CSG Systems International Inc (CSGS) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Thank you for standing by.

Welcome to the CSG Systems second-quarter conference call.

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

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

(Operator Instructions) This conference is being recorded, today -- Tuesday, August 2, 2011.

I would now like to turn the conference over to Miss Liz Bauer.

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 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; and our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic operating and financial goals.

While these statements reflect our most current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revisions 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 on the Investor Relations section of our website.

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

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

We believe that isolating the effects of such events 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.

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

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

For the second quarter of 2011, we generated revenues of $181 million and non-GAAP earnings per share of $0.49 -- both of which were below our first-quarter performance.

We are disappointed with these results.

We are undergoing a significant transformation of our Company, going from a North American-based provider of outsourced services to a global provider with a variety of delivery models.

We expected the transformation would require us to execute at a level and a pace we knew would be challenging.

We set our goals high.

However, we got off to a slower-than-expected start to the year; and based on what we see today, we are not progressing at the pace we previously expected.

Although we now believe it will take longer to achieve some of our near-term goals, we still believe that the decisions we made, in particular the Intec Telecom acquisition, are the right long-term decisions for the Company.

We've enhanced our product offering, expanded our geographic reach, improved the diversity of our client base, and increased the number of ways we can help our clients be successful.

The combination of CSG and Intec has expanded the dialogue that we are having with our clients, both in our traditional cable and satellite market and in our newly acquired international base.

Today, I would like to provide you with some updates on some of the challenges we faced in achieving our near-term goals, the actions we've taken to continue to secure our operational performance, and share with you some successes within CSG's business that demonstrate progress towards our longer-term goals.

Last quarter we shared with you four items which contributed to our slower-than-expected start to 2011.

They were -- first, large transformational deals were slow to close.

While decisions were being delayed, we still expected to close several in the second quarter, which would provide us with some comfort on our second-half revenue ramp.

Second, we identified a sales leadership issue in Asia/Pacific, that once we dug deeper also pointed to a sales coverage issue in this region.

Third, spending on ancillary services that are more discretionary in nature were not growing at the pace we'd anticipated.

And finally, with all the civil unrest in the Middle East, there were delays in decision making.

So, let me provide you with an update on each of these items.

As it relates to large transformational deals, we did not close any of the deals that we had anticipated during the second quarter.

While these deals still remain in our pipeline and we believe that we are in a good position to win these deals, they will not close in a time frame that will contribute in a meaningful way to our 2011 revenues.

Second, in regard to the sales issue in the Asia/Pacific region, both -- we identified both the sales leadership and the coverage of the pipeline.

We moved swiftly to address the problem by moving our America's leader to Asia/Pacific; and after four months of new leadership in the region, there is still work to be done to improve the overall sales culture and way we approach prospecting, qualifying, and closing deals.

We are confident that we've taken the right steps, but we believe it's going to take more time.

Third, discretionary spending on ancillary services continued to lag our original expectations.

Companies continue to watch their bottom-line results, to ensure they are spending their dollars on items that generate near-term results.

Next, the Middle East situation has not improved.

The turmoil in this region continues to negatively impact the investment decisions by service providers within the region.

And while the Middle East has seen its share of challenges, the worldwide economy also continues to struggle.

With over 10% of our revenues coming from the EMEA region, the fact that countries like Spain, Italy, Portugal, and Greece are continuing to face financial challenges has created a cautiousness and conservatism with providers in those markets.

As a result, we have not seen a rebound in spending in large markets like Europe.

This quarter, we took several actions in line with our commitment to be good stewards of the business, keeping a healthy balance between both near-term and long-term opportunities for CSG.

First, we will be consolidating our print processing plants from four to three, to optimize the efficiencies associated with the advancements made in print technologies.

Over the past 10 years, technological advancements in printers have allowed us to double our printer [at] throughput.

Over the same period, the number of inserts that a machine can process in one hour has increased threefold.

The speed and efficiency resulting from our investments in this equipment has allowed us to significantly increase our overall capacity; and thus, make it possible to consolidate our facilities.

Second, during the quarter we streamlined our account management teams to take advantage of our expanded professional services capabilities.

And lastly, we trimmed our development resources by eliminating certain positions not associated with work on our next-generation solutions.

We have proven that we are prudent operators.

We will invest in the long term, much like we are doing with our investments in research and development and our go-to-market strategies.

However, we will make adjustments to our cost when the business warrants such action.

Now let me share with you some activities that demonstrate the progress we are making towards our long-term goals.

As we've discussed in the past, our cable clients continue to look for new ways to leverage their broadband pipe and provide content to customers on any device, anywhere, at any time.

Cable providers have invested over $9 billion in establishing the highest quality broadband network for consuming video and data.

In June at the national cable show, operators demonstrated how they are extending the network and delivering their content to any device -- literally turning a customer's iPad, tablet, or mobile phone into another TV screen or remote control.

They also shared how they are leveraging that broadband pipe for rollout of new lines of business, like commercial services and home security.

