The Daily Magic Formula Stock for 02/21/2009 is CSG Systems International Inc. According to the Magic Formula Investing Web Site, the ebit yield is 15% and the EBIT ROIC is >100%.
Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.
Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.
CSG Systems International, Inc. (the â€śCompanyâ€ť, â€śCSGâ€ť, or forms of the pronoun â€śweâ€ť) was formed in October 1994 and acquired all of the outstanding stock of CSG Systems, Inc. (formerly Cable Services Group, Inc.) from First Data Corporation (â€śFDCâ€ť) in November 1994. CSG Systems, Inc. had been a subsidiary or division of FDC from 1982 until this acquisition.
We are a leading provider of outsourced solutions that facilitate customer interaction management on the behalf of our clients, generating approximately 95% of our 2007 revenues from the North American cable and Direct Broadcast satellite (â€śDBSâ€ť) communications markets. Our solutions also support an increasing number of other industries such as financial services, utilities, telecommunications, and home security.
Our solutions manage key customer interactions such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (i.e., customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the clientâ€™s field technicians to the customerâ€™s home. Our unique combination of solutions, services, and expertise ensure that our clients can rapidly launch new service offerings, improve operational efficiencies, and deliver a high-quality customer experience in a competitive and ever-changing marketplace.
Our principal executive offices are located at 9555 Maroon Circle, Englewood, Colorado 80112, and the telephone number at that address is (303) 200-2000. Our common stock is listed on the NASDAQ Stock Market, Inc. under the symbol â€śCSGSâ€ť. We are an S&P Midcap 400 company.
General Development of Business
Comcast Business Relationship. In September 1997, we entered into a 15-year exclusive contract (the â€śMaster Subscriber Agreementâ€ť) with Tele-Communications, Inc. (â€śTCIâ€ť) to consolidate all TCI customers onto our customer care and billing systems. This transaction allowed our company to substantially increase the number of customers processed on our systems, and at the time, was one of the catalysts to the growth of our domestic broadband business.
In 1999 and 2000, respectively, AT&T completed its mergers with TCI and MediaOne Group, Inc. (â€śMediaOneâ€ť), and consolidated the merged operations into AT&T Broadband (â€śAT&Tâ€ť), and we continued to service the merged operations under the terms of the Master Subscriber Agreement. On November 18, 2002, Comcast Corporation (â€śComcastâ€ť) completed its merger with AT&T, and assumed the Master Subscriber Agreement. Comcast is our largest client, making up approximately 27% of our total revenues in 2007.
During 2002 and 2003, we were involved in various legal proceedings with Comcast, consisting principally of arbitration proceedings related to the Master Subscriber Agreement. In October 2003, we received an unfavorable ruling in the arbitration proceedings. The Comcast arbitration ruling included an award of $119.6 million to be paid by us to Comcast. The award was based on the arbitratorâ€™s determination that we had violated the most favored nations (â€śMFNâ€ť) clause of the Master Subscriber Agreement. We recorded the full impact from the arbitration ruling in the third quarter of 2003 as a charge to revenues. In addition, the arbitration ruling also required that we invoice Comcast for lower fees under the MFN clause of the Master Subscriber Agreement beginning in October 2003. This had the effect of reducing quarterly revenues from Comcast by approximately $13-14 million ($52-56 million annually), when compared to amounts prior to the arbitration ruling. In March 2004, we signed a new contract with Comcast (the â€śComcast Contractâ€ť) that runs through December 31, 2008. The Comcast Contract superseded the former Master Subscriber Agreement that was set to expire at the end of 2012. The pricing inherent in the Comcast Contract was consistent with that of the arbitration ruling in October 2003. See Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations (â€śMD&Aâ€ť) for additional discussion of our business relationship with Comcast.
Discontinued Operations. In February 2002, we acquired the billing and customer care assets of Lucent Technologies (â€śLucentâ€ť). Lucentâ€™s billing and customer care business consisted primarily of: (i) software products and related consulting services acquired by Lucent when it purchased Kenan Systems Corporation in February 1999; (ii) BILLDATS Data Manager mediation software; and (iii) elements of Lucentâ€™s client support, product support, and sales and marketing organizations (collectively, the â€śKenan Businessâ€ť). This acquisition allowed us to expand our customer care and billing product and service offerings into international markets. On December 9, 2005, we sold our Global Software Services (â€śGSSâ€ť) business (â€śGSS Businessâ€ť), which consisted principally of the acquired Kenan Business, to Comverse, Inc., a division of Comverse Technology, Inc. (â€śComverseâ€ť). As a result of our sale of the GSS Business, we no longer provide customer care and billing products or services outside of North America. The decision to sell the GSS Business allowed us intensify our focus on our core competencies in the cable and DBS markets utilizing our Advanced Convergent Platform (â€śACPâ€ť) product and related services. See Note 2 to our Consolidated Financial Statements and MD&A for additional discussion of the sale of the GSS Business.
In addition to the sale of the GSS Business noted above, we also sold our plaNet Consulting business to a group of private investors led by the plaNet management team on December 30, 2005. As a result of these sales, the results of operations for the GSS and plaNet businesses have been reflected as discontinued operations for all periods presented in the accompanying Consolidated Statements of Income. The remainder of the â€śBusinessâ€ť section of this Form 10-K is focused on our continuing operations. See Notes 2 and 5 to our Consolidated Financial Statements and MD&A for additional discussion of our reporting of discontinued operations, and the impact these sales had on our reporting of segment and related information.
Background. We provide our customer interaction management solutions primarily to the North American cable and DBS communications markets. Our client base includes some of the worldâ€™s largest and most innovative service providers of bundled multi-channel video, Internet, voice and IP-based services. Our solutions coordinate and manage the many aspects of the customersâ€™ interactions with a service provider, from the initial set-up and activation of customer accounts, to the support of various service activities, through the presentment of customer invoices and accounts receivable management.
Market Conditions of Communications Industry. The North American communications industry has experienced significant consolidation and increased competition among service providers, and there is the possibility of further consolidation. Market consolidation results in a fewer number of service providers who have massive scale and can deliver a total communications package. The significant plant upgrades and network rationalizations that have taken place have allowed service providers to focus their attention on new revenue and growth opportunities. In addition, new competitors, new technologies, and unique partnerships are forcing service providers to be more creative in their approaches for rolling out new products and services and enhancing their customersâ€™ experiences. These factors drive the demand for scalable, flexible, and cost efficient customer interaction management solutions, which we believe will provide us with revenue opportunities.
However, another facet of this market consolidation poses certain risks to our company. The consolidation of service providers decreases the potential number of buyers for our products and services, and carries the inherent risk that the consolidators may choose to move their purchased customers to a competitorâ€™s solution. Should this consolidation result in a concentration of customer accounts being owned by companies with whom we do not have a relationship, or with whom competitors are entrenched, it could negatively affect our ability to maintain or expand our market share, thereby having a material adverse effect to our results of operations. In addition, service providers at times have chosen to use their size and scale to exert more pressure on pricing negotiations.
In addition, it is widely anticipated that traditional wireline and wireless telephone service providers will continue their aggressive pursuit of providing convergent services. These providers have recently entered the residential video market, a market which has historically been dominated by our clients. Should these traditional telephone service providers be successful in their video strategy, it could threaten our clientsâ€™ market share, and thus our revenues as, generally speaking, traditional wireline and wireless telephone providers do not currently use our products and services.
Our business strategy is designed to achieve growth of revenues and profitability. The key elements of our business strategy include:
Expand Our Core Customer Information Processing and Output Solutions . Most of our revenues are generated from our core customer information processing and output solutions. We provide a fully outsourced processing solution that combines the reliability and high-volume transaction processing capabilities of an enterprise server platform with the flexibility of client/server architecture. As of December 31, 2007, we had approximately 45 million customer accounts on our processing systems. In addition, we provide a full suite of output solutions that include statement design, printing, marketing services, electronic bill presentment, inserting and mailing on a variety of high-speed equipment. We provide our output solutions primarily to those clients that utilize our information processing services, but also provide such services to clients that do not utilize our outsourced customer information processing services. As of December 31, 2007, our average production volume for our output solutions was approximately 60 million customer statements per month.
