Exhibit 99.1

 

PRESS RELEASE

For Immediate Release

CSG SYSTEMS INTERNATIONAL REPORTS RESULTS

FOR SECOND QUARTER 2014

Earnings Call Moved Up to Coincide with Today’s Call on Comcast Contract Expansion

ENGLEWOOD, COLO. (July 31, 2014) — CSG Systems International, Inc. (Nasdaq: CSGS), a leading global provider of interactive transaction-driven solutions and services, today reported results for the quarter ended June 30, 2014.

Key Financial Highlights:

 

•

Second quarter 2014 results:

 

•

Total revenues were $184.6 million.

 

•

Non-GAAP operating income was $29.8 million, or 16.1% of total revenues and GAAP operating income was $21.8 million, or 11.8% of total revenues.

 

•

Non-GAAP earnings per diluted share (EPS) was $0.52. GAAP EPS was $0.28.

 

•

Cash flows from operations for the quarter were $24.8 million.

 

•

CSG increased its quarterly cash dividend by five percent to $0.1575 per share of common stock, which was paid to shareholders on June 26, 2014 for a total of approximately $5 million.

 

•

CSG signed a multi-year agreement with MTN South Africa to provide the end-to-end management of MTN’s wholesale billing and business service platforms.

 

•

CSG signed a multi-year agreement with one of the largest mobile operators in the world to roll out the Singleview platform to 10 countries in Africa as part of a larger modernization effort.

 

•

After the quarter, the company expanded and extended its contract with Comcast Cable through June 30, 2019. The expanded contract provides a framework and financial incentives for Comcast to standardize and streamline all of its current and future residential customer accounts onto the CSG billing platform.

“Over the past several months, we have continued to get broader and deeper in our clients’ operations by working side-by-side with them, understanding their pain points, helping them solve business problems and grow their revenues and profits,” said Peter Kalan, chief executive officer and president for CSG International. “We believe that by delivering on your promises, investing in your people, your products and your client relationships, and focusing your development efforts on helping your clients evolve and grow, that you create long-term value for your employees, your clients and your shareholders.”

---

CSG Systems International, Inc.

July 31, 2014

Page 2

 

Financial Overview (unaudited)

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

 

		Quarter Ended June 30,												Six Months Ended June 30,
		2014				2013				Percent Change				2014				2013				Percent Change
Revenues		$	184,558			$	186,107				(1	)%		$	372,586			$	366,739				2	%
Non-GAAP Results:
Operating Income		$	29,794			$	30,362				(2	)%		$	59,699			$	58,010				3	%
Operating Income Margin			16.1	%			16.3	%			—				16.0	%			15.8	%			—
EPS		$	0.52			$	0.57				(9	)%		$	1.03			$	1.05				(2	)%
GAAP Results:
Operating Income		$	21,820			$	21,681				1	%		$	42,734			$	39,716				8	%
Operating Income Margin			11.8	%			11.6	%			—				11.5	%			10.8	%			—
EPS		$	0.28			$	0.37				(24	)%		$	0.57			$	0.83				(31	)%

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 second quarter of 2014 were $184.6 million, a 1% decrease when compared to revenues of $186.1 million for the second quarter of 2013, and a 2% decrease when compared to the $188.0 million for the first quarter of 2014. The year-over-year decrease in revenues is mainly due to the two business divestitures completed in the second half of 2013, offset to a certain degree by strong processing revenues from continued growth in several of our ancillary products and services. The sequential quarterly decrease is due to a strong first quarter of processing revenues, driven in large part by special project work.

Non-GAAP Results: Non-GAAP operating income for the second quarter of 2014 was $29.8 million, or 16.1% of total revenues, compared to $30.4 million, or 16.3%, for the second quarter of 2013. Non-GAAP operating income for the first quarter of 2014 was $29.9 million, or 15.9% of total revenues.

Non-GAAP EPS for the second quarter of 2014 was $0.52, compared to non-GAAP EPS of $0.57 for the second quarter of 2013, and $0.52 for the first quarter of 2014.

