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CSG Systems International Reports Third Quarter 2022 Results

--News Direct--

CSG (NASDAQ: CSGS) today reported results for the quarter ended September 30, 2022.

Financial Results:

Third quarter 2022 financial results:

  • Total revenue was $273.3 million and total non-GAAP adjusted revenue was $255.1 million.

  • GAAP operating income was $20.0 million, or 7.3% of total revenue, and non-GAAP operating income was $46.7 million, or 18.3% of non-GAAP adjusted revenue.

Shareholder Returns:

  • CSG declared its quarterly cash dividend of $0.265 per share of common stock, or a total of approximately $8 million, to shareholders.
  • During the third quarter of 2022, CSG repurchased 488,000 shares of its common stock under its stock repurchase program for approximately $28 million.

“After hitting some headwinds last quarter, Team CSG delivered strong, healthy revenue growth in Q3 with 4.2% sequential quarter-over-quarter growth. Further, on the back of our timely Operating Margin Improvement Initiative, we reported non-GAAP adjusted operating margin of 18.3%, one of our best results in recent memory. And we returned $91 million to shareholders via buybacks and dividends during the first nine months of the year,” said Brian Shepherd, President and Chief Executive Officer of CSG. “Looking forward, our exciting Q3 results give us confidence that we can finish 2022 strong and build even better growth momentum for 2023.”

Financial Overview (unaudited)

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

Quarter Ended September 30,

Nine Months Ended September 30,

Percent

Percent

2022

2021

Changed

2022

2021

Changed

GAAP Results:

Revenue

$

273,308

$

263,209

%

3.8

$

799,876

$

771,462

%

3.7

Operating Income.

19,977

32,763

(39.0

%)

43,675

96,306

(54.6

%)

Operating Margin Percentage

%

7.3

%

12.4

%

5.5

%

12.5

EPS

$

0.40

$

0.50

(20.0

%)

$

0.76

$

1.72

(55.8

%)

Non-GAAP Results:

Adjusted Revenue

$

255,131

$

246,969

%

3.3

$

744,948

$

722,117

%

3.2

Operating Income

46,747

41,565

%

12.5

123,673

121,561

%

1.7

Adjusted Operating Margin Percentage

%

18.3

%

16.8

%

16.6

%

16.8

EPS

$

1.06

$

0.88

%

20.5

$

2.76

$

2.52

%

9.5

For additional information and reconciliations regarding CSG’s use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG’s website at csgi.com.

Results of Operations

GAAP Results: Total revenue for the third quarter of 2022 was $273.3 million, a 3.8% increase when compared to revenue of $263.2 million for the third quarter of 2021. This increase can be mainly attributed to the continued growth of CSG's revenue management solutions, as approximately three-fourths of the increase was attributed to organic growth resulting mainly from increased payments volume and conversions of customer accounts onto CSG solutions.

GAAP operating income for the third quarter of 2022 was $20.0 million, or 7.3% of total revenue, compared to $32.8 million, or 12.4% of total revenue, for the third quarter of 2021. The decrease in operating income can be primarily attributed to the $14.0 million increase in restructuring and reorganization charges related mainly to an operating margin improvement initiative that began in the second quarter of 2022.

GAAP EPS for the third quarter of 2022 was $0.40, as compared to $0.50 for the third quarter of 2021. The decrease in GAAP EPS can be mainly attributed to the increase in restructuring and reorganization charges, discussed above, offset by a $6.2 million loss recorded in the third quarter of 2021 related to CSG obtaining a controlling interest in MobileCard.

Non-GAAP Results: Non-GAAP adjusted revenue for the third quarter of 2022 was $255.1 million, a 3.3% increase when compared to non-GAAP adjusted revenue of $247.0 million for the third quarter of 2021. The increase in non-GAAP adjusted revenue between periods is due to the factors discussed above.

Non-GAAP operating income for the third quarter of 2022 was $46.7 million, or 18.3% of total non-GAAP adjusted revenue, compared to $41.6 million, or 16.8% of total non-GAAP adjusted revenue for the third quarter of 2021. The increases in operating income and operating income margin can be mainly attributed to the higher revenue along with the margin improvement initiatives, mentioned above.