Our customer information processing and output solutions provide highly predictable, recurring revenues through multi-year contracts with a client base that includes leading cable and DBS providers. We will continue to leverage our investment in and expertise in providing enhanced customer interaction management solutions as we look to expand these core elements of our business. Our customer information processing solutions are currently designed to focus on the North American cable and DBS markets. While our output solution clients are primarily those that utilize our customer information processing solutions, we look to continue to expand this solution set to other markets that demand high-quality, recurring monthly output solutions, such as financial services, utilities, telecommunications, and home security.
Increase the Penetration of Ancillary Products/Services. We provide a complete suite of fully-integrated customer interaction management products and services that complement our customer information processing and output solutions platforms. While our primary value proposition to our clients is the breadth and depth of this integrated offering, we are evolving our product solutions to allow clients to utilize certain of our products as point solutions.
Our ancillary products and services enable and automate various aspects of a service providerâ€™s customer interactions, ranging from the call center, to the field technicians, to the end customer. As our clientsâ€™ businesses have consolidated and become much more complex with an increasingly diverse portfolio of service offerings, we have seen an increase in demand for our ancillary products and services, as our products are designed to help our clients solve their ever-changing customer interaction business needs as they arise.
Evolve Our Products and Services to Meet the Changing Needs of Our Clients . In 1995, we offered our solutions solely to providers of analog cable video. Since then, our solutions have evolved and expanded to accommodate DBS, digital video, high-speed Internet (â€śHSIâ€ť) and digital voice. Our clients continue to look to add more services to their product bundle, including advanced IP and wireless services, as well as services to commercial customers. Our continued investment in our solution set is designed to expand our customer interaction management capabilities to enable our clients to grow their product offerings, control costs, and provide better customer service.
Enhance Growth Through Focused Acquisitions . We follow a disciplined approach in acquiring assets and businesses which provide the technology and technical personnel to expedite our product development efforts, provide complementary products and services, increase market share, and/or provide access to new markets and clients.
Continue Technology Leadership . We believe that our product technology and integrated suite of software solutions gives communications service providers a competitive advantage. Our continuing investment in research and development (â€śR&Dâ€ť) is designed to position us to meet the growing and evolving needs of existing and potential clients. Over the last five years, we have invested approximately $200 million, or approximately 11% of our total revenues, into R&D.
In summary, our R&D and recent acquisition efforts, discussed below, have better positioned us to assist our clients and enable both of us to grow through maximizing every customer interaction. We have continually shown our commitment to deliver solutions and services to our clients with the highest level of performance and functionality, and with our continued investment in R&D and acquisition activities, we believe we will continue to find ways to solve our clientsâ€™ business challenges and provide them with a competitive advantage. While we continue to strive to provide superior solutions and services to our existing clients, we will continue to focus on growing and diversifying our business and finding new ways to expand our footprint in some of the new vertical markets we have entered with our recent acquisitions .
Ronald H. Cooper
Mr. Cooper, 51, was elected to the Board in November 2006. From January 2003 to July 2006, Mr. Cooper served as President and Chief Operating Officer of Adelphia Communications Corporation. From October 2001 to December 2002, Mr. Cooper was President of AT&T Broadband, the cable television and broadband services subsidiary of AT&T Corp. Mr. Cooper was President and Chief Operating Officer of RELERA Data Centers and Solutions, a start-up data center, hosting and data storage company, during 2000 and 2001. Previously, from 1982 to 1999, Mr. Cooper held various executive positions with MediaOne Group, Inc. (formerly Continental Cablevision, Inc.), a cable television and broadband services company, completing his service to MediaOne in 1999 as Executive Vice President-Operations.
Bernard W. Reznicek
Mr. Reznicek, 71, was elected to the Board in January 1997 and has served as the Company's non-executive Chairman of the Board since July 2005. Mr. Reznicek currently provides consulting services through Premier Enterprises, Inc., a private company of which he is President. Mr. Reznicek previously was National Director of Special Markets for Central States Indemnity Company of Omaha, a Berkshire Hathaway company, from January 1997 to January 2003. He has 40 years of experience in the electric utility industry, having served as Chairman, President and Chief Executive Officer of Boston Edison Company and President and Chief Executive Officer of Omaha Public Power District. Mr. Reznicek currently is a director of infoUSA, Inc. and Pulte Homes, Inc.
Donald V. Smith
Mr. Smith, 65, was elected to the Board in January 2002. Mr. Smith presently serves as Senior Managing Director of Houlihan Lokey Howard & Zukin, Inc., an international investment banking firm with whom he has been associated since 1988. He currently is in charge of the firm's New York office and serves on the board of directors of the firm. From 1978 to 1988, Mr. Smith was employed by Morgan Stanley & Co. Incorporated, where he headed the valuation and reorganization services within that firm's corporate finance group.
Class III Directors With Terms Expiring in 2009:
Peter E. Kalan
Mr. Kalan, 48, became President and Chief Executive Officer of the Company on December 29, 2007. Mr. Kalan joined the Company in January 1997, served as Chief Financial Officer of the Company from October 2000 to April 2006 (and as Executive Vice President from December 2003) and served as Executive Vice President-Business and Corporate Development from April 2006 until December 29, 2007. Prior to joining CSG, Mr. Kalan was Chief Financial Officer at Bank One, Chicago, and held various other financial management positions with Bank One in Texas and Illinois from 1985 through 1996.
Frank V. Sica
Mr. Sica, 57, has served as a director of the Company since its formation in 1994. Mr. Sica currently is President of Menemsha Capital Partners, Ltd. (since July 2005) and Managing Partner of Tailwind Capital (since December 2006), the latter two companies being private investment companies. Mr. Sica was President of Soros Private Funds Management from June 2000 through December 2003 and helped to oversee the operations of Quantum Realty Partners; from January 2004 through December 2006 Mr. Sica was a Senior Advisor and Consultant to Soros Fund Management LLC. From 1998 to 2000 Mr. Sica was Managing Director of Soros Fund Management LLC. Before joining Soros, Mr. Sica was a Managing Director and Co-Head of Merchant Banking at Morgan Stanley Dean Witter & Co. Mr. Sica currently is a director of JetBlue Airways Corporation, Kohl's Corporation and Northstar Realty Finance Corp.
James A. Unruh
Mr. Unruh, 67, was elected to the Board in June 2005. He became a founding principal of Alerion Capital Group, LLC (a private equity investment company) in 1998 and currently holds such position. Mr. Unruh was an executive with Unisys Corporation from 1987 to 1997 and served as its Chairman and Chief Executive Officer from 1990 to 1997. From 1982 to 1987, Mr. Unruh held various executive positions, including Senior Vice President, Finance, with Burroughs Corporation, a predecessor of Unisys Corporation. Mr. Unruh currently is a director of Prudential Financial, Inc., Tenet Healthcare Corporation and Qwest Communications International Inc.
MANAGEMENT DISCUSSION FROM LATEST 10K
This report contains a number of forward-looking statements relative to our future plans and our expectations concerning the North American customer care and billing industry, as well as the converging communications industry it serves, and similar matters. These forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are outlined above within Item 1A., â€śRisk Factorsâ€ť. Item 1A. constitutes an integral part of this report, and readers are strongly encouraged to review this section closely in conjunction with MD&A.
Our Company. We are a leading provider of outsourced solutions that facilitate customer interaction management on the behalf of our clients, generating approximately 95% of our 2007 revenues from the North American cable and Direct Broadcast satellite (â€śDBSâ€ť) communications markets. Our solutions also support an increasing number of other industries such as financial services, utilities, telecommunications, and home security.
Our solutions manage key customer interactions such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (i.e., customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the clientâ€™s field technicians to the customerâ€™s home. Our unique combination of solutions, services, and expertise ensure that our clients can rapidly launch new service offerings, improve operational efficiencies, and deliver a high-quality customer experience in a competitive and ever-changing marketplace.
The North American communications industry has experienced significant consolidation over the last few years, resulting in a large percentage of the market being served by a fewer number of service providers with greater size and scale. Consistent with this market concentration, a large percentage of our revenues from continuing operations are generated from a limited number of clients, with approximately 70% of our revenues for 2007 being generated from our four largest clients, which are Comcast, DISH, Time Warner, and Charter.
