CSG Systems International Reports Results for Fourth Quarter and Full Year 2016

ENGLEWOOD, Colo.--()--CSG Systems International, Inc. (Nasdaq: CSGS), the trusted global partner to launch and monetize digital services, today reported results for the quarter and year ended December 31, 2016.

“We are executing well against our strategy to drive profitable growth”

Key Highlights:

  • Fourth quarter 2016 financial results:
    • Total revenues were $195.2 million.
    • GAAP operating income was $25.4 million, or 13.0% of total revenues and non-GAAP operating income was $33.8 million, or 17.3% of total revenues.
    • GAAP earnings per diluted share (EPS) was $0.38. Non-GAAP EPS was $0.57.
    • Cash flows from operations were $24.7 million.
  • Full year 2016 financial results:
    • Total revenues were $761.0 million.
    • GAAP operating income was $132.6 million, or 17.4% of total revenues and non-GAAP operating income was $164.3 million, or 21.6 % of total revenues.
    • GAAP EPS was $1.90. Non-GAAP EPS was $2.79.
    • Cash flows from operations were $84.2 million.
  • CSG declared its quarterly cash dividend of $0.185 per share of common stock, or a total of approximately $6 million, to shareholders, bringing the total 2016 dividend to over $23 million.
  • In January 2017, CSG’s Board of Directors approved an approximately 7% increase in CSG’s cash dividend, effective with the first quarterly payment of $0.1975 per share of common stock.
  • During the fourth quarter, CSG converted 1.5 million Comcast customer accounts onto its cloud-based Advanced Convergent Platform (ACP) for a total of approximately 3 million conversions for the year.

“We are executing well against our strategy to drive profitable growth,” said Bret Griess, president and chief executive officer for CSG International. “We are seeing the results from actions that we took several years ago to evolve our own business model to one that leverages our domain expertise in managing large, complex platforms on behalf of our clients with managed services relationships. Additionally, we are gaining traction with our next generation Ascendon cloud-based, SaaS platform that enables service providers to respond to new digital services opportunities in real-time across the globe – driving the shift from legacy systems to a future ready approach. Finally, we continue to reinforce our well known reputation of delivering day-in and day-out on behalf of some of the world’s leading communications providers – and innovators – around the world.”

Financial Overview (unaudited)

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

    Quarters Ended December 31,     Years Ended December 31,
        Percent         Percent
2016 2015 Changed 2016 2015 Changed
Revenues $ 195,169 $ 197,288 (1 %) $ 760,958 $ 752,520 1 %
GAAP Results:
Operating Income $ 25,366 $ 34,070 (26 %) $ 132,629 $ 113,140 17 %
Operating Margin 13.0 % 17.3 % 17.4 % 15.0 %
EPS $ 0.38 $ 0.70 (46 %) $ 1.90 $ 1.87 2 %
Non-GAAP Results:
Operating Income $ 33,789 $ 43,537 (22 %) $ 164,329 $ 149,568 10 %
Operating Margin 17.3 % 22.1 % 21.6 % 19.9 %
EPS $ 0.57 $ 0.77 (26 %) $ 2.79 $ 2.62 6 %
 

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 www.csgi.com.

Results of Operations

Revenues: Total revenues for the fourth quarter of 2016 were $195.2 million, a 1% decrease when compared to revenues of $197.3 million for the fourth quarter of 2015, and a 3% increase when compared to revenues of $189.3 million for the third quarter of 2016. Total revenues for the full year 2016 were $761.0 million, a 1% increase when compared to revenues of $752.5 million for the full year 2015.

The year-over-year quarterly decrease is primarily attributed to lower software and services and maintenance revenues generated during the quarter, which was mostly offset by the continued growth in CSG’s cloud and related solutions revenues, driven primarily from the conversion of customer accounts onto ACP during 2016, and increases in revenues from recurring managed services arrangements. The sequential quarterly and full year increases in revenues can be attributed to the growth of CSG’s cloud and related solutions revenues, driven primarily from continued conversion of customer accounts onto ACP, and increases in revenues from recurring managed services arrangements.

