CSG Systems International Inc (CSGS) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the CSG Systems fourth-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 February 7, 2012.

It is now my pleasure to introduce our host for today, Ms.

Liz Bauer.

Please go ahead.

Thank you, Diana.

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 best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new or future events.

In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release, as well as our most recently filed 10-K and 10-Q, which are all available 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 would like to now turn the call over to Peter.

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

For the fourth quarter of 2011, we generated revenues of $188 million and non-GAAP earnings per share of $0.64, both of which were an improvement over our third-quarter results.

For 2011, we generated revenues of $735 million and non-GAAP earnings per share of $2.25, which reflects the first full year of the financial performance of the Intec Telecom acquisition, which closed in November of 2010.

During 2011, we undertook a major transformation of our Company to become a global leader of business-enabling solutions.

And while not everything has gone as perfectly and as quickly as I would have liked, I am pleased with how the two companies have come together to help make our clients successful.

The cooperation and teamwork exhibited between employees who did not know each other a year ago is very gratifying to see.

The knowledge sharing and transfer between various departments and functions is occurring naturally and freely, the leveraging of the organizations' strengths to help our clients be successful is gaining momentum.

I think we are through the integration phase of the Intec acquisition, and are now moving into the execution phase of this multi-year transformation of our Company.

Importantly, in 2011, we continued to strengthen our position with the leaders in the communications industry, ranging from our seven-year renewal with DISH Network to our recently signed agreements with MTN South Africa for a multi-year services engagement, and our enterprise license and services agreement for our mediation solution with America Movil.

Our largest clients, Comcast and Time Warner, increased their spending with us by over 5% and 10%, respectively.

And DISH, who we anticipated seeing a 10% to 15% reduction in spending in 2011 as a result of their contract extension, continued to turn to us to help them solve more business problems and introduce more new products, resulting in only a 6% decrease in spending for the year.

These results are a testament to the value of working closely with our clients to help them be more successful.

Continuing on, we added a significant number of new logos, as a result of key wins for our mediation, wholesale billing, and standalone billing solutions.

We pursued the new emerging market of content and over-the-top providers with our Content Direct solution, and are now working with three major studios and several major sports and entertainment providers, and we continued to enable our cable and satellite clients to offering new and enhanced products like home security, WiFi, and high-speed data services through our new product-enablement solutions.

In December, our Singleview and Mediation solutions were selected for a large transformational billing project by a top-10 North American cable operator.

We will be replacing their existing systems, which are currently provided by a competitor.

As the leading provider of customer care and billing solutions to the North American cable and satellite industry, this win validates the importance that rich domain expertise and strong technological solutions play in helping operators compete successfully in this evolving industry.

As you all know, CSG is the undisputed leader in serving the North American cable and satellite market, with over 49 million subscribers on our outsourced Advanced Convergent Platform.

Now, with our standalone Singleview solution, the market that currently uses standalone software solutions is now available for us to serve.

That opens up a whole new market for CSG to pursue, with over 30 years of domain expertise in proven solutions.

From a product standpoint, we met with clients and listened to their challenges, which range from how to better monetize and optimize the explosive consumption of data that is occurring on their networks, to how to more effectively and efficiently roll out new products and services, without having to do a total replacement of existing systems.

We work side by side with our clients as they look for creative ways to provide a more personalized and intentional experience with their customers, and we worked with our clients as they sought to automate and streamline operations to drive down cost.

Rather than rely solely on large multi-year transformational projects to enable our clients to be successful, we provided point solutions to help them continue to grow and evolve their businesses in the short term.

These point solutions range from internally developed solutions like our next-generation product catalogue, which is allowing providers like Mediacom to more effectively and efficiently package and price various products; to our home security solution, which enables providers like Comcast to introduce a new revenue-generating products to its customers.

And they also include acquired solutions like our Interactivate solution.

Just one year after our acquisition of Intec, we introduced, sold, and implemented this solution into our two largest North American cable and satellite clients, Comcast and DISH Network.

As the above examples demonstrate, being able to serve such large and dynamic communication service providers is dependent upon relationships that are built on trust and based on delivering on commitments.

Let me provide a little bit more color on more recent wins this quarter that demonstrate that trust.

For those of you not familiar with America Movil, they are one of the largest integrated telcos in the world, and the third-largest wireless operator, with operations in 18 countries.