Non-GAAP EPS for the third quarter of 2022 was $1.06 compared to $0.88 for the third quarter of 2021, with the increase due to the factors discussed above.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of September 30, 2022 were $147.3 million compared to $135.0 million as of June 30, 2022 and $233.7 million as of December 31, 2021. CSG had net cash flows from operations for the third quarters ended September 30, 2022 and 2021 of $22.8 million and $46.1 million, respectively, and had non-GAAP free cash flow of $10.9 million and $38.7 million, respectively. These year-over-year decreases in quarterly cash flows from operations and non-GAAP free cash flow are mainly attributed to unfavorable changes in working capital, resulting mainly from the timing of payment of employee wages and the accrual of the annual bonus, and deferred revenue related to a large international implementation project.

Summary of Financial Guidance

CSG is updating its financial guidance for the full year 2022, as follows:

As of November 2, 2022

Previous

GAAP Measures:

Revenue

No change

$

1,070 - $1,110 million

Non-GAAP Measures:

Adjusted Revenue

No change

$

1,000 - $1,033 million

Adjusted Operating Margin Percentage

No change

16.2% - 16.7%

EPS

No change

$

3.44 - $3.68

Adjusted EBITDA

No change

$

220 - $230 million

Free Cash Flow

$

25 - $40 million

$

80 - $90 million

For additional information and reconciliations regarding CSG’s use of non-GAAP financial measures, please refer to the attached Exhibit 2 and the Investor Relations section of CSG’s website at csgi.com.

Conference Call

CSG will host a conference call on Wednesday, November 2, 2022 at 5:00 p.m. ET to discuss CSG’s third quarter 2022 earnings results. The call will be conducted live and archived on the Internet. A link to the conference call is available at http://ir.csgi.com. In addition, to reach the conference by phone, call 1-888-412-4131 and use the passcode 2327393.

Additional Information

For information about CSG, please visit CSG’s web site at csgi.com. Additional information can be found in the Investor Relations section of the website.

About CSG

CSG empowers companies to build unforgettable experiences, making it easier for people and businesses to connect with, use and pay for the services they value most. Our customer experience, billing and payments solutions help companies of any size make money and make a difference. With our SaaS solutions, company leaders can take control of their future, and tap into guidance along the way from our more than 5k-strong experienced global CSG services team.

Want to learn more about how to be a change maker and industry shaper like our 1,000-plus clients? Visit csgi.com to learn more.

Forward-Looking Statements

This news release contains forward-looking statements as defined under the Securities Act of 1933, as amended, that are based on assumptions about a number of important factors and involve risks and uncertainties that could cause actual results to differ materially from what appears in this news release. Some of these key factors include, but are not limited to the following items:

  1. CSG derives approximately forty percent of its revenue from its two largest customers;
  2. Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates;
  3. CSG’s ability to maintain a reliable, secure computing environment;
  4. Continued market acceptance of CSG’s products and services;
  5. CSG’s ability to continuously develop and enhance products in a timely, cost-effective, technically advanced and competitive manner;
  6. CSG’s ability to deliver its solutions in a timely fashion within budget, particularly large and complex software implementations;
  7. CSG’s dependency on the global telecommunications industry, and in particular, the North American telecommunications industry;
  8. CSG’s ability to meet its financial expectations;
  9. Increasing competition in CSG’s market from companies of greater size and with broader presence;
  10. CSG’s ability to successfully integrate and manage acquired businesses or assets to achieve expected strategic, operating and financial goals;
  11. CSG’s ability to protect its intellectual property rights;
  12. CSG’s ability to conduct business in the international marketplace;
  13. CSG’s ability to comply with applicable U.S. and International laws and regulations; and
  14. CSG’s business may be disrupted, and its results of operations and cash flows adversely affected by the COVID-19 pandemic.

This list is not exhaustive, and readers are encouraged to review the additional risks and important factors described in CSG’s reports on Forms 10-K and 10-Q and other filings made with the SEC.

For more information, contact:

John Rea, Investor Relations

(210) 687-4409

E-mail: john.rea@csgi.com

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands)

September 30,

December 31,

2022

2021

ASSETS

Current assets:

Cash and cash equivalents.

