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CSG Systems International Reports Third Quarter 2023 Results

November 01, 2023

YTD Organic Revenue Up 9.0% YoY Representing CSG’s Best YTD Results in Nearly Two Decades

Raising Non-GAAP EPS Guidance & Reiterating All Other Financial Guidance Metrics

Repurchased $107 Million of Shares in Q3, Most Quarterly Share Repurchases Since Q3 2007

Successfully Executed $425 Million Convertible Debt Raise in Q3

CSG (NASDAQ: CSGS) today reported results for the quarter ended September 30, 2023.

Financial Results:

Third quarter 2023 financial results:

  • Total revenue was $286.9 million.
  • GAAP operating income was $32.7 million, or an operating margin of 11.4%, and non-GAAPoperating income was $45.2 million, or a non-GAAP adjusted operating margin of 17.0%.
  • GAAP earnings per diluted share (EPS) was $0.62 and non-GAAP EPS was $0.92.
  • Cash flows from operations were $24.6 million, with non-GAAP free cash flow of $18.1 million.

Shareholder Returns:

  • CSG declared its quarterly cash dividend of $0.28 per share of common stock, or a total of approximately $9 million, to shareholders.
  • During the third quarter of 2023, CSG repurchased under its stock repurchase program, approximately 1,991,000 shares of its common stock for approximately $107 million.

Business Activities:

  • In September 2023, CSG issued $425.0 million of convertible notes (2023 Convertible Notes) due in 2028.

“Team CSG had a fantastic first nine months of 2023. We delivered strong financial results across the board highlighted by 9.0% year-over-year organic revenue growth, our strongest first nine-month results in nearly two decades,” said Brian Shepherd, President and Chief Executive Officer of CSG. “During the quarter we completed a successful $425 million convertible debt raise, which lowered our interest rate to 3.875% and significantly decreased our exposure to floating rate debt. We also completed our previously announced $100 million stock repurchase program in the quarter, as we bought back $107 million shares in Q3. Finally, we are raising our non-GAAP EPS guidance and reiterating all other financial targets.”

Financial Overview (unaudited)

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

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

2023

 

 

2022

 

 

Changed

 

 

2023

 

 

2022

 

 

Changed

 

GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

286,868

 

 

$

273,308

 

 

 

5.0

%

 

$

871,934

 

 

$

799,876

 

 

 

9.0

%

Operating Income

 

 

32,731

 

 

 

19,977

 

 

 

63.8

%

 

 

99,130

 

 

 

43,675

 

 

 

127.0

%

Operating Margin Percentage

 

 

11.4

%

 

 

7.3

%

 

 

 

 

 

 

11.4

%

 

 

5.5

%

 

 

 

 

EPS

 

$

0.62

 

 

$

0.40

 

 

 

55.0

%

 

$

1.75

 

 

$

0.76

 

 

 

130.3

%

Non-GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

45,203

 

 

$

46,747

 

 

 

(3.3

%)

 

$

141,664

 

 

$

123,673

 

 

 

14.5

%

Adjusted Operating Margin Percentage

 

 

17.0

%

 

 

18.3

%

 

 

 

 

 

 

17.5

%

 

 

16.6

%

 

 

 

 

EPS

 

$

0.92

 

 

$

1.06

 

 

 

(13.2

%)

 

$

2.76

 

 

$

2.76

 

 

 

0.0

%

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 revenue for the third quarter of 2023 was $286.9 million, a 5.0% increase when compared to revenue of $273.3 million for the third quarter of 2022. The year-over-year increase can be mainly attributed to the continued growth of CSG’s revenue management solutions, to include the conversion of customer accounts on CSG solutions, other ancillary services and increased payments volumes.

GAAP operating income for the third quarter of 2023 was $32.7 million, or 11.4% of total revenue, compared to $20.0 million, or 7.3% of total revenue, for the third quarter of 2022. The increase in operating income can be mainly attributed to the $13.0 million decrease in restructuring and reorganization charges between years.

GAAP EPS for the third quarter of 2023 was $0.62, as compared to $0.40 for the third quarter of 2022. The increase in GAAP EPS is mainly due to the higher operating income in the third quarter of 2023, discussed above, partially offset by higher interest expense and foreign currency movements.

