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Executives

Liz Bauer - VP, IR

Peter Kalan - CEO

Randy Wiese - CFO

Analysts

Chris Cohen - Stifel Nicolaus

Scott Sutherland - Wedbush Securities

Howard Smith - First Analysis Securities

Shaul Eyal - Oppenheimer & Company

Lauren Ye - JPMorgan

CSG Systems International Inc. (CSGS) Q3 2010 Earnings Call October 26, 2010 5:00 PM ET

Operator

Welcome to the CSG Systems Q3 Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, conference will be open for question. (Operator Instructions). This conference is being recorded today, October 26, 2010.

I would now like to turn the conference over to Ms. Liz Bauer. Please go ahead, ma’am.

Liz Bauer

Today’s discussion will contain a number of forward-looking statements. These will include but are not limited to statements regarding our projected financial results; our ability to meet our clients’ needs through our products, services, and performance; our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic, operating and financial goals and our proposed acquisition of Intec Telecom, which we announced on September 24th of this year.

All these statements reflect our best current judgments they are subject to risks and uncertainties that could cause our actual results to differ materially. Please note that these statements reflect our opinions only as of the date of this call and we undertake no obligation to revise or publicly release any revision to these forward looking statements in light of new or future events.

In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today’s press release as well as our most recently filed 10-K and 10-Q, which are available on the Investor Relations section of our website.

Also, we may discuss certain financial information that is not prepared in accordance with GAAP. We use this non-GAAP information in our internal analysis in order to exclude significant items that may have a disproportionate effect in a particular period. We believe that isolating the effects of such events enables us as well as investors to consistently analyze the critical components of our operating results and to have meaningful comparisons to prior periods.

For more information regarding our use of non-GAAP financial measures we refer you to today’s earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K.

With me today on the phone are Peter Kalan, our Chief Executive Officer and Randy Wiese, our Chief Financial Officer.

Finally, before I turn it over to Peter, I would like to remind everyone that our announced acquisition of Intec Telecom is being governed by UK law and regulation; therefore we will be limited in our remarks outside of the details under the rule 2.5 announcement, which is posted on our website.

With that, I’d now like to turn the call over to Peter.

Peter Kalan

I am pleased to report that CSG continues to execute well, posting third quarter revenues of $134 million and non-GAAP earnings per share of $0.59. Our revenues increased 7% and our non-GAAP EPS increased 13% over the same period last year and we have demonstrated a steady quarter-over-quarter growth this year.

In addition to executing well on the revenue side of the business, we continued our strong heritage of operational excellence and performance. This quarter, we expanded on our non-GAAP operating margin to approximately 20%, as a result of our focus on running our operations well and our success in helping our clients grow their businesses.

Today, I am going to provide you with an update on our operations, what we are seeing with our clients and our announced acquisition of Intec Telecom.

First, we reached a significant operational milestone this quarter. We completed our two-plus-year data center migration without any major disruption. Thanks to our employees and our clients. The primary purpose for moving from our provider to Infocrossing was to ensure that we are providing the highest quality operations to our clients.

The secondary purpose was to ensure that we continue to identify ways to optimize our operations. We are pleased with the partnership that we have established with Infocrossing, we can believe this will help us implement several new initiatives aimed at taking our solutions to the next level.

I want to provide you with an ideas to the scope of this project. During the migration, we setup redundant data network, moved over 800 open system servers and switched our high volume transaction processing engine over to Infocrossing. This was a highly complex project and entailed moving almost 50 million subscriber accounts, many of which were double and triple play customers. I can’t say enough about the work that our teams did during this transition. Their work is a testament to our ability to execute well. I’d like to thank our employees, our clients and our partner Infocrossing for the hard work during this migration.

Next I would like to review with you what we are seeing with our clients. Simply stated, I believe our results over the past year demonstrate the types of activity that we are seeing in the communications market. Communications service providers continue to pursue projects that have a quick return on investment. We’ve had success in primarily two areas. Helping our clients generate new or additional revenues and helping our clients streamline processes and workload improve operational efficiencies.