$

146,685

$

205,635

Short-term investments

575

28,037

Total cash, cash equivalents and short-term investments

147,260

233,672

Settlement and merchant reserve assets

172,609

186,267

Trade accounts receivable:

Billed, net of allowance of $4,998 and $4,250

238,831

244,317

Unbilled

51,139

35,802

Income taxes receivable

23,075

6,414

Other current assets

58,811

41,727

Total current assets

691,725

748,199

Non-current assets:

Property and equipment, net of depreciation of $111,994 and $111,244

71,856

73,580

Operating lease right-of-use assets.

53,033

86,034

Software, net of amortization of $159,357 and $152,283

24,585

29,757

Goodwill

295,196

321,330

Acquired customer contracts, net of amortization of $113,348 and 114,166

47,674

57,207

Customer contract costs, net of amortization of $32,574 and $32,410

52,194

46,618

Deferred income taxes

13,791

8,584

Other assets

9,091

15,840

Total non-current assets

567,420

638,950

Total assets.

$

1,259,145

$

1,387,149

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt

$

52,500

$

237,500

Operating lease liabilities

21,726

23,270

Customer deposits

36,442

43,546

Trade accounts payable

32,686

35,397

Accrued employee compensation

51,517

91,115

Settlement and merchant reserve liabilities

171,192

185,276

Deferred revenue

47,067

53,748

Income taxes payable

10,613

398

Other current liabilities

21,637

24,852

Total current liabilities

445,380

695,102

Non-current liabilities:

Long-term debt, net of unamortized discounts of $2,843 and $3,40

377,157

137,219

Operating lease liabilities

58,279

70,068

Deferred revenue

18,738

19,599

Income taxes payable

3,470

4,058

Deferred income taxes

110

7,752

Other non-current liabilities.

11,706

13,107

Total non-current liabilities

469,460

251,803

Total liabilities

914,840

946,905

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; 31,664 and 32,495 shares outstanding

708

705

Additional paid-in capital

488,292

488,303

Treasury stock, at cost; 37,827 and 36,713 shares

(995,606

)

(930,106

)

Accumulated other comprehensive income (loss):

Unrealized loss on short-term investments, net of tax

-

(6

)

Cumulative foreign currency translation adjustments

(73,448

)

(38,347

)

Accumulated earnings

924,359

916,060

Total CSG stockholders' equity.

344,305

436,609

Noncontrolling interest

-

3,635

Total stockholders' equity.

344,305

440,244

Total liabilities and stockholders' equity

$

1,259,145

$

1,387,149

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

Quarter Ended

Nine Months Ended

September 30, 2022

September 30, 2021

September 30, 2022

September 30, 2021

Revenue

$

273,308

$

263,209

$

799,876

$

771,462

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

138,462

134,705

415,014

401,185

Other operating expenses:

Research and development

54

34,384

103,365

99,350

Research and development.

9,026

54,923

173,833

152,988

Depreciation

5,896

6,225

17,685

18,604

Restructuring and reorganization charges

14,193

209

46,304

3,029

Total operating expenses

253,331

230,446

756,201

675,156

Operating income.

9,977

32,763

43,675

96,306

Other income (expense):

Interest expense

4,328

)

(3,636

)

(10,286

)

(10,861

)

Amortization of original issue discount

-

(794

)

-

(2,350

)

Interest and investment income, net

281

78

537

286

Loss on derivative liability upon debt conversion.

-

-

(7,456

)

-

Other, net.

2,790

(5,875

)

6,044

(6,530

)

Total other

(1,257

)

(10,227

)

(11,161

)

(19,455

)

Income before income taxes

18,720

22,536

32,514

76,851

Income tax provision

(6,239

)

(6,406

)

(8,603

)

(21,769

)

Net income

$

81

$

16,130

$

23,911

$

55,082

Weighted-average shares outstanding:

Basic

30,941

31,756

31,219

31,825

Dilute

31,159

31,960

31,487

32,033

Earnings per common share:

Basic

$

0.40

$

0.51

$

0.77

$

1.73

Diluted

0.40

0.50

0.76

1.72

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

Nine Months Ended

September 30, 2022

September 30, 2021

Cash flows from operating activities:

Net income.