GAAP Results: GAAP operating income for the fourth quarter of 2016 was $25.4 million, or 13.0% of total revenues, compared to $34.1 million, or 17.3%, for the fourth quarter of 2015 and $36.6 million, or 19.3% of total revenues, for the third quarter of 2016. GAAP operating income for the full year 2016 was $132.6 million, or 17.4% of total revenues, compared to $113.1 million, or 15.0% of total revenues for the full year 2015.

GAAP EPS for the fourth quarter of 2016 was $0.38, as compared to $0.70 for the fourth quarter of 2015, and $0.55 for the third quarter of 2016. GAAP EPS for the full year 2016 was $1.90 compared to $1.87 for the full year 2015.

The year-over-year and sequential quarterly decreases in GAAP operating margin and GAAP EPS are reflective of the increase in planned investments during the fourth quarter of 2016, aimed at generating future long-term revenue and cash flow growth. In addition, the sequential quarterly decrease was also impacted by higher levels of employee incentive compensation in the fourth quarter, driven by CSG’s strong overall performance for the year.

The full year increases in GAAP operating margin and GAAP EPS are mainly due to the scale benefits from adding more customer accounts to CSG’s cloud solutions, and operational cost improvements made throughout 2016. In addition, for the full year GAAP EPS, these benefits more than offset the negative impact of the loss on the repurchase of the 2010 Convertible Notes and higher interest expense, both related to the refinancing of this instrument earlier this year.

Non-GAAP Results: Non-GAAP operating income for the fourth quarter of 2016 was $33.8 million, or 17.3% of total revenues, compared to $43.5 million, or 22.1%, for the fourth quarter of 2015, and $43.9 million, or 23.2% of total revenues for the third quarter of 2016. Non-GAAP operating income for the full year 2016 was $164.3 million, or 21.6% of total revenues, compared to $149.6 million, or 19.9% of total revenues for the full year 2015.

Non-GAAP EPS for the fourth quarter of 2016 was $0.57, compared to $0.77 for the fourth quarter of 2015, and $0.75 for the third quarter of 2016. Non-GAAP EPS for the full year 2016 was $2.79, compared to $2.62 for the full year 2015.

The year-over-year and sequential quarterly decreases in non-GAAP operating margin and non-GAAP EPS is reflective of the increase in planned investments during the fourth quarter of 2016, aimed at generating future long-term revenue and cash flow growth. In addition, the sequential quarterly decrease was also impacted by higher levels of employee incentive compensation in the fourth quarter, driven by CSG’s strong overall performance for the year.

The full year increases in non-GAAP operating margin and non-GAAP EPS are mainly due to the scale benefits from adding more customer accounts to CSG’s cloud solutions, and operational cost improvements made throughout 2016.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments at December 31, 2016 were $276.5 million, compared to $266.1 million at September 30, 2016 and $240.9 million at December 31, 2015.

CSG generated net cash flows from operations for the fourth quarters ended December 31, 2016 and 2015 of $24.7 million and $52.6 million, respectively, and had non-GAAP free cash flow of $22.0 million and $50.5 million, respectively. CSG generated net cash flows from operations for the years ended December 31, 2016 and 2015 of $84.2 million and $137.0 million, respectively, and had non-GAAP free cash flow of $69.9 million and $118.1 million, respectively. Cash flows from operations for the fourth quarter and full year of 2016 were negatively impacted by year end working capital timing fluctuations, and a payment made at year end as part of the closure of several years of outstanding tax audits with the IRS.

2017 Financial Guidance

CSG’s financial guidance for the full year 2017 is as follows:

        Revenues         $760 - $785 million
GAAP EPS $1.85 - $2.03
Non-GAAP EPS $2.33 - $2.49
GAAP Net Income $61 - $67 million
Non-GAAP Adjusted EBITDA $170 - $179 million
Cash Flows From Operating Activities $100 - $120 million
 

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 www.csgi.com.

Conference Call

CSG will host a conference call on Wednesday, February 1, 2017, at 5:00 p.m. Eastern Time, to discuss CSG’s fourth quarter and full year results for 2016. 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 1-800-768-6544 and ask the operator for the CSG Systems International conference call and Liz Bauer, chairperson.