GAAP Results: GAAP operating income for the second quarter of 2014 was $21.8 million, or 11.8% of total revenues, compared to $21.7 million, or 11.6%, for the same period in 2013.

GAAP EPS for the second quarter of 2014 was $0.28, compared to $0.37 for the second quarter of 2013. GAAP EPS for the second quarter of 2014 was negatively impacted by a higher effective income tax rate, which negatively impacted GAAP EPS by $0.06 per diluted share.

---

CSG Systems International, Inc.

July 31, 2014

Page 3

 

Balance Sheet and Cash Flows

Balance Sheet: Certain key balance sheet items as of the indicated dates are as follows (in thousands):

 

		June 30, 2014				March 31, 2014				December 31, 2013
Cash, cash equivalents, and short-term investments		$	189,583			$	183,012			$	210,837
Net billed trade accounts receivable (1)			191,615				195,736				178,511
Total long-term debt:
Par value		$	277,500			$	281,250			$	285,000
Unamortized OID			(17,116	)			(18,547	)			(19,950	)
Net debt carrying amount		$	260,384			$	262,703			$	265,050

 

(1)	The increases in trade accounts receivable at June 30, 2014 and March 31, 2014, from December 31, 2013, are primarily related to the timing around certain monthly customer payments.

Cash Flows: Certain key operating cash flow items for the indicated quarters then ended are as follows (in thousands):

 

		June 30, 2014				March 31, 2014				June 30, 2013
Cash Flows from Operating Activities:
Operations		$	24,804			$	27,983			$	31,308
Changes in operating assets and liabilities (2)			43				(36,561	)			7,494
Net cash provided by (used in) operating activities		$	24,847			$	(8,578	)		$	38,802
Cash Flows from Investing Activities:
Purchases of property and equipment		$	(6,697	)		$	(4,499	)		$	(6,633	)
Cash Flows from Financing Activities:
Dividend payments		$	(5,160	)		$	(5,162	)		$	—
Repurchase of common stock under stock repurchase program			—				—				(3,490	)
Payments on long-term debt			(3,750	)			(3,750	)			(3,750	)

 

(2)

Cash flows from operating activities for the quarter ended March 31, 2014 reflect the negative impact of the following timing items on working capital for the quarter: (i) the increase in the accounts receivable balance discussed above; and (ii) the payment of 2013 year-end accrued employee incentive compensation.

2014 Financial Guidance

CSG is maintaining its revenue and non-GAAP financial guidance for the full year 2014, while revising its GAAP EPS and cash flows from operating activities guidance primarily associated with CSG’s restructuring of its Content Direct management programs and incentives in the third quarter of 2014 to align its investment across CSG’s offerings. CSG’s financial guidance for the full year 2014 is as follows:

 

		As of July 31, 2014		Previous
Revenues		$745 - $770 million (maintained)		$745 - $770 million
Non-GAAP EPS		$2.05 - $2.17 (maintained)		$2.05 - $2.17
GAAP EPS		$1.02 to $1.12 (revised)		$1.31 - $1.41
Non-GAAP Adjusted EBITDA		$152 - $158 million (maintained)		$152 - $158 million
Cash flows from operating activities		$100 - $110 million (revised)		$110 - $120 million

---

CSG Systems International, Inc.

July 31, 2014

Page 4

 

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 July 31, 2014, at 5:00 p.m. ET, to discuss CSG’s second quarter results for 2014 and the expanded Comcast agreement. 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 (888) 287-5563 and ask the operator for the CSG International conference call and Liz Bauer, chairperson. A replay of the conference call will also be available until 6:00 p.m. ET on August 30, 2014, and can be accessed by calling 1-888-203-1112 and access code of 6899300.