Over the past several quarters, we’ve discussed our successes in positioning our client throughout new products like WiMAX in commercial services aimed at the small-to-medium business market. However, our solutions provide other revenue for our clients to generate new revenues through greater targeting and up-selling opportunities. For example, recently, one of our clients shared with us the results of a trial they conducted, utilizing one of our advanced solutions aimed at marketing the right product to the right customers. Their results speak the value of this solution and help provider to measure the return on investment of our products.

After the implementation of this solution, which included training for customer service reps, our client realized the following benefits. They saw an increase of over 50% in the number of digital subscribers who upgraded to their digital DVR service. They’ve doubled the take rate of high definition receiver cells, and they saw their work order accuracy improved to 97%. We couldn’t have been more pleased for our clients before our product management and development teams. When we setout to create products for our client, these are the type of results we are seeking to achieve.

On the operational front, our clients continue to take advantage of the benefit associated with our workforce automation and financial automation tools. With the average truckload to a consumer’s house costing a service provider almost $75. You can see now ensuring that rolling the right truck with the technician with the right skills to the houses financially easy to quantify, but more difficult to quantify but important to achieve is the improvement in customer satisfaction that is experienced when a customer doesn’t have to spend a four-hour period waiting for the technician to show up.

Receiving an automated call or text message from the service provider, letting them know when technician is actually going to be there is huge values add. These types of activities help hour clients compete in a massively, dynamic growth and are continue to be important if not more important in the future. As we’ve discussed in the past, customers ways in which they consume content and information. All this contributes to an increasing need to identify new business models and new ways to service the end user.

There are new competitors entering this market every day. However this increased competition has increased the sense of urgency by our client to get even more entrants for their customers. As we work, side-by-side with our clients and projecting what the future, the consumers are at the heart of our plans. The end consumer is going to be more demanding, have more choices and want more convenience.

Their combination results in increasing complexity in any provider’s operations and businesses and helping our clients manage their complexity is a key focus of our. Over the past five years, we’ve spent over $300 million on research and development and over $150 million on acquisitions aimed at hoping our clients compete and successes in this increasingly competitive and complex environment.

On September 24th, we announced that we’ve reached an agreement to acquire Intec Telecom, a UK based international provider of business support times for approximately $372 million. This acquisition is consistent with our strategy of looking for ways to get deeper into our client base by helping our clients offer more choices, convenience and flexibility to their customers and in their own operations.

We believe that the combined capabilities of both, Intec and CSG will provide a broad portfolio of products that address the ever-changing needs of communication providers to manage their customers’ interactions in real time.

For those of you who are not familiar with Intec, they are the leader in wholesale billing and mediation and a leader in retail billing worldwide. They have over 400 customers worldwide and serve over 60% of the world’s top 100 communication service providers. They have 1,600 professionals located across the globe in 24 countries.

In the near-term, we’ll be integrating Intec’s solutions with our next-generation solution, Advanced Convergent Platform, enabling our clients to rollout new services wireless, enterprise commercial services, wholesale billing as well as manage transactions and data flow into their networks in real time.

As many of you know, our Advanced Convergent Platform solution is the most proven and deployed customer care billing solution, serving the North American cable market. All of our cable clients are using it.

Based on conversations with our clients, we believe that this acquisition of Intec will allow us to continue to be an enabler of client successes as they execute on their business plans over the next several years. And since the two companies and their solutions are complementary in nature, our focus in the near-term is maximizing our opportunities with our clients.

We believe that we have the teams in place, including employees from both, CSG and Intec to make this happen. The acquisition is scheduled to close by the end of this year.

Finally, before I turn it over Randy, I’d like to close with a few thoughts. We had a very strong quarter by doing what we do best. Helping our clients run their operations more efficiently and rollout new service. We didn’t get distracted by the other activities that were going on, mainly the proposed Intec acquisition and I believe this bodes well for how the integration of the two companies will perceive.

We continue to see strong demand from our clients for our solutions, team that’s streamlining their operations. We continue to execute on all fronts, including in our operations themselves. We continue to make investments aimed to helping our clients to be more successful and competitive and we continue to run our business in a fashion that puts us in a position of strength allowing us to be opportunistic in our acquisitions and our product investments.