Additional Information

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

About CSG International

CSG International (NASDAQ: CSGS) is the trusted global partner to help clients launch and monetize communications and entertainment services in the digital age. Leveraging 30 years of experience and expertise in voice, video, data and content services, CSG delivers market-leading revenue management and customer interaction solutions in licensed and managed service models. The company drives business transformation initiatives for the majority of the top 100 global communications service providers, including AT&T, Charter Communications, Comcast, DISH, ESPN, Media-Saturn, Orange, Reliance, SingTel Optus, Telefonica, Telstra, Vodafone, Vivo and Verizon. For more information, visit our website at www.csgi.com.

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 sixty percent of its revenues from its three largest clients;
  • Continued market acceptance of CSG’s products and services;
  • Timing and success of previously announced client customer account migrations to CSG’s billing platform;
  • 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 sales, which are subject to greater volatility;
  • Increasing competition in CSG’s market from companies of greater size and with broader presence in the communications sector;
  • 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,
2016 2015

ASSETS

Current assets:
Cash and cash equivalents $ 126,351 $ 132,631
Short-term investments   150,147     108,305  
Total cash, cash equivalents and short-term investments 276,498 240,936
Trade accounts receivable:
Billed, net of allowance of $3,080 and $3,600 208,930 178,854
Unbilled 30,828 41,110
Income taxes receivable 11,931 4,038
Other current assets   31,751     35,153  
Total current assets   559,938     500,091  
Non-current assets:
Property and equipment, net of depreciation of $122,866 and $112,282 33,116 35,992
Software, net of amortization of $99,316 and $95,094 30,427 35,095
Goodwill 201,094 219,724
Client contracts, net of amortization of $96,723 and $87,890 40,675 39,738
Deferred income taxes 14,218 17,462
Other assets   12,411     14,629  
Total non-current assets   331,941     362,640  
Total assets $ 891,879   $ 862,731  

LIABILITIES, CURRENT PORTION OF LONG-TERM DEBT CONVERSION OBLIGATION AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt, net of unamortized discounts of $296 and $8,632 $ 49,426 $ 148,868
Client deposits 33,916 33,694
Trade accounts payable 35,118 43,392
Accrued employee compensation 65,341 59,607
Deferred revenue 45,064 41,907
Income taxes payable 822 8,962
Other current liabilities   22,342     22,980  
Total current liabilities   252,029     359,410  
Non-current liabilities:
Long-term debt, net of unamortized discounts of $23,007 and $4,738 326,993 130,262
Deferred revenue 6,694 9,828
Income taxes payable 2,245 4,413
Deferred income taxes 99 182
Other non-current liabilities   12,618     12,791  
Total non-current liabilities   348,649     157,476  
Total liabilities   600,678     516,886  
Current portion of long-term debt conversion obligation   39,841     -  
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; 32,261 and 32,555 shares outstanding 672 672
Common stock warrants; 2,851 and 2,851 warrants issued and outstanding 16,007 7,310
Additional paid-in capital 391,209 503,254
Treasury stock, at cost, 34,919 and 34,601 shares (826,002 ) (814,437 )
Accumulated other comprehensive income (loss):
Unrealized loss on short-term investments, net of tax (159 ) (97 )
Cumulative foreign currency translation adjustments (45,213 ) (26,288 )
Accumulated earnings   714,846     675,431  
Total stockholders' equity   251,360     345,845  
Total liabilities, current portion of long-term debt conversion obligation and stockholders' equity $ 891,879   $ 862,731  
 
 
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED
(in thousands, except per share amounts)
 
    Quarter Ended     Year Ended

December 31,
2016

 

December 31,
2015

December 31,
2016

 

