Le Lézard
Classified in: Science and technology, Business
Subjects: EARNINGS, Conference Call, Webcast

CSG Systems International Reports Record Revenues for Fourth Quarter and Full Year 2019


CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business transformation in the digital age, today reported results for the quarter and year ended December 31, 2019.

Financial Results:

Shareholder Returns:

Business Activities:

"This was a solid quarter and year for CSG, with record revenue highlighting the quality of our execution," said Bret Griess, president and chief executive officer for CSG. "This past year has helped further position CSG as a trusted provider of solutions that help our clients better acquire, monetize, engage, and retain their customers."

"The long-term contract extension we signed with our largest customer in December was a great affirmation of the value we are delivering to the broad communications and entertainment marketplace but was just one among many key sales wins. We added many new logos to our mix of customers worldwide, further diversifying our base, and strengthening our competitive position. Importantly, we remain well positioned to deliver even greater value in 2020 and beyond."

Financial Overview (unaudited)

 

(in thousands, except per share amounts and percentages):

 

 

 

Quarter Ended December 31,

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

2019

 

 

2018

 

 

Changed

 

 

2019

 

 

2018

 

 

Changed

 

GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

254,747

 

 

$

247,267

 

 

 

3

%

 

$

996,810

 

 

$

875,059

 

 

 

14

%

Operating Income

 

 

30,258

 

 

 

29,425

 

 

 

3

%

 

 

126,109

 

 

 

104,932

 

 

 

20

%

Operating Margin Percentage

 

 

11.9

%

 

 

11.9

%

 

 

 

 

 

 

12.7

%

 

 

12.0

%

 

 

 

 

EPS

 

$

0.70

 

 

$

0.64

 

 

 

9

%

 

$

2.55

 

 

$

2.01

 

 

 

27

%

Non-GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Revenues

 

$

236,907

 

 

$

231,665

 

 

 

2

%

 

$

927,696

 

 

$

859,457

 

 

 

8

%

Operating Income

 

 

41,540

 

 

 

41,400

 

 

 

0

%

 

 

165,702

 

 

 

147,855

 

 

 

12

%

Adjusted Operating Margin Percentage

 

 

17.5

%

 

 

17.9

%

 

 

 

 

 

 

17.9

%

 

 

17.2

%

 

 

 

 

EPS

 

$

0.98

 

 

$

0.95

 

 

 

3

%

 

$

3.53

 

 

$

3.06

 

 

 

15

%

For additional information and reconciliations regarding CSG's use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG's website at csgi.com.

Results of Operations

GAAP Results: Total revenues for the fourth quarter of 2019 were $254.7 million, a 3% increase when compared to revenues of $247.3 million for the fourth quarter of 2018, and a 1% increase when compared to $251.4 million for the third quarter of 2019. These increases can be mainly attributed to the continued growth in our cloud solutions. Total revenues for the full year 2019 were $996.8 million, a 14% increase when compared to revenues of $875.1 million for the full year 2018. The full year-over-year increase in revenues is primarily due to the acquisitions of Business Ink on February 28, 2018 and Forte on October 1, 2018, and to a lesser degree, the continued growth in our cloud solutions and managed services arrangements.

GAAP operating income for the fourth quarter of 2019 was $30.3 million, or 11.9% of total revenues, compared to $29.4 million, or 11.9% of total revenues, for the fourth quarter of 2018, and $33.4 million, or 13.3% of total revenues, for the third quarter of 2019. GAAP operating income for the full year 2019 was $126.1 million, or 12.7% of total revenues, compared to $104.9 million, or 12.0% of total revenues, for the full year 2018.

GAAP EPS for the fourth quarter of 2019 was $0.70 as compared to $0.64 for the fourth quarter of 2018, and $0.66 for the third quarter of 2019. GAAP EPS for the fourth quarter of 2019 was positively impacted by a 7% effective income tax rate for the quarter resulting primarily from an approximate $4 million net income tax benefit related to Comcast's exercise of 0.4 million vested common stock warrants in December 2019. CSG net settled Comcast's exercise by paying cash of $12.9 million. GAAP EPS for the full year 2019 was $2.55, compared to $2.01 for the full year 2018. The increase in the full year GAAP EPS is reflective of the higher operating income for 2019, mainly due to the higher revenues, and to a much lesser degree, the lower effective income tax rate between years.

Non-GAAP Results: Non-GAAP adjusted revenues for the fourth quarter of 2019 were $236.9 million, a 2% increase when compared to $231.7 million for the fourth quarter of 2018, and a 1% increase when compared to $235.1 million for the third quarter of 2019. Total non-GAAP adjusted revenues for the full year 2019 were $927.7 million, an 8% increase when compared to $859.5 million for the full year 2018.