Results of Operations. A summary of our results of operations and other key performance metrics for 2007 are as follows:
Our consolidated revenues from continuing operations for 2007 were $419.3 million, up $36.2 million, or 9.4% when compared to $383.1 million for 2006. The increase in revenues is primarily due to: (i) the continued growth in the use of various ancillary products and services we offer; and to a slightly lesser degree (ii) the revenues generated from the acquired ComTec and Prairie businesses, discussed in greater detail below.
Our operating expenses from continuing operations for 2007 increased $38.8 million, or 13.1%, to $335.4 million, when compared to $296.6 million for 2006. The increase in operating expenses from continuing operations between years is primarily due to: (i) the impact of the ComTec and Prairie business acquisitions; and (ii) an increase in labor-related costs, primarily as a result of an increase in staff levels between periods related to the increase in our R&D and other product support efforts.
Income from continuing operations (net of tax) for 2007 was $60.2 million, or $1.50 per diluted share, compared to $62.6 million, or $1.33 per diluted share, for 2006. The 13% increase in diluted EPS between years is primarily due to a decrease in shares outstanding as a result of our significant share repurchases made under our stock repurchase program during 2007, discussed in greater detail below.
Continuing operations for 2007 include non-cash charges related to depreciation, amortization, and stock-based compensation expense totaling $41.8 million (pretax impact), or $0.68 per diluted share impact, as compared to non-cash charges for 2006 of $38.6 million (pretax impact), or $0.51 per diluted share impact.
We continue to generate strong cash flows as a result of our profitable operations and through our effective management of our working capital items. During 2007, we generated $115.4 million of cash flows from operating activities, as compared to $118.2 million for 2006, with the decrease between years primarily related to lower interest income in 2007 as a result of lower investment balances in 2007. Our cash and short-term investments totaled $415.5 million at December 31, 2006, compared to $132.8 million as of December 31, 2007, with this decrease resulting primarily from significant cash outlays we made for stock repurchases during 2007.
Other key events related to our operations for 2007 were as follows:
As discussed in greater detail above, as part of our strategy to extend our customer interaction management capabilities and enter new vertical markets, we closed on the ComTec and Prairie acquisitions during 2007. Combined, these acquisitions contributed approximately $16 million in revenues and were slightly accretive to our 2007 results of operations. See Note 4 to our Financial Statements for additional discussion of these acquisitions.
In November 2007, we completed our planned $350 million of stock repurchases that we announced in August 2006. During 2007, we repurchased a total of 13.2 million shares, for a total of $307.6 million (a weighted-average price of $23.34 per share). In total, under this program, we purchased 14.8 million shares at a weighted-average price of $23.72 per share, or approximately 30% of our outstanding common stock at the time we announced the program.
During 2007, we invested $58.3 million, or approximately 14% of our revenues, on R&D activities. We continued to invest heavily in R&D to ensure that we stay ahead of our clientsâ€™ needs and advance our clientsâ€™ business as well as our own. Our clients are facing more competition than ever before from new entrants, and at the same time, are deploying new services at a faster pace than ever before, dramatically increasing the complexity of their business operations. We recognize these challenges and believe our value proposition is to provide solutions that help our clients ensure that each interaction they have with their customers is an opportunity to create value and deepen the business relationship. As a result of our R&D efforts, we have broadened our footprint within our client base with many innovative product offerings.
Effective December 28, 2007, our then-current Chief Executive Officer (â€śCEOâ€ť) and President, Mr. Edward C. Nafus, retired from the company. In conjunction with his retirement, we entered into a Separation and Release Agreement dated December 6, 2007. Under the terms of the Separation and Release Agreement, Mr. Nafus:
Was paid his regular base salary through his retirement date. However, pursuant to the terms of CSGâ€™s Performance Bonus Program, Mr. Nafus was not entitled to his 2007 cash incentive bonus as he was not employed on the last calendar day of 2007. Thus, the expense accrued in earlier quarters related to his bonus was reversed in December 2007;
Vested in 102,500 shares of previously granted restricted stock on the date of his retirement. The expense related to this acceleration of vesting was not significant. These shares would have also vested under their original terms had Mr. Nafus retired anytime after March 31, 2008; and
Received a one-time cash payment of $1.9 million.
The net impact of these retirement benefits to our 2007 operating income was $1.3 million. We received certain income tax benefits related to Mr. Nafusâ€™ retirement such that the net reduction to our net income for 2007 was $0.01 per diluted share. Mr. Nafus will continue to serve as a member of our Board of Directors, with his current Board term running through mid-2010. See our Form 8-K filed on November 20, 2007 and Form 8-K/A filed on December 11, 2007 for additional details of these matters.
Effective December 29, 2007, Mr. Peter E. Kalan, our then current Executive Vice President of Business and Corporate Development assumed the position of CEO and President of our company.
Additionally, Mr. Kalan was also added to our Board of Directors, with his term running through mid-2009. See our Form 8-K filed on November 20, 2007 for additional details of these matters.
We had no material client relationships up for renewal in 2007. However, our current processing agreements with Comcast and DISH run through December 31, 2008. See our Significant Client Relationship Section below for further discussion.
Total customer accounts processed on our systems as of December 31, 2006 were 45.1 million, compared to 45.4 million as of December 31, 2006. We have successfully migrated all of the cable customer accounts processed on our systems to our ACP solution.
Significant Client Relationships
Comcast. Comcast continues to be our largest client. For 2007 and 2006, revenues from Comcast represented approximately 27% and 24%, respectively, of our total revenues. Our processing agreement with Comcast runs through December 31, 2008. We are currently engaged in discussions with Comcast regarding contract renewal terms. Although we believe our operating relationship with Comcast is good, there can be no assurances around the timing and/or the terms of any renewal arrangement at this time. The Comcast processing agreement and related material amendments are included in the exhibits to our periodic filings with the SEC. The documents are available on the Internet and we encourage readers to review these documents for further details.
DISH. DISH is our second largest client. For 2007 and 2006, revenues from DISH represented approximately 20% and 19%, respectively, of our total revenues. Our processing agreement with DISH runs through December 31, 2008, and provides DISH with the option to extend the term of the agreement for either one or two years beyond the end of December 2008. We are currently engaged in discussions with DISH regarding contract renewal options. Although we believe our operating relationship with DISH is good, there can be no assurances around the timing and/or the terms of any contract extension or renewal arrangement at this time. The DISH processing agreement includes certain annual financial commitments that we expect DISH to exceed based on the number of DISH customers currently on our systems. The DISH processing agreement and related material amendments are included in the exhibits to our periodic filings with the SEC. The documents are available on the Internet and we encourage readers to review these documents for further details.
Time Warner. Time Warner is our third largest client. For 2007 and 2006, revenues from Time Warner represented approximately 13% and 12%, respectively, of our total revenues. Our processing agreement with Time Warner runs through March 31, 2013. The Time Warner processing agreement contains provisions establishing annual minimum customer account levels that have to be processed on our systems, which we expect Time Warner to exceed based on the number of Time Warner customers currently on our systems.
Charter. Charter is our fourth largest client. For 2007 and 2006, revenues from Charter represented approximately 9% and 11%, respectively, of our total revenues. Our processing agreement with Charter runs though December 31, 2012. The Charter processing agreement contains certain annual minimum customer account levels that have to be processed on our systems, which we expect Charter to exceed based on the number of Charter customers currently on our systems.
Adelphia. Adelphia had historically been our fifth largest client, with revenues from Adelphia for 2006 representing approximately 5% of our total revenues. Adelphia had been operating under bankruptcy protection since June 2002. On July 31, 2006, Adelphia completed the sale of its broadband assets to Comcast and Time Warner. Prior to the closing of this transaction, we processed approximately three million Adelphia domestic broadband customer accounts (the â€śAcquired Customer Accountsâ€ť) on our systems under a processing agreement that ran through March 31, 2009. Upon closing of this transaction, the Acquired Customer Accounts we processed remained on our systems and were transferred to the respective Comcast and Time Warner processing agreements. This transaction had the following impacts to our business:
In August 2006, we recognized $2.8 million of one-time, non-recurring revenues related to the Adelphia processing agreement when the Acquired Customer Accounts were transferred under our
Comcast and Time Warner processing agreements. These revenues included items such as upfront payments for services that had previously been deferred and were being recognized ratably over the remaining term of the Adelphia processing agreement.
