Form 8-K CSG SYSTEMS INTERNATIONA For: May 04

Delaware

0-27512

47-0783182

(State or other jurisdiction

of incorporation)

(Commission

File Number)

(IRS Employer

Identification No.)

9555 Maroon Circle, Englewood, CO

80112

(Address of principal executive offices)

(Zip Code)

¨

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

99.1

Press release of CSG Systems International, Inc. dated May 4, 2016

CSG SYSTEMS INTERNATIONAL, INC.

By:

 /s/ Rolland B. Johns 

Rolland B. Johns

Chief Accounting Officer

PRESS RELEASE

•

First quarter 2016 financial results:

•

Total revenues were $186.2 million.

•

Non-GAAP operating income was $44.3 million, or 23.8% of total revenues and GAAP operating income was $41.3 million, or 22.2% of total revenues.

•

Non-GAAP earnings per diluted share (EPS) was $0.77. GAAP EPS was $0.64.

•

Cash flows from operations were $10.7 million.

•

CSG declared its quarterly cash dividend of $0.185 per share of common stock, or a total of approximately $6 million, to shareholders.

•

During the quarter, CSG repurchased approximately 264,000 shares of its common stock for $9.5 million (weighted-average of $36.07 per share) under its stock repurchase program.

•

In March 2016, CSG issued $230 million of convertible notes (2016 Convertible Notes) due in 2036.

•

Through April 2016, CSG has repurchased $106 million aggregate principal amount of the $150 million 2010 Convertible Notes for approximately $199 million, with proceeds from the 2016 Convertible Notes.

Quarter Ended March 31,

2016

2015

Percent
Change

Revenues

$

186,226

$

185,631

0

%

Non-GAAP Results:

Operating Income

$

44,272

$

30,806

44

%

Operating Income Margin

23.8

%

16.6

%

—

EPS

$

0.77

$

0.51

51

%

GAAP Results:

Operating Income

$

41,291

$

21,893

89

%

Operating Income Margin

22.2

%

11.8

%

—

EPS

$

0.64

$

0.28

129

%

As of May 4, 2016

Previous

Revenues

No change

$735 - $760 million

Non-GAAP EPS

No change

$2.59 - $2.69 

GAAP EPS

$1.74 - $1.84

$1.84 - $1.94

Non-GAAP Adjusted EBITDA

No change

$177 - $182 million

Cash flows from operating activities

No change

$110 - $130 million

•

CSG derives approximately fifty percent of its revenues from its three largest clients;

•

Continued market acceptance of CSG’s products and services;

•

Timing and success of previously announced client customer account migrations to CSG’s billing platform;

•

CSG’s ability to continuously develop and enhance products in a timely, cost-effective, technically-advanced and competitive manner;

•

CSG’s ability to deliver its solutions in a timely fashion within budget, particularly large and complex software implementations;

•

CSG’s dependency on the global telecommunications industry, and in particular, the North American telecommunications industry;

•

CSG’s ability to meet its financial expectations as a result of increased dependency on software sales, which are subject to greater volatility;

•

Increasing competition in CSG’s market from companies of greater size and with broader presence in the communications sector;

•

CSG’s ability to successfully integrate and manage acquired businesses or assets to achieve expected strategic, operating and financial goals;

•

CSG’s ability to protect its intellectual property rights;

•

CSG’s ability to maintain a reliable, secure computing environment;

•

CSG’s ability to conduct business in the international marketplace;

•

CSG’s ability to comply with applicable U.S. and International laws and regulations; and

•

Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates.

March 31,
2016

December 31,
2015

ASSETS

Current assets:

Cash and cash equivalents

$

289,733

$

132,631

Short-term investments

95,497

108,305

Total cash, cash equivalents, and short-term investments

385,230

240,936

Trade accounts receivable:

Billed, net of allowance of $3,647 and $3,600

181,650

178,854

Unbilled

39,236

41,110

Income taxes receivable

4,314

4,038

Other current assets

28,944

35,153

Total current assets

639,374

500,091

Non-current assets:

Property and equipment, net of depreciation of $116,038 and $112,282

34,290

35,992

Software, net of amortization of $97,171 and $95,094

33,213

35,095

Goodwill

216,911

219,724

Client contracts, net of amortization of $90,402 and $87,890

37,516

39,738

Deferred income taxes

12,470

17,462

Other assets

14,646

14,629

Total non-current assets

349,046

362,640

Total assets

$

988,420

$

862,731

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

Current liabilities:

Current portion of long-term debt, net of unamortized discounts of $5,020 and $8,632

$

114,355

$

148,868

Client deposits

33,498

33,694

Trade accounts payable

28,938

43,392

Accrued employee compensation

43,479

59,607

Deferred revenue

46,930

41,907

Income taxes payable

7,407

8,962

Other current liabilities

18,984

22,980

Total current liabilities

293,591

359,410

Non-current liabilities:

Long-term debt, net of unamortized discounts of $26,464 and $4,738

334,786

130,262

Deferred revenue

9,045

9,828

Income taxes payable

4,009

4,413

Deferred income taxes

4,036

182

Other non-current liabilities

12,166

12,791

Total non-current liabilities

364,042

157,476

Total liabilities

657,633

516,886

Current portion of long-term debt conversion obligation

107,604

—

Stockholders’ equity:

Preferred stock, par value $.01 per share; 10,000 shares authorized; zero shares issued and outstanding

—

—

Common stock, par value $.01 per share; 100,000 shares authorized; 32,447 shares and 32,555 shares outstanding

673

672

Common stock warrants, 2,851 and 2,851 warrants issued and outstanding

7,310

7,310

Additional paid-in capital

374,689

503,254

Treasury stock, at cost, 34,865 and 34,601 shares

(823,963

)

(814,437

)

Accumulated other comprehensive income (loss):

Unrealized gain (loss) on short-term investments, net of tax

814

(97

)

Cumulative foreign currency translation adjustments

(27,390

)

(26,288

)

Accumulated earnings

691,050

675,431

Total stockholders’ equity

223,183

345,845

Total liabilities, current portion of long-term debt conversion obligation and stockholders’ equity

$

988,420

$

862,731

Quarter Ended

March 31,
2016

March 31,
2015

Revenues:

Cloud and related solutions

$

149,814

$

143,833

Software and services

19,178

22,633

Maintenance

17,234

19,165

Total revenues

186,226

185,631

Cost of revenues (exclusive of depreciation, shown separately below):

Cloud and related solutions

66,233

69,260

Software and services

13,366

21,109

Maintenance

9,884

9,897

Total cost of revenues

89,483

100,266

Other operating expenses:

Research and development

23,626

25,729

Selling, general and administrative

34,051

33,442

Depreciation

3,516

3,695

Restructuring and reorganization charges

(5,741

)

606

Total operating expenses

144,935

163,738

Operating income

41,291

21,893

Other income (expense):

Interest expense

(3,005

)

(3,368

)

Amortization of original issue discount

(1,658

)

(1,516

)

Interest and investment income, net

468

167

Loss on repurchase of convertible notes

(3,211

)

—

Other, net

(791

)

(465

)

Total other

(8,197

)

(5,182

)

Income before income taxes

33,094

16,711

Income tax provision

(11,590

)

(7,353

)

Net income

$

21,504

$

9,358

Weighted-average shares outstanding:

Basic

30,762

31,542

Diluted

33,672

33,340

Earnings per common share:

Basic

$

0.70

$

0.30

Diluted

0.64

0.28

Cash dividends declared per common share

$

0.19

$

0.18

Quarter Ended

March 31,

2016

March 31,

2015

Cash flows from operating activities:

Net income

$

21,504

$

9,358

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

Depreciation

3,516

3,695

Amortization

6,415

8,217

Amortization of original issue discount

1,658

1,516

Loss on short-term investments and other

11

91

Loss on repurchase of convertible notes

3,211

—

Gain on disposition of business operations

(6,614

)

—

Deferred income taxes

3,923

23

Excess tax benefit of stock-based compensation awards

(3,375

)

(1,796

)

Stock-based compensation

6,506

5,089

Subtotal

36,755

26,193

Changes in operating assets and liabilities:

Trade accounts receivable, net

35

(986

)

Other current and non-current assets

1,597

(1,093

)

Income taxes payable/receivable

992

3,338

Trade accounts payable and accrued liabilities

(32,490

)

(16,140

)