Non-GAAP operating income for the fourth quarter of 2019 was $41.5 million, or 17.5% of total non-GAAP adjusted revenues, compared to $41.4 million, or 17.9% of total non-GAAP adjusted revenues for the fourth quarter of 2018, and $42.7 million, or 18.2% of total non-GAAP adjusted revenues for the third quarter of 2019. Non-GAAP operating income for the full year 2019 was $165.7 million, or 17.9% of total non-GAAP adjusted revenues, compared to $147.9 million, or 17.2% of total non-GAAP adjusted revenues for the full year 2018.

Non-GAAP EPS for the fourth quarter of 2019 was $0.98, compared to $0.95 for the fourth quarter of 2018, and $0.88 for the third quarter of 2019. Non-GAAP EPS for the full year 2019 was $3.53 compared to $3.06 for the full year 2018.

The increases in non-GAAP adjusted revenues and non-GAAP EPS between years are primarily due to the factors discussed above.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of December 31, 2019 were $182.7 million compared to $172.0 million as of September 30, 2019 and $162.9 million as of December 31, 2018. CSG had net cash flows from operations for the fourth quarters ended December 31, 2019 and 2018 of $43.5 million and $70.1 million, respectively, and had non-GAAP free cash flow of $33.9 million and $57.0 million, respectively. For the year ended December 31, 2019 and 2018, CSG generated net cash flows from operations of $151.1 million and $143.3 million, respectively, and had non-GAAP free cash flow of $113.8 million and $86.2 million, respectively.

Summary of 2020 Financial Guidance

CSG is updating its initial financial guidance for the full year 2020, provided on December 17, 2019, following the announcement of its contract extension with Comcast, as follows:

 

 

As of
February 5, 2020

 

Previous

GAAP Measures:

 

 

 

 

Revenues

 

$990 - $1,030 million

 

$980 - $1,020 million

Operating Margin Percentage

 

No change

 

11.5% - 12.5%

EPS

 

$2.13 - $2.46

 

N/A

Cash Flows from Operating Activities

 

$130 - $155 million

 

N/A

Non-GAAP Measures:

 

 

 

 

Adjusted Revenues

 

$917 - $950 million

 

$907 - $940 million

Adjusted Operating Margin Percentage

 

No change

 

16.0% - 17.0%

EPS

 

$2.96 - $3.29

 

N/A

For additional information and reconciliations regarding CSG's use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG's website at csgi.com.

Conference Call

CSG will host a conference call on Wednesday, February 5, 2020 at 5:00 p.m. EST, to discuss CSG's fourth quarter and full year results for 2019. The call will be carried live and archived on the Internet. A link to the conference call is available at http://ir.csgi.com. In addition, to reach the conference by phone, dial 1-888-254-3590 and ask the operator for the CSG conference call and David Banks, chairperson.

Additional Information

For information about CSG, please visit CSG's web site at csgi.com. Additional information can be found in the Investor Relations section of the website.

About CSG

For more than 35 years, CSG has simplified the complexity of business, delivering innovative customer engagement solutions that help companies acquire, monetize, engage and retain customers. Operating across more than 120 countries worldwide, CSG manages billions of critical customer interactions annually, and its award-winning suite of software and services allow companies across dozens of industries to tackle their biggest business challenges and thrive in an ever-changing marketplace. CSG is the trusted partner for driving digital innovation for hundreds of leading global brands, including AT&T, Charter Communications, Comcast, DISH, Eastlink, Formula One, iflix, Maximus, MTN and Telstra. To learn more, visit our website at csgi.com and connect with us on LinkedIn, Twitter and Facebook.

Forward-Looking Statements

This news release contains forward-looking statements as defined under the Securities Act of 1933, as amended, that are based on assumptions about a number of important factors and involve risks and uncertainties that could cause actual results to differ materially from what appears in this news release. Some of these key factors include, but are not limited to the following items:

? CSG derives approximately forty percent of its revenues from its two largest clients;

? Continued market acceptance of CSG's products and services;

? CSG's ability to continuously develop and enhance products in a timely, cost-effective, technically advanced and competitive manner;

? CSG's ability to deliver its solutions in a timely fashion within budget, particularly large and complex software implementations;

? CSG's dependency on the global telecommunications industry, and in particular, the North American telecommunications industry;

? CSG's ability to meet its financial expectations as a result of its dependency on software solution sales, which are subject to greater volatility;

? Increasing competition in CSG's market from companies of greater size and with broader presence;

? CSG's ability to successfully integrate and manage acquired businesses or assets to achieve expected strategic, operating and financial goals;

? CSG's ability to protect its intellectual property rights;

? CSG's ability to maintain a reliable, secure computing environment;

? CSG's ability to conduct business in the international marketplace;

? CSG's ability to comply with applicable U.S. and International laws and regulations; and

? Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates.

