investment, in both the CSG and Intec assets, to include some near-term product integration efforts to bring Intec's real-time billing and charging capabilities to our core cable and satellite clients.

As a result, we plan to make an additional investment of approximately $7 million in 2011, in our global go-to-market strategy that includes the integration of our products, our people, and our processes to better position the Company for future growth.

Third, we are excited about the opportunity the Intec products and employees bring to CSG.

Since we have not had a chance to discuss the Intec business in too much detail yet, I thought it would be helpful to provide some background information.

First, CSG's revenues have historically been heavily concentrated in the US cable and satellite vertical market, with approximately two-thirds of CSG's historical revenues coming from our four largest material clients.

Intec derives a large percentage of its revenues from the global telecommunications industry, serving well over 400 clients, with no single customer typically accounting for more than 5% of their total annual revenues.

As a result, the Intec business will provide us with greater market and client diversification, increased sales opportunities in new verticals, and reduced customer concentration risk.

Going forward into 2011, we anticipate approximately 60% of our combined revenues will come from the US cable and satellite vertical, 30% from the global telecom, wireline and wireless vertical, with the remaining portion coming from a number of smaller verticals.

In addition, we anticipate that our revenue concentration from our two material clients will fall to about one-third of our total revenues in 2011.

Second, CSG only served the North American market.

Intec is a global provider of software and services, generating roughly 45% of its revenues from the Americas, 35% from EMEA, and 20% from the Asia Pacific region.

The Intec business provides us with greater geographic diversification, and also provides us with a solid international infrastructure to help grow our business in new geographies.

And the third and final point on Intec, Intec helps expands our overall delivery model capabilities.

CSG's business has been predominantly focused on a very successful outsourced processing business.

Intec's business adds greater software, and professional service delivery capabilities to the mix.

In its most recent years, Intec has generated approximately two-thirds of its revenues from professional services and related software sales, and about one-fourth of its revenues from recurring annual software maintenance, and the balance of about 10% or so, from longer-term managed services contracts.

The size of Intec's software sales can vary by project, but typically average from $1 million to $4 million, dependent upon the product offering and its complexity.

In addition, as a general rule of thumb, for every $1 in software license revenue sold, there's another $1 to $3 in professional services work associated with that sale.

CSG will be recognizing a large portion of its software professional services contracts, utilizing the percentage of completion method of accounting.

Software maintenance revenues generally range between 15% to 20% of the related software license revenues.

For its managed services contracts, several of Intec's larger clients have a five-year term.

One of the attractive investment characteristics of CSG, is our recurring revenue model.

Historically, CSG has generated -- has generally entered any given year, with about 90% visibility into our revenues for that year.

With the addition of Intec, we do introduce a slightly higher risk of revenue variability, that is typically present in a software professional services business.

However, a significant portion of Intec's revenues are highly visible, going into any given year.

As a result of a long-term relationship Intec has established with its clients, Intec generates consistent revenues through software upgrades for functionality and capacity, ongoing professional services work, a steady software maintenance stream, and a smaller managed services operation.

Considering the recurring nature of the revenues from both CSG and Intec, we anticipate our annual revenue visibility to be in the 80% range going forward, which is still an extremely strong measure for a Company of our size and diversified delivery options.

To summarize, I view 2011 as a transitional year for CSG.

We're expanding business relationships with our existing clients, adding additional product capabilities through continued R&D efforts, and integrating the capabilities of both businesses.

With that as a backdrop, I'd now like to walk you through some of the details of our 2011 outlook.

We expect revenues to range between $757 million to $772 million for 2011.

This obviously represents significant growth over our 2010 revenues, due to the inclusion of the full-year impact of Intec in 2011.

To help you better understand the underlying growth profile of this revenue guidance, and factor in the timing of the Intec acquisition, let me provide some color behind the numbers.

This represents approximately 2% to 4% revenue growth over our December 2010, monthly exit rate, which includes the one month of Intec operating results.

Our revenue goal for 2011 is negatively impacted in the near term, by the investments we made in making our long-term relationship with DISH extend for seven years.

If you exclude the negative impacts of the DISH discount we provided for 2011, the growth rate underlying this guidance rises to 4% to 6% for the year.

This rate is consistent with the markets we serve, and we believe this is a solid growth plan for 2011, considering the transitional matters we must execute on during the year.