December 31,
2015

Revenues:
Cloud and related solutions $ 155,913 $ 148,401 $ 606,936 $ 577,410
Software and services 20,436 25,377 79,400 93,678
Maintenance   18,820     23,510     74,622     81,432  
Total revenues   195,169     197,288     760,958     752,520  
Cost of revenues (exclusive of depreciation, shown separately below):
Cloud and related solutions 76,374 69,260 282,952 270,715
Software and services 12,145 15,685 49,202 68,597
Maintenance   10,942     10,552     42,993     40,429  
Total cost of revenues 99,461 95,497 375,147 379,741
Other operating expenses:
Research and development 27,204 25,383 98,683 101,950
Selling, general and administrative 38,928 37,578 140,467 139,839
Depreciation 3,193 3,508 13,616 14,776
Restructuring and reorganization charges   1,017     1,252     416     3,074  
Total operating expenses   169,803     163,218     628,329     639,380  
Operating income   25,366     34,070     132,629     113,140  
Other income (expense):
Interest expense (4,386 ) (2,536 ) (16,262 ) (10,967 )
Amortization of original issue discount (1,010 ) (1,607 ) (4,866 ) (6,246 )
Interest and investment income, net 759 364 2,457 1,038
Loss on repurchase of convertible notes - - (8,651 ) -
Other, net   (1,268 )   (1,050 )   (5,308 )   (624 )
Total other   (5,905 )   (4,829 )   (32,630 )   (16,799 )
Income before income taxes 19,461 29,241 99,999 96,341
Income tax provision   (6,814 )   (5,573 )   (37,117 )   (33,774 )
Net income $ 12,647   $ 23,668   $ 62,882   $ 62,567  
 
Weighted-average shares outstanding:
Basic 31,107 30,944 30,968 31,051
Diluted 32,935 34,029 33,014 33,438
 
Earnings per common share:
Basic $ 0.41 $ 0.76 $ 2.03 $ 2.01
Diluted 0.38 0.70 1.90 1.87
 
Cash dividends declared per common share $ 0.19 $ 0.18 $ 0.74 $ 0.70
 
 
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED
(in thousands)
 
    Year Ended

December 31,
2016

   

December 31,
2015

Cash flows from operating activities:
Net income $ 62,882 $ 62,567
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation 13,616 14,776
Amortization 27,626 29,281
Amortization of original issue discount 4,866 6,246
Asset impairment - 1,685
(Gain) loss on short-term investments and other (83 ) 177
Loss on repurchase of convertible notes 8,651 -
Gain on disposition of business operations (6,611 ) (3,733 )
Deferred income taxes (2,811 ) (16,106 )
Excess tax benefit of stock-based compensation awards (4,729 ) (2,185 )
Stock-based compensation 22,715 21,130
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net (23,243 ) 1,831
Other current and non-current assets 255 (5,387 )
Income taxes payable/receivable (14,167 ) 8,953
Trade accounts payable and accrued liabilities (5,738 ) 13,916
Deferred revenue   957     3,808  
Net cash provided by operating activities   84,186     136,959  
 
Cash flows from investing activities:
Purchases of property and equipment (14,263 ) (18,845 )
Purchases of short-term investments (196,967 ) (181,553 )
Proceeds from sale/maturity of short-term investments 157,825 192,994
Acquisition of and investments in business, net of cash acquired - (1,300 )
Acquisition of and investments in client contracts (7,587 ) (8,018 )
Proceeds from the disposition of business operations   8,850     -  
Net cash used in investing activities   (52,142 )   (16,722 )
 
Cash flows from financing activities:
Proceeds from issuance of common stock 1,547 1,547
Payment of cash dividends (24,110 ) (22,238 )
Repurchase of common stock (25,196 ) (65,027 )
Payments on acquired asset financing - (829 )
Proceeds from long-term debt 230,000 150,000
Payments on long-term debt (7,500 ) (127,500 )
Repurchase of convertible notes (215,676 ) -
Payments of deferred financing costs (6,744 ) (2,742 )
Excess tax benefit of stock-based compensation awards   4,729     2,185  
Net cash used in financing activities   (42,950 )   (64,604 )
Effect of exchange rate fluctuations on cash   4,626     (4,714 )
 
Net increase (decrease) in cash and cash equivalents (6,280 ) 50,919
 
Cash and cash equivalents, beginning of period   132,631     81,712  
Cash and cash equivalents, end of period $ 126,351   $ 132,631  
 
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest $ 12,191 $ 8,380
Income taxes 53,020 41,860
 
 

EXHIBIT 1
CSG SYSTEMS INTERNATIONAL, INC.
SUPPLEMENTAL REVENUE ANALYSIS

Revenues by Geography

 
        Quarter Ended     Quarter Ended     Quarter Ended
December 31, September 30, December 31,
2016 2016 2015
Americas 85 % 86 % 83 %
Europe, Middle East and Africa 10 % 9 % 11 %
Asia Pacific 5 % 5 % 6 %
Total Revenues 100 % 100 % 100 %
                    Year Ended     Year Ended
December 31, December 31,
2016 2015
Americas 86 % 84 %
Europe, Middle East and Africa 9 % 11 %
Asia Pacific 5 % 5 %
Total Revenues 100 % 100 %
 