This list is not exhaustive, and readers are encouraged to review the additional risks and important factors described in CSG's reports on Forms 10-K and 10-Q and other filings made with the SEC.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands, except per share amounts)

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

156,548

 

 

$

139,277

 

Short-term investments

 

 

26,109

 

 

 

23,603

 

Total cash, cash equivalents and short-term investments

 

 

182,657

 

 

 

162,880

 

Settlement assets

 

 

169,327

 

 

 

124,627

 

Trade accounts receivable:

 

 

 

 

 

 

 

 

Billed, net of allowance of $3,735 and $3,115

 

 

244,058

 

 

 

235,827

 

Unbilled

 

 

33,450

 

 

 

37,227

 

Income taxes receivable

 

 

4,297

 

 

 

6,720

 

Other current assets

 

 

35,293

 

 

 

32,286

 

Total current assets

 

 

669,082

 

 

 

599,567

 

Non-current assets:

 

 

 

 

 

 

 

 

Property and equipment, net of depreciation of $98,029 and $93,278

 

 

84,429

 

 

 

81,813

 

Operating lease right-of-use assets

 

 

94,847

 

 

 

-

 

Software, net of amortization of $125,437 and $119,381

 

 

32,526

 

 

 

36,400

 

Goodwill

 

 

259,164

 

 

 

255,816

 

Acquired client contracts, net of amortization of $93,767 and $82,692

 

 

55,105

 

 

 

65,456

 

Client contract costs, net of amortization of $31,526 and $43,051

 

 

50,746

 

 

 

37,289

 

Deferred income taxes

 

 

9,392

 

 

 

11,087

 

Other assets

 

 

27,739

 

 

 

26,934

 

Total non-current assets

 

 

613,948

 

 

 

514,795

 

Total assets

 

$

1,283,030

 

 

$

1,114,362

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

10,313

 

 

$

7,500

 

Operating lease liabilities

 

 

22,442

 

 

 

-

 

Client deposits

 

 

38,687

 

 

 

36,889

 

Trade accounts payable

 

 

32,704

 

 

 

45,386

 

Accrued employee compensation

 

 

77,527

 

 

 

61,107

 

Settlement liabilities

 

 

168,342

 

 

 

123,613

 

Deferred revenue

 

 

45,094

 

 

 

40,236

 

Income taxes payable

 

 

2,806

 

 

 

218

 

Other current liabilities

 

 

20,778

 

 

 

35,442

 

Total current liabilities

 

 

418,693

 

 

 

350,391

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of unamortized discounts of $10,053 and $14,549

 

 

346,509

 

 

 

352,326

 

Operating lease liabilities

 

 

78,936

 

 

 

-

 

Deferred revenue

 

 

18,552

 

 

 

17,527

 

Income taxes payable

 

 

2,543

 

 

 

2,284

 

Deferred income taxes

 

 

6,376

 

 

 

8,205

 

Other non-current liabilities

 

 

14,759

 

 

 

22,605

 

Total non-current liabilities

 

 

467,675

 

 

 

402,947

 

Total liabilities

 

 

886,368

 

 

 

753,338

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Preferred stock, par value $.01 per share; 10,000 shares authorized; zero shares issued and outstanding

 

 

-

 

 

 

-

 

Common stock, par value $.01 per share; 100,000 shares authorized; 32,891 and 33,158 shares outstanding

 

 

696

 

 

 

693

 

Common stock warrants; zero and 439 warrants vested; 950 and 1,425 warrants issued

 

 

-

 

 

 

9,082

 

Additional paid-in capital

 

 

454,663

 

 

 

441,417

 

Treasury stock, at cost; 35,356 and 34,779 shares

 

 

(867,817

)

 

 

(842,360

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gains on short-term investments, net of tax

 

 

16

 

 

 

2

 

Cumulative foreign currency translation adjustments

 

 

(39,519

)

 

 

(42,937

)

Accumulated earnings

 

 

848,623

 

 

 

795,127

 

Total stockholders' equity

 

 

396,662

 

 

 

361,024

 

Total liabilities and stockholders' equity

$

1,283,030

$

1,114,362

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 

 

Quarter Ended

 

 

Year Ended

 

 

 

December 31,
2019

 

 

December 31,
2018

 

 

December 31,
2019

 

 

December 31,
2018

 

 

Revenues

$

254,747

 

 

$

247,267

 

 

$

996,810

 

 

$

875,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues (exclusive of depreciation, shown separately below)

 

131,871

 

 

 

130,180

 

 

 

525,122

 

 

 

449,820

 

 

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

32,207

 

 

 

32,225

 

 

 

127,994

 

 

 

124,034

 

 

Selling, general and administrative

 

53,345

 

 

 

48,793

 

 

 

191,329

 

 

 

169,308

 

 

Depreciation

 

5,503

 

 

 

5,011

 

 

 

21,422

 

 

 

18,304

 

 

Restructuring and reorganization charges

 

1,563

 

 

 

1,633

 

 

 

4,834

 

 

 

8,661

 

 

Total operating expenses

 

224,489

 

 

 

217,842

 

 

 

870,701

 

 

 

770,127

 

 

Operating income

 

30,258

 

 

 

29,425

 

 

 

126,109

 

 

 

104,932

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(4,300

)