Deferred revenue

3,785

7,624

Net cash provided by operating activities

10,674

18,936

Cash flows from investing activities:

Purchases of property and equipment

(5,262

)

(6,695

)

Purchases of short-term investments

(14,100

)

(10,085

)

Proceeds from sale/maturity of short-term investments

30,067

49,470

Acquisition of and investments in client contracts

(1,520

)

(1,223

)

Proceeds from the disposition of business operations

8,850

—

Net cash provided by investing activities

18,035

31,467

Cash flows from financing activities:

Proceeds from issuance of common stock

356

396

Payment of cash dividends

(6,529

)

(5,842

)

Repurchase of common stock

(18,990

)

(62,753

)

Payments on acquired asset financing

—

(829

)

Proceeds from long-term debt

230,000

150,000

Payments on long-term debt

(1,875

)

(121,875

)

Repurchase of convertible notes

(72,619

)

—

Payments of deferred financing costs

(6,655

)

(2,692)

Excess tax benefit of stock-based compensation awards

3,375

1,796

Net cash provided by (used in) financing activities

127,063

(41,799

)

Effect of exchange rate fluctuations on cash

1,330

(1,039

)

Net increase in cash and cash equivalents

157,102

7,565

Cash and cash equivalents, beginning of period

132,631

81,712

Cash and cash equivalents, end of period

$

289,733

$

89,277

Supplemental disclosures of cash flow information:

Net cash paid during the period for -

Interest

$

3,339

$

3,441

Income taxes

6,680

3,968

Quarter Ended
March 31,

 2016

Quarter Ended
December 31, 

2015

Quarter Ended
March 31,

 2015

Americas

87

%

83

%

85

%

Europe, Middle East and Africa

8

%

11

%

11

%

Asia Pacific

5

%

6

%

4

%

Total Revenues

100

%

100

%

100

%

Quarter Ended
March 31,

 2016

Quarter Ended
December 31, 

2015

Quarter Ended
March 31,

 2015

Comcast

25

%

24

%

23

%

DISH

14

%

13

%

15

%

Time Warner

12

%

11

%

11

%

•

Certain internal financial planning, reporting, and analysis;

•

Forecasting and budgeting;

•

Certain management compensation incentives; and

•

Communications with CSG’s Board of Directors, stockholders, financial analysts, and investors.

•

A more complete understanding of CSG’s underlying operational results, trends, and cash generating capabilities;

•

Consistency and comparability with CSG’s historical financial results; and

•

Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.

•

Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles;

•

The way in which CSG calculates non-GAAP financial measures may differ from the way in which other companies calculate similar non-GAAP financial measures;

•

Non-GAAP financial measures do not include all items of income and expense that affect CSG’s operations and that are required by GAAP to be included in financial statements;

•

Certain adjustments to CSG’s non-GAAP financial measures result in the exclusion of items that are recurring and will be reflected in CSG’s financial statements in future periods; and

•

Certain charges excluded from CSG’s non-GAAP financial measures are cash expenses, and therefore do impact CSG’s cash position.

Non-GAAP Exclusions

Operating
Income

EPS

Restructuring and reorganization charges

X

X

Acquisition-related charges

X

X

Stock-based compensation

X

X

Amortization of acquired intangible assets

X

X

Amortization of original issue discount (“OID”)

—

X

Gain (loss) on repurchase of convertible notes

—

X

Unusual income tax matters

—

 X

•

Restructuring and reorganization charges are infrequent expenses that result from cost reduction initiatives and/or significant changes to CSG’s business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. These charges are not considered reflective of CSG’s recurring core business operating results. The exclusion of these items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

•

Acquisition-related charges relate to direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring core business operating results. These charges typically include expenses related to legal, accounting, and other professional services. The exclusion of these charges in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

•

Stock-based compensation results from CSG’s issuance of equity awards to its employees under incentive compensation programs. The amount of this incentive compensation in any period is not generally linked to the level of performance by employees or CSG, but instead is more dependent on CSG’s stock price at the date the equity award is granted, and the employee service period over which the equity awards vest. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to compensation included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.