Moving on to our operating performance expectations, beginning in 2011, we have modified our calculation of non-GAAP operating income to be more consistent with the method used by other companies in similar industries, and with the calculation of our current non-GAAP EPS measure.

Going forward, the calculation of our non-GAAP operating income will now exclude the impact of stock-based compensation, and the amortization of acquired intangible assets, both non-cash expenses.

There is no change to our calculation of non-GAAP EPS.

Under this revised definition, we expect our full-year 2011 non-GAAP operating margin to be in the range of approximately 18%.

This represents a decrease in our comparable non-GAAP operating margin percentage between years, which is driven in large part by the investments I mentioned previously, and by the inclusion of the full-year of Intec operating results.

Intec's operating margins are more consistent with those of a software and services company, which are lower than CSG's historical operations.

Just as we have in the past, we are willing to make the necessary investments in our business for the long term, which can negatively impact our margins in the near-term.

However, we have proven to be good operators of our business, and you should expect us to look for ways to expand our margins over time, as we see the benefits of our long-term investments come into play.

Moving on, we expect our non-GAAP EPS for 2011 to range between $2.24 and $2.32.

This is generally in line with our 2010 performance, reflecting the level of investments we are making in the business for 2011.

The financial incentives provided to DISH for 2011 had a negative impact on our 2011 non-GAAP EPS in the range of $0.20 to $0.30 per share, and the additional $7 million of investments I mentioned earlier, had a negative impact of approximately $0.14 per share.

Last year, when we announced the Intec acquisition, we indicated our expectations were that the business would be accretive to our non-GAAP EPS in 2011.

I would note that Intec is expected to be accretive to our 2011 non-GAAP EPS guidance, at a level consistent with the full-year's impact of Intec's December results under CSG's ownership.

This non-GAAP EPS guidance reflects an assumed effective income tax rate of approximately 37% for the full-year 2011, which is higher than the 35% rate used for our 2010 non-GAAP EPS calculation.

This increase, which can be partially attributed to the complexity associated with our international operations translates to $0.05 per share of negative impact to our 2011 guidance.

As we work to implement our longer term global tax planning strategy during the year, we may see some volatility in our income tax rate.

One last item before we move on, our 2011 guidance does not anticipate any significant impact from foreign currency fluctuations, because of the difficulty in predicting such items.

We do have a large portion of our revenues and expenses in a natural hedged position, but are still subject to foreign currency fluctuations in certain currencies.

Our expectations for cash flows from operations for the year are $105 million to $112 million.

These 2011 cash flows expectations include a negative impact of $20 million, related to the change in the timing around how we invoice DISH for its monthly services, which was included as part of the renewal terms.

Absent this impact, our 2011 cash flows from operations would be in line with our more normal historical annual levels of approximately $120 million.

Our expectation for 2011 capital expenditures is approximately $20 million to $25 million.

And finally, beginning this year, we also intend to report adjusted EBITDA to help investors further understand the financial strength of our business.

For 2011, we anticipate adjusted EBITDA in the range of $177 million to $181 million, or approximately 23% of our expected total revenues, which represents growth of approximately 13% over our 2010 adjusted EBITDA performance.

Our 2011 guidance reflects the full integration of our acquisition of Intec into our financial results.

Given the cross-selling opportunities of CSG, and Intec's products among the various client bases over time, we do not intend to report Intec's results separately, as we did for the fourth quarter.

Instead, you will see us report our revenues broken down by three categories on a consolidated basis, processing and managed services, software and maintenance, and professional services.

To summarize, we are very pleased with our results for the fourth quarter and full-year of 2010.

We are excited, as we begin 2011 with the combination of two world-class operations, CSG and Intec.

We have a solid foundation of revenues, generated from a more diverse and global client base.

We have a broader product portfolio, with multiple delivery models to help our clients execute on their business objectives.

The combined business generates strong cash flows, contributing to a solid balance sheet providing us with opportunities to continue to invest in our business to generate long-term growth and value for our shareholders.

We are excited about the opportunities before CSG.

We know that we have a lot of hard work ahead of us for 2011, but we believe that it will establish a strong foundation, to take advantage of the growth opportunities that the changing communications and service provider industries are presenting to us.

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

Thank you, sir.

(Operator Instructions).

And our first question is from the line of Scott Sutherland with Wedbush Securities.