And finally, they shared how standardizing and simplifying the customer experience is becoming more complex, as number of viewing screens expands and the experience becomes more mobile.

All these activities bode well for CSG.

We enable our clients to leverage their existing plant and generate new revenues by rolling out new products.

And we have an extensive suite of products that enable our clients to standardize and simplify the customer experience.

This last quarter, a large cable client signed a contract with us to help roll out their home security offering.

Home security services have become much more sophisticated and interactive, due to the number of devices that can be connected via home network.

As our clients continue to look for ways to roll out more and more services, we will continue to help our clients be successful.

And as a result of our expanded product set, we have more ways to help them.

This last quarter, our Content Direct team rolled out a direct-to-consumer campaign with Paramount Studios, that allowed consumers to personalize their movie experience in a way that's never been done before.

It started with the studio establishing a feature windowing perspective, meaning that the studio had exclusivity for its transformer blockbuster films during a 16-day window -- ultimately limiting outlets such as Amazon, Netflix, and others from streaming those titles during that time period.

Content Direct created a transformers viewing site and provided purchasing and streaming capabilities for Paramount to stream transformer movies exclusively, using their digital locker in the cloud for a fee.

To drive viewership to this site, Paramount utilized e-mail channels and social media, sending millions of e-mails during the 16-day exclusive streaming window and pushing it to millions of Facebook friends.

In addition, we are also helping Paramount leverage the viral distribution of content through social media, and creating a mechanism for payment while in these environments with e-wallet capabilities.

This allows you, for example, to use your Facebook credits to pay for a movie while on Facebook.

This is the first time a movie studio has utilized this type of approach to drive consumption of their products directly to a consumer.

On the software and services front, we continue to see a steady flow of professional services work, volume upgrades, volume upgrades with existing clients, and new license cells.

Our clients tell us that as their businesses continue to evolve, they need our help; and this steady stream of work demonstrates the value of establishing long-term relationships with clients.

And these relationships rated -- aided by our delivery teams, who had a very strong quarter with numerous clients going into live production.

Finally, we are only eight months into the integration of CSG and Intec, and we signed our first Intec client to our print communication services with [Priya] Mobile.

This is important for several reasons.

First, it demonstrates the value that we can bring to our existing clients with our expanded solutions.

Second, it reinforces the teamwork that we are seeing between our employees, and looking for ways to expand our relationships with our clients.

And finally, it validates that we have a diverse group of clients, who have lots of needs that we can meet through a variety of products.

I'd like to close with a few comments regarding our quarterly performance and expectations for the remainder of the year.

We are disappointed.

However, we are a disciplined Management team that takes a long-term view of our investment horizon.

Our financial performance has not lessened our enthusiasm for our people, our products, our clients, and the opportunities that are ahead of us.

As we've said in the past, we're willing to make investments that may negatively impact our short-term financial results but provide us with greater long-term opportunities.

Like extending our contract in the first quarter this year with our second-largest client for seven years, and agreeing to migrate DISH to our next-generation solution at our expense.

Investing over $100 million for product R&D efforts in 2011.

Like investing $25 million in capital expenditures in 2011.

And investing close to $300 million to purchase Intec last year, allowing us to expand our capabilities globally and further enable the long-term transformation of CSG.

We believe these decisions are good business decisions that over time will further establish us as a preferred provider to service providers worldwide.

Our clients tell us that they want to do business with us.

And this major transformation that we are undergoing has expanded and enhanced the dialogue that we are having with our client.

They like what they are seeing, they like the vision for our products.

They tell us that we are easy to do business with.

And they like the fact that there is more ways to do business with us -- not just in managed services and not just in software services.

They like the fact that we have more ways to say yes.

And while we won't get there today with everything that we'd like to accomplish on this transformational journey, we know that we are building something that is sustainable and desirable for our clients.

Make no mistake, I'm not pleased with our execution and our performance this year.

We are focused on what it will take to execute on our longer-term strategy, and I don't want investors to lose sight of the fact that we have extremely strong Company is that well-positioned for the long term.

As I've shared before, we work with a vast and diverse group of clients who are leaders in a highly dynamic and changing market.

We continue to extend and expand our relationship with providers in the ever-changing communications market.

We have a sizable international infrastructure that provides us with the skill to take advantage of the opportunities in the market.

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.

And we continue to invest in the business to help our clients be successful.

And we are good operators.

We know how to manage the business to deliver strong financial results.

We have a lot of work ahead of us as we transform this Company from a North American-focused partner to a global leader in providing business-enabling solutions.

However, as I meet our employees and clients across the globe, I really like what I see; and I'd like to thank our employees for their hard work and commitment to our united cause, and thank our shareholders for their interest in our Company.

Now, I'd like to turn it over to Randy to go through our financial performance this quarter, and provide more details on our expectations for the remainder of the year.

Thank you, Peter.