Non-GAAP Results: Non-GAAP operating income for the third quarter of 2023 was $45.2 million, or a non-GAAP adjusted operating margin of 17.0%, compared to $46.7 million, or a non-GAAP adjusted operating margin of 18.3% for the third quarter of 2022.

Non-GAAP EPS for the third quarter of 2023 was $0.92 compared to $1.06 for the third quarter of 2022. The decrease in non-GAAP EPS is mainly due to higher interest expense and foreign currency movements.

Balance Sheet and Cash Flows

Cash, cash equivalents, and short-term investments as of September 30, 2023 were $146.7 million compared to $146.2 million as of June 30, 2023 and $150.4 million as of December 31, 2022. CSG had net cash flows provided by operations for the third quarters ended September 30, 2023 and 2022 of $24.6 million and $22.8 million, respectively, and had non-GAAP free cash flow of $18.1 million and $10.9 million, respectively.

Summary of Financial Guidance

CSG is revising its financial guidance for the full year 2023, as follows:

 

 

As of November 1, 2023

 

Previous

GAAP Measures:

 

 

 

 

Revenue

 

No change

 

$1,150 - $1,175 million

Non-GAAP Measures:

 

 

 

 

Adjusted Operating Margin Percentage

 

No change

 

16.75% - 17.1%

EPS

 

$3.50 - $3.70

 

$3.42 - $3.58

Adjusted EBITDA

 

No change

 

$238 - $245 million

Free Cash Flow

 

No change

 

$80 - $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 csgi.com.

Conference Call

CSG will host a conference call on Wednesday, November 1, 2023 at 5:00 p.m. ET, to discuss CSG’s third quarter 2023 earnings results. 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, call 1-888-412-4131 and use the passcode 2327393.

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

CSG empowers companies to build unforgettable experiences, making it easier for people and businesses to connect with, use and pay for the services they value most. Our customer experience, billing and payments solutions help companies of any size make money and make a difference. With our SaaS solutions, company leaders can take control of their future and tap into guidance along the way from our fiercely committed and forward-thinking CSGers around the world.

Want to be future-ready and a change-maker like the global brands that trust CSG? Visit csgi.com to learn more.

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 revenue from its two largest customers;
  • Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates;
  • CSG’s ability to maintain a reliable, secure computing environment;
  • 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;
  • 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 conduct business in the international marketplace;
  • CSG’s ability to comply with applicable U.S. and International laws and regulations; and
  • CSG’s business may be disrupted, and its results of operations and cash flows adversely affected by a global pandemic.

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)

 

 

 

September 30,
2023

 

 

December 31,
2022

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

146,730

 

 

$

150,365

 

Short-term investments

 

 

-

 

 

 

71

 

Total cash, cash equivalents, and short-term investments

 

 

146,730

 

 

 

150,436

 

Settlement and merchant reserve assets

 

 

193,371

 

 

 

238,653

 

Trade accounts receivable:

 

 

 

 

 

 

 

 

Billed, net of allowance of $4,731 and $5,528

 

 

275,161

 

 

 

274,189

 

Unbilled

 

 

83,612

 

 

 

52,830

 

Income taxes receivable

 

 

2,492

 

 

 

1,270

 

Other current assets

 

 

58,701

 

 

 

48,577

 

Total current assets

 

 

760,067

 

 

 

765,955

 

Non-current assets:

 

 

 

 

 

 

 

 

Property and equipment, net of depreciation of $118,424 and $105,466

 

 

68,029

 

 

 

71,787

 

Operating lease right-of-use assets

 

 

37,196

 

 

 

49,687

 

Software, net of amortization of $159,451 and $150,337

 

 

16,741

 

 

 

22,774

 

Goodwill

 

 

302,996

 

 

 

304,036

 

Acquired customer contracts, net of amortization of $127,490 and $120,080

 

 

37,932

 

 

 

45,417

 

Customer contract costs, net of amortization of $38,174 and $30,601

 

 

53,336

 

 

 

54,735

 

Deferred income taxes

 

 

46,271

 

 

 

26,206

 

Other assets

 

 

7,034

 

 

 

7,956

 

Total non-current assets

 

 

569,535

 

 

 

582,598

 

Total assets

 

$

1,329,602

 

 

$

1,348,553

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

22,500

 

 

$

37,500

 

Operating lease liabilities

 

 

16,915

 