America Movil was an existing Mediation customer; however, they were using a competitor's solution in several of their largest properties.

With this new contract, we will help America Movil implement our Mediation solution throughout their Caribbean and Latin American properties.

MTN South Africa is part of the MTN Group, a multinational telecommunications conglomerate that has over 152 million subscribers, with operations in 21 countries in Africa and the Middle East.

They are a Singleview and Interconnect client who demands a highly flexible and configurable environment for their business customers, composed of resellers and distributors.

In order to help MTN focus on growing their wholesale business, they asked us to provide operational support and services on their business critical applications, which resulted in a three-year services engagement.

These types of relationships are not built overnight.

They are built after years of proving yourself and delivering on your promises.

This is a cornerstone of our business.

Now, looking ahead to 2012, we continue to see a fairly challenging environment, similar to what we experienced in 2011.

Europe continues to present its own set of macroeconomic challenges, due to the financial situation; operators are still interested in solutions that produce a 9- to 12-month return on investment; however, the appetite for large transformational billing projects continues to remain low.

This is presenting a significant challenge to operators, as data consumption continues to explode, and their existing legacy systems are not equipped to help them change their business models to capitalize on the massive amount of transactions and consumption that is occurring over their networks.

The Middle East and Northern Africa have seen some political stability; however, there is cautiousness amongst operators in making significant decisions, due to the unrest that still exists in some countries.

The Americas are served by large mature operators, who are trying to transform their companies, while competition is increasing from all directions and IT budgets are being held flat.

Investments are focused on network and content expansion.

Spending on discretionary projects continues to lag the spending on must-have projects that streamline operations or maximize current systems.

And while the APAC region is one area of the world where spending on business support systems is growing, we are playing catch-up as a result of the decision we made in the first half of last year to rebuild the sales organization from the top down.

By not having a strong sales organization, we missed out on several opportunities that will impact us in the near term.

However, we believe that we are now well-positioned for 2012 and beyond, as a result of putting the right leadership and sales professionals in place to service this growing market.

Many of these factors that contributed to a challenging business climate are out of our control; however, there is much that is within our control.

As I look ahead to 2012, I'm optimistic that we have made the right decisions to drive long-term shareholder value.

Today, we are the number-one provider of business-enabling solutions to the North American cable and satellite industry.

Our Advanced Convergent Platform is the most deployed and comprehensive solution serving this industry.

Today, with over 150 clients, we have one of the most deployed Mediation solutions in the world.

Our clients have massive amounts of data going across their networks, and are looking for creative and intelligent ways to analyze that data and develop new business models that will enable them to monetize that traffic.

We are in a very good position to help them succeed with new business models.

With over 260 clients and the majority of the top-100 telcos in the world as clients, we have one of the most deployed Interconnect billing solutions in the world.

As our clients look for new ways to optimize the traffic that is going across their networks and provide more options for the partners to provide services to the end user, we are right in the middle of helping them.

Our Singleview solution has proven its strength, with clients like MTN, Virgin Mobile, Reliance, Hutchison 3G, Verizon, Best Buy, and MasterCard.

Its proven scalability and flexibility appeals to those providers who are looking for a flexible architecture that is robust and proven.

With our win last quarter with a North American cable operator and a targeted pipeline of opportunities, we believe that we are in a good position to win our share of transformational billing opportunities when the decisions are finally made.

And we continue to focus on those things that have made us successful in the past.

We continue to invest in relationships with our clients, so that we become an even more integral part of their operations and teams.

Our clients trust us and look to us to help them solve problems and become more competitive.

We continue to add to our deep domain expertise and product sets.

Historically, we have invested 14% to 15% of our revenues in research and development, to bring new products to bear for our clients.

This continuous and proven history of adding to our capabilities enables us to get broader and deeper in our clients' operations.

We believe that this investment creates an enviable relationship and position within our clients that makes it very difficult for competitors to disrupt.

We continue to leverage our strong operational expertise to the benefit of our clients.

We are constantly looking for new ways to improve the efficiency and effectiveness of our own solutions and our clients' operations, positively impacting the bottom line for both our clients and us -- grabbing good conversations with operators around the world regarding how they can benefit in different delivery models from our operational expertise, whether that be in the form of managed services or having our employees embedded in their operations.

And finally, we continue to invest in our people, so that we can continue to differentiate ourselves through our combination of people and products.

We believe that people solve problems.

People identify new opportunities, and people drive success.