Welcome to all of you on the call today to discuss our financial results for the second quarter and our revised guidance for the remainder of the year.

Let me begin by walking you through our quarter results in more detail.

Total revenues for the quarter were $181 million, up 38% over the same quarter last year, with the increase attributed to Intec Telecom being included in this year's results.

Total revenues were down 1% from the first quarter, due to a sequential decline in our processing revenues.

This decline can be attributed in part to having a full-quarter impact of the discount provided to DISH effective February 1, in consideration of their seven-year contract extension, as compared to only a two-month impact in the prior quarter.

Also during the quarter, we saw continued weakness in our clients' discretionary spending for various ancillary services.

Revenues from software, maintenance, and professional services were basically flat from the prior quarter.

Now, as a global software and services business, our revenues reflect greater diversification and an expanded customer base and delivery model, illustrated as follows.

First, our customer concentration has decreased from prior years.

This quarter, we only had three material clients that individually generated revenues over 10% of our total revenue.

This includes Comcast, DISH, and Time Warner, which together were 41% of our total revenues in the quarter.

This compares to four material clients accounting for 66% of our revenues in the same quarter of last year.

Second, we now have greater geographic revenue diversification for the quarter.

We generated 10% of our revenues from Europe, Middle East, and Africa region, and 4% of our revenues from the Asia/Pacific region, compared to none for these regions in the same period last year.

And third, we have greater diversification in our delivery model.

For the quarter, we generated 29% of our revenues from software-related services -- an improvement over the 2010 comparable measure of 8%.

Our expanded delivery model does increase the variability in our quarterly revenues, but we still have 12-month revenue visibility in the 80% range.

Over time, we believe that this revenue diversification provides us with additional opportunities for growth, with a broader customer base and expanded product portfolio.

Moving on, our non-GAAP operating income for the quarter was $33 million, which compares to $30 million in the same period last year -- an increase of 10%.

Our second-quarter non-GAAP operating income was comparable to that of the first quarter.

Our non-GAAP operating margin was 18% for the current quarter, compared to 23% margin for the second quarter of 2010.

This margin percentage is consistent with our expectation of operating at the lower end of our long-term target range of 18% to 20%, as we transform CSG to a global product and services organization.

GAAP operating income for the quarter was $22 million, or a margin of 12%.

Non-GAAP EPS for the second quarter was $0.49, which compares to $0.53 for this same period last year.

This decrease is largely a result of a higher effective income tax rate this quarter.

Our estimated non-GAAP effective tax rate was 41% for the quarter, bringing the rate to 39% for the first six months of our results for 2011 -- higher than the 37% used for the first quarter and previously assumed in our full-year guidance.

This increase can be attributed to unanticipated losses in certain foreign jurisdictions that we cannot tax effect at this time.

The higher-than-expected tax rate resulted in negative impact of $0.03 per share in the second quarter.

GAAP EPS for the second quarter was $0.27.

On to the balance sheet -- we ended the second quarter with a cash balance of $134 million, which was down from the last quarter's balance of $167 million.

Let me walk you through the big items affecting our cash in the quarter.

As we anticipated, the bondholders of our 2004 convertible debt instrument exercised their put option, and we paid $24 million for the par value of this debt.

This, along with our scheduled principal payment of $2.5 million on our term bank debt, brought our long-term debt balance to $346 million at the end of quarter, or $212 million net of cash.

Next, our capital expenditures for the quarter totaled $7 million.

And finally, our cash flows from operations for the quarter came in at approximately $1 million -- significantly below our expectation, caused in large part by unanticipated quarter-end movements in our working capital items.

In particular, we had an increase in quarter-end receivables of approximately $20 million, due primarily to payments from a large client crossing over quarter-end.

There are no client concerns underlying the payment -- the month-end timing of payments we experienced this quarter.

As we have seen in the past, the timing of payments from clients can frequently vary between quarters -- thus impacting our accounts receivable balance in the short term, but evening out over time.

Our overall days billed receivable outstanding measure remained solid for the quarter, at 59 days.

When you compare our $134 million cash balance at the end of June to the $216 million balance at the end of 2010, much of the $82 million difference relates to cash we spent this year targeted at strengthening our balance sheet and investing in our business.

Through the end of the second quarter, we lowered our debt position by $64 million, and directed over $11 million to capital expenditures during 2011.

Although our cash flows from operations year to date are less than you would typically expect from CSG, they have been impacted by several unique items for the year.

We do expect operating cash flows to continue to be a very strong metric for us, going forward.

I will provide some additional color on cash flows from operations when I discuss our outlook for the remainder of the year, later in my comments.

For the second quarter, our adjusted EBITDA increased to $44 million, or 24% of our total revenue.

This represents 15% growth over the same period last year, and was in line with our expectation.

Based on our solid financial position and our history of being strong operators, 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.

Moving on to our guidance -- as Peter stated earlier, we set a high goal this year, and we are falling short.