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 Systems International, Inc. (NASDAQ: CSGS) is a market-leading business support solutions and services company serving the majority of the top 100 global communications service providers, including leaders in fixed, mobile and next-generation networks such as AT&T, Comcast, DISH, Orange, Reliance, SingTel Optus, Telecom New Zealand, Telefonica, Time Warner Cable, T-Mobile, Verizon, Vivo and Vodafone. With over 30 years of experience and expertise in voice, video, data and content services, CSG International offers a broad portfolio of licensed and Software-as-a-Service (SaaS)-based products and solutions that help clients compete more effectively, improve business operations and deliver a more impactful customer experience across a variety of touch points. 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 over forty 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 increased 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 Systems International, Inc.

July 31, 2014

Page 5

 

•

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.

For more information, contact:

Liz Bauer, Senior Vice President of Investor Relations & Strategic Communications

(303) 804-4065

E-mail: liz.bauer@csgi.com

---

CSG Systems International, Inc.

July 31, 2014

Page 6

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands, except per share amounts)

 

		June 30, 2014				December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents		$	86,122			$	82,686
Short-term investments			103,461				128,151
Total cash, cash equivalents, and short-term investments			189,583				210,837
Trade accounts receivable:
Billed, net of allowance of $2,798 and $2,359			191,615				178,511
Unbilled			39,592				38,365
Deferred income taxes			11,445				15,085
Income taxes receivable			7,640				3,815
Other current assets			35,105				28,762
Total current assets			474,980				475,375
Non-current assets:
Property and equipment, net of depreciation of $135,345 and $129,522			35,711				35,061
Software, net of amortization of $83,146 and $77,504			46,434				43,565
Goodwill			236,788				233,599
Client contracts, net of amortization of $85,759 and $75,382			49,436				55,191
Deferred income taxes			7,950				7,447
Income taxes receivable			1,833				1,930
Other assets			17,658				16,812
Total non-current assets			395,810				393,605
Total assets		$	870,790			$	868,980
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	18,750			$	15,000
Client deposits			32,445				30,431
Trade accounts payable			36,306				33,376
Accrued employee compensation			42,974				58,434
Deferred revenue			50,377				47,131
Income taxes payable			2,273				2,814
Other current liabilities			21,615				19,620
Total current liabilities			204,740				206,806
Non-current liabilities:
Long-term debt, net of unamortized original issue discount of $17,116 and $19,950			241,634				250,050
Deferred revenue			7,363				9,221
Income taxes payable			1,613				1,909
Deferred income taxes			17,653				20,274
Other non-current liabilities			14,957				14,616
Total non-current liabilities			283,220				296,070
Total liabilities			487,960				502,876
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; 34,092 shares and 33,745 shares outstanding			661				658
Additional paid-in capital			477,053				473,190
Treasury stock, at cost, 32,030 and 32,030 shares			(738,372	)			(738,372	)
Accumulated other comprehensive income (loss):
Unrealized gain on short-term investments, net of tax			51				41
Unrealized loss on change in fair value of interest rate swaps, net of tax			—				(98	)
Cumulative foreign currency translation adjustments			5,749				1,674
Accumulated earnings			637,688				629,011
Total stockholders’ equity			382,830				366,104
Total liabilities and stockholders’ equity		$	870,790			$	868,980

---

CSG Systems International, Inc.