 

 

(4,465

)

 

 

(17,748

)

 

 

(17,667

)

 

Amortization of original issue discount

 

(720

)

 

 

(680

)

 

 

(2,819

)

 

 

(2,664

)

 

Interest and investment income, net

 

457

 

 

 

390

 

 

 

1,785

 

 

 

2,646

 

 

Loss on extinguishment of debt

 

-

 

 

 

-

 

 

 

-

 

 

 

(810

)

 

Other, net

 

(1,481

)

 

 

897

 

 

 

(1,604

)

 

 

550

 

 

Total other

 

(6,044

)

 

 

(3,858

)

 

 

(20,386

)

 

 

(17,945

)

 

Income before income taxes

 

24,214

 

 

 

25,567

 

 

 

105,723

 

 

 

86,987

 

 

Income tax provision

 

(1,633

)

 

 

(4,669

)

 

 

(22,953

)

 

 

(20,857

)

 

Net income

$

22,581

 

 

$

20,898

 

 

$

82,770

 

 

$

66,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

31,967

 

 

 

32,329

 

 

 

32,051

 

 

 

32,488

 

 

Diluted

 

32,443

 

 

 

32,602

 

 

 

32,465

 

 

 

32,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.71

 

 

$

0.65

 

 

$

2.58

 

 

$

2.04

 

 

Diluted

 

0.70

 

 

 

0.64

 

 

 

2.55

 

 

 

2.01

 

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

 

Year Ended

 

 

 

December 31,
2019

 

 

December 31,
2018

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

82,770

 

 

$

66,130

 

 

Adjustments to reconcile net income to net cash provided by operating activities-

 

 

 

 

 

 

 

 

Depreciation

 

21,422

 

 

 

18,304

 

 

Amortization

 

45,700

 

 

 

44,328

 

 

Amortization of original issue discount

 

2,819

 

 

 

2,664

 

 

Asset impairment

 

438

 

 

 

1,851

 

 

Gain on short-term investments and other

 

(364

)

 

 

(101

)

 

Loss on extinguishment of debt

 

-

 

 

 

810

 

 

Deferred income taxes

 

(77

)

 

 

4,913

 

 

Stock-based compensation

 

19,919

 

 

 

19,358

 

 

Subtotal

 

172,627

 

 

 

158,257

 

 

Changes in operating assets and liabilities, net of acquired amounts:

 

 

 

 

 

 

 

 

Trade accounts receivable, net

 

(4,015

)

 

 

(138

)

 

Other current and non-current assets and liabilities

 

(17,727

)

 

 

(23,179

)

 

Income taxes payable/receivable

 

4,771

 

 

 

5,055

 

 

Trade accounts payable and accrued liabilities

 

(10,317

)

 

 

(7,146

)

 

Deferred revenue

 

5,737

 

 

 

10,492

 

 

Net cash provided by operating activities

 

151,076

 

 

 

143,341

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of software, property and equipment

 

(37,319

)

 

 

(57,104

)

 

Purchases of short-term investments

 

(54,258

)

 

 

(75,022

)

 

Proceeds from sale/maturity of short-term investments

 

52,135

 

 

 

190,778

 

 

Acquisition of and investments in business, net of cash acquired

 

(17,194

)

 

 

(144,791

)

 

Net cash used in investing activities

 

(56,636

)

 

 

(86,139

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

2,227

 

 

 

2,311

 

 

Payment of cash dividends

 

(29,126

)

 

 

(27,979

)

 

Repurchase of common stock

 

(30,918

)

 

 

(34,726

)

 

Exercise of common stock warrants

 

(12,911

)

 

 

-

 

 

Proceeds from long-term debt

 

-

 

 

 

150,000

 

 

Payments on long-term debt

 

(7,500

)

 

 

(125,625

)

 

Payments of deferred financing costs

 

-

 

 

 

(1,490

)

 

Net cash used in financing activities

 

(78,228

)

 

 

(37,509

)

 

Effect of exchange rate fluctuations on cash

 

1,059

 

 

 

(2,659

)

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

17,271

 

 

 

17,034

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of period

 

139,277

 

 

 

122,243

 

 

Cash and cash equivalents, end of period

$

156,548

 

 

$

139,277

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for-

 

 

 

 

 

 

 

 

Interest

$

16,064

 

 

$

15,857

 

 

Income taxes

 

18,358

 

 

 

10,426

 

 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

 

Components of Revenues

 
 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2019

 

 

2018

 

Cloud and related solutions

 

$

230,044

 

 

$

224,347

 

 

$

214,987

 

Software and services

 

 

12,757

 

 

 

14,406

 

 

 

18,528

 

Maintenance

 

 

11,946

 

 

 

12,661

 

 

 

13,752

 

Total revenues

 

$

254,747

 

 

$

251,414

 

 

$

247,267

 

 

 

Year Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Cloud and related solutions

 

$

896,164

 

 

$

766,377

 

Software and services

 

 