While we are disappointed with our expected performance of the year, we believe that the transformation that we are undertaking is necessary for the Company to remain competitive and continue to secure long-term relationships with the leaders in the communication industry.

We are evolving our solution and our delivery organization to meet the needs of our clients -- not just for today, but for three to five years down the road.

Although we have seen many successes across the Company for the first half of the year, we have encountered several top-line challenges that left us short of our initial expectation.

And we see those challenges continuing, such that we are reducing our guidance for the remainder of the year.

Our revised revenues will now range between $730 million to $750 million for 2011.

The lower end of the guidance essentially implies a slight increase in our second half of the year performance over our first half of the year performance, with the upper end of the range dependent upon the timely closing and delivery of new business for the remainder of the year.

To give you some greater perspective on our outlook, about one-half of the guidance reduction for the year is related to headwinds we are facing on the closure of several large, transformational deals we are pursuing with various clients.

And the balance of the reduction can be attributed almost equally to the challenges we have faced in turning around our sales team in Asia/Pacific, and the lower demand we've seen from clients for various ancillary services.

In response to our top-line revenue expectation, CSG has responded as you would expect.

CSG will manage our business to maximize our near-term bottom-line result, in line with our revenue expectations, without jeopardizing our long-term strategic opportunity.

We expect that we can also have a large portion of a revenue miss and still deliver on our previous non-GAAP operating margin guidance of 18% for the year, as a result of our business model and prudent cost management.

I'd like to share with you some additional insight on how we plan to accomplish this for the remainder of the year.

First, our business model affords us several levers in managing costs, because of their variable nature.

For example, because of our lower revenues, we can avoid growing our professional services staff at the pace we intended to deliver the higher revenue.

And a large percentage of the cost related to delivering our ancillary services are direct variable costs that can be avoided.

Second, as a result of our financial performance not meeting our original expectation, we anticipate having lower employee incentive-based compensation for the year.

Since we established our performance goals with the annual bonus instead of compensation at the beginning of each year, the margin benefit we are experiencing for this item for 2011 is not expected to be sustainable into next year.

And third, we will prudently manage our business through discretionary spending action.

This discipline is at the core of the actions taken during the second quarter to reduce our near-term cost and better manage the business longer term.

As Peter mentioned, these reductions were primarily in three areas -- first, we lowered our head count in account services to better leverage our enhanced and expanded professional services talent across the global organization.

Second, we reduced our head count in certain development areas to ensure we are focusing a greater portion of our efforts on our next-generation solution like ACP, [Single View], wholesale billing, and mediation.

And finally, we consolidated our print facilities from four to three locations, as we continue to take advantage of the advances made in print technologies and the capabilities of our staff.

The efficiencies and added speed resulting from our previous investments have allowed us to significantly increase our production throughput.

This makes it possible to consolidate our facilities without reducing our overall revenue opportunity.

These initiatives will result in a $3 million restructuring charge for this year, with slightly under half being recognized in the second quarter and the rest to be recognized over the remainder of the year.

We anticipate that these actions will result in cost savings of $7 million annually, with approximately one-half or $3 million of this benefit to be back-end loaded for the remainder of 2011, and the full-year run-rate savings to be experienced in early 2012.

We do not anticipate any further restructuring charges in 2011, based on today's financial guidance.

We now anticipate adjusted EBITDA will be in the range of $172 million to $176 million, or 24% of expected total revenues, which represents growth of approximately 10% over our 2010 adjusted EBITDA performance.

The expense management reductions I previously mentioned are evident, and our expected adjusted EBITDA performance at this measure has only been reduced by $5 million from our previous guidance.

Moving on, we expect our non-GAAP EPS for 2011 to now fall between $2.08 and $2.18, which is below our previous guidance range of $2.24 and $2.32.

This non-GAAP EPS guidance reflects an estimated effective income tax rate of approximately 39% for the full year 2011 -- greater than our previous expectation of 37% for 2011.

As a result of our revised revenues and profit levels, we now anticipate generating losses with certain foreign (inaudible) for the year.

Under current accounting rules, we cannot tax effect those losses at this time, which has the effect of increasing our income tax rate.

About one-half of the reduction in our non-GAAP EPS guidance for the year can be attributed to this higher tax rate, with other one-half attributable to lower profits due to increased revenue expectation.

The last piece of guidance I want to discuss is our cash flows from operations.

This has consistently been a very strong metric for us, year after year.

However, our year-to-date operating cash flows for 2011 are negative $1 million.

To illustrate this is anomaly for CSG, I would like to discuss two unique nonrecurring items totaling $28 million that occurred in the first quarter, that contributed to this lower level of cash flows so far this year.

First, we experienced a $20 million negative impact resulting from a change in the monthly invoice timing for DISH, as part of their contract extension.

And second, we paid $8 million of Intec acquisition-related expenses that were accrued at the end of 2010 and paid in the first quarter.

We expect in the last six months of 2011 we will generate approximately $65 million in cash flows, which then becomes our revised full-year guidance number as well, since our cash flows are relatively insignificant for the first half of the year.