Please go ahead.

Great.

Thank you.

Good afternoon.

Good job on the quarter.

Thank you, Scott.

Two questions.

One, wanted to get kind of a little more on the EPS guidance.

Despite the -- outside the $0.05 impact from the tax rate, is there anything else that is kind of making the non-GAAP EPS flat year-over-year?

Yes, Scott, I'll take that.

I had a couple in my prepared comments.

It was the DISH discount, which was quantified to range between $0.20 to $0.30 per share.

And also we made some additional investments that we're planning on doing in 2011 to the tune of about $7 million, which is about $0.14 a share.

Okay.

So those three things?

Yes.

Keep in mind also, that you have to consider the debt cost, as well for the acquisition in 2011 as well.

That's buried in there -- in them.

Right.

And as we look at the kind of growth of the different segments, were you assuming the Intec business grew at a similar 2% to 4% rate as the traditional CSG business, so that all the lines are growing around 2% to 4%, for the three line items you are modeling for next year, or are some things growing faster or slower than others?

No.

I think you can look at it -- it's pretty general across all the lines, 4% to 6%.

Okay.

Great.

Thank you.

Our next question is from the line of Ashwin Shirvaikar with Citi.

Please go ahead.

Hi, guys.

Nice quarter.

Thanks, Ashwin.

I guess my first question is, can you comment on the -- the margin and cash characteristics of Intec?

Sure, Ashwin.

Let me take that one.

From the standpoint of the margin profile, and you can get a lot of it out of the 8-K, but I'll summarize it for you.

If you look at their margin profile, they generate about a 50% gross margin, across all their lines.

Some are more profitable than others, but if you look at the overall gross margin, they are about 50%, which is fairly consistent with CSG.

They generate about 10% operating margin, so below the gross margin level, they invest about 14% of their revenues in R&D.

Probably in the mid 20s for the SG&A line, and a couple of percentage points on the depreciation.

So if you do the math, you'll see it's about 10%.

That should give you a good idea, as to the profile.

From a cash generating standpoint, they do generate fairly decent cash flows.

Again, not at the same return as CSG, because their profitability is not as strong.

But if you look at their most recent years, they generate probably close to anywhere from $20 million to $25 million, US a year in cash flow from operations.

They don't spend much on CapEx.

It's a relatively low CapEx business.

Probably historically again, if you look at the 8-Ks, it's probably in the -- anywhere from the $5 million to $7 million US of CapEx, so low CapEx.

I guess, then I think too -- as I looked at the past, sort of interim statements from Intec, it was very obvious that, because it's more of a software business, that there was an incredibly high impact from revenue fluctuations on their margins.

So what I'm getting to is, what assumptions are you making about any sign of a recovery, with regards to telecom spending on Intec's products?

Ashwin, this is Peter.

We're not looking at 2011 as being a resurgence, but clearly, there is an expectation that there is the stabilization of the space continues, and that there is some opening up of spending.

But with the underlying information that Randy provided, that says we're looking at overall guidance of 4% to 6%, normalized out for the one-time items that we're bringing through in 2011.

We're seeing consistent expectations across our business, including what the acquired markets would be as well.

So we are expecting that we'll have a very solid business, and the integration works that we have underway, will continue to strengthen the business as it moves forward.

Okay.

And the impact, $0.20 to $0.30 -- it's a pretty wide range, what needs to happen for $0.20 versus $0.30?

Is it primarily you need to sell more services?

What needs to happen there?

Two things, Ashwin.

One, is there is some usage-based revenues that DISH uses for us.

So it depends on how much they continue to use, whether it be marketing services, or some of our other financial services products, and also expectations of new business sales.

Okay?

It could include professional services--.

It could include such things as professional services, in addition to some of the processing services they use for us.

Okay.

And last question, foreign exchange, with regards to Intec, what are the primary currencies that we should -- and percentages, if you can--.

Sure.

The four largest currencies are, in order of large -- or in order of magnitude for revenues is the US dollar, which is probably about 40% to 45%.

The second is the pound sterling, which is probably -- probably 20% or so.

Then you have the euro, which is probably 11% or 12%, and the fourth would be the Australian dollar.

That's about 80% of the revenues in those four currencies.

If you look at it from an expense side, those four currencies probably make up about 65% of the expense base.

So there a relatively good natural hedge there.