52,364

 

 

 

58,101

 

Maintenance

 

 

48,282

 

 

 

50,581

 

Total revenues

 

$

996,810

 

 

$

875,059

 

Revenues by Significant Customers: 10% or more of Revenues

 
 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2019

 

 

2018

 

Comcast

 

 

24

%

 

 

23

%

 

 

22

%

Charter

 

 

20

%

 

 

20

%

 

 

18

%

 

 

Year Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Comcast

 

 

23

%

 

 

25

%

Charter

 

 

20

%

 

 

20

%

Revenues by Geography

 
 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

 

2019

 

 

2019

 

 

2018

 

Americas

 

 

88

%

 

 

87

%

 

 

85

%

Europe, Middle East and Africa

 

 

8

%

 

 

9

%

 

 

10

%

Asia Pacific

 

 

4

%

 

 

4

%

 

 

5

%

Total revenues

 

 

100

%

 

 

100

%

 

 

100

%

 

 

Year Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

Americas

 

 

87

%

 

 

85

%

Europe, Middle East and Africa

 

 

9

%

 

 

10

%

Asia Pacific

 

 

4

%

 

 

5

%

Total revenues

 

 

100

%

 

 

100

%

 

EXHIBIT 2
CSG SYSTEMS INTERNATIONAL, INC.
DISCLOSURES FOR NON-GAAP FINANCIAL MEASURES

Use of Non-GAAP Financial Measures and Limitations

To supplement its condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), CSG uses non-GAAP adjusted revenues, non-GAAP operating income, non-GAAP adjusted operating margin percentage, non-GAAP EPS, non-GAAP adjusted EBITDA, and non-GAAP free cash flow. CSG believes that these non-GAAP financial measures, when reviewed in conjunction with its GAAP financial measures, provide investors with greater transparency to the information used by CSG's management in its financial and operational decision making. CSG uses these non-GAAP financial measures for the following purposes:

These non-GAAP financial measures are provided with the intent of providing investors with the following information:

Non-GAAP financial measures are not measures of performance under GAAP, and therefore should not be considered in isolation or as a substitute for GAAP financial information. Limitations with the use of non-GAAP financial measures include the following items:

CSG compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures as a supplement only. Additionally, CSG provides specific information regarding the treatment of GAAP amounts considered in preparing the non-GAAP financial measures and reconciles each non-GAAP financial measure to the most directly comparable GAAP measure.

Non-GAAP Financial Measures: Basis of Presentation

The table below outlines the exclusions from CSG's non-GAAP financial measures:

Non-GAAP Exclusions

 

Adjusted
Revenues

 

Operating
Income

 

Adjusted
Operating
Margin
Percentage

 

EPS

Transaction fees

 

X

 

?

 

X

 

?

Restructuring and reorganization charges

 

?

 

X

 

X

 

X

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

?

 

X

 

X

 

X

Earn-out compensation

 

?

 

X

 

X

 

X

Transaction-related costs

 

?

 

X

 

X

 

X

Stock-based compensation

 

?

 

X

 

X

 

X

Amortization of original issue discount ("OID")

 

?

 

?

 

?

 

X

Gain (loss) on extinguishment of debt

 

?

 

?

 

?

 

X

Unusual income tax matters

 

?

 

?

 

?

 

X

CSG believes that excluding certain items in calculating its non-GAAP financial measures provides meaningful supplemental information regarding CSG's performance and these items are excluded for the following reasons:

CSG also reports non-GAAP adjusted EBITDA and non-GAAP free cash flow. Management believes non-GAAP adjusted EBITDA is a useful measure to investors in evaluating CSG's operating performance, debt servicing capabilities, and enterprise valuation. CSG defines non-GAAP adjusted EBITDA as income before interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency transaction adjustments, acquisition-related expenses, and unusual items, such as restructuring and reorganization charges, and gains and losses related to the extinguishment of debt, as discussed above. Additionally, management uses non-GAAP free cash flow, among other measures, to assess its financial performance and cash generating capabilities, and believes that it is useful to investors because it shows CSG's cash available to service debt, make strategic acquisitions and investments, repurchase its common stock, pay cash dividends, and fund ongoing operations. CSG defines non-GAAP free cash flow as net cash flows from operating activities less the purchases of software, property and equipment.

Non-GAAP Financial Measures

Non-GAAP Adjusted Revenues:

The reconciliations of GAAP revenues to non-GAAP adjusted revenues for the indicated periods are as follows (in thousands):

 

 

Quarter Ended

December 31,

 

 

Year Ended

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

GAAP revenues

 

$

254,747

 

 

$

247,267

 

 

$

996,810

 

 

$

875,059

 

Less: Transaction fees

 

 

(17,840

)

 

 

(15,602

)

 

 

(69,114

)

 

 

(15,602

)

Non-GAAP adjusted revenues (1)

 

$

236,907

 

 

$

231,665

 

 

$

927,696

 

 

$

859,457

 

(1)

 

Non-GAAP adjusted revenues are defined as GAAP revenues less transaction fees.  Transaction fees are primarily comprised of interchange and other payment-related fees paid, in conjunction with the delivery of service to clients under CSG's payment services contracts, to third-party payment processors and financial institutions by CSG.  Because CSG controls the integrated service provided under its payment services client contracts, these transaction fees are presented gross, and not netted against revenues; however, other payments companies who do not provide and/or control an integrated service present their revenues net of transaction fees.