$

23,911

$

55,082

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

Depreciation

21,817

18,604

Amortizatio

36,470

34,314

Amortization of original issue discount

impairment

30,126

415

Loss on short-term investments and other

19

51

Loss on derivative liability upon debt conversion

7,456

-

Loss on extinguishment of debt

-

132

Loss on acquisition of controlling interest

-

6,180

Unrealized foreign currency transactions gains, net

(1,700

)

(339

)

Deferred income taxes

(16,457

)

2,188

Stock-based compensation

20,778

15,304

Subtotal

122,420

134,281

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

Trade accounts receivable, net

(22,026

)

(11,621

)

Other current and non-current assets and liabilities

(16,430

)

(13,912

)

Income taxes payable/receivable

(7,188

)

(6,111

)

Trade accounts payable and accrued liabilities

(67,053

)

(18,329

)

Deferred revenue

(150

)

4,001

Net cash provided by operating activities

9,573

88,309

Cash flows from investing activities:

Purchases of software, property and equipment

(31,564

)

(22,531

)

Purchases of short-term investments

-

(57,734

)

Proceeds from sale/maturity of short-term investments

27,447

80,092

Acquisition of and investments in business, net of cash acquired

-

(51,111

)

Net cash used in investing activities

(4,117

)

(51,284

)

Cash flows from financing activities:

Proceeds from issuance of common stock

2,217

1,926

Payment of cash dividends

(25,396

)

(24,653

)

Repurchase of common stock

(73,380

)

(25,568

)

Deferred acquisition payments

(1,959

)

-

Proceeds from long-term debt

290,000

150,000

Payments on long-term debt.

(247,926

)

(126,563

)

Payments of deferred financing costs

-

(3,000

)

Settlement and merchant reserve activity

(13,931

)

(7,735

)

Net cash used in financing activities

(70,375

)

(35,593

)

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

(7,689

)

(1,872

)

Net decrease in cash, cash equivalents and restricted cash

(72,608

)

(440

)

Cash, cash equivalents and restricted cash, beginning of period

391,902

354,730

Cash, cash equivalents and restricted cash, end of period

$

319,294

$

354,290

Supplemental disclosures of cash flow information:

Cash paid during the period for-

Interest

$

12,367

$

11,947

Income taxes

31,817

25,688

Reconciliation of cash, cash equivalents and restricted cash:

Cash and cash equivalents

$

146,685

$

195,365

Settlement and merchant reserve assets

172,609

158,925

Total cash, cash equivalents and restricted cash

$

319,294

$

354,290

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

Revenue by Significant Customers: 10% or more of Revenue

Quarter Ended

Quarter Ended

Quarter Ended

September 30, 2022

June 30, 2022

September 30, 2021

Amount

% of Revenue

Amount

% of Revenue

Amount

% of Revenue

Charter

$

57,974

%

21

$

53,173

%

20

$

55,332

%

21

Comcast

53,533

%

20

52,919

%

20

53,840

%

20

Revenue by Vertical

Quarter Ended

Quarter Ended

Quarter Ended

September 30,

June 30,

September 30,

2022

2022

2021

Broadband/Cable/Satellite

%

55

%

55

%

56

Telecommunications

%

20

%

19

%

20

All other

%

25

%

26

%

24

Total revenue

%

100

%

100

%

100

Revenue by Geography

Quarter Ended

Quarter Ended

Quarter Ended

September 30,

June 30,

September 30,

2022

2022

2021

Americas

%

86

%

85

%

85

Europe, Middle East and Africa

%

10

%

11

%

12

Asia Pacific

%

4

%

4

%

3

Total revenue.

%

100

%

100

%

100

EXHIBIT 2

CSG SYSTEMS INTERNATIONAL, INC.

DISCLOSURES FOR NON-GAAP FINANCIAL MEASURES

Use of Non-GAAP Financial Measures and Limitations

To supplement its condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), CSG uses non-GAAP adjusted revenue, non-GAAP operating income, non-GAAP adjusted operating margin percentage, non-GAAP EPS, non-GAAP adjusted EBITDA, and non-GAAP free cash flow. CSG believes that these non-GAAP financial measures, when reviewed in conjunction with its GAAP financial measures, provide investors with greater transparency to the information used by CSG’s management in its financial and operational decision making. CSG uses these non-GAAP financial measures for the following purposes:

• Certain internal financial planning, reporting, and analysis;

• Forecasting and budgeting;