 

 

21,012

 

Customer deposits

 

 

33,084

 

 

 

40,472

 

Trade accounts payable

 

 

42,623

 

 

 

47,720

 

Accrued employee compensation

 

 

64,313

 

 

 

68,321

 

Settlement and merchant reserve liabilities

 

 

191,637

 

 

 

237,810

 

Deferred revenue

 

 

61,419

 

 

 

46,033

 

Income taxes payable

 

 

2,211

 

 

 

5,455

 

Other current liabilities

 

 

26,831

 

 

 

22,886

 

Total current liabilities

 

 

461,533

 

 

 

527,209

 

Non-current liabilities:

 

 

 

 

 

 

 

 

Long-term debt, net of unamortized discounts of $16,502 and $2,656

 

 

535,998

 

 

 

375,469

 

Operating lease liabilities

 

 

37,574

 

 

 

53,207

 

Deferred revenue

 

 

20,828

 

 

 

21,991

 

Income taxes payable

 

 

3,243

 

 

 

3,410

 

Deferred income taxes

 

 

128

 

 

 

117

 

Other non-current liabilities

 

 

9,807

 

 

 

11,901

 

Total non-current liabilities

 

 

607,578

 

 

 

466,095

 

Total liabilities

 

 

1,069,111

 

 

 

993,304

 

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; 29,726 and 31,269 shares outstanding

 

 

713

 

 

 

708

 

Additional paid-in capital

 

 

483,063

 

 

 

495,189

 

Treasury stock, at cost; 40,202 and 38,210 shares

 

 

(1,125,897

)

 

 

(1,018,034

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Unrealized gain on short-term investments, net of tax

 

 

1

 

 

 

1

 

Cumulative foreign currency translation adjustments

 

 

(60,773

)

 

 

(58,830

)

Accumulated earnings

 

 

963,384

 

 

 

936,215

 

Total stockholders' equity

 

 

260,491

 

 

 

355,249

 

Total liabilities and stockholders' equity

 

$

1,329,602

 

$

1,348,553

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 

 

Quarter Ended

 

 

Nine Months Ended

 

 

September 30,
2023

 

 

September 30,
2022

 

 

September 30,
2023

 

 

September 30,
2022

 

Revenue

$

286,868

 

 

$

273,308

 

 

$

871,934

 

 

$

799,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

152,734

 

 

 

138,462

 

 

 

458,897

 

 

 

415,014

 

Other operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

35,292

 

 

 

35,754

 

 

 

107,401

 

 

 

103,365

 

Selling, general and administrative

 

59,097

 

 

 

59,026

 

 

 

180,930

 

 

 

173,833

 

Depreciation

 

5,862

 

 

 

5,896

 

 

 

17,155

 

 

 

17,685

 

Restructuring and reorganization charges

 

1,152

 

 

 

14,193

 

 

 

8,421

 

 

 

46,304

 

Total operating expenses

 

254,137

 

 

 

253,331

 

 

 

772,804

 

 

 

756,201

 

Operating income

 

32,731

 

 

 

19,977

 

 

 

99,130

 

 

 

43,675

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(8,036

)

 

 

(4,328

)

 

 

(23,092

)

 

 

(10,286

)

Interest and investment income, net

 

1,175

 

 

 

281

 

 

 

2,516

 

 

 

537

 

Loss on derivative liability upon debt conversion

 

-

 

 

 

-

 

 

 

-

 

 

 

(7,456

)

Other, net

 

813

 

 

 

2,790

 

 

 

(3,047

)

 

 

6,044

 

Total other

 

(6,048

)

 

 

(1,257

)

 

 

(23,623

)

 

 

(11,161

)

Income before income taxes

 

26,683

 

 

 

18,720

 

 

 

75,507

 

 

 

32,514

 

Income tax provision

 

(7,989

)

 

 

(6,239

)

 

 

(21,931

)

 

 

(8,603

)

Net income

$

18,694

 

 

$

12,481

 

 

$

53,576

 

 

$

23,911

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

30,097

 

 

 

30,941

 

 

 

30,381

 

 

 

31,219

 

Diluted

 

30,284

 

 

 

31,159

 

 

 

30,540

 

 

 

31,487

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.62

 

 

$

0.40

 

 

$

1.76

 

 

$

0.77

 