There is no single currency that I would say that we have a significant exposure in.

If I was to list the three currencies that we probably have the greatest exposure, it probably is the Australian dollar, probably the Canadian dollar, and probably the Indian rupee.

That's a pretty big basket.

So Ashwin, we need to -- you've had four questions.

(Laughter).

I think the key point there is 80% of our revenues are in four currencies that have 65% of expenses in those four currencies.

So there is a pretty good natural hedge there.

And our next question is from the line of Shaul Eyal with Oppenheimer & Company.

Please go ahead.

Thank you.

Hi, good afternoon, guys.

Good quarter.

Thanks, Shaul.

Guys, can you provide us with the number of subscribers you've had on the core CSG business this quarter?

Yes.

It was right at 49,000.

It should have been in the press release, I believe, it was right at -- Liz is going to check, but I think it was right at 49,000, on a rounded basis.

Yes, 48,913, up a couple hundred thousand from last quarter.

48.9 thousand.

Got it.

Thank you, thank you for that.

Peter, what's the feedback you've been hearing from customers, since late last year, since basically acquiring Intec.

What are some of the cable guys telling you about the acquisition?

In general, there's been favorable reception to this.

We've talked to clients about what we see happening in their business, and how we've responded to that, both in traditionally investing in our products from an R&D perspective, and historically where we also invest from an M&A perspective.

And as we laid out where we see, the business evolving for ourselves in conjunction with their business, getting assets that are -- have capabilities around real-time, network awareness, versatility in the way that we can deliver some of the solutions, and do professional services, these all fit with the desires where our clients are trying to move to, in their businesses, and complement what they have in their business models.

So, it's been well received.

Got it.

Any kind of maybe it's a -- I've got to ask this question about a quarter or two.

Any attrition, so far in terms of management, senior employees from Intec?

As we said early on, this was an acquisition that was focused on bringing the best of two businesses together, and taking advantage of the assets and the markets that the companies had built a strong presence in.

There's a couple of members of executive management that early on agreed that they wouldn't continue on, just because Randy and I thought they were competing for our jobs.

(Laughter).

So we thought we would like to keep our jobs.

And then there was some -- that as a public company, they wouldn't need to have their Board anymore.

But we've outlined key roles for their senior leaders, and their management.

And we're -- kicked off the integration piece, and have people assuming roles, moving forward.

All right.

Thank you very much.

Good luck.

Good job.

Thank you.

And our next question is from the line of Daniel Meron with RBC Capital Markets.

Please go ahead.

Hi, guys.

Good job with the quarter.

A couple of questions on my end.

First of all, can you provide us with some sense on where you guys are with integration?

I know it's been only a couple of months, but what have you done so far?

What do you expect to do within, the next say, six to 12 months?

How should we think about the integration process?

Thank you.

You bet.

From an integration perspective, it's now been just a little bit over two months.

We wanted to make sure that we spent time with the employees around the world, to make sure they understand what CSG is about, and how we look at running a business, and making sure that there is an awareness of values and focuses of the business.

We've brought the businesses together, from an alignment of responsibilities.

So we're bringing our sales organizations together, so that we have a single sales organization.

Our delivery organizations are being brought together, so that we can bring the best from both sides together, and start getting benefits there.

Our product teams are starting to look at where there's opportunities to integrate products and putting together product integration plans, and where we can get some hopefully fairly quick benefits in the first 12 months of bringing an enhanced solution to the marketplace.

And then, of course, all of the back office things that have to take place, of business management processes around financials, and accounting, and HR and all that is naturally going on as well.

But I have to say for the first, now a little bit over two months of the integration process -- it's very excited about what we've seen about the enthusiasm of the employees and leaders from Intec, coming in.

Their enthusiasm for what they see, as the strength of the combined business.

And when you start seeing excited people looking about how you can attack the marketplace with an overall better offering, it bodes well for what we have in front of us.

Very well.

And then, I don't know if this is a question for Randy or you Peter.

I understand that DISH, and also the integration process of Intec, you're creating somewhat of a headwind to the bottom line, a little bit to the top line, but can you -- if we're to think about 2012, or some apples to apples comparison of the businesses, how we should think about it, excluding this renewal or the integration, how would the numbers look like on the top line, as far as the growth, as far as the trajectory for revenue?

And then also, on the margins and the cash generation?