• Certain management compensation incentives; and

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

These non-GAAP financial measures are provided with the intent of providing investors with the following information:

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

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

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

Non-GAAP financial measures are not measures of performance under GAAP, and therefore should not be considered in isolation or as a substitute for GAAP financial information. Limitations with the use of non-GAAP financial measures include the following items:

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

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

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

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

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

CSG compensates for these limitations by relying primarily on its GAAP results and using non-GAAP financial measures as a supplement only. Additionally, CSG provides specific information regarding the treatment of GAAP amounts considered in preparing the non-GAAP financial measures and reconciles each n on-GAAP financial measure to the most directly comparable GAAP measure.

Non-GAAP Financial Measures: Basis of Presentation

The table below outlines the exclusions from CSG’s non-GAAP financial measures:

Non-GAAP Exclusions

Adjusted Revenue

Operating Income

Adjusted Operating Margin Percentage

EPS

Transaction fees

X

X

Restructuring and reorganization charges

X

X

X

Executive transition costs

X

X

X

Acquisition-related expenses:

Amortization of acquired intangible assets

X

X

X

Earn-out compensation

X

X

X

Transaction-related costs

X

X

X

Stock-based compensation

X

X

X

Amortization of original issue discount (“OID”)

X

Gain (loss) on debt extinguishment/conversion

X

Gain (loss) on acquisitions or dispositions

X

Unusual income tax matters

X

CSG believes that excluding certain items in calculating its non-GAAP financial measures provides meaningful supplemental information regarding CSG’s performance and these items are excluded for the following reasons:

  1. Transaction fees are primarily comprised of interchange and other payment-related fees paid, in conjunction with the delivery of service to customers under CSG’s payment services contracts, to third-party payment processors and financial institutions by CSG. Because CSG controls the integrated service provided under its payment services customer contracts, these transaction fees are presented gross, and not netted against revenue; however, other payments companies who do not provide and/or control an integrated service present their revenue net of transaction fees. The exclusion of these fees in calculating CSG’s non-GAAP adjusted revenue provides management and investors an additional means to use to compare CSG’s current revenue with historical and future periods, as well as with other payments companies.
  2. Restructuring and reorganization charges are expenses that result from cost reduction initiatives and/or significant changes to CSG’s business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. These charges are not considered reflective of CSG’s recurring business operating results. The exclusion of these items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  3. Executive transition costs include expenses incurred related to a departure of a CSG executive officer under the terms of the related separation agreement. These types of costs are not considered reflective of CSG’s recurring business operating results. The exclusion of these costs in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

• Acquisition-related expenses include amortization of acquired intangible assets, earn-out compensation, and transaction-related costs. Transaction-related costs, which typically include expenses related to legal, accounting, and other professional services, are direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring business operating results. The total amount of acquisition-related expenses can vary significantly between periods based on the number and size of acquisition activities, previously acquired intangible assets becoming fully amortized, and ultimate realization of earn-out compensation. In addition, the timing of these expenses may not directly correlate with underlying performance of the CSG’s operations. Therefore, the exclusion of acquisition-related expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

• Stock-based compensation results from CSG’s issuance of equity awards to its employees under incentive compensation programs. The amount of this incentive compensation in any period is not generally linked to the level of performance by employees or CSG. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to compensation included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.

• 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.

  1. Gains and losses related to the extinguishment/conversion of debt can be as a result of the refinancing of CSG’s credit agreement and/or repurchase, conversion, or settlement of CSG’s convertible notes. These activities, to include any derivative activity related to debt conversions, are not considered reflective of CSG’s recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.
  2. Gains or losses related to the acquisition or disposition of certain of CSG’s business activities are not considered reflective of CSG’s recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.
  3. Unusual items within CSG’s quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

CSG also reports non-GAAP adjusted EBITDA and non-GAAP free cash flow. Management believes non-GAAP adjusted EBITDA is a useful measure to investors in evaluating CSG’s operating performance, debt servicing capabilities, and enterprise valuation. CSG defines non-GAAP adjusted EBITDA as income before interest, income taxes, depreciation, amortization, stock-based compensation, foreign currency transaction adjustments, acquisition-related expenses, and unusual items, such as restructuring and reorganization charges, executive transition costs, gains and losses related to the extinguishment of debt, and gains and losses on acquisitions or dispositions, as discussed above. Additionally, management uses non-GAAP free cash flow, among other measures, to assess its financial performance and cash generating capabilities, and believes that it is useful to investors because it shows CSG’s cash available to service debt, make strategic acquisitions and investments, repurchase its common stock, pay cash dividends, and fund ongoing operations. CSG defines non-GAAP free cash flow as net cash flows from operating activities less the purchases of software, property and equipment.