And our clients continue to tell us that our people make a difference.

They help drive our clients' successes.

That is tough to replicate, and something we are not willing to compromise on.

We will continue to invest in our people, which we view as an investment in our clients' successes.

Our transformation as a Company is not complete; and in this ever-changing world, I don't believe that a successful company that plans to compete and go the distance ever stands still.

We will continue to make decisions that we believe are in the best long-term interest of our clients, our employees, and our shareholders.

I want to thank our employees for their hard work and commitment to our united cause, and thank our shareholders for their interest and understanding what we are accomplishing here at CSG.

Now, I would like to turn it over to Randy to go through the financial performance of the quarter and year, as well as our financial performance for 2012.

Thank you, Peter, and welcome to all of you on the call today to discuss our financial results for the fourth quarter and full year of 2011, as well as our outlook for 2012.

Overall, from a financial perspective, we did not achieve what we originally sought out to accomplish a year ago.

We set our financial goals high, and due to a variety of reasons, some that were within our control and some that were not, we fell short of our original goals.

We realize that the transformation of this Company will take longer than we originally anticipated, but we remain very excited about the opportunities we see before us.

As I walk you through our financial results, I want to remind you that when you compare our year-over-year performance, the fourth quarter and full year of 2010 include only one month of Intec's financial results -- December of 2010, since the acquisition closed on November 30, 2010; whereas our financial results for 2011 reflect a full 12 months of Intec operations.

Now, on to the results.

Total revenues for the quarter were $188 million, up 22% over the same quarter of last year.

Full-year revenues were $735 million, up 34% over the prior year.

Sequentially, fourth-quarter revenues were up $5 million, or 3% from the third quarter, with the strength of the quarter driven primarily by several year-end software license upgrades and special project work on the processing side of our business.

Our 2011 performance reflects the progress we have made in diversifying and expanding our customer base, geographical markets, and delivery capabilities, illustrated as follows.

First, in 2011, we had three material clients that each individually generated revenues over 10% of our total revenues; Comcast, DISH Network, and Time Warner.

Together, they were 42% of revenues for the year, as compared to our having four material clients accounting for 64% of our full-year revenues in 2010.

Second, for the full year 2011, we generated 10% of our revenues from the Europe, Middle East, and Africa region, and 5% of our revenues from the Asia-Pacific region, compared to a nominal amount for these regions in 2010 full-year results.

And finally, we generated 29% of our revenues from software and related services in the full year of 2011, as compared to only 9% during the prior year.

While our more diversified revenue base has introduced greater risk and variability in our business, we believe this added diversification provides us with greater opportunities for future growth, with a broader customer base and expanded product portfolio, as a leading global software and services provider.

Moving on, our non-GAAP operating income for the fourth quarter was $40 million, which compares to (technical difficulty) million in the same period last year, for an increase of 10%.

The non-GAAP operating margin was 21% for the quarter, compared to 24% for the fourth quarter of 2010.

Our fourth-quarter non-GAAP operating income and margin were up from the third quarter, primarily attributed to the sequential increase in revenues to include a greater percentage of higher-margin, software-related revenues and the special project work, when compared to the previous quarter.

Absent the impact of these items, our fourth-quarter margins would have been more in line with our third-quarter performance.

For the full year, our non-GAAP operating income in 2011 was $139 million, or a margin of 19%; compared to $126 million, or a 23% margin, for the prior year.

The 2011 margin percentage is within our long-range target of 18% to 20%.

The 19% margin performance for 2011 is better than our expectations of 18% that we set earlier this year.

This outperformance relates to our ability to control our costs in line with revenue fluctuations, and also reflects lower employee incentive compensation as a result of us not meeting the financial goals we established at the beginning of the year.

The lower costs related to employee incentive compensation realized in 2011 are not sustainable into 2012, as our 2012 incentive plans assume we will successfully achieve our 2012 financial targets.

I will touch on this a bit later when I provide our 2012 outlook.

GAAP operating income for the quarter was $27 million, or a margin of 14%, and $96 million and a margin of 13% for the full year.

For the fourth quarter, our adjusted EBITDA was $51 million, or 27% of total revenues.

For the full year, our adjusted EBITDA increased by 14% from last year to $181 million, or 25% of our total revenues.

Non-GAAP EPS for the fourth quarter was $0.64, which compares to $0.69 for the fourth quarter of the prior year.