In closing, we’re focused on closing up 2010 on a positive note and positioning the company for continued success in 2011.

Now, I’d like to turn it over to Randy to go through our financial performance for the quarter.

Randy Wiese

I’m happy to share with you the financial results for our third quarter and our outlook for remainder of 2010. Once again, we had another quarter with a favorable combination of solid organic revenue growth and margin improvement together yielding strong bottom line results. Along with our consistent cash flows and solid balance sheet, we are in a very strong position to invest in new solutions that will enable our clients to more effectively compete and operate in this changing market.

Now, I’d like to walk you through the financial results for the quarter. Total revenues for the quarter were close to $134 million, representing an increase of 7% year-over-year. This 7% revenue growth is all organic relating to the continued adoption of our solutions and year-over-year subscriber growth on our systems.

Revenue generated from Comcast and DISH Network for the quarter were 24% and 19%, respectively, relatively consistent with the second quarter. Our non-GAAP operating income for the quarter was $27 million, or 20% margin. This non-GAAP operating income excludes $2 million of expense related to the transition of our data center and $3 million of acquisition-related charges associated with our proposed acquisition of Intec Telecom, which I will discuss in more detail in a few minutes.

This represents sequential improvement over our second quarter non-GAAP operating margin of about 19%. This increase can be attributed primarily to the four quarterly benefit of operating in our new data center as well as strong revenue growth and continued good expense management. Our GAAP operating income for the quarter was $23 million, or 17% margin.

Non-GAAP EPS for the third quarter was $0.59, which compares to $0.52 for the same period last year. This represents growth of 13% year-over-year driven mainly by growth in our operating results since last year. For the third quarter, our effective income tax rate was 35%. This tax rate still does not include the positive impact of the proposed R&D tax credits that remain pending congress’s approval. Should the R&D tax credit legislation pass before yearend as we are anticipating, we will expect the full year benefit of the credits to be recognized in the fourth quarter.

GAAP EPS for the third quarter $0.35. Our operating cash flows were $19 million in the third quarter, which is larger than our average quarterly run rate due to the timing associated with $13 million in client payments that were received shortly after quarter end. As with this timing impact, we had another solid quarter of cash flow generation. We spent $2 million on capital expenditures in the quarter.

As of September 30th, total cash and short-term investments were $212 million, down $17 million from June 30th. This sequential decline was primarily due to our repurchase of $23 million in par value for our 2004 convertible debt security during the quarter. As you may recall, these securities have a put date of June 2011.

As of September 30th, the balance of our long-term debt had a par value of $177 million, which includes the remaining balance of $27 million of these 2004 convertible debt securities as well as $150 million of our recently issued 2010 convertible debt securities, which have a term of 2017.

Our strong cash flows and solid balance sheet put us in an excellent position to invest in new solutions such as our proposed $372 million acquisition of Intec Telecom that we announced earlier this quarter. As a reminder, this purchase price represents a multiple of a little or a one-time enterprise value to both fiscal year 2010 and 2011 estimated revenues based on I/B/E/S consensus estimates as of the date we announced the acquisition.

At this time, we believe that acquisition will be accretive to CSG’s non-GAAP EPS within the first year. We plan on financing this transaction by utilizing no less than $130 million of our existing cash and through new debt facilities, a $200 million term loan facility and a $100 million revolving credit facility were entered into during the quarter as part of this transaction.

After the completion of this transaction, we will continue to have a strong balance sheet. At close, we estimate that the combined combine company will have an estimated cash liquid investment balance of approximately $175 million and approximately $430 million of par value debt with a very large percentage of this debt having payment terms extending up-sell years be on the closing day. Based on these amounts and the expected cash flows to be generated by the combined company. We are comfortable with this level of debt leverage.

Now, I like to review our full year guidance for 2010, but before I get into the details, I want to summarize the expected impact of the Intec acquisition on our 2010 guidance. First, our 2010 GAAP guidance includes the estimated impact of the Intec acquisition-related charges were approximately $16 million, which assume the transaction closes before the end of the year.