Our monthly processing revenues related to the Acquired Customer Accounts were $4.5 million lower in 2006 when compared to 2005 due to the Comcast and Time Warner contracts having lower per unit pricing than the Adelphia contract (due to the relative size of Comcast and Time Warner when compared to Adelphia). The $4.5 million reflects five months of invoices at the lower per unit pricing for these Acquired Customer Accounts.
Although there was some movement of customer accounts between Comcast and Time Warner as the result of this transaction, it had minimal impact on the overall number of customer accounts processed on our systems as of the end of 2006.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the U.S. requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Consolidated Financial Statements.
We have identified the most critical accounting policies that affect our financial condition and the results of our businessâ€™ continuing operations. These critical accounting policies were determined by considering our accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to: (i) revenue recognition; (ii) allowance for doubtful accounts receivable; (iii) impairment assessments of long-lived assets; (iv) loss contingencies; (v) income taxes; and (vi) business combinations and asset purchases. These critical accounting policies, as well as our other significant accounting policies, are disclosed in the notes to our Consolidated Financial Statements.
Revenue Recognition. The revenue recognition policies that involve the most complex or subjective decisions or assessments that may have a material impact on our businessâ€™ continuing operations relate to: (i) the application of the guidelines of Emerging Issues Task Force (â€śEITFâ€ť) Issue No. 00-21, â€śAccounting for Revenue Arrangements with Multiple Deliverablesâ€ť (â€śEITF 00-21â€ť) when determining a revenue arrangementâ€™s separate units of accounting; and (ii) the accounting for software arrangements.
For those revenue arrangements within the scope of EITF No. 00-21, we are required to evaluate all deliverables in the arrangement to determine whether they represent separate units of accounting. If the deliverables qualify as separate units of accounting, the arrangement consideration is allocated among the separate units of accounting based upon their relative fair values, and applicable revenue recognition criteria are considered for the separate units of accounting. If the deliverables do not qualify as separate units of accounting, the consideration allocable to delivered items is combined with the consideration allocable to the undelivered items, and the appropriate recognition of revenue is then determined for those combined deliverables as a single unit of accounting. For the processing agreements that we have historically evaluated under EITF No. 00-21, we have generally concluded that the deliverables do not qualify as separate units of accounting, and thus have treated the deliverables as a single unit of accounting, with the revenue recognized ratably over the term of the processing agreement. The determination of separate units of accounting, and the determination of objective and reliable evidence of fair value of the undelivered items, if applicable, both require judgments to be made by us.
The accounting for software arrangements, especially when software is sold in a multiple-element arrangement, is complex and requires judgments in the following areas: (i) the identification of the separate elements of the software arrangement; (ii) the determination of whether any undelivered elements are essential to the functionality of the delivered elements; (iii) the assessment of whether our hosted service transactions meet the requirements of EITF Issue No. 00-03, â€śApplication of AICPA Statement of Position 97-2 to Arrangements That Include the Right to Use Software Stored on Another Entityâ€™s Hardwareâ€ť, to be treated as a separate element to the software arrangement; (iv) the determination of vendor-specific objective evidence of fair value for the various undelivered elements of the software arrangement; and (v) the period of time maintenance services are expected to be performed. The evaluation of these factors, and the ultimate revenue recognition decisions, require significant judgments to be made by us. The judgments made in this area could have a significant effect on revenues recognized in any period by changing the amount and/or the timing of the revenue recognized. In addition, because software licenses typically have little or no direct, incremental costs related to the recognition of the revenue, these judgments could also have a significant effect on our results of operations.
Allowance for Doubtful Accounts Receivable. We maintain an allowance for doubtful accounts receivable based on client-specific allowances, as well as a general allowance. Specific allowances are maintained for clients which are determined to have a high degree of collectibility risk based on such factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the clientâ€™s past payment experience; (iii) the economic condition of the industry in which the client conducts the majority of its business; and (iv) a deterioration in a clientâ€™s financial condition, evidenced by weak financial condition and/or continued poor operating results, reduced credit ratings, and/or a bankruptcy filing. In addition to the specific allowance, we maintain a general allowance for all our accounts receivable which are not covered by a specific allowance. The general allowance is established based on such factors, among others, as: (i) the total balance of the outstanding accounts receivable, including considerations of the aging categories of those accounts receivable; (ii) past history of uncollectible accounts receivable write-offs; and (iii) the overall creditworthiness of the client base. Our credit risk is heightened due to our concentration of clients within the North American cable television and satellite industries. A considerable amount of judgment is required in assessing the realizability of accounts receivable. Should any of the factors considered in determining the adequacy of the overall allowance change significantly, an adjustment to the allowance for doubtful accounts receivable may be necessary. Because of the overall significance of our gross billed accounts receivable balance ($115.6 million as of December 31, 2007), such an adjustment could be material.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
The information contained in this Managementâ€™s Discussion and Analysis of Financial Condition and Results of Operations (â€śMD&Aâ€ť) should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto (our â€śFinancial Statementsâ€ť) included in this Form 10-Q and the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2007 (our â€ś2007 10-Kâ€ť).
This report contains a number of forward-looking statements relative to our future plans and our expectations concerning our business and the industries we serve. These forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are outlined within Part II Item 1A., â€śRisk Factorsâ€ť. Item 1A. constitutes an integral part of this report, and readers are strongly encouraged to review this section closely in conjunction with MD&A.
Management Overview of Quarterly Results
Our Company. We are a leading provider of outsourced solutions that facilitate customer interaction management on the behalf of our clients, generating a large percentage of our revenues from the North American cable and Direct Broadcast satellite (â€śDBSâ€ť) industries. Our solutions also support an increasing number of other industries such as financial services, healthcare, utilities, telecommunications, and home security.
Our solutions manage key customer interactions such as set-up and activation of customer accounts, sales support and marketing, order processing, invoice calculation (i.e., customer billing), production and mailing of monthly customer invoices, management reporting, electronic presentment and payment of invoices, automated and interactive messaging, and deployment and management of the clientâ€™s field technicians to the customerâ€™s home. Our combination of solutions, services, and expertise ensures that our clients can rapidly launch new service offerings, improve operational efficiencies, and deliver a high-quality customer experience in a competitive and ever-changing marketplace.
The North American communications industry has experienced significant consolidation over the last few years, resulting in a large percentage of the market being served by a fewer number of services providers with greater size and scale. Consistent with this market concentration, a large percentage of our revenues are generated from a limited number of clients, with approximately two-thirds of our revenues being generated from our four largest clients, which are Comcast Corporation (â€śComcastâ€ť), DISH Network Corporation (â€śDISHâ€ť), Time Warner Inc. (â€śTime Warnerâ€ť), and Charter Communications (â€śCharterâ€ť).
General Market Conditions. In recent months, the U.S. has experienced a significant economic downturn and difficulties within the financial and credit markets, and these adverse economic conditions are predicted to continue into the foreseeable future. The possible adverse impacts to companies during these times include a reduction in revenues, decreasing profits and cash flows, distressed or default debt conditions, and/or difficulties in obtaining necessary operating capital.
Because of the severity and the far-reaching impacts of the situation, all companies could be adversely affected by the current economic conditions to a certain degree, including CSG and its clients. However, we believe our recurring revenue and predictable cash flow business model, our sufficient sources of liquidity, and our stable capital structure, lessen the risk of a significant negative impact to our business as a result of the current economic conditions. Additionally, we believe our key clients have business models that have historically performed well in down economies. However, there can be no assurances regarding the performance of our business, and the potential impact to our clients and the markets they serve, resulting from the current economic conditions.
Third Quarter Highlights. A summary of our results of operations for the third quarter of 2008 is as follows:
Our revenues for the third quarter of 2008 were $118.0 million, up 9.7% when compared to $107.6 million for the same period in 2007, with approximately three-fourths of this increase related to the year-over-year impact of the additional revenues generated from the businesses we acquired in 2007 and 2008; ComTec, Inc. (â€śComTecâ€ť) in July 2007, Prairie Interactive Messaging, Inc. (â€śPrairieâ€ť) in August 2007, and DataProse in April 2008 (collectively, the â€śAcquired Businessesâ€ť), with the remaining portion of the increase attributed to organic growth factors.