•

Amortization of acquired intangible assets is the result of business acquisitions. A portion of the purchase price in an acquisition is allocated to acquired intangible assets (e.g., software, client relationships, etc.), which are then amortized to expense over their estimated useful lives. This annual amortization expense is generally unchanged from the initial estimates, regardless of performance of the acquired business in any one period. Also, the value assigned to acquired intangible assets in a business combination is based

on various estimates and valuation techniques, and does not necessarily represent the costs CSG would incur to develop such capabilities internally. Additionally, amortization of acquired intangible assets can be inconsistent in amount and frequency, and can be significantly affected by the timing and size of an acquisition. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to acquisitions included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.

•

The convertible notes OID is the result of allocating a portion of the principal balance of the debt at issuance to the equity component of the instrument, as required under current accounting rules. This OID is then amortized to interest expense over the life of the respective convertible debt instrument. The interest expense related to the amortization of the OID is a non-cash expense, and therefore, the exclusion of this item allows investors to further evaluate the cash interest costs of CSG’s convertible notes for cash flow, liquidity, and debt service purposes.

•

Gains and losses related to the repurchase of CSG’s convertible notes are not considered reflective of CSG’s recurring core business operating results.  Any resulting gain or loss on the repurchase of CSG’s convertible notes is non-cash income or expense, and therefore, the exclusion of this item allows investors to further evaluate the cash impact of these repurchases for cash flow and liquidity purposes.  In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.  

•

Unusual items within CSG’s quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

Quarter Ended
March 31, 2016

Quarter Ended
March 31, 2015

Amounts

% of
Revenues

Amounts

% of
Revenues

GAAP operating income

$

41,291

22.2

%

$

21,893

11.8

%

Restructuring and reorganization charges (1)

(5,741

)

(3.1

)%

606

0.3

%

Stock-based compensation (1)

6,527

3.5

%

5,089

2.8

%

Amortization of acquired intangible assets

2,195

1.2

%

3,218

1.7

%

Non-GAAP operating income

$

44,272

23.8

%

$

30,806

16.6

%

(1)

Stock-based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges.  In addition, restructuring and reorganization changes include the impact of the gain on disposition of business operations for the first quarter of 2016.

Quarter Ended
March 31, 2016

Quarter Ended
March 31, 2015

Pretax
Amount (2)

EPS (4)

Pretax
Amount (2)

EPS (5)

GAAP income before income taxes

$

33,094

$

0.64

$

16,711

$

0.28

Restructuring and reorganization charges (1)

(5,741

)

606

Stock-based compensation (1)

6,527

5,089

Amortization of acquired intangible assets

2,195

3,218

Loss on repurchase of convertible notes

3,211

—

Amortization of OID

1,658

1,516

Non-GAAP income before income taxes (3)

$

40,944

$

0.77

$

27,140

$

0.51

(2)

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

(3)

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

(4)

For the first quarter of 2016 the GAAP effective income tax rate was 35%, the non-GAAP effective income tax rate was approximately 37%, and the outstanding diluted shares were 33.7 million.

(5)

For the first quarter of 2015, the GAAP effective income tax rate was 44%, the non-GAAP effective income tax rate was approximately 37%, and the outstanding diluted shares were 33.3 million. The difference between the GAAP and the non-GAAP effective income tax rates relates to the timing of the 2015 R&D tax credit legislation.  The anticipated quarterly benefit of the credits was included for non-GAAP purposes, but could not be reflected for GAAP purposes until the legislation was actually passed.

Quarter Ended
March 31,

2016

2015

GAAP operating income

$

41,291

$

21,893

Restructuring and reorganization charges (1)

(5,741

)

606

Depreciation

3,516

3,695

Amortization of acquired intangible assets (6)

2,195

3,218

Amortization of other intangible assets (6)

3,725

3,634

Stock-based compensation (1)

6,527

5,089

Adjusted EBITDA

$

51,513

$

38,135

Adjusted EBITDA as a percentage of revenues

28

%

21

%

Quarter Ended
March 31,

2016

2015

Net income

$

21,504

$

9,358

Interest expense (7)

3,005

3,368

Amortization of OID

1,658

1,516

Loss on repurchase of convertible notes

3,211

—

Interest and investment income and other, net

323

298

Income tax provision

11,590

7,353

Depreciation

3,516

3,695

Amortization of acquired intangible assets (6)

2,195

3,218

Amortization of other intangible assets (6)

3,725

3,634

Stock-based compensation (1)