This includes such things as financial advisor and professional services fees and the cost of our currency hedge we purchase to protect ourselves from adverse movements and the exchange rate between the British pound and the U.S. dollar between announcement and closing of the transaction.

Of this amount approximately $10 million will be included in operating expenses and approximately $6 million will be reflected in the other income expense section of our income statement. These costs estimates may fluctuate as we work through the closing of the transaction. Just as a quick reminder, since we exclude the impact of these charges in our non-GAAP financial measures, these will have no impact on our non-GAAP financial measures for 2010.

The second point, I’d like to make on this topic, our 2010 guidance does not include any estimated impact from Intec’s operations or new debt financing cost related to the transaction, because of the uncertainty of the timing of the close of the transaction. We expect the transaction to close by year end and we’ll include the impact of the Intec acquisition in our 2011 financial guidance that we’ll provide in January.

Now for the details of our 2010 guidance. For the full year 2010, we are maintaining our expected revenue range of $522 million $530 million, which represents organic growth of 4% to 6% over our 2009 revenues and acceleration in the organic revenue growth rate from what we saw last year. Based on our performance for the first nine months of the year, you should expect us to come in towards die end of this guidance.

Next, we have demonstrated solid expansion in our non-GAAP operating margin throughout this year, as a result of our strong revenue growth and related scale benefits, our successful data center migration efforts and our good expense management. We expect this strong performance to continue into the fourth quarter and therefore we anticipate that our non-GAAP operating margin in the fourth quarter will be comparable to that of the third quarter.

As a result, we expect our full year 2010 non-GAAP operating margin to be towards the high end of our long-term target of 18% to 20%. As a remainder, our 2010 full year non-GAAP operating margin guidance excludes two items, first approximately $10 million of the Intec acquisition recharges that I mentioned earlier and second our data center transition expanses of $20 million. Since we completed the transition to our new data center during the quarter we do not anticipate any material data center migration cost going forward. The negative impact of these costs on our full year 2010 GAAP operating margin is estimated to be approximately 550 basis points in total resulting in an expected GAAP operating income margin in the 14% range for 2010.

Next, we are making a slight increase in our guidance for non-GAAP EPS. We now expect our non-GAAP EPS for 2010 to range between $2.22 and $2.27 up from our prior guidance of $2.16 and $2.22. This guidance increase relates primarily to our stronger than previously expected operating margin in the second half of 2010.

We expect our GAAP EPS for 2010 to range between $0.93 and $0.98, which represents a decrease from our prior guidance caused mainly by the Intec acquisition related recharges expected to be incurred in 2010.

Our non-GAAP EPS guidance reflects the use of an effective income tax rate of approximately 35% for the full year 2010, consistent with our expectations in previous quarters. This income tax rates assumes that congress approves the proposed 2010 R&D tax credit legislation before the end of the year, as it is done so consistently in the past. Assuming the tax credit passes, our fourth quarter tax rate for purpose of the calculating our non-GAAP EPS will be approximately 30%, which will result in a full year rate coming in at approximately 35%.

Next, our expectations for cash closed from operations for the year remain unchanged from our prior guidance of $105 million to $112 million. These 2010 cash flow expectations include a negative impact of approximately $18 million relating to the cost incurred for our data center transition efforts and Intec related acquisition activities.

Absent this impact our 2010 cash flows from operations will be more in line with our historical annual levels of $115 million to $220 million. One last-item on our guidance, our expectation for 2010 capital expenditures is approximately $16 million.

To summarize, we are every pleased with our results for the third quarter and how we are positioned for the remainder of the year, as evidenced by our good organic revenue growth, improved operational profitability, strong cash flows, and solid balance sheet. Furthermore, we believe that our combination with Intec will create a combined company that is financially strong generates strong operating results and cash flows as greater operating skill and is well capitalized with a strong balance sheet. We are excited about the opportunities before CSG.

I will now turn it over to the moderate for questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question will be from Tom Roderick with Stifel Nicolaus.