Non-GAAP Operating Income:

The reconciliations of GAAP operating income to non-GAAP operating income for the indicated periods are as follows (in thousands, except percentages):

 

 

Quarter Ended
December 31,

 

 

Year Ended
December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

GAAP operating income

 

$

30,258

 

 

$

29,425

 

 

$

126,109

 

 

$

104,932

 

Restructuring and reorganization charges (2)

 

 

1,563

 

 

 

1,633

 

 

 

4,834

 

 

 

8,661

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,095

 

 

 

3,326

 

 

 

12,603

 

 

 

9,699

 

Earn-out compensation

 

 

-

 

 

 

1,260

 

 

 

1,260

 

 

 

1,260

 

Transaction-related costs

 

 

-

 

 

 

1,034

 

 

 

-

 

 

 

3,653

 

Stock-based compensation (2)

 

 

6,624

 

 

 

4,722

 

 

 

20,896

 

 

 

19,650

 

Non-GAAP operating income

 

$

41,540

 

 

$

41,400

 

 

$

165,702

 

 

$

147,855

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP adjusted revenues (1)

 

$

236,907

 

 

$

231,665

 

 

$

927,696

 

 

$

859,457

 

Non-GAAP adjusted operating margin percentage

 

 

17.5

%

 

 

17.9

%

 

 

17.9

%

 

 

17.2

%

(2)

 

Stock-based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges. 

Non-GAAP EPS:

The reconciliations of GAAP EPS to non-GAAP EPS for the indicated periods are as follows (in thousands, except per share amounts):

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

Amounts

 

 

EPS (4)

 

 

Amounts

 

 

EPS (4)

 

GAAP net income

 

$

22,581

 

 

$

0.70

 

 

$

20,898

 

 

$

0.64

 

GAAP income tax provision (3)

 

 

1,633

 

 

 

 

 

 

 

4,669

 

 

 

 

 

GAAP income before income taxes

 

 

24,214

 

 

 

 

 

 

 

25,567

 

 

 

 

 

Restructuring and reorganization charges (2)

 

 

1,563

 

 

 

 

 

 

 

1,633

 

 

 

 

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,095

 

 

 

 

 

 

 

3,326

 

 

 

 

 

Earn-out compensation

 

 

-

 

 

 

 

 

 

 

1,260

 

 

 

 

 

Transaction-related costs

 

 

-

 

 

 

 

 

 

 

1,034

 

 

 

 

 

Stock-based compensation (2)

 

 

6,624

 

 

 

 

 

 

 

4,722

 

 

 

 

 

Amortization of OID

 

 

720

 

 

 

 

 

 

 

680

 

 

 

 

 

Non-GAAP income before income taxes

 

 

36,216

 

 

 

 

 

 

 

38,222

 

 

 

 

 

Non-GAAP income tax provision (3)

 

 

(4,306

)

 

 

 

 

 

 

(7,247

)

 

 

 

 

Non-GAAP net income

 

$

31,910

 

 

$

0.98

 

 

$

30,975

 

 

$

0.95

 

 

 

Year Ended

 

 

Year Ended

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

Amounts

 

 

EPS (4)

 

 

Amounts

 

 

EPS (4)

 

GAAP net income

 

$

82,770

 

 

$

2.55

 

 

$

66,130

 

 

$

2.01

 

GAAP income tax provision (3)

 

 

22,953

 

 

 

 

 

 

 

20,857

 

 

 

 

 

GAAP income before income taxes

 

 

105,723

 

 

 

 

 

 

 

86,987

 

 

 

 

 

Restructuring and reorganization charges (2)

 

 

4,834

 

 

 

 

 

 

 

8,661

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,603

 

 

 

 

 

 

 

9,699

 

 

 

 

 

Earn-out compensation

 

 

1,260

 

 

 

 

 

 

 

1,260

 

 

 

 

 

Transaction-related costs

 

 

-

 

 

 

 

 

 

 

3,653

 

 

 

 

 

Stock-based compensation (2)

 

 

20,896

 

 

 

 

 

 

 

19,650

 

 

 

 

 

Loss on extinguishment of debt

 

 

-

 

 

 

 

 

 

 

810

 

 

 

 

 

Amortization of OID

 

 

2,819

 

 

 

 

 

 

 

2,664

 

 

 

 

 

Non-GAAP income before income taxes

 

 

148,135

 

 

 

 

 

 

 

133,384

 

 

 

 

 

Non-GAAP income tax provision (3)

 

 

(33,404

)

 

 

 

 

 

 

(32,786

)

 

 

 

 

Non-GAAP net income

 

$

114,731

 

 

$

3.53

 

 

$

100,598

 

 

$

3.06

 

(3)

 

For the fourth quarter and year ended December 31, 2019 the GAAP effective income tax rates were approximately 7% and 22%, respectively, and the non-GAAP effective income tax rates were approximately 12% and 23%, respectively. 