This level reflects a more normalized quarterly run rate for CSG, and assumes no significant changes in working capital from now until the end of the year.

We would expect that we will continue to see some quarter-end variability amongst our receivables in future quarters, but over a longer period of time, we do not expect this to be a factor in our ability to continue to generate strong cash flows.

This second half of year cash flow level does include a one-time payment of $6 million for deferred income taxes that will be made in the third quarter, which was triggered upon our retirement of our 2004 convertible debt balance in June 2011.

When you combine this $6 million with the other $28 million of one-time items I mentioned previously for the quarter -- from the first quarter, there is a total of $34 million of unique, nonrecurring items included in our 2011 cash flow expectation.

When you consider the negative impact of these items, our 2011 cash flows from operation would be more in line with our historical levels of $100 million to $120 million -- a level we believe we can return to, heading into 2012.

Our 2011 expectations for capital expenditures remains approximately $25 million, with this level dependent upon the opportunities we see heading into 2012.

One last item related to our guidance -- our 2011 guidance does not anticipate any significant impact from foreign currency fluctuations, since we generate approximately 80% of our revenues in US dollars, and because of the difficulty in predicting foreign currency rates for the remainder of our business.

We do have a portion of our foreign revenues expenses in a natural hedge position, but we will still -- we are still subject to foreign currency fluctuation in certain areas.

To summarize, we set the bar high when we established our financial goals for this year, when you consider the significance of the long-term transformation we had undertaken in purchasing Intec last year.

You heard me consistently say -- the key to our performance for this year would be in our ability to execute early on in the year, and then carry that momentum into the second half of the year.

We have not executed to the level of our expectation.

No excuses.

However, we remain very excited about our business and our long-term opportunities.

We are in the early stages of this Company's transformation, and believe that the investments we are making in the business will continue to build upon our position as a leading provider in [BSS] solutions to communications service providers.

We have financially strong business.

We have great people and great products.

And more importantly, we have great clients that operate in exciting, growing, and dynamic markets, that we are honored to do business with.

With that, I will open up to the Operator so we can take questions.

Thank you, sir.

We will now begin the question-and-answer session.

Vincent Lin, Goldman Sachs.

I guess I wanted to understand a little bit more, in terms of the [softer] expectations leading to the second half.

Maybe you can comment on how much is execution-related, versus the broad macro issues.

Is there any specific clients that are reducing the discretionary spending more than others?

And also, if you can comment on the expectations for the core CSGS business, versus what's happening on the Intec side, I think that will be helpful.

Thanks.

Vincent, this is Peter.

First of all, in the first question about the software side, the -- we have been pursuing some large transformational deals that are replacements of complex systems, and those deals just aren't closing at the pace that we thought they would.

We believe they still will happen, based on the dialogue that we have with the prospects and client.

But to date, they haven't materialized into signed contracts, and thus starting the implementation phase and the revenue recognition.

That's one piece that's affected it, as well as what we talked about on the Asia/Pacific sales, having to restructure that and bring a greater emphasis to the whole client and prospect management side.

It's just taking us longer to materialize.

I would say on one of those, it's clients in their timing and when they are ready to pull triggers, as well as -- the other one is us rebuilding a go-to-market and sales organization in an important market to us.

Thirdly, from a macro perspective, there are economic factors affecting us that we can't completely control, whether it's the Middle East or the economic and credit challenges of the different countries in the EU.

And so, when we look at that, EMEA is just not rebounding to the level that we would have originally anticipated or hoped.

So, various reasons in there on the software side.

On the ancillary side, I think it's important that you know that we have very strong relationships with our clients.

They are leaders in the industry.

These relationships have never been stronger; and as we dialogue with these clients, they're really asking us to do more.

And so, the vacillation or the movement on ancillary services is nothing that we view as concerning.

It's just the natural ebbs and flows of our clients' businesses, but it's ones that we were hoping to have more than and targeting to have more revenue than what we generated in the quarter.

And that causes us to have an outlook for the year that causes us to be cautious around that.

Okay.

Maybe just a follow-up.

Is there any -- I guess, is it fair to say that in terms of what's happening on the ancillary side, those [projects] have not been terminated per se, but just pushed out to the right, because of the delay in decision making?

I would say that it's based on where they can see more immediate return in their business, and what some of their business drivers are for either driving efficiency or operational engagement with their customers can affect when they want to pull those off.

Our clients have complex businesses; and what we may view as a priority and what we would hope they would buy doesn't always match up to what their priorities are.

But the good thing is, our clients' business are going forward strongly, and we think there will still be needs for these things long-term.

Got it.

That's helpful.

Thanks.

[Suhal Chandi], Wedbush Securities.

Two questions if I may -- one, have you completely taken out of the (inaudible) some of these transformational [deeds] coming back from the (inaudible)?

I -- there's two aspects of it.