Our operating expenses for the third quarter of 2008 were $96.8 million, up 12.6% when compared to $86.0 million for the same period in 2007, with approximately three-fourths of this increase related to the year-over-year impact of the Acquired Businesses.
Income from continuing operations for the third quarter of 2008 was $21.1 million (17.9% operating margin percentage), compared to $21.6 million (20.1% operating margin percentage) for the same period in 2007. A significant percentage of the decrease in operating income margin between years is due to the impact of the Acquired Businesses.
Other income (expense) for the third quarter of 2008 was $(0.8) million, down $2.8 million from $2.0 million for the third quarter of 2007. The year-over-year decrease is a result of lower interest and investment income due to: (i) the decrease in our cash and short-term investment balances between years, as a result of our stock repurchase activity in 2007 and the purchases of the Acquired Businesses; and (ii) a decrease in the overall rate of return realized on investments between years due to a deterioration in the interest rate environment.
Our diluted earnings per common share from continuing operations for the third quarter of 2008 was $0.40, an increase of 2.6% when compared to $0.39 per diluted share for the third quarter of 2007, and consistent with the second quarter of 2008.
Income from continuing operations for the third quarter of 2008 includes non-cash charges related to depreciation, amortization of intangible assets, and stock-based compensation expense totaling $10.3 million (pretax impact), or $0.20 per diluted share impact, as compared to non-cash charges for the third quarter of 2007 of $11.3 million (pretax impact), or $0.19 per diluted share.
We continue to generate strong cash flows from operations. As of September 30, 2008, we had cash, cash equivalents, and short-term investments of $164.7 million, as compared to $148.2 million as of June 30, 2008, and $132.8 million as of December 31, 2007.
Cash flows from operating activities for the third quarter of 2008 were $27.6 million, compared to $35.7 million for the third quarter of 2007, with the fluctuation between periods related almost entirely to normal timing differences in operating assets and liabilities. See the â€śLiquidityâ€ť section below for further discussion.
Other key matters were as follows:
In July 2008, we entered into a restated and amended Master Subscriber Management System Agreement with Comcast that extends our contractual relationship with Comcast through December 31, 2012. See our Significant Client Relationships Section below for further discussion.
Our current processing agreement with DISH runs through December 31, 2008. See our Significant Client Relationships Section below for further discussion.
During the third quarter of 2008, we invested $16.8 million, or 14.2% of our revenues, in research and development (â€śR&Dâ€ť) activities.
Critical Accounting Policies
The preparation of our Financial Statements in conformity with accounting principles generally accepted in the U.S. requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Financial Statements.
We have identified the most critical accounting policies that affect our financial condition and the results of our businessâ€™ continuing operations. Those critical accounting policies were determined by considering the accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to: (i) revenue recognition; (ii) allowance for doubtful accounts receivable; (iii) impairment assessments of long-lived assets; (iv) loss contingencies; (v) income taxes; and (vi) business combinations and asset purchases. These critical accounting policies, as well as our other significant accounting policies, are discussed in greater detail in our 2007 10-K.
Results of Operations
Total Revenues. Total revenues for the: (i) third quarter of 2008 increased $10.4 million, or 9.7% to $118.0 million, from $107.6 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 increased $42.6 million, or 13.9% to $348.4 million, from $305.8 million for the nine months ended September 30, 2007. Approximately three-fourths of the increase in revenues between periods relates to the year-over-year impact of the additional revenues generated from the Acquired Businesses, with the remaining portion of the increase attributed to organic growth factors. The components of total revenues are discussed in more detail below.
Processing and related services revenues. Processing and related services revenues for the: (i) third quarter of 2008 increased $12.8 million or 13.1% to $110.6 million, from $97.8 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 increased $46.4 million or 16.7% to $324.1 million, from $277.7 million for the nine months ended September 30, 2007. Approximately two-thirds of this increase in processing and related services revenues between periods relates to the revenues generated from the Acquired Businesses (as all of their revenues fall within this revenue classification), with the remaining portion attributed to organic growth resulting from increased utilization of new and existing products and services by our clients, to include such things as higher usage of marketing services and various ancillary customer care solutions.
Additional information related to processing and related services revenues is as follows:
Amortization of our client contracts intangible assets (reflected as a reduction of processing and related services revenues) for the: (i) third quarter of 2008 and 2007 was $1.0 million and $3.6 million, respectively; and (ii) nine months ended September 30, 2008 and 2007 was $8.2 million and $10.8 million, respectively. The decrease in amortization expense between periods is due to the change in life of the Comcast client contract intangible asset as a result of the extension of the contractual arrangement with Comcast, effective July 1, 2008, noted above. See the Significant Client Relationship section for further details.
Total customer accounts processed on our systems as of September 30, 2008 were 45.4 million, up slightly when compared to 45.1 million as of September 30, 2007.
Software, Maintenance and Services Revenues. Software, maintenance and services revenues for the: (i) third quarter of 2008 decreased $2.4 million, or 24.5% to $7.4 million, from $9.8 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 decreased $3.7 million or 13.3% to $24.4 million, from $28.1 million, for the nine months ended September 30, 2007.
Over the most recent quarters, our software, maintenance and services revenues have decreased as a result of lower professional services revenues and lower software-related revenues. This recent decrease in our professional services revenues is the result of the timing and type of work our professional services team has been engaged in (e.g., longer term implementations which may require the fees be deferred upfront and recognized over the life of the service agreement).
Cost of Revenues. See our 2007 10-K for a description of the types of costs that are included in the individual line items for cost of revenues.
Cost of Processing and Related Services. The cost of processing and related services for the: (i) third quarter of 2008 increased $7.9 million, or 15.5% to $58.5 million, from $50.6 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 increased $28.9 million, or 20.9% to $167.5 million, from $138.6 million for the nine months ended September 30, 2007. Approximately three-fourths of the increase in cost of processing and related services between periods relates to the impact of the Acquired Businesses (as all of their cost of revenues fall within this expense classification), with the remaining portion related primarily to: (i) the impact of annual employee wage increases that are implemented in August of each year; and (ii) increases in variable costs related to the delivery of products and services (e.g., data processing, print costs, etc.), which directly correlate with the increase in revenues related to these products and services.
The gross margin percentage for processing and related services was: (i) 47.1% for the third quarter of 2008 compared to 48.2% for the third quarter of 2007; and (ii) 48.3% for the nine months ended September 30, 2008 compared to 50.1% for the nine months ended September 30, 2007. The decrease in gross margin percentages between periods is due to the impact of the Acquired Businesses, as the Acquired Businesses currently operate at lower gross margin percentage levels than our historical business operations.
Cost of Software, Maintenance and Services. The cost of software, maintenance and services for the: (i) third quarter of 2008 decreased $1.6 million, or 26.1% to $4.4 million, from $6.0 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 decreased $4.2 million, or 22.4% to $14.4 million, from $18.6 million for the nine months ended September 30, 2007. The decrease between periods reflects a reduction in personnel and related costs assigned internally to software maintenance projects.
The gross margin percentage for software, maintenance and services was: (i) 39.9% for the third quarter of 2008, as compared to 38.6% for the third quarter of 2007; and (ii) 40.8% for the nine months ended September 30, 2008, as compared to 33.8% for the nine months ended September 30, 2007. The increase in gross margin percentage is attributed to: (i) a decrease in personnel and related costs assigned internally to software maintenance projects; and (ii) the change in mix of revenues between periods. Variability in quarterly revenues and operating results are inherent characteristics of companies that sell software licenses, and perform professional services. Our quarterly revenues for software licenses and professional services may fluctuate, depending on various factors, including the timing of executed contracts and revenue recognition, and the delivery of contracted services or products. However, the costs associated with software and professional services revenues are not subject to the same degree of variability (e.g., these costs are generally fixed in nature within a relatively short period of time), and thus, fluctuations in our software and maintenance, professional services, and overall gross margins, will likely occur between periods.