July 31, 2014

Page 7

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 

		Quarter Ended								Six Months Ended
		June 30, 2014				June 30, 2013				June 30, 2014				June 30, 2013
Revenues:
Processing and related services		$	136,357			$	131,184			$	278,715			$	265,818
Software and services			25,618				31,391				50,474				56,755
Maintenance			22,583				23,532				43,397				44,166
Total revenues			184,558				186,107				372,586				366,739
Cost of revenues (exclusive of depreciation, shown separately below):
Processing and related services			67,364				62,964				135,791				124,541
Software and services			17,871				22,506				43,191				43,945
Maintenance			8,447				9,288				16,804				19,626
Total cost of revenues			93,682				94,758				195,786				188,112
Other operating expenses:
Research and development			26,437				27,548				51,444				56,093
Selling, general and administrative			39,140				37,388				74,439				72,185
Depreciation			3,440				4,770				6,926				9,770
Restructuring charges			39				(38	)			1,257				863
Total operating expenses			162,738				164,426				329,852				327,023
Operating income			21,820				21,681				42,734				39,716
Other income (expense):
Interest expense			(2,546	)			(3,180	)			(5,318	)			(6,109	)
Amortization of original issue discount			(1,430	)			(1,325	)			(2,834	)			(2,624	)
Interest and investment income, net			225				188				438				343
Other, net			(328	)			1,498				(277	)			1,080
Total other			(4,079	)			(2,819	)			(7,991	)			(7,310	)
Income before income taxes			17,741				18,862				34,743				32,406
Income tax provision			(8,338	)			(6,790	)			(15,649	)			(5,436	)
Net income		$	9,403			$	12,072			$	19,094			$	26,970
Weighted-average shares outstanding:
Basic			32,619				32,125				32,469				32,129
Diluted			33,543				32,439				33,789				32,483
Earnings per common share:
Basic		$	0.29			$	0.38			$	0.59			$	0.84
Diluted			0.28				0.37				0.57				0.83
Cash dividends declared per common share		$	0.1575			$	0.1500			$	0.3075			$	0.1500

---

CSG Systems International, Inc.

July 31, 2014

Page 8

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

		Six Months Ended
		June 30, 2014				June 30, 2013
Cash flows from operating activities:
Net income		$	19,094			$	26,970
Adjustments to reconcile net income to net cash provided by operating activities -
Depreciation			6,926				9,770
Amortization			16,924				18,757
Amortization of original issue discount			2,834				2,624
Loss on short-term investments and other			735				998
Gain on disposition of business operations			(222	)			—
Deferred income taxes			766				6,533
Excess tax benefit of stock-based compensation awards			(1,984	)			(542	)
Stock-based employee compensation			7,714				7,518
Subtotal			52,787				72,628
Changes in operating assets and liabilities:
Trade accounts receivable, net			(13,457	)			10,382
Other current and non-current assets			(8,987	)			(8,367	)
Income taxes payable/receivable			(2,512	)			(4,178	)
Trade accounts payable and accrued liabilities			(12,353	)			(16,763	)
Deferred revenue			791				7,644
Net cash provided by operating activities			16,269				61,346
Cash flows from investing activities:
Purchases of property and equipment			(11,196	)			(11,125	)
Purchases of short-term investments			(85,014	)			(98,883	)
Proceeds from sale/maturity of short-term investments			109,138				41,361
Acquisition of and investments in client contracts			(3,296	)			(3,808	)
Proceeds from the disposition of business operations			630				—
Net cash provided by (used in) investing activities			10,262				(72,455	)
Cash flows from financing activities:
Proceeds from issuance of common stock			661				921
Payment of cash dividends			(10,322	)			—
Repurchase of common stock			(6,584	)			(14,883	)
Payments on acquired equipment financing			(1,097	)			(1,894	)
Payments on long-term debt			(7,500	)			(7,500	)
Excess tax benefit of stock-based compensation awards			1,984				542
Net cash used in financing activities			(22,858	)			(22,814	)
Effect of exchange rate fluctuations on cash			(237	)			(2,975	)
Net increase (decrease) in cash and cash equivalents			3,436				(36,898	)
Cash and cash equivalents, beginning of period			82,686				133,747
Cash and cash equivalents, end of period		$	86,122			$	96,849
Supplemental disclosures of cash flow information:
Net cash paid during the period for -
Interest		$	4,211			$	4,770
Income taxes			17,075				2,306
Non-cash financing activity -
Cash dividend payable			—				5,069

 

---

CSG Systems International, Inc.