Chris Cohen - Stifel Nicolaus

This is [Chris Cohen] for Tom. Good job on the quarter. Obviously, the margin performance was pretty good, and Randy mentioned that you attributed it to operating performance or expense control as usual, but just as far as your long-term, like not including the Intec guidance of 18% to 20%, would you say that going forward, if we exclude any Intec costs, like 20% would have been like a reasonable run rate going forward? Could you maybe bump up your long-term operating margin target for the core business?

Randy Wiese

See for the core business, Chris, is what I have said in the past is the range of 18% to 20% was intended to be arranged as time we believe operate above it, the time when we operate below it, going well above 20% is really its not enough part of our target because we believe that we will continue to make a lots of investments in this company and, therefore, an expectation of operating between 18% and 20% we believe make more sense.

Chris Cohen - Stifel Nicolaus

You guys would have plowed it back into your product R&D investments or something like that?

Randy Wiese

We will do what we have done historic in which is to continue invest in the opportunities we see in the front of us in the form of R&D, M&A and any other investments we believe are appropriate to grow the company.

Chris Cohen - Stifel Nicolaus

As far as the discretionary spend, you mentioned this last quarter that it was still a little bit soft; I was wondering if you have an update on that?

Peter Kalan

We still don’t see uptick in our clients on some of their marketing efforts in what we have seen in the past Chris and those we view as some of the discretionary spending of how they communicate on some of the on the fringe of their business. It hasn’t big backup, where we are cautions with the still the choppy economy and consumer spending still being somewhat restrained. We didn’t see return in this quarter and we are still cautious as we look forward.

Chris Cohen - Stifel Nicolaus

Got it so as far as just the overall tone of the spending, it’s pretty much the same as it was last quarter?

Peter Kalan

Yes.

Chris Cohen - Stifel Nicolaus

Great and then just mechanical issue, on the portion of the data center expense that was attributable to COGS, I was wondering if you could break that up for me?

Randy Wiese

Of the $1.8 million that we spend this quarter was all costs. There was no depreciation in that.

Operator

Our next question will be from the line of Scott Sutherland with Wedbush Securities.

Scott Sutherland - Wedbush Securities

Good job on the quarter. Just a couple of housekeeping questions first. Can you give us the number of subscriber accounts that you had on the system, maybe some color on numbers taking multiple services, and also what is the amount of revenue excluding outside of broadband?

Randy Wiese

The revenue outside of broadband, you are probably outside the cable, where we describe our non-cable is about 14%, which was consistent with the previous quarter. The number of subscribers I believe is 48.8 million I believe. 48.8 million is correct. I’m sorry what was the third portion of your question?

Scott Sutherland - Wedbush Securities

Could you give some color on the number of those subscribers maybe taking multiple services and how that has been trending?

Peter Kalan

Well, we don’t give specific number on that Scott because we don’t think its appropriate to share those numbers relative to how our customers are performing any of their specific numbers either in total or by individual customer, but its clearly been growing. Some examples are, we are over 10 million voice accounts on our system in total and that has been growing over time, and then the same thing the data services you look at any of the industry analysis and it shows those are continuing to grow as well.

Scott Sutherland - Wedbush Securities

A couple of questions, you talked a little bit about some of the functionality Intec brings to you and integrating ACP; do you bring any functionality maybe on the video side to Intec customers, and have you heard any feedback there so far?

Peter Kalan

No, we are in the early stages on that Scott. As we have been working on the integration we believe a lot of the modularization that we have done in our assets could have applicability in the foreign markets, but there are restrictions of how much work we can do under the 2.5 arrangement business planning relative declines and so we are being cautious on that so we don’t step any type of regulatory hole.

We do believe that there is a very broad suite of products that we have developed over the years to help our clients to manage those interactions and that’s an area, where Intec historically has not invested they have been much more around the billing and rating and mediation assets which are probably closer to the network. We have been closer to the customer extension and so what we got to figure out as in some of their foreign markets as well as the markets in the US, if there is an ability to extend our capabilities to them as we think we can take their assets to our clients.

Scott Sutherland - Wedbush Securities

Lastly, have you seen any more wins or momentum on the content business I know you’ve had a couple of wins already.

Peter Kalan

We have had some good traction over the quarters. We didn’t have anything that we can announce it at this point, but we continue to see strong pipelines in that business.