One -- we're still hopeful that we can get some signed during the year; but from an accounting methodology, we just don't think that they're going to be, in any way, meaningfully attributable to any revenues.

Randy, you want to add to that?

Correct.

You're exactly right, Peter.

The time frame to get these executed and then get the teams on the ground and getting the work done -- and we recognize the revenue on a percentage of completion basis, so there won't be anything meaningful for this year, if it gets signed here in the near term.

And (multiple speakers) for 2012.

Got it.

On content data, obviously you're doing a lot of interesting things here with your marquee clients.

My understanding -- you have [UFC], you have Universal Sports on live, and Paramount.

Am I missing any clients?

On live gaming, we've previously announced.

Right.

We have the Universal Sports that we're doing -- I think you've hit all of the major --

You've hit all of the ones that we've --

That we've announced.

Yes.

Okay.

Okay, good.

And one last thing.

So, to [me] there's now a content data mobile media streaming application on Android.

I'm not sure of this -- current products and other platforms, and if not, if you have plans for accessing this on other mobile OS platforms.

Our Content Direct team is working directly with studios or with content producers on being able to stream their stuff to the Android device.

So, they have implemented that with a couple of our clients.

Was that your question?

Right, yes.

Okay, good.

Yes.

Our content team is focused on making sure that we can address as many devices and as many operating systems to help our clients drive their content to as many end users as possible.

Got.

It makes sense.

Thanks.

And the higher tax rate that you saw is potential (inaudible), I'm guessing there is timing there.

But could we see some (inaudible) through 2011?

I think -- put it in reverse in 2011.

I think, based upon our current guidance, I wouldn't expect it to be differently for 2011.

There is opportunity going forward.

If we can expand some of our profits and offshore entities, there is a great opportunity to bring that down.

But probably not for 2011.

Great.

Thanks a lot, guys.

Sterling Auty, JPMorgan.

Sir, your line is open.

Tom Roderick, Stifel Nicolaus.

I guess my question would be a little bit more around the methodology of the guidance here, Randy.

And thinking about maybe if you did anything different this time around versus Q1.

If we went back to Q1, it seemed like there were some initial challenges on the integration side, and still trying to get your hands around some of those components.

But you didn't guide down all that aggressively, perhaps being a bit more optimistic that some of that stuff would close.

Is this just more of a reflection that you've had another quarter under your belt, some of the challenges didn't necessarily get solved, and you are taking a more conservative step toward guidance than you did last quarter?

Or is it more of a reflection that -- hey, things actually got a little bit trickier, a little bit more difficult, and there were more problems than we sort of thought about last quarter with the integration?

Tom, I'll go first, and then Randy can add in from some of the specific guidance spots, as it's been built with us.

We clearly had an expectation that we were going to sign some of these prospects that were in our pipeline, to do complex software implementations for them.

And we expected to do that in the first six months of the year, which was going to trigger an acceleration of revenue in the second half of the year.

And by those not happening through June, and based on -- as Randy was commenting a minute ago about our accounting policy on those types of implementations, we just don't have the runway for 2011 to generate the revenues and book them.

And so, it's -- we still believe the deals are there; but when you look at it in a finite time of 2011, it doesn't present the opportunity for us to drive it.

The business is complex; I don't underestimate that.

But we haven't lost our enthusiasm for what we see as these opportunities.

But as time passes for us, the window for 2011 starts to close for what it can mean to us.

Randy, you can feel free to add to that.

I think you summarized it well.

I think if you look at lower end of our guidance, Tom, we are simply saying we are going to replicate the first half of the year, which is really just selling business at the pace in which it runs off, if you [typically] want to look at it from that perspective.

If we get some of these big transformational deals signed this year, they'll happen later part of the year; and they may help us push more towards the upper end of the guidance.

But clearly, we won't get the amount of revenue that we initially thought [bringing] in the part of the year.

And you -- question for both of you guys.

I apologize if I missed it.

But when you're talking about transformational deals, are these entirely reflective of what's happening on the Intec side?

Or is this reflective also of the cable business?

It's where we saw opportunities to use the Intec assets, Singl.eView, and [IntermediatE] and Interconnect to help our prospects and clients change their business, and bring new technologies and new solutions for them.

So, it's really built -- being built from the historical Intec side, and the opportunities that were brought over and we have since really brought forward and tried to drive more opportunity with.

It doesn't say that we won't look to get other type of software deals that may give us opportunity, but just not the large-size deals that we have been in dialogue with our prospects.

Okay.

And last one for me.

In just thinking about the processing business -- totally understand that this quarter was -- the dynamic of DISH sort of normalizing on a run rate that was a full three months, not just two months.

So, not usual to see that necessarily down, but completely understand it.

Are there any other dynamics at play on the processing side that we should be aware of?

Or should the run rate and kind of natural pace of growth and processing go back to its usual level?

Yes, I think you are right on the DISH -- that normalized itself this quarter.