Let's break this into a couple of pieces.

The first piece I would tell you is that, we have clearly made some investments into the relationship with DISH, based on the financials that Randy has shared with you, and the impacts to the P&L for 2011.

We view that this is -- with a seven-year outlook, and some extension opportunities beyond that, a great investment from our side is, we get their commitment to migrate to our next gen platform of ACP, and allow us to drive toward the elimination of redundancy in our R&D and our development efforts.

So we think that, coupled with the visibility of this relationship to drive revenue long term, and support DISH in their evolution of their business, is a really key critical investment, that gives not only scale and leverage to our business, but great visibility.

From a outlook for 2012 and beyond, probably the best that I would say -- and Randy can chime in is that exclusive of the impacts of the DISH renewal and the savings we gave, we were looking at a 4% to 6% growth, and that gives a baseline of how we think the business is doing.

For 2012 guidance or outlook, you're not ready to do anything along that, are you?

No, we haven't provided any guidance.

(Laughter).

Okay, so how should we think about the margin expansion--?

So Daniel -- go ahead, Randy.

Go ahead, Daniel, you said on the margin expansion?

Yes.

I think you should -- I think you should look at what we've done the last few years.

We have been a Company that's committed to making the necessary investments to grow the business.

And then we work towards -- you'll see some pressure on our margins in those investments periods.

And then you'll see us make some improvements to our bottom line through efficiency, scale, cost savings.

So I think we're sitting at 18% for my guidance for 2011.

You should expect us to look for ways to expand that over the next few years.

That's more difficult until we get DISH migrated over to ACP, but once we get them migrated over, that should give us some opportunities.

But also as we grow the business, we should get some greater scale across the various platforms.

So looking for ways to expand the margin, very consistent with what our approach has been in the past, look for solid top line growth, look for ways to expand the margin.

Okay, Randy.

That's helpful.

And then just to clarify, so we should be looking at free cash flow, net all these headwinds -- as around $120 million for the combined business, or at least north of that, if we look into 2012?

I think you're a little high -- if you're doing your math on 2011 though, because the guidance was about $108 million -- I had about $109 million as the midpoint.

Right.

And I had about $25 million on the high side for the CapEx, so that is going to get you down into the $80 millions.

And then if you add back the $20 million for DISH for kind of as an unusual item, it gets you a little over a $100 million in the free cash flow.

Okay.

Very good.

Thank you.

I think, looking forward, you should be able to look for cash flows to grow somewhat consistent with the earnings in the top line growth.

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

Please go ahead.

Yes, good afternoon, everybody, and congratulations on a good end of the year, and a good start to Intec.

My question is around, a specifically Intec, two months -- your biggest surprise relative to your expectations, your due diligence going in, that you've seen?

You hinted at enthusiasm of the sales force, so I'm looking for -- maybe something else?

I guess probably on the first part, the first surprise is how far away Australia is from here.

(Laughter).

No, in -- we've been pleasantly surprised in the strength of the assets and the people.

You always want to make sure that things haven't been starved from a business.

We recognize there's going to be some need to put some more dollars in the business, and that's some of the investment that Randy talked about.

So he referenced, between the integration and investments of about $7 million that we will be investing.

And that's just to make sure that it is a business that is, as we bring them together, is well positioned for what we see as the longer-term opportunities.

And so that would probably be a little bit of a surprise, that we knew we needed to make some investment in, but as you get closer to the business, you see some areas that you feel like you want to put some more in than you originally anticipated.

But all in all, I mean, we can't under or overstate, we are extremely excited about the assets, the people, the client relationships -- and the -- clients that they're supporting in both developing countries and maturing markets that are going through everything from high organic growth, to those that are looking to do more on the platforms, on their networks.

And what we see as our own domestic clients, who as their businesses evolve, are looking very favorably upon, how we do support them going forward.

Great.

Well, I'll leave it there.

Thank you.

You bet.

Our next question is from the line of Lauren Choi with JPMorgan.

Hi, guys.

This is Lauren, in for Sterling.

Hi, Lauren.

How is it going?

Just first question is around, I guess, the three new areas that you're going to report, software -- or not software, processing, professional services, and managed -- is managed services, is that the third one?

Yes.

What we are going do, Lauren, is we're going to report processing and managed services together, because they have a lot of like characteristics.

We intend to report software maintenance together, because they're very inter-related.