Gross Margin (Exclusive of Depreciation, Shown Separately Below). The overall gross margin percentage (exclusive of depreciation) for the: (i) third quarter of 2008 was 46.7%, compared to 47.4% for the third quarter of 2007; and (ii) nine months ended September 30, 2008 was 47.8%, compared to 48.6% for the nine months ended September 30, 2007. The decreases in the overall gross margin percentages between periods is due to the impact of the Acquired Businesses.
R&D Expense . R&D expense for the: (i) third quarter of 2008 increased $1.4 million or 8.7% to $16.8 million, from $15.4 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 increased $6.4 million, or 14.8% to $49.7 million, from $43.3 million for the nine months ended September 30, 2007. The increase between periods is due to an increase in personnel and related costs on R&D projects, reflective of our increased focus on product development and enhancement efforts. As a percentage of total revenues, R&D expense was 14.2% for the third quarter of 2008, compared to 14.3% for the third quarter of 2007, and 14.6% for the second quarter of 2008. We did not capitalize any internal software development costs during the quarter or nine months ended September 30, 2008 and 2007.
Our R&D efforts have been focused on the continued evolution of our products, both functionally and architecturally, in response to market demands that our products have certain functional features and capabilities, as well as architectural flexibilities (such as service oriented architecture, or SOA). This product evolution will result in the modularization of certain product functionality that historically has been tightly integrated within our product suite, which will allow us to respond more quickly to required changes to our products and provide greater interoperability with other computer systems. Although our primary value proposition to our clients will continue to be the breadth and depth of our integrated solutions, these R&D efforts will also allow us to separate certain product components so as to allow such components to be marketed on a stand-alone basis where a specific client requirement and/or business need dictates, including the use of certain products across non-CSG customer care and billing systems.
At this time, we expect our future R&D efforts to continue to focus on similar tasks as noted above. In the near term, we expect that our investment in R&D will be in a range comparable with the second and third quarter of 2008, with the level of our R&D spend highly dependent upon the opportunities that we see in our markets.
Selling, General and Administrative (â€śSG&Aâ€ť) Expense . SG&A expense for the: (i) third quarter of 2008 increased $2.1 million, or 20.4% to $12.7 million, from $10.6 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 increased $6.1 million, or 18.8 % to $38.4 million, from $32.3 million for the nine months ended September 30, 2007. The increase in SG&A expense reflects the impact of the sales and marketing costs of the Acquired Businesses. As a percentage of total revenues, SG&A expense was 10.8% for the third quarter of 2008, compared to 9.8% for the third quarter of 2007.
Depreciation Expense . Depreciation expense for the: (i) third quarter of 2008 increased $1.1 million, or 30.6% to $4.5 million, compared to $3.4 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 increased $2.8 million, or 29.9% to $12.1 million, compared to $9.3 million for the nine months ended September 30, 2007. The increase in depreciation expense is due to the increased capital expenditures made over the past year (mainly related to statement production equipment) and to the acquired property and equipment from our acquisition activities. Depreciation expense for all property and equipment is reflected separately in the aggregate and is not included in the cost of revenues or the other components of operating expenses.
Operating Income. Operating income for the: (i) third quarter of 2008 was $21.1 million (17.9% operating margin percentage), compared to $21.6 million (20.1% operating margin percentage) for the third quarter of 2007; and (ii) nine months ended September 30, 2008 was $66.3 million (19.0% operating margin percentage), compared to $63.2 million (20.7% operating margin percentage) for the nine months ended September 30, 2007. A significant percentage of the decrease in operating income margin between years is due to the impact of the Acquired Businesses.
Total non-cash charges related to depreciation, amortization of intangible assets, and stock-based compensation expense included in the determination of operating income for the: (i) third quarter of 2008 and 2007 were $10.3 million and $11.3 million, respectively; and (ii) nine months ended September 30, 2008 and 2007 were $33.5 million and $30.5 million, respectively.
Interest and Investment Income, net. Interest and investment income, net for the: (i) third quarter of 2008 decreased $2.5 million, to $1.2 million, from $3.7 million for the third quarter of 2007; and (ii) nine months ended September 30, 2008 decreased $10.4 million, to $3.9 million, from $14.3 million. The decrease is due to the following: (i) a significant decrease in our cash and short-term investment balances between years as a result of our stock repurchase activity in 2007 and the purchase of the Acquired Businesses; and to a much lesser degree (ii) a decrease in the overall rate of return realized on investments between periods due to a deterioration in the interest rate environment.
As discussed in Note 10 to the Financial Statements, we will be required to adopt FASB Staff Position (â€śFSPâ€ť) No. APB 14-1, â€śAccounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)â€ť effective January 1, 2009. The adoption of this FSP will impact how we account for our Convertible Debt Securities, which among other things, will increase the amount of interest expense related to our Convertible Debt Securities. We are currently in the process of quantifying the impact of this FSP. However, we expect the adoption of this FSP will significantly increase our interest expense, and thus, have a material impact on our results of operations. This FSP is not expected to have an impact on our cash flows as the recognition of the additional interest expense will be a non-cash expense.
Thank you David and thanks to everyone on the call for joining us. Todayâ€™s discussion will contain a number of forward-looking statements. In particular, these will include statements regarding our projected financial results; our ability to meet our clients needs through our products, services and performance; and our ability to successfully integrate and manage acquired businesses in order to achieve their strategic operating and financial goals.
While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call. And we undertake no obligation to revise or publicly release any revisions to these forward-looking statements in light of new information or future events.
In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in todayâ€™s press release as well as in our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our website. Also we will 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 affect in a particular period.
Accordingly, we believe isolating the effects of such events enables us as well as investors to consistently analyze the critical components of our operating results and to add meaningful comparisons to prior periods. For more information regarding our use of non-GAAP financial measures, we refer you to todayâ€™s earnings release 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. I would now like to turn the call over to Peter.
Peter E. Kalan
Thank you Kathleen and thanks to all of you for joining us today. Before I get started Iâ€™d like to welcome Kathleen Marvin to her first quarterly earnings call. And as many of you may know, Roger Metz our former head of Investor Relations and Treasury accepted a CFO position with a local Denver software company in the fourth quarter.
Kathleen has been assisting in our Investor Relations efforts over the past several years and took on these responsibilities upon Rogerâ€™s departure. We congratulate Kathleen on her expanded Investor Relations duties for CSG and we welcome her to this call.
Now onto the results. Iâ€™m pleased to report that CSG continued to perform well in the recent fourth quarter, posting revenues of $124 million and net income of $0.59 per share for the quarter and revenues of $472 million and net income of $1.84 per share for the full year. These results included a $7 million gain or $0.14 per share, resulting from the repurchase of some of our convertible debt during the fourth quarter.
Weâ€™re pleased with our solid financial performance in 2008 and also with our execution from an operational perspective on behalf of our clients. We also made good progress in 2008 on our plans to grow and diversify our business and advance our product suite, which Iâ€™ll discuss in more detail later. Randy will share more details on our financial performance after I conclude.
During the earnings call last October, I commented on the tumultuous economic and credit situations that the world and our country were facing. Since that time, the economic and financial markets have worsened, corporate restructurings have increased, and government bailouts have become more the norm. As I look back on 2008 and also into 2009, Iâ€™m appreciative of the areas of strength on which CSG is built.
These strengths include stable capital, a consistently solid business model, and clients who have strong viable businesses. But all businesses are likely to be impacted by the current economic challenges. The increase in unemployment; decline in home values and personal investment portfolios; and decreases in consumer confidence have all contributed to weaknesses in the consumer related markets.
Our clients are not without concern for these weaknesses and the impacts on their businesses, and we expect that our clients will cautiously watch their discretionary spending as they manage through this downturn.
As we look at our own business, we are fortunate to have several areas of strength on which to build. Our innovative billing and interaction management systems are integral to many of the daily operations of our clientsâ€™ businesses. Though we derive some revenues from products and services that could be more discretionary in nature, the majority of our revenues are for services already deployed and generating value in our clientsâ€™ operations.
That being said, we are cautious in our outlook for 2009 and recognize that longer sales cycles and discretionary spending cutbacks may have a negative impact on our business. We donâ€™t anticipate that our clients will undertake any large, transformational projects in 2009 but will instead focus on smaller projects that quickly generate operational and economic benefits.