The other item that we pointed to is the ancillary services -- they can be lumpy at times, Tom, and I think you saw a little bit of that this quarter -- a little bit higher in the first quarter and down the second quarter.

Some of those decisions around ancillary purchases can be as short as anywhere from 60 to 90 days; so, there is some degree of lumpiness.

We expected some of that to return this year, to give us some growth.

We're not seeing it.

People are still watching their bottom line very closely.

We have a good set of products, a good set of clients; so we think that over time, our clients will continue to buy the ancillary services so that it can maybe give us a little bit of uplift.

Okay, okay.

Very good.

Well, thanks so much for the detail.

Very helpful.

Ashwin Shirvaikar, Citigroup.

My first question is a follow-up on Tom's question.

In terms of the ancillary services, in particular marketing services and stuff like that, it has been weak for the last couple of quarters.

And I just want to understand if that weakness is cyclical, related to people not feeling good about the economy?

Or is it -- is there anything more structural going on, in terms of just less usage of that kind of service, as you build up the -- let's call it the Facebook Paramount-type of business?

You know, Ashwin -- this is Peter.

I would tell you that one is, we view this as more than just the marketing services.

There are services that our clients can turn on to drive incremental impact to their business -- whether it's from the interactive messaging, whether it's some of the things that we may try to do around their -- helping them understand their customers, some of the reporting services as well marketing services.

So, it's several items other than just thinking about from a pure and a marketing to the end consumer.

But we still believe that the way that our clients engage and connect with the end consumers is important.

We still believe that there is not anything that is structural that says our clients are going to stop doing these things.

It's just -- it's not coming back at the same rate, and we're not getting the amount of growth that we had anticipated earlier.

But when we talk to our clients, we know that their long-term business is going to become more complex, and they talk about how they simplify that engagement and use technology more.

But in some cases, they are just not making those system uses in place yet.

Okay.

And then, on the lower revenue guidance -- I can sort of understand that the lower end is flattish with the first half.

But why is flat a good assumption if -- I mean, if that's the right question to ask.

Why is flat a good assumption?

Ashwin, I will take that one.

First of all, if you look at the historical course of the CSG business, it's a recurring revenue model.

That's pretty solid quarter to quarter, there's not a lot of fluctuations.

I think you can be pretty comfortable about that.

If you look at some of the software services of the Intec team, they are doing a lot of great work, they're signing additional work to keep themselves busy.

So, I think what we are seeing is that we are essentially on the lower end, saying that they are just going to continue at the pace of their delivery in the first half, which I think is a reasonable assumption.

There is also a portion of the revenues from the Intec side that are from software maintenance revenues, which are really recurring in nature, as well.

So, as I said in my comments, we still have the great revenue visibility of 80%; when you go 12 months out, that percentage increases as you get within the six-month window.

So, we feel that we can replicate the second half of the year on the lower end of the guidance.

And Ashwin, because we've had what we thought was good visibility into these transformational deals, we needed to build into our guidance -- what happens if those delayed further in the year and we don't get the signatures like we expect, and don't turn up the revenues on those types of opportunities?

And hence, that's how Randy looked at what the revenue opportunities were for us.

Thanks.

Okay.

The $65 million of cash flow in the second half -- that includes the pushout from 2Q?

You know, Ashwin, when I looked at second half of the year, I assumed that there'd be some type of similar cutoff on some of the payables at the end of the second quarter, and see the same thing at the end of the year.

So, I didn't try to assume how much of this would correct itself.

So, I just really looked at the second half, really kind of on a normalized basis, because it's very difficult to predict the timing of some of those quarter-end cutoff payments.

Okay.

That's helpful.

Thank you.

[Dob] Rosenberg, RBC.

I just want to clarify something -- I apologize if I'm repetitive here.

But the lower end of guidance is really sort of flat results, which I understand are very achievable.

The higher end of the guidance is sort of -- only if you reach some of those transformational deals?

Not completely.

The transformational deals can contribute to that, because we'd expect to get some of the revenue.

We do have continuing efforts to sell license upgrades to clients around the world, do system upgrades, get broader services engagement in some of our existing clients.

But it still has some of the same challenge of -- some of this will still have recognition as we do the work.

So, the upper end is not purely transformational deals, but there are other opportunities that are of smaller scale that we continue to chase, and are hopeful to deliver in the second half.

All right, great.

Thanks.

My second question is on Europe.

First of all -- on [demand] in general.

With all the macro trouble, everything that's happening, is there anything that you are doing different there, sort of like in APAC you changed your sales force?

And as part of that, when EMEA comes back, do you expect to grow with -- at the same pace, or maybe a little bit faster, considering by then you will already have Intec and everything in place?

Our goal is to grow at the rate of the markets.

So -- and that's our overall goal, when we look at the markets that we service and the types of solutions we are providing.

As EMEA comes back, we would be hopeful to take advantage of the strength we have in there.

We do have quite a few clients in EMEA.

We have long-term relationships with those leaders in the communications space.