Non-GAAP EPS for the full year was $2.25, which compares to $2.30 for the prior year.

Foreign currency movements did not have a material impact on the current quarter or for the full year 2011.

Our estimated non-GAAP effective tax rate was 42% for the quarter and 40% for the full year 2011 -- slightly higher than our previous expectation, with the increase related to a change in the mix of our pretax income between our domestic and foreign operations.

GAAP EPS for the fourth quarter was $0.35, and $1.28 for 2011.

And now, on to the cash flows and balance sheet.

Our cash flows from operations for the quarter were $32 million.

For the year, we reported cash flows from operations of $61 million.

Our annual cash flow performance is lower than our historical run rate, as a result of several unusual and unique items we experienced in the first half of 2011.

However, our second half of the year results are consistent with our expectations for operating cash flows to return to more normalized levels.

We view our cash-generation capability continuing as a very strong metric for our business model, going forward.

We ended the quarter with a cash balance of $159 million, which was up $20 million from the ending balance last quarter.

During the quarter, we purchased 172,000 shares of our common stock for $2 million, or a weighted average price of $13.20 per share.

For all of 2011, we repurchased 750,000 shares of our common stock for $10 million, or a weighted average price of $13.24 per share.

For the full year 2011, we lowered our debt position by $70 million and directed over $22 million to capital expenditures.

We ended the year with $340 million in par value debt on our balance sheet.

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 our balance sheet, and the flexibility our capital structure provides us to manage and grow the business going forward.

Now, let's move on to our outlook for 2012.

Our 2012 revenue guidance is $715 million to $740 million.

Let me provide some additional color around these expectations.

First, this guidance reflects the consolidation of one remaining Comcast market that is currently in an Amdocs billing market off of our solutions and onto the Amdocs solution.

By and large, in the past, this sort of consolidation has gone in our favor; yet sometimes they don't, such as in this case.

As a result, we expect year-over-year decline in processing revenues of approximately $5 million related to this item.

Our overall relationship with Comcast remains very strong, evidenced by the fact that we increased our revenues from Comcast during 2011 by 5%, or $7 million over the previous year.

Other than this reduction in revenue from Comcast, our current guidance does not assume any other material changes in revenues from Comcast for 2012 or any other material clients.

Second, after considering the impact of this $5 million reduction, the high side of our guidance represents nominal growth over the prior year and further stabilization of the Business.

And third, the lower end of the guidance represents the risk and volatility that is now inherent in our Business, since we now generate close to 30% of our revenues from software and services, and 15% of our revenues from outside the Americas region.

This lower end of our range reflects the uncertainty in the global economic environment, and continued lengthening of sales cycles and the normal challenges in delivering on complex projects.

If we close opportunities early in the year, we believe we are in a stronger position to achieve the higher end of our guidance.

If deals slip beyond our current expectation, more towards the second half of the year, that will put greater pressure on our 2012 revenues, due to the fact that we recognize our software and services revenues generally on a percentage of completion method of accounting.

We had a strong finish in our sales activities in the fourth quarter of 2011, and have had a good start to 2012 so far, such that we have visibility into approximately 85% of our expected 2012 revenues at this time.

However, timely execution on our sales and delivery expectations throughout the year is necessary for us to be successful in achieving our overall revenue guidance for the year.

We expect our non-GAAP operating margin to be in the 17% range for the full year 2012.

This margin guidance reflects our relatively flat to slightly-down revenues and a continued investment in the Company, resulting in an increase in expenses over 2011.

These expense increases are coming primarily from two areas that are essentially equal in their impact to 2012.

First, we anticipate higher employee wage-related costs in 2012, driven mainly by expected annual merit increases and higher incentive compensation, as our programs assume achievement of our 2012 financial targets; and second, we anticipate an increase in our data-processing costs over 2011, reflecting additional processing capacity needed as our clients' businesses grow and become more complex.

Although this margin reflects a decline from the comparable operating margin we reported in 2011 and is below our long-range target of 18% to 20%, it is still best in class amongst our peers.

I have said in the past, we would be willing to invest in areas of our Business that cause our margin to fall below our long-term target level for a period of time, in pursuit of longer-term opportunities.

We believe the investments we are making in our employees in 2012 and in our data-processing environment are the right investments for this Company longer term, and will help us grow our revenues and return to our long-term targeted range of 18% to 20%.