Revenues by Significant Customers: 10% or more of Revenues

   
    Quarter Ended     Quarter Ended     Quarter Ended
December 31, September 30, December 31,
2016 2016 2015
Comcast 26 % 27 % 24 %
Charter/Time Warner (for all periods presented) 20 % 21 % 20 %
DISH 12 % 13 % 13 %
                    Year Ended     Year Ended
December 31, December 31,
2016 2015
Comcast   26 %   24 %
Charter/Time Warner (for all periods presented) 21 % 21 %
DISH 13 % 14 %
 

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 operating income, 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:

  • Certain internal financial planning, reporting, and analysis;
  • Forecasting and budgeting;
  • Certain management compensation incentives; and
  • Communications with CSG’s Board of Directors, stockholders, financial analysts, and investors.

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

  • A more complete understanding of CSG’s underlying operational results, trends, and cash generating capabilities;
  • Consistency and comparability with CSG’s historical financial results; and
  • Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.

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:

  • Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles;
  • The way in which CSG calculates non-GAAP financial measures may differ from the way in which other companies calculate similar non-GAAP financial measures;
  • Non-GAAP financial measures do not include all items of income and expense that affect CSG’s operations and that are required by GAAP to be included in financial statements;
  • Certain adjustments to CSG’s non-GAAP financial measures result in the exclusion of items that are recurring and will be reflected in CSG’s financial statements in future periods; and
  • Certain charges excluded from CSG’s non-GAAP financial measures are cash expenses, and therefore do impact CSG’s cash position.

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    

Operating
Income

   

  EPS  

Restructuring and reorganization charges   X   X
Acquisition-related charges X X
Stock-based compensation X X
Amortization of acquired intangible assets X X
Amortization of original issue discount (“OID”) X
Gain (loss) on repurchase of convertible notes 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:

  • Restructuring and reorganization charges are infrequent expenses that result from cost reduction initiatives and/or significant changes to CSG’s business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. These charges are not considered reflective of CSG’s recurring core business operating results. The exclusion of these items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  • Acquisition-related charges relate to direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring core business operating results. These charges typically include expenses related to legal, accounting, and other professional services. The exclusion of these charges in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  • Stock-based compensation results from CSG’s issuance of equity awards to its employees under incentive compensation programs. The amount of this incentive compensation in any period is not generally linked to the level of performance by employees or CSG, but instead is more dependent on CSG’s stock price at the date the equity award is granted, and the employee service period over which the equity awards vest. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to compensation included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.
  • Amortization of acquired intangible assets is the result of business acquisitions. A portion of the purchase price in an acquisition is allocated to acquired intangible assets (e.g., software, client relationships, etc.), which are then amortized to expense over their estimated useful lives. This annual amortization expense is generally unchanged from the initial estimates, regardless of performance of the acquired business in any one period. Also, the value assigned to acquired intangible assets in a business combination is based on various estimates and valuation techniques, and does not necessarily represent the costs CSG would incur to develop such capabilities internally. Additionally, amortization of acquired intangible assets can be inconsistent in amount and frequency, and can be significantly affected by the timing and size of an acquisition. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to acquisitions included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.
  • The convertible notes OID is the result of allocating a portion of the principal balance of the debt at issuance to the equity component of the instrument, as required under current accounting rules. This OID is then amortized to interest expense over the life of the respective convertible debt instrument. The interest expense related to the amortization of the OID is a non-cash expense, and therefore, the exclusion of this item allows investors to further evaluate the cash interest costs of CSG’s convertible notes for cash flow, liquidity, and debt service purposes.
  • Gains and losses related to the repurchase of CSG’s convertible notes are not considered reflective of CSG’s recurring core business operating results. Any resulting gain or loss on the repurchase of CSG’s convertible notes is non-cash income or expense, and therefore, the exclusion of this item allows investors to further evaluate the cash impact of these repurchases for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.
  • Unusual items within CSG’s quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

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, and unusual items, such as restructuring and reorganization charges, and gains and losses related to the repurchase of CSG’s convertible notes, 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 property and equipment.