 

 

 

For the fourth quarter and year ended December 31, 2018, the GAAP effective income tax rates were approximately 18% and 24%, respectively, and the non-GAAP effective income tax rates were approximately 19% and 25%, respectively. 

 

(4)

 

The outstanding diluted shares for the fourth quarter and year ended December 31, 2019 were 32.4 million and 32.5 million, respectively, and for the fourth quarter and year ended December 31, 2018 were 32.6 million and 32.9 million, respectively.

Non-GAAP Adjusted EBITDA:

CSG's calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG's non-GAAP adjusted EBITDA measure to GAAP net income is provided below for the indicated periods (in thousands, except percentages):

 

 

Quarter Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

GAAP net income

 

$

22,581

 

 

$

20,898

 

 

$

82,770

 

 

$

66,130

 

GAAP income tax provision (3)

 

 

1,633

 

 

 

4,669

 

 

 

22,953

 

 

 

20,857

 

Interest expense (5)

 

 

4,300

 

 

 

4,465

 

 

 

17,748

 

 

 

17,667

 

Amortization of OID

 

 

720

 

 

 

680

 

 

 

2,819

 

 

 

2,664

 

Loss on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

810

 

Interest and investment income and other, net

 

 

1,024

 

 

 

(1,287

)

 

 

(181

)

 

 

(3,196

)

GAAP operating income

 

 

30,258

 

 

 

29,425

 

 

 

126,109

 

 

 

104,932

 

Restructuring and reorganization charges (2)

 

 

1,563

 

 

 

1,633

 

 

 

4,834

 

 

 

8,661

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets (6)

 

 

3,095

 

 

 

3,326

 

 

 

12,603

 

 

 

9,699

 

Earn-out compensation

 

 

-

 

 

 

1,260

 

 

 

1,260

 

 

 

1,260

 

Transaction-related costs

 

 

-

 

 

 

1,034

 

 

 

-

 

 

 

3,653

 

Stock-based compensation (2)

 

 

6,624

 

 

 

4,722

 

 

 

20,896

 

 

 

19,650

 

Amortization of other intangible assets (6)

 

 

2,897

 

 

 

2,521

 

 

 

10,641

 

 

 

9,517

 

Amortization of client contract costs (6)

 

 

4,705

 

 

 

6,096

 

 

 

20,779

 

 

 

23,381

 

Depreciation

 

 

5,503

 

 

 

5,011

 

 

 

21,422

 

 

 

18,304

 

Non-GAAP adjusted EBITDA

 

$

54,645

 

 

$

55,028

 

 

$

218,544

 

 

$

199,057

 

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenues

 

 

23

%

 

 

24

%

 

 

24

%

 

 

23

%

(5)

 

Interest expense includes amortization of deferred financing costs as provided in Note 6 below.

   

(6)

 

Amortization on the statement of cash flows is made up of the following items for the indicated periods (in thousands):

 

 

Quarter Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Amortization of acquired intangible assets

 

$

3,095

 

 

$

3,326

 

 

$

12,603

 

 

$

9,699

 

Amortization of other intangible assets

 

 

2,897

 

 

 

2,521

 

 

 

10,641

 

 

 

9,517

 

Amortization of client contract costs

 

 

4,705

 

 

 

6,096

 

 

 

20,779

 

 

 

23,381

 

Amortization of deferred financing costs

 

 

424

 

 

 

411

 

 

 

1,677

 

 

 

1,731

 

Total amortization

 

$

11,121

 

 

$

12,354

 

 

$

45,700

 

 

$

44,328

 

Non-GAAP Free Cash Flow:

CSG's calculation of non-GAAP free cash flow and the reconciliation of CSG's non-GAAP free cash flow measure to cash flows from operating activities are provided below for the indicated periods (in thousands):

 

 

Quarter Ended

 

 

Year Ended

 

 

 

December 31,

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

$

43,549

 

 

$

70,072

 

 

$

151,076

 

 

$

143,341

 

Purchases of software, property and equipment

 

 

(9,613

)

 

 

(13,057

)

 

 

(37,319

)

 

 

(57,104

)

Non-GAAP free cash flow

 

$

33,936

 

 

$

57,015

 

 

$

113,757

 

 

$

86,237

 

Non-GAAP Financial Measures ? 2020 Financial Guidance

Non-GAAP Adjusted Revenues:

The reconciliation of GAAP revenues to non-GAAP adjusted revenues, as included in CSG's 2020 full year financial guidance, is as follows:

 

 

2020 Guidance Range

 