Diluted

 

0.62

 

 

 

0.40

 

 

 

1.75

 

 

 

0.76

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

 

Nine Months Ended

 

 

 

September 30,
2023

 

 

September 30,
2022

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

$

53,576

 

 

$

23,911

 

 

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

 

 

 

 

 

 

 

 

Depreciation

 

17,549

 

 

 

21,817

 

 

Amortization

 

34,543

 

 

 

36,470

 

 

Asset impairment

 

1,689

 

 

 

30,126

 

 

Gain on lease modifications

 

(4,349

)

 

 

-

 

 

Loss on short-term investments and other

 

-

 

 

 

19

 

 

Loss on derivative liability upon debt conversion

 

-

 

 

 

7,456

 

 

Unrealized foreign currency transactions gain, net

 

(442

)

 

 

(1,700

)

 

Deferred income taxes

 

(12,504

)

 

 

(16,457

)

 

Stock-based compensation

 

21,253

 

 

 

20,778

 

 

Subtotal

 

111,315

 

 

 

122,420

 

 

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

 

 

 

 

 

 

 

 

Trade accounts receivable, net

 

(33,351

)

 

 

(22,026

)

 

Other current and non-current assets and liabilities

 

(11,449

)

 

 

(16,430

)

 

Income taxes payable/receivable

 

(4,650

)

 

 

(7,188

)

 

Trade accounts payable and accrued liabilities

 

(24,158

)

 

 

(67,053

)

 

Deferred revenue

 

14,658

 

 

 

(150

)

 

Net cash provided by operating activities

 

52,365

 

 

 

9,573

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of software, property and equipment

 

(22,940

)

 

 

(31,564

)

 

Proceeds from sale/maturity of short-term investments

 

71

 

 

 

27,447

 

 

Net cash used in investing activities

 

(22,869

)

 

 

(4,117

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

2,541

 

 

 

2,217

 

 

Payment of cash dividends

 

(26,231

)

 

 

(25,396

)

 

Repurchase of common stock

 

(116,418

)

 

 

(73,380

)

 

Deferred acquisition payments

 

(3,220

)

 

 

(1,959

)

 

Proceeds from long-term debt

 

470,000

 

 

 

290,000

 

 

Payments on long-term debt

 

(310,625

)

 

 

(247,926

)

 

Purchase of capped call transactions related to convertible notes

 

(34,298

)

 

 

-

 

 

Payments of deferred financing costs

 

(13,518

)

 

 

-

 

 

Settlement and merchant reserve activity

 

(46,196

)

 

 

(13,931

)

 

Net cash used in financing activities

 

(77,965

)

 

 

(70,375

)

 

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash

 

(448

)

 

 

(7,689

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

(48,917

)

 

 

(72,608

)

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents, and restricted cash, beginning of period

 

389,018

 

 

 

391,902

 

 

Cash, cash equivalents, and restricted cash, end of period

$

340,101

 

 

$

319,294

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for-

 

 

 

 

 

 

 

 

Interest

$

21,772

 

 

$

12,367

 

 

Income taxes

 

39,136

 

 

 

31,817

 

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, and restricted cash:

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

146,730

 

 

$

146,685

 

 

Settlement and merchant reserve assets

 

193,371

 

 

 

172,609

 

 

Total cash, cash equivalents, and restricted cash

$

340,101

 

$

319,294

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

Revenue by Significant Customers: 10% or more of Revenue

 

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

September 30, 2023

 

 

June 30, 2023

 

 

September 30, 2022

 

 

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

 

Amount

 

 

% of Revenue

 

Charter

 

$

59,432

 

 

 

21

%

 

$

60,175

 

 

 

21

%

 

$

57,974

 

 

 

21

%

Comcast

 

 

53,653

 

 

 

19

%

 

 

53,757

 

 

 

19

%

 

 

53,533

 

 

 

20

%

Revenue by Vertical

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

September 30,

 

 

June 30,

 

 

September 30,

 

 

 

2023

 

 

2023

 

 

2022

 

Broadband/Cable/Satellite

 

 

53

%

 

 

54

%

 

 

55

%

Telecommunications

 

 

20

%

 

 

18

%

 

 

20

%

All other

 

 

27

%

 

 

28

%

 

 

25

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

Revenue by Geography

 

 