Non-GAAP Financial Measures

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     Quarter Ended
December 31, 2016 December 31, 2015
    % of     % of
Amounts Revenues Amounts Revenues
GAAP operating income $ 25,366 13.0 % $ 34,070 17.3 %
Restructuring and reorganization charges (1) 1,017 0.5 % 1,252 0.6 %
Stock-based compensation (1) 5,443 2.8 % 5,511 2.8 %
Amortization of acquired intangible assets   1,963 1.0 %   2,704 1.4 %
Non-GAAP operating income $ 33,789 17.3 % $ 43,537 22.1 %
 
Year Ended Year Ended
December 31, 2016 December 31, 2015
% of % of
Amounts Revenues Amounts Revenues
GAAP operating income $ 132,629 17.4 % $ 113,140 15.0 %
Restructuring and reorganization charges (1) 416 0.1 % 3,074 0.4 %
Stock-based compensation (1) 22,795 3.0 % 21,371 2.9 %
Amortization of acquired intangible assets   8,489 1.1 %   11,983 1.6 %
Non-GAAP operating income $ 164,329 21.6 % $ 149,568 19.9 %
(1)   Stock-based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges. In addition, restructuring and reorganization charges include the impact of the gain on disposition of business operations for the year ended December 31, 2016.
 

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, 2016 December 31, 2015
Amounts     EPS (3) Amounts     EPS (3)
GAAP net income $ 12,647 $ 0.38 $ 23,668 $ 0.70
GAAP income tax provision (2)   6,814   5,573  
GAAP income before income taxes 19,461 29,241
Restructuring and reorganization charges (1) 1,017 1,252
Stock-based compensation (1) 5,443 5,511
Amortization of acquired intangible assets 1,963 2,704
Amortization of OID   1,010     1,607  
Non-GAAP income before income taxes 28,894 40,315
Non-GAAP income tax provision (2)   (10,037 )   (14,024 )
Non-GAAP net income $ 18,857   $ 0.57 $ 26,291   $ 0.77
    Year Ended     Year Ended
December 31, 2016 December 31, 2015
Amounts     EPS (3) Amounts     EPS (3)
GAAP net income $ 62,882 $ 1.90 $ 62,567 $ 1.87
GAAP income tax provision (2)   37,117     33,774  
GAAP income before income taxes 99,999 96,341
Restructuring and reorganization charges (1) 416 3,074
Stock-based compensation (1) 22,795 21,371
Amortization of acquired intangible assets 8,489 11,983
Loss on repurchase of convertible notes 8,651 -
Amortization of OID   4,866     6,246  
Non-GAAP income before income taxes 145,216 139,015
Non-GAAP income tax provision (2)   (53,076 )   (51,436 )
Non-GAAP net income $ 92,140   $ 2.79 $ 87,579   $ 2.62
(2)   For the fourth quarter and year ended December 31, 2016 the GAAP and non-GAAP effective income tax rates were approximately 35% and 37%, respectively.
 
For the fourth quarter and year ended December 31, 2015, the GAAP effective income tax rates were approximately 19% and 35%, respectively, and the non-GAAP effective income tax rates were approximately 35% and 37%, respectively. The fourth quarter difference between the GAAP and the non-GAAP effective income tax rates relates primarily to the timing of the 2015 R&D tax credit legislation. The anticipated quarterly benefit of the credits was included in each of the quarters of 2015 for non-GAAP purposes; however, the fourth quarter GAAP tax rate reflects the entire benefit of the full year impact of the R&D tax credits, as the legislation was not passed until December.
 
(3) The outstanding diluted shares for the fourth quarter and year ended December 31, 2016 were 32.9 million and 33.0 million, respectively, and for the fourth quarter and year ended December 31, 2015 were 34.0 million and 33.4 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,
2016     2015 2016     2015
GAAP net income $ 12,647 $ 23,668 $ 62,882 $ 62,567
GAAP income tax provision 6,814 5,573 37,117 33,774
Interest expense (4) 4,386 2,536 16,262 10,967
Amortization of OID 1,010 1,607 4,866 6,246
Loss on repurchase of convertible notes - - 8,651 -
Interest and investment income and other, net   509     686     2,851     (414 )
GAAP operating income 25,366 34,070 132,629 113,140
Restructuring and reorganization charges (1) 1,017 1,252 416 3,074
Stock-based compensation (1) 5,443 5,511 22,795 21,371
Amortization of acquired intangible assets (5) 1,963 2,704 8,489 11,983
Amortization of other intangible assets (5) 5,150 3,762 16,856 14,547
Depreciation   3,193     3,508     13,616     14,776  
Non-GAAP adjusted EBITDA $ 42,132   $ 50,807   $ 194,801   $ 178,891  
Non-GAAP adjusted EBITDA as a percentage of revenues   22 %   26 %   26 %   24 %
(4)   Interest expense includes amortization of deferred financing costs as provided in Note 5 below.
 