Non-GAAP Financial Measures

Non-GAAP Adjusted Revenue:

The reconciliations of GAAP revenue to non-GAAP adjusted revenue for the indicated periods are as follows (in thousands):

Quarter Ended

September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

GAAP revenue

$

273,308

$

263,209

$

799,876

$

771,462

Less: Transaction fees

(18,177

)

(16,240

)

(54,928

)

(49,345

)

Non-GAAP adjusted revenue

$

255,131

$

246,969

$

744,948

$

722,117

Non-GAAP Operating Income:

The reconciliations of GAAP operating income to non-GAAP operating income for the indicated periods are as follows (in thousands, except percentages):

Quarter Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

GAAP operating income

$

19,977

$

32,763

$

43,675

$

96,306

Restructuring and reorganization charges (1)

14,193

209

46,304

3,029

Executive transition costs

27

-

1,302

60

Acquisition-related expenses:

Amortization of acquired intangible assets

3,405

3,213

11,017

8,072

Earn-out compensation

-

-

-

(2,521

)

Transaction-related costs

495

435

469

1,137

Stock-based compensation (1).

8,650

4,945

20,906

15,478

Non-GAAP operating income

$

46,747

$

41,565

$

123,673

$

121,561

Non-GAAP adjusted revenue

$

255,131

$

246,969

$

744,948

$

722,117

Non-GAAP adjusted operating margin percentage

%

18.3

%

16.8

%

16.6

%

16.8

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

Non-GAAP EPS:

The reconciliations of GAAP EPS to non-GAAP EPS for the indicated periods are as follows (in thousands, except per share amounts):

Quarter Ended

Quarter Ended

September 30, 2022

September 30, 2021

Amounts

EPS (4)

Amounts

EPS (4)

GAAP net income

$

12,481

$

0.40

$

16,130

$

0.50

GAAP income tax provision (3)

6,239

6,406

GAAP income before income taxes.

18,720

22,536

Restructuring and reorganization charges (1)

14,193

209

Executive transition costs

27

-

Acquisition-related costs:

Amortization of acquired intangible assets

3,405

3,213

Transaction-related costs

495

435

Stock-based compensation (1

8,650

4,945

Amortization of OID

-

794

Loss on acquisition of controlling interest (2)

taxes

45,490

38,312

Non-GAAP income tax provision (3)

(12,510

)

(10,344

)

Non-GAAP net income.

$

32,980

$

1.06

$

27,968

$

0.88

Nine Months Ended

Nine Months Ended

September 30, 2022

September 30, 2021

Amounts

EPS (4)

Amounts

EPS (4)

GAAP net income

$

23,911

$

0.76

$

55,082

$

1.72

GAAP income tax provision (3)

8,603

21,769

GAAP income before income taxes

32,514

76,851

Restructuring and reorganization charges (1)

46,304

3,029

Executive transition costs

1,302

60

Acquisition-related expenses:

Amortization of acquired intangible assets

11,017

8,072

Earn-out compensation

-

(2,521

)

Transaction-related costs

469

1,137

Stock-based compensation (1)

20,906

15,478

Loss on extinguishment of debt

7,456

-

Amortization of OID

-

2,350

Loss on acquisition of controlling interest (2)

-

6,180

Non-GAAP income before income taxes

119,968

110,636

Non-GAAP income tax provision (3)

(32,991

)

(29,872

)

Non-GAAP net income

$

86,977

$

2.76

$

80,764

$

2.52

(2) During the third quarter of 2021, CSG acquired a controlling interest in MobileCard, in which it had previously held only an equity interest in. Upon acquisition of the controlling interest, CSG recognized a non-cash loss in other income (expense) related to the fair value remeasurement of the pre-existing equity investment.