We anticipate adjusted EBITDA will be within the range of $164 million to $171 million, or 23% of our expected total revenues.

Our guidance for 2012 non-GAAP EPS is expected to fall between $1.85 and $2.

This non-GAAP EPS guidance reflects an estimated effective income tax rate of approximately 43% for the full year 2012, an increase over 2011's rate, due to an increase in our estimated losses in certain foreign jurisdictions that we cannot tax effect at this time.

We continue to evaluate different options to stabilize and improve our income tax rate going forward.

About two-thirds of this decrease in EPS performance over 2011 relates to our expected decrease in operating performance for the year, and the remainder relates to this higher tax rate.

We expect that we will generate between $110 million to $120 million in operating cash flows for 2012, which assumes no unusual fluctuations in working capital like we experienced in 2011.

At this time, we anticipate our capital expenditures for 2012 will be in the $30 million range, slightly higher than our normal $25 million range, as we had some 2011 capital expenditures flow into 2012.

Our guidance reinforces our solid cash-generating business model and strong capital structure.

Please note that our 2012 guidance does not anticipate any significant impact from foreign currency fluctuations, since we generate a large percentage 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 and expenses in a natural hedge position, but we are still subject to foreign currency fluctuations in certain areas.

And finally, consistent with our past practices, our guidance does not assume any share buybacks under our repurchase program during the year.

As we have done in the past, we will evaluate the best use of our available cash during the year, which may or may not include any share buybacks.

To summarize, in 2012 we will continue to make strides to transition our Company to a leading global software and services Business.

We remain committed to delivering our world-class product offerings to service providers around the world, who depend upon our mission-critical solutions to operate their businesses and deliver a superior customer experience.

While there are still some headwinds that we are facing, we believe that the efforts that we have undertaken will create long-term shareholder value.

We remain excited about our Business and the opportunities ahead, and look forward to sharing our successes with you as the year progresses.

With that, I will open it up to the operator so that we can take any questions.

(Operator Instructions) Suhail Chandy, Wedbush.

Congrats on the quarter.

A few questions, if I may -- one, is it possible for you to give us a breakup percent of revenue on software license versus maintenance and professional services?

Because, obviously, these things are now (inaudible), right?

So, any ballpark numbers would be very helpful.

So, your question is, is to break out maintenance versus software license revenue?

Because we can -- (multiple speakers)

Right.

Yes, versus services.

Is there anything directionally you can -- (multiple speakers)

Yes, I think what you can probably do is -- we don't break it out separately.

But if you look at some of our past communications on this, I think the way I would look at this is that if you look at the Intec business prior to acquisition, they were doing about $20 million to $25 million of software on an annual basis.

And [CSU] software is relatively insignificant, and their professional services were probably in the $85 million to $95 million range, and CSG's were about $10 million.

So, again, if you use those directionally, I think they would get you there.

And the balance would be the maintenance.

Got it.

No, that is helpful.

Second question, if I may, again -- I have a small housekeeping item -- can you remind us how much remains in authorized stock repurchase?

How much remains in our authorized stock repurchase?

Do you have that one?

Yes, approximately 4 million shares.

Okay, great.

And, last question -- I'm trying to understand the puts and takes into the guidance here.

So, correct me if I'm wrong, but the range is completely a reflection of the Comcast market consolidation that you have seen.

But other than that, everything remains intact, as far as [degradement] goes, because if I (inaudible) the [degradement] is probably going to get -- goes (inaudible) at some time in 2012, right?

What was the last part about what happens in 2012?

Right, with the Comcast agreements.

Oh, the Comcast agreement.

Yes, the Comcast agreement is -- we are expecting to renew that during 2012.

And so, your question is, is the only thing that is identified as a change in our guidance from a business perspective is those subscribers that are migrating off of our system --

Right.

It has an impact of about $5 million.

So, I think that is a fair statement.

But that is the only change in the underlying business.

Great, and that is very helpful.

Thanks a lot.

Daniel Meron, RBC Capital Markets.

Good to see that you are executing on the targets for this quarter.

A quick question on the outlook -- Peter, I think you mentioned that you won a major cable operator in North America.

Can you provide a little bit more color on the size of this operator?

And what is the operational impact on revenue and the OpEx this year?

So, for our business, Daniel, it is one of the top-10 cable providers in North America.

We won't name them at this point, as we work through the project with them.