And they also have a similar cost base in the R&D to deliver that, as well as the cost of those two services.

Okay.

And then we intend to report professional services as a separate line item.

Can you remind me again what the intel break-out of those three areas are again?

Sure, I'll give you -- historically, they've done about 50% professional services.

About a fourth of their business has been software maintenance services.

About 15% is software, and the balance of 10% is the managed serviced side.

Okay.

And was the business model at Intec around -- was it a managed services kind of -- they were trying to get their customers on to managed services, or was it the other way around?

I am just trying to understand -- yes.

I'm sorry.

I would say -- I think that was a strategy to increase their managed services, because it's a good recurring revenue model.

Right.

But their business model really is software sales, and then providing a very high value-add professional services, and then providing maintenance services going forward.

So it truly was a software business, and I think you see lots of demand in the marketplace when you sell software.

Sometimes people can't run it.

So I think they try to supplement that with the managed services side, to really round out their service offering.

Okay.

And then, just going forward, as you kind of take over these customers, are your thoughts in terms of trying to move them back into more of a software model?

Or are you going to stick with whatever the current model is, or any thoughts in terms of going-forward strategy there?

Lauren, this is Peter.

What we want to do, regardless of how our clients choose to take a CSG offering, whether it's to run the assets themselves or to have us run that asset for them.

We want to deepen those relationships, such that we are providing critical resources to them, both in support and professional services, operational support, new feature functionality, and be in lockstep with them about where their business goes.

We really see the potential to develop those relationships, regardless of whether it's a processing relationship or services.

But what that requires is that we have to make sure that we continue to bring more product to them, that we can integrate, or that we can provide more integration and management support to them, whether it's on their floor, or our floor of the hardware and the applications.

We're not looking to shift any one client, or any one business in a different direction.

We're looking to be responsive to what the clients and the marketplace demands, around how they take services and products and how we deliver them.

Okay.

Yes, that was my, I guess next question, which is of the $7 million investment, you talked about the integrating real-time billing and charging into the cable operators.

Is any of that $7 million investment also the other way, where you're trying to integrate into Intec solutions?

Well, I think anytime you have assets talk to each other, you have the ability to potentially bring something to the -- both directions in the marketplace.

How much bang for the buck that we can see in that in that near term, we're being cautious, but by having the assets talk to each other there -- and since we built a modular capability in our road map, for our core assets with CSG, we'll see how those have applicability in other markets and other clients around the world.

Okay.

And just one last question.

Can you just remind me around DISH, what the road map is to their transition?

Does it take over -- like the time line basically, in terms of how they're doing it?

Well, we don't have all the specifics on that because the teams have to work together.

It's really key that anytime you look to work with a client to migrate them from one platform to another, that you do it at a pace that is within our capabilities, and also within the desires and capabilities of the client, because it has to be linked up in the timing of their business operations.

We're looking at 2012, as the target year in which this would take place.

There is a lot of your edge systems, there are outbound systems that they have that are integrated to [Cycle E] that will have to be rationalized as part of this, and their business operations of how they take the full value of what we have in ACP.

We have great history of migrating customers to ACP.

As you know, over probably the last three years, we've migrated somewhere in the range of 35 plus million subscribers onto the platform, and done so successfully.

And so we feel comfortable we can do it, but we don't want to set a guideline on this, without having a more detailed plan worked out with our client.

And our next question is from the line of Vincent Lin with Goldman Sachs.

Please go ahead.

Great, thanks.

I guess the first question is on the $7 million investment.

Is there a way to think about how much of that investment is sort of recurring versus one-time in nature, in terms of what is integration related, product related?

And I know you're not prepared to give 2012 guidance yet, but as we roll into, say, next year, how much of that investment is expected -- is expected to normalize?

I think you can expect some of that investment to go into 2012.

I mean some of the products, I think you'll see a majority of it go into 2012, but as we get some of the integration work done, some of it may fall off in 2012.

And Vincent, just as a -- we are building the product road map that I mentioned earlier.

And so the scope of what that product road map needs to actually carry out, and what opportunities are in 2012 beyond what we see today, could also impact how much of that carries into 2012.

Got it.

That's helpful.

And then just secondly, regarding the guidance, both revenue and earnings between the low end and high end of the range, just wondering if maybe you can provide some color, around some other assumptions put into the guidance.