Quarter Ended

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

September 30,

 

 

June 30,

 

 

September 30,

 

 

 

2023

 

 

2023

 

 

2022

 

Americas

 

 

86

%

 

 

87

%

 

 

86

%

Europe, Middle East and Africa

 

 

9

%

 

 

9

%

 

 

10

%

Asia Pacific

 

 

5

%

 

 

4

%

 

 

4

%

Total revenue

 

 

100

%

 

 

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 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:

  • 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 n on-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

 

Adjusted Operating Margin Percentage

 

EPS

Transaction fees

 

 

X

 

Restructuring and reorganization charges

 

X

 

X

 

X

Executive transition costs

 

X

 

X

 

X

Acquisition-related expenses:

 

 

 

 

 

 

Amortization of acquired intangible assets

 

X

 

X

 

X

Transaction-related costs

 

X

 

X

 

X

Stock-based compensation

 

X

 

X

 

X

Gain (loss) on debt extinguishment/conversion

 

 

 

X

Gain (loss) on acquisitions or dispositions

 

 

 

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:

  • Transaction fees are primarily comprised of fees paid to third-party payment processors and financial institutions and interchange fees under CSG’s payment services contracts. Transaction fees are included in revenue in CSG’s Income Statement (and not netted against revenue) because CSG maintains control and acts as principal over the integrated service provided under its payment services customer contracts. However, CSG excludes expense associated with transaction fees from the numerator and denominator in calculating its non-GAAP adjusted operating margin percentage in order to provide comparability with historical and future periods and with its peer group and competitors.
  • Restructuring and reorganization charges are 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 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.
  • Executive transition costs include expenses incurred related to a departure of a CSG executive officer under the terms of the related separation agreement. These types of costs are not considered reflective of CSG’s recurring business operating results. The exclusion of these costs 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 expenses include amortization of acquired intangible assets and transaction-related costs, to include earn-out compensation. Transaction-related costs, which typically include expenses related to legal, accounting, and other professional services, are direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring business operating results. The total amount of acquisition-related expenses can vary significantly between periods based on the number and size of acquisition activities, previously acquired intangible assets becoming fully amortized, and ultimate realization of earn-out compensation. In addition, the timing of these expenses may not directly correlate with underlying performance of the CSG’s operations. Therefore, the exclusion of acquisition-related expenses 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. 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.
  • Gains and losses related to the extinguishment/conversion of debt can be as a result of the refinancing of CSG’s credit agreement and/or repurchase, conversion, or settlement of CSG’s convertible notes. These activities, to include any derivative activity related to debt conversions, are not considered reflective of CSG’s recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities 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.
  • Gains or losses related to the acquisition or disposition of certain of CSG’s business activities are not considered reflective of CSG’s recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities 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, acquisition-related expenses, and unusual items, such as restructuring and reorganization charges, executive transition costs, gains and losses related to the extinguishment of debt, and gains and losses on acquisitions or dispositions, 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 Operating Income and Non-GAAP Adjusted Operating Margin Percentage:

The reconciliation of GAAP operating income to non-GAAP operating income, and calculation of CSG’s non- GAAP adjusted operating margin percentage, for the indicated periods are as follows (in thousands, except percentages):

 

 

Quarter Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Non-GAAP Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GAAP operating income

 

$

32,731

 

 

$

19,977

 

 

$

99,130

 

 

$

43,675

 

Restructuring and reorganization charges (1)

 

 

1,152

 

 

 

14,193

 

 

 

8,421

 

 

 

46,304

 

Executive transition costs

 

 

1,148

 

 

 

27

 

 

 

1,148

 

 

 

1,302

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

2,996

 

 

 

3,405

 

 

 

9,203

 

 

 

11,017

 

Transaction-related costs

 

 

(40

)

 

 

495

 

 

 

2,122

 

 

 

469

 

Stock-based compensation (1)

 

 

7,216

 

 

 

8,650

 

 

 

21,640

 

 

 

20,906

 

Non-GAAP operating income

 

$

45,203

 

 

$

46,747

 

 

$

141,664

 

 

$

123,673

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-GAAP Adjusted Operating Margin Percentage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

286,868

 

 

$

273,308

 

 

$

871,934

 

 

$

799,876

 

Less: Transaction fees (2)

 

 

(20,314

)

 

 

(18,177

)

 

 

(63,463

)

 

 

(54,928

)

Revenue less transaction fees

 

$

266,554

 

 

$

255,131

 

 

$

808,471

 

 

$

744,948

 

Non-GAAP adjusted operating margin percentage

 

 

17.0

%

 

 

18.3

%

 

 

17.5

%

 

 

16.6

%

(1)

Restructuring and reorganization charges include stock-based compensation, which is not included in the stock-based compensation line in the tables above and following, and depreciation, which has not been recorded to the depreciation line item on CSG’s Income Statement.