 

 

Low Range

 

 

High Range

 

GAAP revenues

 

$

990,000

 

 

$

1,030,000

 

Less: Transaction fees

 

 

(73,000

)

 

 

(80,000

)

Non-GAAP adjusted revenues

 

$

917,000

 

 

$

950,000

 

Non-GAAP Operating Income:

The reconciliation of GAAP operating income to non-GAAP operating income, as included in CSG's 2020 full year financial guidance, is as follows (in thousands, except percentages):

 

 

2020 Guidance Range

 

 

 

Low Range

 

 

High Range

 

Operating Income

 

 

 

 

 

 

 

 

GAAP operating income

 

$

114,000

 

 

$

128,600

 

Restructuring and reorganization charges

 

 

100

 

 

 

100

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,400

 

 

 

11,400

 

Stock-based compensation

 

 

21,500

 

 

 

21,500

 

Non-GAAP operating income

 

$

147,000

 

 

$

161,600

 

 

 

 

 

 

 

 

 

 

Operating Margin Percentage

 

 

 

 

 

 

 

 

GAAP revenues

 

$

990,000

 

 

$

1,030,000

 

GAAP operating margin percentage

 

 

11.5

%

 

 

12.5

%

 

 

 

 

 

 

 

 

 

Non-GAAP adjusted revenues

 

$

917,000

 

 

$

950,000

 

Non-GAAP adjusted operating margin percentage

 

 

16.0

%

 

 

17.0

%

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG's 2020 full year financial guidance is as follows (in thousands, except per share amounts):

 

 

2020 Guidance Range

 

 

 

Low Range

 

 

High Range

 

 

 

Amounts

 

 

EPS (8)

 

 

Amounts

 

 

EPS (8)

 

GAAP net income

 

$

68,800

 

 

$

2.13

 

 

$

79,500

 

 

$

2.46

 

GAAP income tax provision (7)

 

 

25,500

 

 

 

 

 

 

 

29,400

 

 

 

 

 

GAAP income before income taxes

 

 

94,300

 

 

 

 

 

 

 

108,900

 

 

 

 

 

Restructuring and reorganization charges

 

 

100

 

 

 

 

 

 

 

100

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,400

 

 

 

 

 

 

 

11,400

 

 

 

 

 

Stock-based compensation

 

 

21,500

 

 

 

 

 

 

 

21,500

 

 

 

 

 

Amortization of OID

 

 

3,000

 

 

 

 

 

 

 

3,000

 

 

 

 

 

Non-GAAP income before income taxes

 

 

130,300

 

 

 

 

 

 

 

144,900

 

 

 

 

 

Non-GAAP income tax provision (7)

 

 

(34,500

)

 

 

 

 

 

 

(38,400

)

 

 

 

 

Non-GAAP net income

 

$

95,800

 

 

$

2.96

 

 

$

106,500

 

 

$

3.29

 

(7)

 

For 2020, the estimated effective income tax rate for GAAP and non-GAAP purposes is expected to be approximately 27%.

   

(8)

 

The weighted-average diluted shares outstanding are expected to be approximately 32 million.

Non-GAAP Adjusted EBITDA:

CSG's calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG's non-GAAP adjusted EBITDA measure to GAAP net income is provided below for CSG's 2020 full year financial guidance (in thousands, except percentages):

 

 

2020 Guidance Range

 

 

 

Low Range

 

 

High Range

 

GAAP net income

 

$

68,800

 

 

$

79,500

 

GAAP income tax provision (7)

 

 

25,500

 

 

 

29,400

 

Interest expense

 

 

16,800

 

 

 

16,800

 

Amortization of OID

 

 

3,000

 

 

 

3,000

 

Interest and investment income and other, net

 

 

(100

)

 

 

(100

)

GAAP operating income

 

 

114,000

 

 

 

128,600

 

Restructuring and reorganization charges

 

 

100

 

 

 

100

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

11,400

 

 

 

11,400

 

Stock-based compensation

 

 

21,500

 

 

 

21,500

 

Amortization of other intangible assets

 

 

9,000

 

 

 

9,000

 

Amortization of client contract costs

 

 

18,700

 

 

 

18,700

 

Depreciation

 

 

27,700

 

 

 

27,700

 

Non-GAAP adjusted EBITDA

 

$

202,400

 

 

$

217,000

 

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenues

 

 

22

%

 

 

23

%

Non-GAAP Free Cash Flow:

CSG's calculation of non-GAAP free cash flow and the reconciliation of CSG's non-GAAP free cash flow measure to cash flows from operating activities is provided below for the indicated period (in thousands):

 

 

2020 Guidance Range

 

 

 

Low Range

 

 

High Range

 

Cash flows from operating activities

 

$

130,000

 

 

$

155,000

 

Purchases of software, property and equipment

 

 

(25,000

)

 

 

(35,000

)

Non-GAAP free cash flow

 

$

105,000

 

 

$

120,000

 

 


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