6,527

5,089

Restructuring and reorganization charges (1)

(5,741

)

606

Adjusted EBITDA

$

51,513

$

38,135

Quarter Ended
March 31,

2016

2015

Cash flows from operating activities

$

10,674

$

18,936

Income tax provision

11,590

7,353

Changes in operating assets and liabilities and deferred taxes

22,158

7,234

Interest expense (7)

3,005

3,368

Interest and investment income and other, net

323

298

Excess tax benefit of stock-based compensation awards

3,375

1,796

Restructuring and reorganization charges (1)(8)

873

606

Other

(485

)

(1,456

)

Adjusted EBITDA

$

51,513

$

38,135

(6)

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

Quarter Ended
March 31,

2016

2015

Amortization of acquired intangible assets

$

2,195

$

3,218

Amortization of other intangible assets

3,725

3,634

Amortization of deferred financing costs

495

1,365

Total amortization

$

6,415

$

8,217

(7)

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

(8)

Restructuring and reorganization charges exclude the impact of the gain on disposition of business operations for the first quarter of 2016, as this amount is already excluded from cash flows from operating activities.

Quarter Ended
March 31,

2016

2015

Cash flows from operating activities

$

10,674

$

18,936

Purchases of property and equipment

(5,262

)

(6,695

)

Non-GAAP free cash flow

$

5,412

$

12,241

2016
Guidance

GAAP operating income margin

16.0

%

Restructuring and reorganization charges (9)

0.0

%

Stock-based compensation (10)

3.0

%

Amortization of acquired intangible assets (11)

1.0

%

Non-GAAP operating income margin (“approximately 20%”)

20.0

%

(9)

This represents the pretax impact of restructuring and reorganization charges of an estimated ($3) million on CSG’s operating income margin as a percentage of the midpoint of 2016 revenue guidance.

(10)

This represents the pretax impact of stock-based compensation expense of an estimated $24 million on CSG’s operating income margin as a percentage of the midpoint of 2016 revenue guidance.

(11)

This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $9 million on CSG’s operating income margin as a percentage of the midpoint of 2016 revenue guidance.

2016 Guidance Range

Low Range

High Range

Pretax
Amount (12)

EPS (14)

Pretax
Amount (12)

EPS (14)

GAAP income before income taxes

$

90,000

$

1.74

$

95,000

$

1.84

Restructuring and reorganization charges

(3,000

)

(3,000

)

Stock-based compensation

24,000

24,000

Amortization of acquired intangible assets

9,000

9,000

Amortization of OID

5,000

5,000

Loss on repurchase of convertible notes

8,500

8,500

Non-GAAP income before income taxes (13)

$

133,500

$

2.59

$

138,500

$

2.69

(12)

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

(13)

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

(14)

For 2016, the estimated effective income tax rate for non-GAAP purposes is expected to be approximately 37%. The weighted-average diluted shares outstanding are expected to be 32.7 million.

2016

GAAP operating income

$

120,500

Restructuring and reorganization charges

(3,000

)

Depreciation

15,000

Amortization of acquired intangible assets

9,000

Amortization of other intangible assets

14,000

Stock-based compensation

24,000

Non-GAAP Adjusted EBITDA

$

179,500

Non-GAAP Adjusted EBITDA as a percentage of revenues

24

%

2016

Net income

$

59,000

Interest expense

16,000

Amortization of OID

5,000

Loss on repurchase of convertible notes

8,500

Interest and investment income and other, net

(1,500

)

Income tax provision

33,500

Depreciation

15,000

Amortization of acquired of intangible assets

9,000

Amortization of other intangible assets

14,000

Stock-based compensation

24,000

Restructuring and reorganization charges

(3,000

)

Non-GAAP Adjusted EBITDA

$

179,500

2016

Cash flows from operating activities (midpoint of guidance)

$

120,000

Income tax provision

33,500

Changes in operating assets and liabilities and deferred taxes

4,000

Interest expense

16,000

Interest and investment income and other, net

(1,500

)

Restructuring and reorganization charges

(3,000

)

Other

10,500

Non-GAAP Adjusted EBITDA

$

179,500

2016

Cash flows from operating activities (midpoint of guidance)

$

120,000

Purchases of property and equipment

(20,000

)

Non-GAAP free cash flow

$

100,000