July 31, 2014

Page 9

 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

Revenues by Geography

 

		Quarter Ended June 30, 2014				Quarter Ended March 31, 2014				Quarter Ended June 30, 2013
Americas			85	%			86	%			85	%
Europe, Middle East and Africa			11	%			10	%			9	%
Asia Pacific			4	%			4	%			6	%
Total Revenues			100	%			100	%			100	%

Revenues by Significant Customers: 10% or more of Revenues

 

		Quarter Ended June 30, 2014				Quarter Ended March 31, 2014				Quarter Ended June 30, 2013
Comcast			21	%			21	%			18	%
DISH			16	%			15	%			15	%
Time Warner			11	%			11	%			10	%

ACP Customer Accounts (in thousands, at end of period)

 

		June 30, 2014				March 31, 2014				June 30, 2013
Cable/Satellite Customer Accounts			49,891				49,811				49,072

---

CSG Systems International, Inc.

July 31, 2014

Page 10

 

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 Systems International, Inc.

July 31, 2014

Page 11

 

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 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
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 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.

---

CSG Systems International, Inc.

July 31, 2014

Page 12

 

•

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 debt securities 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 debt securities for cash flow, liquidity, and debt service purposes.

 

•

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, liquidity, 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 charges, 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.

---

CSG Systems International, Inc.

July 31, 2014

Page 13

 

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 June 30, 2014								Quarter Ended June 30, 2013
		Amounts				% of Revenues				Amounts				% of Revenues
GAAP operating income		$	21,820				11.8	%		$	21,681				11.6	%
Restructuring charges			39				0.0	%			(38	)			(0.0	)%
Stock-based compensation			3,931				2.1	%			3,908				2.1	%
Amortization of acquired intangible assets			4,004				2.2	%			4,811				2.6	%
Non-GAAP operating income		$	29,794				16.1	%		$	30,362				16.3	%

 

		Six Months Ended June 30, 2014								Six Months Ended June 30, 2013
		Amounts				% of Revenues				Amounts				% of Revenues
GAAP operating income		$	42,734				11.5	%		$	39,716				10.8	%
Restructuring charges			1,257				0.3	%			863				0.2	%
Stock-based compensation			7,714				2.1	%			7,518				2.1	%
Amortization of acquired intangible assets			7,994				2.1	%			9,913				2.7	%
Non-GAAP operating income		$	59,699				16.0	%		$	58,010				15.8	%

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 June 30, 2014								Quarter Ended June 30, 2013
		Pretax Amount (1)				EPS (3)				Pretax Amount (1)				EPS (4)
GAAP income before income taxes		$	17,741			$	0.28			$	18,862			$	0.37
Restructuring charges			39								(38	)
Stock-based compensation			3,931								3,908
Amortization of acquired intangible assets			4,004								4,811
Amortization of OID			1,430								1,325
Non-GAAP income before income taxes (2)		$	27,145			$	0.52			$	28,868			$	0.57

---

CSG Systems International, Inc.

July 31, 2014

Page 14

 

		Six Months Ended June 30, 2014								Six Months Ended June 30, 2013
		Pretax Amount (1)				EPS (3)				Pretax Amount (1)				EPS (4)
GAAP income before income taxes		$	34,743			$	0.57			$	32,406			$	0.83
Restructuring charges			1,257								863
Stock-based compensation			7,714								7,518
Amortization of acquired intangible assets			7,994								9,913
Amortization of OID			2,834								2,624
Non-GAAP income before income taxes (2)		$	54,542			$	1.03			$	53,324			$	1.05

 

(1)	These items (on a pretax basis) are calculated in accordance with GAAP, and are reflected as part of the results of operations in the accompanying Unaudited Condensed Consolidated Statements of Income.

(2)

Non-GAAP EPS is calculated by taking the non-GAAP income before income taxes and deducting from this amount non-GAAP income taxes calculated by using the non-GAAP effective income tax rate for the period, and then dividing the result of this calculation by the outstanding diluted shares for the period.

(3)

For the second quarter and six months ended June 30, 2014, the GAAP effective income tax rate was 47% and 45%, respectively, the non-GAAP effective income tax rate was approximately 36% for both periods, and the outstanding diluted shares were 33.5 million and 33.8 million, respectively. The difference between the GAAP and the non-GAAP effective income tax rates relates primarily to the timing of the 2014 R&D tax credit legislation. The anticipated quarterly benefit of the credits is included for non-GAAP purposes, but cannot be reflected for GAAP purposes until the legislation is actually passed.