CSGâ€™s products and solutions can typically be deployed without large upfront fees and lengthy implementations, and this allows for benefits to be quickly recognized in the clientsâ€™ operations. We saw this in the fourth quarter with clients embracing our solutions to deliver enhanced messaging to the customer, both electronically and through print. We have also seen Internet-based ordering and customer support solutions increasing in importance, and we supported clients in these endeavors in the fourth quarter.
Products and solutions which help our clients to deliver a high level of customer satisfaction, roll out and market new products and services quickly, streamline operations and reduce churn are going to be important going forward. The strength of our client relationships was validated by some important renewals that occurred as 2008 came to a close. We extended our current contract with DISH Network through the end of 2009, continuing our more than ten-plus year partnership.
We remain committed to being a trusted and valued business partner to DISH in the future, and we continue to work towards a longer term relationship that utilizes CSGâ€™s solutions to meet their business needs. We also renewed our print services contract with Cox Communications for an additional three years through December, 2011. Cox is our largest print services only client with over 6 million statements per month, and we look forward to being a key part of their business in the years ahead.
As part of delivering our solutions to the marketplace, weâ€™re dependent on our employees and our vendors. We are fortunate to have employees who have shown loyalty to CSG and our clients, investing countless years in our solutions and client relationships. Also important to us are the vendors and supply chain partners that have built trusted relationships with us and with whom we build our business.
As you may have seen in our press release issued earlier today, weâ€™re planning a change in our outsource data center service provider. We currently utilize First Data Corporation to provide the data center computing environment for the delivery of most of our customer care and billing solutions under a contract that runs through June 30, 2010.
Just as we do with any critical vendor, we evaluate our options well in advance of the renewal date to provide adequate time for planning and decision making. Through this review process, we decided to select another partner for data center services. After an extensive selection process, we entered into an agreement in December of 2008 with Infocrossing to transition these outsourced data center services prior to the expiration of the First Data contract.
Infocrossing is a Wipro Limited Company and has been in the business of providing end-to-end information technology management tech solutions for over 25 years, and operates world-class data centers throughout the U.S. for multiple computing environments and platforms. First Data has been a valued partner of CSG since her inception as an independent company in 1994 and has been a key contributor in our ability to grow our business substantially over time.
We are thankful for the outstanding services weâ€™ve received from First Data over the years, and are equally excited about our new partner opportunities with Infocrossing. We believe that choosing a partner whose primary business is providing data center and technology services will benefit us over the long term as we continue to evolve our business and technologies. We will be making investments as part of this change, and Randy will speak to the costs related to these transition efforts in a few moments.
Our business model and capital structure is the strength which provides for continued stability, which is important to all our stakeholders. Our delivery of key services to clients, which results in revenue visibility, along with our careful focus on controlling costs and our judicious approach to capital investment, yields strong cash flows and a solid balance sheet. This financial foundation not only enables us to weather these difficult economic times, but also keeps us well positioned to invest in the future needs of our clients and the vertical markets we serve.
One of our most recent investments was our acquisition of Quaero Corporation, which closed at the end of 2008. Quaero broadens our solutions suite with customer intelligence capabilities that will further assist our clients in maximizing the value of their customer interactions through marketing and customer service strategies. Quaeroâ€™s advanced analytics will help our clients predict a customerâ€™s behavior and then act upon that information.
Our clients can operationalize this information by integrating the intelligence with our customer care and marketing solutions to engage in more timely and relevant customer interactions, whether through customer service representatives, websites, monthly statements, interactive messaging, or direct marketing. Quaeroâ€™s customer intelligence solutions will allow clients to accelerate customer value, improve customer relationships, and increase retention through relevant and timely multi-channel customer interactions. We welcome the employees of Quaero to our team and we look forward to the successes of our combined capabilities.
Weâ€™re also having success with [Smart Color], our advanced color print solution that enhances monthly printed statements with high impact color, to provide a higher level of engagement in communications with a customer. Weâ€™re pleased with the very positive response to our investment in this print solution, and have several implementations scheduled for this year.
Investments in our business have been instrumental in furthering our goal of revenue diversification. Revenues outside of our core video market were approximately 15% of our total revenues in the fourth quarter, and we expect to further improve on this diversification in 2009 as we continue to build and expand relationships in these new verticals.
In closing, as we look to 2009, we approach it with a sense of caution given the economic environment in which we and our customers are operating. But we remain confident in the strength of our business and the solution we bring to our clients. We continue to work towards the long term expansion of our products and solutions within our existing clients and the markets we serve.
While these are challenging economic times, we look to our future with a spirit of dedication and confidence. Our success is founded on the commitment and hard work of our employees, exemplified by their diligent efforts day in and day out to earn our clientsâ€™ business. Each of these days has added up to years of reliable service, innovative solutions, and long term relationships with our clients in meeting their business needs.
We appreciate your continued support of CSG and we look forward to having the opportunity to continue delivering results for our clients and shareholders alike. With that, Iâ€™ll turn it over to Randy to walk through our financial performance and our outlook for 2009.
Randy R. Wiese
Thank you Peter and welcome to all of you on the call today. Iâ€™m happy to share with you the financial results for the fourth quarter and the year ended December 31, 2008, as well as our outlook for 2009.
Total revenues for the fourth quarter were $123.6 million. This represents an increase of 9% when compared to $113.5 million for the same period in 2007, a sequential increase of 5% when compared to $118 million for the third quarter of 2008. Our full year revenues for 2008 were
$472.1 million, an increase of 13% over the same period in 2007. We came in at the high end of our revenue guidance at $472 million for the year.
These quarterly and full year results are reflective of the success we have experienced in our plan to grow top line revenues and achieve market diversification through both acquisitions and organic growth. Comcast continued as our largest client, comprising approximately 26% of our total revenues for the fourth quarter, consistent with that of the third quarter.
DISH Network continued as our second largest client and represented approximately 17% of our total revenues for the quarter compared to 18% for the third quarter. We finished the quarter with 45.3 million subscriber counts on our processing system, consistent with the previous quarter. EPS from continuing operations for the fourth quarter was $0.59 per share, compared to $0.40 per share for the same period last year. EPS for the full year 2008 was $1.84 per share compared to $1.50 per share for 2007.
Both the quarter and the full year 2008 results include a $7 million gain or approximately $0.14 per share related to our repurchase of some of our convertible debt during the quarter, which I will discuss later. Absent the impact of this $0.14 per share gain, CSG exceeded the high end of its full year EPS guidance of $1.66 by $0.04 per share, which represents approximately 13% growth over the comparable $1.50 per share results for 2007.
This improvement in EPS performance year-over-year reflects our continued focus on operational performance, as well as the effective use of our capital resources through acquisitions and debt and equity repurchases.
The operating income margin percentage for the fourth quarter came in at approximately 18.6%, an increase from the 17.9% level we experienced in the third quarter and significantly better than the mid-17% range we had anticipated in our guidance. This strong operating performance for the quarter was the result of solid revenue performance, our continued prudence in managing our costs, and some one time non-recurring expense benefits realized during the quarter.
As you will see when I discuss our 2009 financial guidance in a few minutes, we do not expect to be able to sustain this level of operating margin percentage performance in 2009, which is consistent with our messaging to you over the last several quarters.
Our effective income tax rate for the fourth quarter was 32.4% and for the full year 2008 was 34.6%, which is slightly better than our expectation of 35% for the year. Our non-cash charges related to depreciation, amortization and stock-based compensation for the fourth quarter totaled approximately $10 million or approximately $0.20 per share, and for the full year totaled
$23.5 million or approximately $0.86 per share.
Turning to the balance sheet, as of December 31 cash and short-term investments totaled
$141 million, down approximately $24 million from September 30, primarily as a result of the Quaero acquisition we completed in December and the repurchase of our debt equity securities during the quarter.
Our net billed trade accounts receivable totaled $118 million, up approximately $10 million from the previous quarter, with the increase related primarily to the timing of certain plant payments which were largely received after year-end in early January, 2009. Our days billed outstanding for the fourth quarter remained very good at 56 days. This measure has been consistent across the last several quarters.