(5) 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,
2016     2015 2016     2015
Amortization of acquired intangible assets $ 1,963 $ 2,704 $ 8,489 $ 11,983
Amortization of other intangible assets 5,150 3,762 16,856 14,547
Amortization of deferred financing costs   592   462   2,281   2,751
Total amortization $ 7,705 $ 6,928 $ 27,626 $ 29,281
 

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,
2016     2015 2016     2015
Cash flows from operating activities $ 24,680 $ 52,613 $ 84,186 $ 136,959
Purchases of property and equipment   (2,721 )   (2,069 )   (14,263 )   (18,845 )
Non-GAAP free cash flow $ 21,959   $ 50,544   $ 69,923   $ 118,114  
 

Non-GAAP Financial Measures – 2017 Financial Guidance

Non-GAAP Operating Margin:

The reconciliation of GAAP operating margin to non-GAAP operating margin, as included in CSG’s 2017 full year financial guidance, is as follows:

                2017
Guidance
GAAP operating margin 14.50 %
Restructuring and reorganization charges (6) (0.00 %)
Stock-based compensation (7) 2.75 %
Amortization of acquired intangible assets (8) 1.00 %
Non-GAAP operating margin 18.25 %
(6)   This represents the pretax impact of restructuring and reorganization charges of an estimated ($0.2) million on CSG’s operating margin as a percentage of the midpoint of 2017 revenue guidance.
 
(7) This represents the pretax impact of stock-based compensation expense of an estimated $21.2 million on CSG’s operating margin as a percentage of the midpoint of 2017 revenue guidance.
 
(8) This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $7.0 million on CSG’s operating margin as a percentage of the midpoint of 2017 revenue guidance.
 

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2017 full year financial guidance is as follows (in thousands, except per share amounts):

    2017 Guidance Range
Low Range     High Range
Amounts     EPS (10) Amounts     EPS (10)
GAAP net income $ 61,300 $ 1.85 $ 67,100 $ 2.03
GAAP income tax provision (9)   30,200     33,000  
GAAP income before income taxes 91,500 100,100
Restructuring and reorganization charges (200 ) (200 )
Stock-based compensation 21,200 21,200
Amortization of acquired intangible assets 7,000 7,000
Amortization of OID   2,800     2,800  
Non-GAAP income before income taxes 122,300 130,900
Non-GAAP income tax provision (9)   (45,300 )   (48,400 )
Non-GAAP net income $ 77,000   $ 2.33 $ 82,500   $ 2.49
(9)   For 2017, the estimated effective income tax rates for GAAP and non-GAAP purposes are expected to be approximately 33% and 37%, respectively.
 
(10) The weighted-average diluted shares outstanding are expected to be 33.1 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 2017 full year financial guidance at the mid-point (in thousands, except percentages):

                2017
GAAP net income $ 64,200
GAAP income tax provision 31,600
Interest expense 16,000
Amortization of OID 2,800
Interest and investment income and other, net   (2,000 )
GAAP operating income 112,600
Restructuring and reorganization charges (200 )
Stock-based compensation 21,200
Amortization of acquired intangible assets 7,000
Amortization of other intangible assets 19,000
Depreciation   15,000  
Non-GAAP adjusted EBITDA $ 174,600  
Non-GAAP adjusted EBITDA as a percentage of revenues   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):

                2017
Cash flows from operating activities $ 110,000
Purchases of property and equipment   (22,500 )
Non-GAAP free cash flow $ 87,500  

Contacts

CSG Systems International, Inc.
Liz Bauer, 303-804-4065
Chief Communications and Investor Relations Officer
liz.bauer@csgi.com

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