Operator

Our next question is from the line of Howard Smith with First Analysis.

Howard Smith - First Analysis Securities

I echo the comments on outstanding execution here. I want to follow-up on Scott’s question, if I may. You seem to be growing the processing and related services line pretty well without subscriber growth, and with the non-cable business as you described as somewhat flat, it does seem, without giving specifics on how many are taking new services, it does seem that that is the engine of growth is these multiple and add-on services, and I’m curious, is there anything trial or otherwise that wouldn’t be repeating into future quarters on a recurring basis?

Peter Kalan

Well, what you see indicative of our growth in our business within the cable and satellite customers, is indicative how they’re focused on their growth and that’s to get closer to their ends customers to buy more products, whether its buying products such as more DVR services, high definition channels and packages, voice services and so forth. They are extending into small business and medium business.

They’re looking to extend their networks to Wifi and WiMax’s. Those are all things that we’re hoping them work on. The absolute organic growth in the number of household in US, who are taking broadband services as the full suite of services is really not on an accelerated basis, which holding pretty constant because we’ve had a fairly we are reaching almost saturation state in North America for that.

Our clients are focused on those next services that are going really bring value and depth to their relationship and as we help them do that, whether its by delivering a service or delivering how they provide customer service and responsiveness, which really edge to a better customer experience, that’s what driving our profits.

We’re really aligned from a business offering to be consistent with what our clients are focusing on what challenges they face. The good thing is that there are clients are focused on the type of new services. They recognize their networks are going to evolve. They’re going to be consumed in different ways and that gives us an outlook that we think we believe that there is going to be a sustainable spending pattern with us to support our businesses as which evolved.

Randy Wiese

I’d one thing Peter, is that it also demonstrates the broad set of applications that we provided that. There is no single one-item that really is driving at it. It is lots of smaller product pieces that are rent a lot of success. The amount of investment we have done on R&D over the years is showing some payment payback on this since we have such a broad suite of products to deliver.

Peter Kalan

Yes, Howard the other thing I’d just to add, as we not just pay attention to our clients operations, but if they report their results every quarter, you will see that they recognize single play accounts that are primarily basic analog or potentially digital subscribes that aren’t focused on really expanding the relationships.

Our areas that they recognize have a higher chance of turn and they want to add services to those and when they don’t, they see a loss of those accounts. They recognize the value of those relationships of building depth is really important and they report every year that they are absolute basic videos subs go down in number, but their RGUs are going up for all the others and that really gives the foundation for them and for us to have good growth from those.

Howard Smith - First Analysis Securities

That’s a very comprehensive answer. That’s great. It means thorough, you really answered the question, which is great. Depreciation, I just want to make sure I understand, since it jumped around a little bit maybe more than your property equipment base. I just want to understand, is there anything that makes the $4.9 million current number in that quarter not the run rate going forward that we might be building off of?

Randy Wiese

The way look at Howard, there were some unique adjustments as a result of the data center migration, what I would tell you probably do, look at the last two quarters, Q2 is like $5.5 million and this quarter is right at $5 million. Look at those on an average basis and used at it on a go forward.

Operator

Our next question will be from the line Shaul Eyal with Oppenheimer & Company

Shaul Eyal - Oppenheimer & Company

Congrats on the good quarter. Peter, in your prepared remarks, if I’m not mistaken, you have mentioned the words "newcomers to the arena" anything new, anything specific, or just a general commentary?

Peter Kalan

Its nothing new, it’s the message you see in the market place all the time these days is that there are new entrants, whether AT&T and Verizon and they are really not that new any more. They have been pursuing this for 2 to 3 years. They are coming in and have built a reasonable amount of skill that allows them to compete in certain markets very aggressively with our traditional clients.

You see the satellite operators with their single play solution getting very aggressive to retain their clients and then equally important as you have different channels of content consumption, whether its Hulu, who’s coming in and trying to find ways to monetize their distribution and access to content or in some cases people, who want they don’t want a package to an aggregator like Hulu, but they want to go directly. All that’s creating a different dynamic for the consumer than what’s been seen before and you add to that what I see is the broadening of the type for distribution as this and accessibility to these network types, that is only going to drive more optionality to the consumer.