(2)

Transaction fees are primarily comprised of fees paid to third-party payment processors and financial institutions and interchange fees under CSG’s payment services contracts. Transaction fees are included in revenue in CSG's Income Statement (and not netted against revenue) because CSG maintains control and acts as principal over the integrated service provided under its payment services customer contracts. However, CSG excludes expense associated with transaction fees from the numerator and denominator in calculating its non-GAAP adjusted operating margin percentage in order to provide comparability with historical and future periods and with its peer group and competitors.

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

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

 

Amounts

 

 

EPS (4)

 

 

Amounts

 

 

EPS (4)

 

GAAP net income

 

$

18,694

 

 

$

0.62

 

 

$

12,481

 

 

$

0.40

 

GAAP income tax provision (3)

 

 

7,989

 

 

 

 

 

 

 

6,239

 

 

 

 

 

GAAP income before income taxes

 

 

26,683

 

 

 

 

 

 

 

18,720

 

 

 

 

 

Restructuring and reorganization charges

 

 

1,152

 

 

 

 

 

 

 

14,193

 

 

 

 

 

Executive transition costs

 

 

1,148

 

 

 

 

 

 

 

27

 

 

 

 

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

2,996

 

 

 

 

 

 

 

3,405

 

 

 

 

 

Transaction-related costs

 

 

(40

)

 

 

 

 

 

 

495

 

 

 

 

 

Stock-based compensation (1)

 

 

7,216

 

 

 

 

 

 

 

8,650

 

 

 

 

 

Non-GAAP income before income taxes

 

 

39,155

 

 

 

 

 

 

 

45,490

 

 

 

 

 

Non-GAAP income tax provision (3)

 

 

(11,159

)

 

 

 

 

 

 

(12,510

)

 

 

 

 

Non-GAAP net income

 

$

27,996

 

 

$

0.92

 

 

$

32,980

 

 

$

1.06

 

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2023

 

 

September 30, 2022

 

 

 

Amounts

 

 

EPS (4)

 

 

Amounts

 

 

EPS (4)

 

GAAP net income

 

$

53,576

 

 

$

1.75

 

 

$

23,911

 

 

$

0.76

 

GAAP income tax provision (3)

 

 

21,931

 

 

 

 

 

 

 

8,603

 

 

 

 

 

GAAP income before income taxes

 

 

75,507

 

 

 

 

 

 

 

32,514

 

 

 

 

 

Restructuring and reorganization charges

 

 

8,421

 

 

 

 

 

 

 

46,304

 

 

 

 

 

Executive transition costs

 

 

1,148

 

 

 

 

 

 

 

1,302

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

9,203

 

 

 

 

 

 

 

11,017

 

 

 

 

 

Transaction-related costs

 

 

2,122

 

 

 

 

 

 

 

469

 

 

 

 

 

Stock-based compensation (1)

 

 

21,640

 

 

 

 

 

 

 

20,906

 

 

 

 

 

Loss on extinguishment of debt

 

 

-

 

 

 

 

 

 

 

7,456

 

 

 

 

 

Non-GAAP income before income taxes

 

 

118,041

 

 

 

 

 

 

 

119,968

 

 

 

 

 

Non-GAAP income tax provision (3)

 

 

(33,642

)

 

 

 

 

 

 

(32,991

)

 

 

 

 

Non-GAAP net income

 

$

84,399

 

 

$

2.76

 

 

$

86,977

 

 

$

2.76

 

(3)

For the third quarter and nine months ended September 30, 2023, the GAAP effective income tax rates were approximately 30% and 29%, respectively, and the non-GAAP effective income tax rates were 28.5% for both periods. For the third quarter and nine months ended September 30, 2022 the GAAP effective income tax rates were approximately 33% and 26%, respectively, and the non-GAAP effective income tax rates were 27.5% for both periods.