(4)

For the second quarter and six months ended June 30, 2013, the GAAP effective income tax rate was 36% and 17%, respectively, the non-GAAP effective income tax rate was approximately 36% for both periods, and the outstanding diluted shares were 32.4 million and 32.5 million, respectively. The difference between the GAAP and the non-GAAP effective income tax rates for the six months ended June 30, 2013 is primarily due to the recognition of the 2012 R&D tax credits of approximately $6 million, or approximately $0.18 per diluted share, in the first quarter of 2013. These credits were recognized for GAAP purposes in the first quarter of 2013 since the credit legislation was passed by Congress in January 2013. The effective income tax rate for non-GAAP purposes of approximately 36% for the six months ended June 30, 2013 excludes the impact of these tax credits, as they were reflected in the 2012 non-GAAP effective income tax rate.

---

CSG Systems International, Inc.

July 31, 2014

Page 15

 

Non-GAAP Adjusted EBITDA:

CSG’s calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG’s non-GAAP adjusted EBITDA measure to net income and cash flows from operating activities are provided below for the indicated periods (in thousands, except percentages):

 

		Quarter Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
GAAP operating income		$	21,820			$	21,681			$	42,734			$	39,716
Restructuring charges			39				(38	)			1,257				863
Depreciation			3,440				4,770				6,926				9,770
Amortization of acquired intangible assets (5)			4,004				4,811				7,994				9,913
Amortization of other intangible assets (5)			3,745				3,598				7,752				7,614
Stock-based compensation			3,931				3,908				7,714				7,518
Adjusted EBITDA		$	36,979			$	38,730			$	74,377			$	75,394
Adjusted EBITDA as a percentage of revenues			20	%			21	%			20	%			21	%

 

		Quarter Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Net income		$	9,403			$	12,072			$	19,094			$	26,970
Interest expense (6)			2,546				3,180				5,318				6,109
Amortization of OID			1,430				1,325				2,834				2,624
Interest and investment income and other, net			103				(1,686	)			(161	)			(1,423	)
Income tax provision			8,338				6,790				15,649				5,436
Depreciation			3,440				4,770				6,926				9,770
Amortization of acquired intangible assets (5)			4,004				4,811				7,994				9,913
Amortization of other intangible assets (5)			3,745				3,598				7,752				7,614
Stock-based compensation			3,931				3,908				7,714				7,518
Restructuring charges			39				(38	)			1,257				863
Adjusted EBITDA		$	36,979			$	38,730			$	74,377			$	75,394

 

		Quarter Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Cash flows from operating activities		$	24,847			$	38,802			$	16,269			$	61,346
Income tax provision			8,338				6,790				15,649				5,436
Changes in operating assets and liabilities and deferred taxes			1,963				(7,580	)			35,752				4,749
Interest expense (6)			2,546				3,180				5,318				6,109
Interest and investment income and other, net			103				(1,686	)			(161	)			(1,423	)
Restructuring charges			39				(38	)			1,257				(19	)
Other			(857	)			(738	)			293				(804	)
Adjusted EBITDA		$	36,979			$	38,730			$	74,377			$	75,394

---

CSG Systems International, Inc.

July 31, 2014

Page 16

 

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

 

		Quarter Ended June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Amortization of acquired intangible assets		$	4,004			$	4,811			$	7,994			$	9,913
Amortization of other intangible assets			3,745				3,598				7,752				7,614
Amortization of deferred financing costs			585				612				1,178				1,230
Total amortization		$	8,334			$	9,021			$	16,924			$	18,757

 

(6)	Interest expense includes amortization of deferred financing costs as provided in Note 5 above.