And as we've met with them, the relationships are very strong; as their businesses continue to evolve, we look to do more for them.

And in many cases, our clients are talking to us about how we could be part of doing more for them.

It's not a market that right now, though, that we see is going to turn around on an accelerated basis.

And so, that's how we look at the EMEA market.

Okay.

And if I can have one more.

And in APAC, in other words, you are talking about changing the sales force, and EMEA is not turning around, do you expect APAC to accelerate in the near term?

I would tell you that I think with what we are rebuilding from a resource standpoint in Asia/Pacific, that right now we just look as being slower for our ability to drive something in 2011.

Our goal is to continue to get stronger every month, continue to build on the relationships we have in those markets, continue to extend those relationships.

And we think there is opportunities there for both existing and new business; but we are starting from a weaker position than what we thought we were.

And we are building up and we have great confidence in the team that's there, and we believe we will get stronger.

But I can't predict that it's going to be in the next six months.

Okay.

Thanks.

(Operator Instructions) Sterling Auty, JPMorgan.

Sorry about that before, I was having a little phone issues.

Jumping between calls.

And maybe you covered a little bit of this.

But I wanted to get -- you've mentioned a number of different factors that have led to the cut in the outlook for revenue for the year.

Can you rank order them in terms of order of magnitude?

And then, just to follow on to that, you gave a couple of examples of the ancillary items like interactive marketing, but how big is that component?

And is there any further examples?

Because I know that's going to come up in our discussions, just to kind of walk through what exactly are those ancillary services that you expected to come back, that maybe are ramping a little bit slower?

Randy, do you want to talk about the prioritization?

Sure, I will look first at the quantification of the change in revenues, Sterling.

If you look at it, about half of it we would attribute to the large transformational deals; and the balance of the miss, probably equally amongst those other two items we mentioned -- ancillary services and the sales issue in Asia/Pacific.

And Sterling, from the perspective of -- again, the types of things we're seeing, it's everything from interactive messaging, it's -- think of it as analytic services.

It's some of our marketing services around print, some of our incremental print services.

It's no one single item; it's a conglomeration of several things that we're just seeing -- a slower take up than what we thought when we originally set our expectations for the year.

So, it's not anything that we see as foundational or systemic with either our product or our client.

We think it's just a prioritization of where some of our clients are in their businesses right now.

And then, given the comment about the strategy, including the strategy to buy Intec, how did Intec perform in the quarter relative to expectations?

How much of those transformational deals would have been either partly or mainly dependent on the Intec business?

I think Peter touched on it earlier, that the transformational deals were mainly around the Singl.eView assets and the whole [sub]-billing and mediation; so you can attribute probably the transformational to the Intec business.

Sterling, you can also see -- if you look at the financials, you can see that the software services were essentially flat from the first quarter; and almost all that business is really coming through the Intec.

So, you would expect pretty much flat performance quarter over quarter, and the expectation for some of those transformational deals would have gotten us to the levels of performance we anticipated for Intec for the quarter.

And Sterling, I guess I'd put an additional thought on this, as well.

One of the things that, even though the transformational deals have been delayed for us, where we are optimistic and still have great enthusiasm for what the combined business can do, is that we are having dialogues with our clients, both our domestic clients and our worldwide clients, of how we can do more for them -- whether it's some of the capabilities that we have with Content Director, some of the types of ways that we can help our clients run their businesses internationally.

Versus some of the solutions that Intec had, we're having dialogues with our domestic clients, our large cable clients, of how it can be effectively used to complement some of their existing systems in place, to drive where they are going in the future.

And so, for us, the future outlook, even though these transformational deals are near-term delayed, we believe, the long-term prospects of this, we believe, are very promising and we're very optimistic.

Okay.

And then, last question -- on the print center consolidation -- and I apologize if you did mention this.

At what point would you expect to start to realize the full cost savings behind it?

And if we were to annualize the cost savings of the consolidation, what would it look like?

Sure.

It's not just the consolidation of our print facilities, Sterling.

I put them all together because we had a couple of programs that we did.

But the full-year run rate on the expense savings is about $7 million.

We expect to recognize about half of that in 2011, with most of that in the fourth quarter; and then have the full run-rate basis of the savings in early 2012.

All right, great.

Thanks, guys.

There are no further questions at this time.

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

I want to thank everybody for their time on the call, and just again reaffirm our enthusiasm as a Company that can do so much in the marketplace, both with building on our long-term relationships with our clients, engaging with them about what our capabilities are, and engaging with them about how our offerings can solve their future needs.

We are enthusiastic.

We are disappointed in what we've accomplished for the first six months of the year, and what the near-term outlook is in 2011 from a financial perspective.

But we continue to be strong operators, and look to deliver strong financial results on the bottom line.

So, we thank you for your support.

Know that we are committed to running this Company in the right way for the near term and the long term.

Thanks.

Ladies and gentlemen, this concludes the CSG Systems second-quarter conference call.

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