During the quarter, the public convertible bond markets experienced unprecedented volatility which resulted in convertible bonds of many companies trading at a significant discount to par values including CSGâ€™s convertible bonds. We took advantage of these deep discount opportunities and repurchased approximately $30 million of our convertible debt at a cost of
$22.4 million. This represents a weighted average purchase price of approximately 75% of par value for the bonds we repurchased, and represents a pretax yield of approximately 14%. Some of these bonds were to be retired at the first put or call date in June, 2011.
These debt repurchases resulted in a book gain of approximately $7 million or $0.14 per share for both the fourth quarter and the year ended December 31, 2008. After these debt repurchases, the remaining par value of CSGâ€™s outstanding convertible bonds as of the end of the year was approximately $200 million, down from $230 million in the previous periods or approximately 13% decrease.
The convertible bond market has stabilized over the last few months, and thus the deep discount buying opportunities we experienced during the earlier part of the fourth quarter may not exist in the future. We will continue to track and evaluate the trading activity and valuations around our convertible debt for possible future buying opportunities.
During the fourth quarter, we repurchased 250,000 shares of the companyâ€™s stock under our stock repurchase program at a total purchase price of approximately $4 million. We will continue to evaluate the best use of our capital going forward, which may or may not include additional share repurchases.
Cash flows from operations for the fourth quarter were $19 million and our full year, 2008 cash flows from operation were approximately $115 million. This is slightly below the lower end of our guidance range of $118 million for full year 2008, but the shortfall related primarily to the timing of certain accounts receivable payments from our clients falling into the first week in January, 2009, as I mentioned earlier. Our cash flows from operations continue to be very strong.
In summary, for 2008 we finished the year very strong and we are pleased with our most recent quarterly and full year performance. CSG is a strong company financially. The operating business model provides a recurring source of profitable revenues and predictable cash flows. This business model provides CSG with sufficient liquidity and capital resources to not only weather these difficult times our country is currently experiencing, but also keeps us well positioned to fund the future growth of the company as well.
Before I get into 2009 guidance, there are two key background matters that I want to address as they materially impact 2009. First, as Peter mentioned earlier in his comments, we plan to transition our data center services from First Data to Infocrossing. We expect to incur transition related costs and capital expenditures during the time period leading up to the final transition of services from First Data to Infocrossing.
These costs are one time in nature and will include such things as labor and consulting costs for the transition team and capital expenditures in related infrastructure costs to set up and replicate the computing environment at the new Infocrossing data center location without disruption of the current environment at First Data during the transition period. These operating costs will be expensed as incurred.
Expected costs attributed to the data center transition project that will run through our results of operations for 2009 are approximately $17 to $18 million, or approximately $0.32 to $0.34 per share negative impact. These expense amounts are based on the best available estimates at this time and may fluctuate up or down during the year as we execute on our transition plan. I will address the expected one time financial impact of these transition efforts on CSGâ€™s 2009 financial guidance shortly.
The next item I would like to cover impacts our convertible debt for 2009. Effective January 1, 2009, we will change the accounting for our convertible debt as a result of a change in an accounting pronouncement. Historically we have recorded the entire par value of our convertible bonds as long-term debt. The accounting rule change requires us to look back to the original issue date of June, 2004 and record an original issue discount equal to the amount attributable to the convertible equity feature of the debt.
The corresponding value assigned to the original issue discount will be reported as equity. The original issue discount is then required to be amortized to book interest expense subsequent to the issue date through the first put date option of our convertible debt, which is June, 2011. The overall effective book interest rate for 2009 for our convertible debt as a result of this new accounting pronouncement will be 8% annually, which consists of the cash coupon rate of 2.5% plus the impact of the amortization of the original issued discount.
This will result in additional interest expense of approximately $9.4 million for 2009, or approximately $0.18 per share. Additional interest expense is a non-cash expense, and therefore will not impact CSGâ€™s historical or expected future cash flows from operations. Even while we have a negative impact on our results of operations going forward, this continues to be an attractive debt instrument for us due to the low cash coupon rate of 2.5%, and a tax advantage treatment we are allowed for this instrument.
Iâ€™ll address the expected impact of this new accounting pronouncement on CSGâ€™s 2009 financial guidance shortly. Because of the complexity of this matter, we did provide details on this topic in our press release issued earlier today. And additional information on the adoption of this new accounting pronouncement was included in our most recent Form 10-Q for the quarter ended September 30, 2008.
With this background information, Iâ€™d like to now provide you with an overview of our financial expectations for 2009. Our 2009 guidance includes non-GAAP EPS, which is a non-GAAP financial measure. The required disclosures related to this non-GAAP financial measure were included in our press release issued earlier today.
For the full year 2009 we expect the following. Revenues will range between $486 million and $496 million, which represents top line revenue and growth of approximately 3 to 5% over 2008. This growth is almost entirely related to the year-over-year pending impact of the Dataprose acquisition which closed in April of 2008 and the impact of the Quaero acquisition which closed on December 31, 2008.
Relatively flat year-over-year organic growth that is implicit in this guidance is reflective of the uncertainty that exists in todayâ€™s economy. While we still believe we have good visibility to over 90% of our revenues for 2009, we are cautious in those areas in which our clients can exercise some scrutiny in the discretionary spending activities such as money spent on marketing activities, special project work such as special development work, and software and professional services related projects.
We remain confident in the strength of our business, but acknowledge that all businesses will be negatively impacted to some degree by the current economic conditions. We expect our non-GAAP EPS from continuing operations for 2009 to range between $1.47 and $1.54 per share. This guidance includes estimated dilution of approximately $0.03 per share related to the Quaero acquisition. This estimate is preliminary and may change as we complete our purchase accounting for the acquisition and finalize the intangible asset amortization during the first quarter of 2009.
This non-GAAP EPS guidance excludes the impact of the data center transition expenses of approximately $0.32 to $0.34 and the amortization of convertible debt original issue discount of approximately $0.18 per share, both of which I discussed earlier in my comments. The total of these two items for 2009 is approximately $0.50 to $0.52 per share negative impact.
Including the impact of these items, we expect our GAAP EPS from continuing operations for 2009 to range between $0.97 and $1.02 per diluted share. Weâ€™re providing our guidance in both GAAP EPS and non-GAAP EPS form to allow investors to not only focus on the expected impact of these two items individually on the results of operations, but also so investors can understand the underlying performance of our core business operations.
Continuing on, this guidance reflects an operating margin percentage expectation in the low 13% range. The negative impact of the data center transition costs is approximately 350 basis points. In addition, the operating margin reflects a negative impact of approximately 70 basis points related to the GAAP diluted impact estimated for Quaero for 2009. As to the negative impact of these two items, the operating margins will be in line with the low 17% range that we previously communicated.
Over the years we have proven to be good stewards of the business in both good times and bad, and you should expect the same from us going forward, which will include a continued strong emphasis on cost management in response to the downturn of the economy. We expect cash flows from operations to range between $98 million and $102 million, assuming no significant net impact related to fluctuations in working capital for the year.
This cash flow estimate includes the negative impact of two items worth noting. First, a negative cash flow impact related to the data center transition cost of approximately $9 million to $10 million for 2009. Second, we are required to make an approximately $5 million cash payment for income taxes in the first quarter of 2009 related to the repurchase of our convertible debt we completed in 2008.
At this time, we expect our capital expenditures for 2009 to be approximately $30 million which includes approximately $15 million related to the hardware and related to the infrastructure items necessary to set up and replicate the new computing environment at Infocrossing. We expect the total of our non-cash items of depreciation, amortization, intangible assets and stock-based compensation to be approximately $45 million for the year.
This guidance reflects an effective income tax rate of approximately 35% for the year, generally in line with our 2008 effective rate. We did not assume any significant changes in our outstanding shares in our guidance.
In summary, we closed out 2008 with a strong quarter to complete another successful year. We are committed to continue to grow our business as demonstrated by our continued investments in R&D, the 2008 acquisitions of Dataprose and Quaero, and our key client renewals during the year. Although we are operating in challenging times, we believe the financial strength of CSG and the key clients and markets we serve puts us in a solid position to deal with the current economic conditions.
We believe that the financial guidance we provided for 2009 is reflective of the strength of our business. We know the difficult economic times provide many challenges heading into 2009, yet we look forward to meeting these challenges and the opportunities that lie ahead in reporting on continued success.