They are a client that has been evaluating how they get off of a legacy system and move to a new solution.

From a revenue perspective, this is a license and services engagement that [were] recognized over the life of the services implementation, the implementation period.

So, you are probably looking at somewhere about roughly [maybe] 18 months for the project.

From an OpEx perspective, it doesn't really have any step-up in OpEx.

It will be use of our existing services staff to do the deployment of this solution, on behalf of our client.

Okay.

Thank you, [good] that is very helpful, Peter.

And another question -- you guys seem to be a little bit more conservative than a couple of other vendors in this space.

Is this just the segments that you guys are operating in?

And then, related to that -- what kind of growth -- maybe I missed it during the opening remarks.

What kind of growth do you expect from cable this year versus the mediation business on an apples-to-apples basis?

Daniel, we didn't give, actually, breakouts between growth between cable and the other pieces.

I guess if we were to give you some more color of our outlook, one is, we believe that our broad business between our cable and our internationals business has stabilized versus some of the early stages of what we saw of our expectations back in 2011.

But we are cautious as we look at 2012 on several facets.

One is, we continue to be cautious about the worldwide economic climate, whether it's the challenges in Europe, still some of the activities in the Middle East and Northern Africa, the challenges in our own US economy that seem to be improving a little bit, but we are still cautious.

We also recognize that for this business, the timing of deals when they are signed, as well as the timing and speed of which we implement a project for a client, could have an impact to the revenues.

And so, we are cautious around those aspects, because we think there is a lot of behavior by clients that we can't always control, but we look to try to drive.

And so, those are aspects that cause us to be concerned about being overly aggressive, and so we have provided a range that we feel comfortable, based on the markets and the dynamics of clients as we understand them today.

Okay.

Understood.

Thank you, Peter.

Good luck.

Thank you, Daniel.

(Operator Instructions) Sterling Auty, JPMorgan.

I wanted to continue on that line of questioning.

So, even if we add back the $5 million of Comcast revenue that you lost, and you are barely above flat in terms of the outlook.

So, is there anything -- I just want to clarify -- it sounds this way, but is there anything in your recurring services business that you are expecting to decline, because either the pricing or volumes or other factors?

Or is simply the flat to down revenue, the $5 million plus, an assumption maybe you don't close as much software and services revenue for 2012?

We are not expecting any other significant change to our processing business.

We believe that we have stability.

But as I mentioned before, Sterling, on Daniel's question, we are cautious about how some of the spending by clients may be and new logos may be for us in 2012, and whether that has any downward pressure on our business that we experienced in 2011.

And when you look at that part of the business, if you were to split it between legacy CSG and Intec, which are the areas that you are more concerned, or you are baking in more prudence, in terms of the outlook for 2012?

Clearly, a lot of the macroeconomic items we talked about have to do with software and services, whether it be the challenges in Europe, the challenges in the Middle East and Northern Africa, as well as our APAC challenges of rebuilding the sales organization and not having the speed out of the gate that we would have liked to have in that market.

So, we are cautious and prudent for 2012, as we look at our outlook.

But we still believe that what we have is a business that is going to grow as we build out of 2012, whether it be continuing to win new clients; whether it's expanding our footprint with existing clients by bringing more products to them, as we have had some early success of selling new products to them; or building recurring relationships around our services engagements.

As we did with MTN South Africa and announced, we are showing that we are starting to build in clients around the world the type of business relationships that we built in the United States in our cable and satellite markets.

It just takes a while to build that.

Okay.

And then, Randy, looking at the quarter, if you look at the overage relative to consensus, is it fair to characterize -- you had the big lift in gross margin, that looks like it provided about $0.09 of the upside.

Is it fair to characterize almost all of that coming from the mix, because of the software renewals and maybe one-time services?

And then, maybe the remaining $0.03 coming from the lower rules for incentive comp?

Or how would you look at the upside attribution?

I think you summarized it very well.

There was about $3 million you can look at right on the income statement.

The software and services were about $3 million up over the last quarter, and processing was up about $2 million.

That is your $5 million.

That was very, very high margins.

So, I think your summation is pretty good.

Okay.

And then, looking at the 2012 cash flow, you mentioned the return to a more normalized level.

But just to walk people from -- the walk from 2011 to 2012, what is it in the working capital that is getting back to normal?

Is it deferred revenue?

What are the items that we are looking at to get back to a quote-unquote normalized level?