Is that primarily related to just less -- overall less visibility related to Intec, because of higher software sales, lower recurring revenues, or how should we think about the kind of puts and takes, between the low end and high end of the guidance?

Yes, I'll tell you this.

First of all, the range in the guidance is not that different from what we've had in the past for CSG.

Last year, we had a $10 million range.

So there's variability in CSG's business, from the standpoint of discretionary spending as for our client.

So it's things of a marketing nature, so clients could spend more or less.

Obviously, as an international software business, you have potential variability in software professional services.

So I don't know if I would point to one item that has got a greater degree of risk than others.

It's just across the business, a $15 million spread on $770 million is a pretty low percentage.

Okay.

Got it.

And just a last question, in terms of housekeeping items, for 2011, what are you expecting in terms of stock comp and overall amortization?

You can get this information in the press release.

I'll try to give it to you, if I can recall.

I think the stock based comp is between $13 million and $14 million, but again, it is in the press release.

On the amortization, the total acquisition amortization is about $22.5 million.

I think Liz is going to look it up here, maybe if she gets to it.

If not, it's laid out very nicely in some of the tables, in the back of the press release.

Got it.

That's fine.I might have just missed that number in the press release.

Thanks, Vincent.

And our final question is from the line of Tom Roderick with Stifel Nicolaus.

Please go ahead.

Hi, guys.

This is [Chris Growe] in for Tom.

Hi, Chris.

Just wanted to clarify, on the core versus -- or the core growth rate, I think you mentioned, Randy.

You said 2% to 4% is core CSG, and also that's what you're assuming for the Intec business?

It was consolidated.

It wasn't broken down by the two different businesses.

Okay.

So two to four across all products-- .So Intec--?

So CSG X DISH is 2% to 4%, and then 4% to 6% is what it would be excluding the DISH impact, correct?

Correct.

Correct.

Great.

Okay.

Thanks.

And then, as far as, if I kind of grind the numbers, you mentioned that your two biggest customers would be about third of your revenue next year.

So -- and I think it was in the 42% ballpark this year.

So if I run it, it seems like you're implying that the revenue from those two guys, will still be up year-over-year despite what maybe looks like a $15 million hit on the revenue line from DISH.

So can we kind of deduce from that -- that -- like you're making inroads with Comcast, in terms of selling additional services.

Or I don't know if they are gaining share or not, but can you just give us a little color on that?

No, I think your math might be in error there.

I don't think that you are seeing the revenues from DISH.Clearly, it's not increasing, it's decreasing because of the discount of 2010 to 2011.

On Comcast, I think actually we would expect their revenues to grow over 2010, at a similar pace to the rest of the business.

Yes, the thing is we only had the one month of Intec in the fourth quarter.

And you have a lot of different mathematics going into play here, Chris.

It might be best for us to maybe have this discussion, when we get together later.

Because it's not quite as easy as it sounds.

Okay, so just to be clear.

You don't expect -- I was talking about the contribution, in terms of both Comcast and DISH.

You don't expect that amount to be up, year-over-year.

That will still be down year-over-year?

The combined two, yes, should be down year-over-year.

Okay.

Cool.

I'll double-check that.

And again, on the Intec EPS contribution, did I hear correctly that you said a $0.01 per quarter, in terms of -- or that's roughly you would expect a similar incremental contribution to EPS from Intec throughout the year?

Or I don't know if I heard that correctly?

What I said is the $0.01 that we saw in December should be annualized, so multiply that by 12, is what I said.

Oh, okay.

Thanks, guys.

Thanks, Chris.

Thank you, and that does conclude the question-and-answer session.

I would now like to turn the call back over to management for closing remarks.

Thank you, Camille.

And thanks, everybody, for bearing through this complex outline of where we're going as a business, and the complexity of bringing two businesses together, and talking about them for the first time.

I just want to reiterate, we're very excited about all aspects of what we see in front of us.

2011 is really a key year for us, as we really bring the businesses together, and position ourselves for what is a continuing changing marketplace of communication providers.

We think we have the right assets, the right people, and the right commitment to be successful.

And we look forward to reporting on the successes, as we go into 2011.

Thanks, and we'll talk to you in three months.

Ladies and gentlemen, this concludes the CSG Systems Q4 conference call.

You may now disconnect.

Thank you for using ACT conferencing.