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 June 30,								Six Months Ended June 30,
		2014				2013				2014				2013
Cash flows from operating activities		$	24,847			$	38,802			$	16,269			$	61,346
Purchases of property and equipment			(6,697	)			(6,633	)			(11,196	)			(11,125	)
Non-GAAP free cash flow		$	18,150			$	32,169			$	5,073			$	50,221

Non-GAAP Financial Measures – 2014 Financial Guidance

Non-GAAP Operating Income Margin:

The reconciliation of GAAP operating income margin to non-GAAP operating income margin, as included in CSG’s 2014 full year financial guidance, is as follows:

 

		2014 Guidance
GAAP operating income margin			11.0	%
Restructuring charges (7)			1.0	%
Stock-based compensation (8)			2.5	%
Amortization of acquired intangible assets (9)			2.0	%
Non-GAAP operating income margin (“approximately 16.5%”)			16.5	%

 

(7)

This represents the pretax impact of restructuring charges of an estimated $9 million, primarily related to CSG’s restructuring of its Content Direct management program and incentives in the third quarter of 2014 to align its investment across CSG’s offerings, on CSG’s operating income margin as a percentage of the midpoint of 2014 revenue guidance.

(8)	This represents the pretax impact of stock-based compensation expense of an estimated $18 million on CSG’s operating income margin as a percentage of the midpoint of 2014 revenue guidance.

(9)	This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $16 million on CSG’s operating income margin as a percentage of the midpoint of 2014 revenue guidance.

---

CSG Systems International, Inc.

July 31, 2014

Page 17

 

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2014 full year financial guidance is as follows (in thousands, except per share amounts):

 

		2014 Guidance Range
		Low Range								High Range
		Pretax Amount (10)				EPS (12)				Pretax Amount (10)				EPS (12)
GAAP income before income taxes		$	63,000			$	1.02			$	68,000			$	1.12
Restructuring charges			9,000								9,000
Stock-based compensation			18,000								18,000
Amortization of acquired intangible assets			16,000								16,000
Amortization of OID			6,000								6,000
Non-GAAP income before income taxes (11)		$	112,000			$	2.05			$	117,000			$	2.17

 

(10)	These items (on a pretax basis) are calculated in accordance with GAAP, and will be reflected as part of the results of operations in CSG’s Unaudited Condensed Consolidated Statements of Income.

(11)

Non-GAAP EPS is calculated by taking the non-GAAP income before income taxes and deducting from this amount non-GAAP income taxes calculated by using the non-GAAP effective income tax rate for the period, and then dividing the result of this calculation by the outstanding diluted shares for the period.

(12)	For 2014, the estimated effective income tax rate for non-GAAP purposes is expected to be approximately 36%-37%, which assumes Congress will approve the 2014 R&D income tax credit legislation prior to the end of 2014. The weighted-average diluted shares outstanding are expected to be 34.1 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 net income and cash flows from operations are provided below for CSG’s 2014 full year financial guidance at the mid-point (in thousands, except percentages):

 

		2014
GAAP operating income		$	81,000
Restructuring charges			9,000
Depreciation			16,000
Amortization of acquired intangible assets			16,000
Amortization of other intangible assets			15,000
Stock-based compensation			18,000
Non-GAAP Adjusted EBITDA		$	155,000
Non-GAAP Adjusted EBITDA as a percentage of revenues			21	%

---

CSG Systems International, Inc.

July 31, 2014

Page 18

 

		2014
Net income		$	37,000
Interest expense			10,000
Interest and investment income and other, net			(1,000	)
Amortization of OID			6,000
Income tax provision			29,000
Depreciation			16,000
Amortization of acquired of intangible assets			16,000
Amortization of other intangible assets			15,000
Stock-based compensation			18,000
Restructuring charges			9,000
Non-GAAP Adjusted EBITDA		$	155,000

 

		2014
Cash flows from operating activities (midpoint of guidance)		$	105,000
Income tax provision			29,000
Interest and investment income and other, net			—
Changes in operating assets and liabilities and deferred taxes			2,000
Interest expense			10,000
Restructuring charges			9,000
Non-GAAP Adjusted EBITDA		$	155,000

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):

 

		2014
Cash flows from operating activities (midpoint of guidance)		$	105,000
Purchases of property and equipment			(30,000	)
Non-GAAP free cash flow		$	75,000