(4)

The outstanding diluted shares for the third quarter and nine months ended September 30, 2023 were 30.3 million and 30.5, respectively, and for the third quarter and nine months ended September 30, 2022 were 31.2 million and 31.5 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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

GAAP net income

 

$

18,694

 

 

$

12,481

 

 

$

53,576

 

 

$

23,911

 

GAAP income tax provision

 

 

7,989

 

 

 

6,239

 

 

 

21,931

 

 

 

8,603

 

Interest expense (5)

 

 

8,036

 

 

 

4,328

 

 

 

23,092

 

 

 

10,286

 

Loss on derivative liability upon debt conversion

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7,456

 

Interest and investment income and other, net

 

 

(1,988

)

 

 

(3,071

)

 

 

531

 

 

 

(6,581

)

GAAP operating income

 

 

32,731

 

 

 

19,977

 

 

 

99,130

 

 

 

43,675

 

Restructuring and reorganization charges (1)

 

 

1,152

 

 

 

14,193

 

 

 

8,421

 

 

 

46,304

 

Executive transition costs

 

 

1,148

 

 

 

27

 

 

 

1,148

 

 

 

1,302

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets (6)

 

 

2,996

 

 

 

3,405

 

 

 

9,203

 

 

 

11,017

 

Transaction-related costs

 

 

(40

)

 

 

495

 

 

 

2,122

 

 

 

469

 

Stock-based compensation (1)

 

 

7,216

 

 

 

8,650

 

 

 

21,640

 

 

 

20,906

 

Amortization of other intangible assets (6)

 

 

3,438

 

 

 

3,530

 

 

 

10,274

 

 

 

10,741

 

Amortization of customer contract costs (6)

 

 

4,997

 

 

 

3,829

 

 

 

14,390

 

 

 

14,150

 

Depreciation (1)

 

 

5,862

 

 

 

5,896

 

 

 

17,155

 

 

 

17,685

 

Non-GAAP adjusted EBITDA

 

$

59,500

 

 

$

60,002

 

 

$

183,483

 

 

$

166,249

 

Non-GAAP adjusted EBITDA as a percentage of revenue less transaction fees (2)

 

 

22.3

%

 

 

23.5

%

 

 

22.7

%

 

 

22.3

%

(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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Amortization of acquired intangible assets

 

$

2,996

 

 

$

3,405

 

 

$

9,203

 

 

$

11,017

 

Amortization of other intangible assets

 

 

3,438

 

 

 

3,530

 

 

 

10,274

 

 

 

10,741

 

Amortization of customer contract costs

 

 

4,997

 

 

 

3,829

 

 

 

14,390

 

 

 

14,150

 

Amortization of deferred financing costs

 

 

304

 

 

 

186

 

 

 

676

 

 

 

562

 

Total amortization

 

$

11,735

 

 

$

10,950

 

 

$

34,543

 

 

$

36,470

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2023

 

 

2022

 

 

2023

 

 

2022

 

Cash flows from operating activities

 

$

24,582

 

 

$

22,838

 

 

$

52,365

 

 

$

9,573

 

Purchases of software, property and equipment

 

 

(6,512

)

 

 

(11,917

)

 

 

(22,940

)

 

 

(31,564

)

Non-GAAP free cash flow

 

$

18,070

 

 

$

10,921

 

 

$

29,425

 

 

$

(21,991

)

Non-GAAP Financial Measures – 2023 Financial Guidance

Non-GAAP Operating Income and Non-GAAP Adjusted Operating Margin Percentage:

The reconciliation of GAAP operating income to non-GAAP operating income, and calculation of non-GAAP adjusted operating margin percentage, as included in CSG’s 2023 full year financial guidance, is as follows (in thousands, except percentages):

 

 

2023 Guidance Range

 

 

 

Low Range

 

 

High Range

 

Non- GAAP Operating Income

 

 

 

 

 

 

 

 

GAAP operating income

 

$

124,200

 

 

$

131,400

 

Restructuring and reorganization charges

 

 

8,400

 

 

 

8,400

 

Executive Transition Costs

 

 

1,300

 

 

 

1,300

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,200

 

 

 

12,200

 

Transaction-related costs

 

 

2,100

 

 