As I think about it Shaul, the ipad came out, its actually surprising, its only been out in the market about six months and you have got Dell and Samsung and a bunch of others, where are all coming out with their tablets. All these tablets have the ability to present content information in a flexible robust way, were its mobile, whether it’s in the house and all those things are just adding to the depth of content that can go across the networks and that it’s creating an interesting competitive dynamic, whether all those payout we don’t know yet. We know our traditional clients have a very strong business from which to continue to evolve and service the consumers that they have, but its clearly causing every player to think differently and how they play in this market place.

Shaul Eyal - Oppenheimer & Company

Got it.

Peter Kalan

Sorry for another comprehensive answer

Shaul Eyal - Oppenheimer & Company

That’s all good. One quick housekeeping for Randy, just want to make sure that I get it right. As it relates to this tax settlements, and potential impact on capital, that’s basically a non-tax event, correct?

Randy Wiese

A non said it again.

Shaul Eyal - Oppenheimer & Company

A non-tax event, the tax settlement, potential settlement.

Randy Wiese

Are you talking about from the second quarter?

Shaul Eyal - Oppenheimer & Company

Correct

Randy Wiese

Yes, in the second quarter it was a non-cash adjustment to the tax reserve, correct.

Operator

Our next question will be from the line of Lauren Ye with JPMorgan.

Lauren Ye - JPMorgan

Hey guys, this is Lauren for Sterling Auty. The first question is around I guess Intec. I know that you guys can’t say much because its UK related, but we’ve also dealt with other companies, who have done deals in the UK, and there usually is milestones maybe that we can watch out for? Are there any you can talk about in terms of what to expect next in terms of regulatory approval and such?

Peter Kalan

Well, there are some stages that are published at this point around this stages Lauren. There is a shareholder vote that comes up in the month of November and the early part of November 3rd.

Randy Wiese

November 3rd and then there is schedule core date dependent upon the results of that vote is in latter part of November, around November 25th. Those are probably two big miles stones to look for.

Lauren Ye - JPMorgan

I guess the question is, the relationship at Time Warner and Charter, were those below 10% this quarter?

Randy Wiese

No, they will not be below 10%.

Lauren Ye - JPMorgan

They won’t, okay. Will you give that out or?

Randy Wiese

That will be in the 10-Q. We will expect quarter-over-quarter the revenues of the top four clients do not fluctuate all that much, you could probably look at the second quarter levels and anticipate and being comparable from a percentage standpoint. It will be in 10Q.

Lauren Ye - JPMorgan

Last quarter is, I think last quarter you mentioned you are continuing to kind of invest some in R&D and operations; did you guys meet your goals in the quarter?

Peter Kalan

We continue to invest in the areas that I mention in the past, and we’ll continue to do so going forward as well.

Lauren Ye - JPMorgan

What about in the quarter, did you get to the headcount that you wanted to or was it other areas that you are?

Peter Kalan

We met the goals that we were looking to do. Your next question is why did you better operating margin and what I say, across the board we had a very solid operational quarter such that the benefits full quarterly impact of the datacenter came through the bottomline. If you call we had moved our datacenter mid Q2 so, there was only a half quarter benefit. So, we had the full quarterly benefit can through in Q3and really solid operational performance allowed us to invest and also see that come to the bottom line.

Lauren Ye - JPMorgan

I guess not related to data centers but just people-wise, I think last quarter you guys also mentioned there might be a slight uptick in Q4 the back half of the year, second half; is that going to continue in Q4, just headcount-wise?

Peter Kalan

I believe so. Also, in my prepared comments I mention that I expect the fourth quarter margin with the third quarter. So, you are not going to see something that going to move the numbers.

Operator

(Operator Instructions). I am showing no questions at this time.

Peter Kalan

John, I will take it from there then. I just want to thank everyone for participating on the call today and we look forward to reporting our full year results in late January of 2011 and we’ll keep you updated as this we make progress on the Intec acquisition. Have a great day.

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