I think I would say all of them are, Sterling.

There were several different unique items during the year -- there was some AR, there were some deferred revenue, there were some payables.

They all had some degree of uniqueness to them.

The way I would look at it, for people to really get a grasp on it, is look at the second half of the year performance for us.

We did about $69 million of cash flow from operations, and there was about a $7 million drag on working capital to get you down to the $62 million.

If you multiply those by 2, that gets you pretty close to my guidance, if you also consider that the cash flow will be slightly lighter next year because of the lower operation.

So, I would say that it's just going to be normalized back to all the working capital items, Sterling.

Okay.

And last question -- outside of Comcast, which has the renewal in 2012, are there any other major customer renewals in 2012?

And while I'm sure it's too early to tell, looking at what Amdocs did in terms of their renewal, it seemed to be pretty solid relative to some of the other discounts that they have given, with like Bell Canada, et cetera.

Does that give you any insight as to what the thoughts might be around pricing and services, et cetera?

Well, we don't -- well, one -- first to answer to your first question, Sterling, we don't have any other major clients in 2012 that are up for renewal.

Comcast is our significant one.

We are in discussions with Comcast about how we renew that contract, going forward.

We have high confidence of the strength of the relationship we have, and what that is going to bode for us for the long term of the business.

I don't really look at what competitors are doing from a guidance or from their outlook of how they negotiate their contracts, because we really solve problems in different ways with different solution sets.

So, we will do our best to build a long-term contract set of terms and conditions that really help facilitate Comcast's growth and their business needs, and match up with what we need to do long-term in driving this business.

Okay, thank you.

Howard Smith, First Analysis.

Congratulations for a strong finish to the year.

Thanks, Howard.

My question deals with the pro forma operating margin, and directionally where it goes in the medium term.

You talk about having some additional data center expenses this year.

I'm thinking about 2013.

Who knows what the terms will be around Comcast.

But given history, it's unlikely that the pricing goes up in the early part or the margins go up in the early part of that contract.

So, what gives you optimism -- or maybe you can reconcile for me how operating margin, as we look out a couple of years, returns to the 18% to 20% level?

I would say a couple of things -- first, just remind you we are at 17%.

That is still best-in-class margins.

That's good.

Our aspirations are clearly to increase that going forward.

We have a proven history of managing the bottom line, so we are very good at managing the business.

I have said it in the past, and I think it's still true -- that the way in which we achieve the increased margin is through revenue scale, growing the revenues, and increasing the mix of software revenues back into our revenue base, because software has a good margin on it, compared to the remainder of the business.

So, it's really growing the business, and we plan to grow the business by -- and many of the things that Peter talked about is that getting closer to our clients, creating long-term recurring relationships with our clients, expanding our product portfolio, and also adding new clients, new logos.

So, as we can grow revenues, I think that is our best basis to really increase the margins, going forward.

And Howard, just to add to Randy's comments is -- when you look at what is happening with our clients, their businesses are becoming more complex.

We were successful in 2011, with Comcast consuming more of our products and growing those revenues.

And so, we are building a good relationship where they continue to turn for us for solutions.

And we think that provides us a great position to not only create great value in the near term, but really create value for our business long-term.

Okay.

Thank you.

(Operator Instructions) Julio Quinteros, Goldman Sachs.

This is [Gio] sitting in for Julio.

Just had a quick clarification on your guidance for revenues.

In your guidance [earlier], you said you had about 85% visibility for 2012 revenue.

Just wondering whether this guidance range includes any large transformational deals that got delayed late last year or early this year?

Well, we would expect that we will not only generate revenues from the contracts that we signed with the large cable operator in North America, but we continue to have expectations that we can win some business as we go through the year, and then it will generate revenue for us.

So, to the extent that we have difficulties in achieving that, then that could have an impact towards the lower range of our guidance.

But we have pipeline that shows deals that we believe have probability, and we are looking forward to getting some of those deals signed, similar to what we signed in December with the cable operator.

Okay, thank you.

(Operator Instructions).

And we do not have any questions.

You may continue.

All right, Diana.

Well, for those on the call, we appreciate your support, and we look forward to performing as we enter 2012, and continuing to drive bottom-line results for the business, our shareholders, and all stakeholders.

Thank you.

Thank you.

Ladies and gentlemen, that does conclude the CSG Systems fourth-quarter conference call.

Thank you for your participation.

You may now disconnect.