 

2,100

 

Stock-based compensation

 

 

30,700

 

 

 

30,700

 

Non-GAAP operating income

 

$

178,900

 

 

$

186,100

 

 

 

 

 

 

 

 

 

 

Non-GAAP Operating Margin Percentage

 

 

 

 

 

 

 

 

Revenue

 

$

1,150,000

 

 

$

1,175,000

 

Less: Transaction fees

 

 

(82,000

)

 

 

(87,000

)

Revenue less transaction fees

 

$

1,068,000

 

 

$

1,088,000

 

Non-GAAP adjusted operating margin percentage

 

 

16.75

%

 

 

17.1

%

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2023 full year financial guidance is as follows (in thousands, except per share amounts):

 

 

2023 Guidance Range

 

 

 

Low Range

 

 

High Range

 

 

 

Amounts

 

 

EPS (8)

 

 

Amounts

 

 

EPS (8)

 

GAAP net income

 

$

66,200

 

 

$

2.19

 

 

$

71,200

 

 

$

2.35

 

GAAP income tax provision (7)

 

 

27,200

 

 

 

 

 

 

 

29,400

 

 

 

 

 

GAAP income before income taxes

 

 

93,400

 

 

 

 

 

 

 

100,600

 

 

 

 

 

Restructuring and reorganization charges

 

 

8,400

 

 

 

 

 

 

 

8,400

 

 

 

 

 

Executive Transition Costs

 

 

1,300

 

 

 

 

 

 

 

1,300

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,200

 

 

 

 

 

 

 

12,200

 

 

 

 

 

Transaction-related costs

 

 

2,100

 

 

 

 

 

 

 

2,100

 

 

 

 

 

Stock-based compensation

 

 

30,700

 

 

 

 

 

 

 

30,700

 

 

 

 

 

Non-GAAP income before income taxes

 

 

148,100

 

 

 

 

 

 

 

155,300

 

 

 

 

 

Non-GAAP income tax provision (7)

 

 

(42,200

)

 

 

 

 

 

 

(43,400

)

 

 

 

 

Non-GAAP net income

 

$

105,900

 

 

$

3.50

 

 

$

111,900

 

 

$

3.70

 

(7)

For 2023, the estimated GAAP and non-GAAP effective income tax rates are expected to be approximately 29% and approximately 28% - 28.5%, respectively.

(8)

The weighted-average diluted shares outstanding are expected to be approximately 30 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 2023 full year financial guidance (in thousands, except percentages):

 

 

2023 Guidance Range

 

 

 

Low Range

 

 

High Range

 

GAAP net income

 

$

66,200

 

 

$

71,200

 

GAAP income tax provision (7)

 

 

27,200

 

 

 

29,400

 

Interest expense

 

 

30,900

 

 

 

30,900

 

Interest and investment income

 

 

(3,100

)

 

 

(3,100

)

Other, net

 

 

3,000

 

 

 

3,000

 

GAAP operating income

 

 

124,200

 

 

 

131,400

 

Restructuring and reorganization charges

 

 

8,400

 

 

 

8,400

 

Executive transition costs

 

 

1,300

 

 

 

1,300

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,200

 

 

 

12,200

 

Transaction-related costs

 

 

2,100

 

 

 

2,100

 

Stock-based compensation

 

 

30,700

 

 

 

30,700

 

Amortization of other intangible assets

 

 

13,500

 

 

 

13,500

 

Amortization of client contract costs

 

 

20,300

 

 

 

20,300

 

Depreciation

 

 

24,800

 

 

 

24,800

 

Non-GAAP adjusted EBITDA

 

$

237,500

 

 

$

244,700

 

Non-GAAP adjusted EBITDA as a percentage of revenue less transaction fees (2)

 

 

22.2

%

 

 

22.5

%

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 CSG’s 2023 full year financial guidance (in thousands):

 

 

2023 Guidance Range

 

 

 

Low Range

 

 

High Range

 

Cash flows from operating activities

 

$

102,000

 

 

$

148,000

 

Purchases of software, property and equipment

 

 

(22,000

)

 

 

(28,000

)

Non-GAAP free cash flow

 

$

80,000

 

 

$

120,000

 

 

John Rea, Investor Relations
(210) 687-4409
E-mail: john.rea@csgi.com

Source: CSG
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