(3) For the third quarter and nine months ended September 30, 2022 the GAAP effective income tax rates were approximately 33% and 26%, respectively, and the non-GAAP effective income tax rates were 27.5% for both periods. For the third quarter and nine months ended September 30, 2021 the GAAP effective income tax rates were approximately 28% for both periods, and the non-GAAP effective income tax rates were 27% for both periods.

(4) The outstanding diluted shares for the third quarter and nine months ended September 30, 2022 were 31.2 million and 31.5 million, respectively, and for the third quarter and nine months ended September 30, 2021 were 32.0 million for both periods.

Non-GAAP Adjusted EBITDA:

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

Quarter Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021

GAAP net income

$

12,481

$

16,130

$

23,911

$

55,082

GAAP income tax provision

6,239

6,406

8,603

21,769

Interest expense (5)

4,328

3,636

10,286

10,861

Amortization of OID

-

794

-

2,350

Loss on derivative liability upon debt conversion

-

-

7,456

-

Interest and investment income and other, net (6)

(3,071

)

5,797

(6,581

)

6,244

GAAP operating income

19,977

32,763

43,675

96,306

Restructuring and reorganization charges (1)

14,193

209

46,304

3,029

Executive transition costs

27

-

1,302

60

Acquisition-related expenses:

Amortization of acquired intangible assets (6).

3,405

3,213

11,017

8,072

Earn-out compensation

-

-

-

(2,521

)

Transaction-related costs

495

435

469

1,137

Stock-based compensation (1)

8,650

4,945

20,906

15,478

Amortization of other intangible assets (6)

3,530

3,330

10,741

9,933

Amortization of customer contract costs (6)

3,829

5,293

14,150

14,971

Depreciation

5,896

6,225

17,685

18,604

Non-GAAP adjusted EBITDA

$

60,002

$

56,413

$

166,249

$

165,069

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenue

%

23.5

%

22.8

%

22.3

%

22.9

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

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

Quarter Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021

Amortization of acquired intangible assets

$

3,405

$

3,213

$

11,017

$

8,072

Amortization of other intangible assets

3,530

3,330

10,741

9,933

Amortization of customer contract costs

3,829

5,293

14,150

14,971

Amortization of deferred financing costs

186

460

562

1,338

Total amortization

$

10,950

$

12,296

$

36,470

$

34,314

Non-GAAP Free Cash Flow:

CSG’s calculation of non-GAAP free cash flow and the reconciliation of CSG’s non-GAAP free cash flow measure to cash flows from operating activities are provided below for the indicated periods (in thousands):

Quarter Ended

Nine Months Ended

September 30,

September 30,

2022

2021

2022

2021

Cash flows from operating activities

$

22,838

$

46,080

$

9,573

$

88,309

Purchases of software, property and equipment

(11,917

)

(7,373

)

(31,564

)

(22,531

)

Non-GAAP free cash flow

$

10,921

$

38,707

$

(21,991

)

$

65,778

Non-GAAP Financial Measures – 2022 Financial Guidance

Non-GAAP Adjusted Revenue:

The reconciliation of GAAP revenue to non-GAAP adjusted revenue, as included in CSG’s 2022 full year financial guidance, is as follows:

2022 Guidance Range

Low Range

High Range

GAAP revenue

$

1,070,000

$

1,110,000

Less: Transaction fees

(70,000

)

(77,000

)

Non-GAAP adjusted revenue

$

1,000,000

$

1,033,000

Non-GAAP Operating Income:

The reconciliation of GAAP operating income to non-GAAP operating income, as included in CSG’s 2022 full year financial guidance, is as follows (in thousands, except percentages):

2022 Guidance Range

Low Range

High Range

Operating Income

GAAP operating income

$

70,200

$

80,600

Restructuring and reorganization charges

47,300

47,300

Executive transition costs

1,300

1,300

Acquisition-related expenses:

Amortization of acquired intangible assets

14,300

14,300

Transaction-related costs

500

500

Stock-based compensation

28,400

28,400

Non-GAAP operating income

$

162,000

$

172,400

Operating Margin Percentage

Non-GAAP adjusted revenue

$

1,000,000

$

1,033,000

Non-GAAP adjusted operating margin percentage

%

16.2

%

16.7

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2022 full year financial guidance is as follows (in thousands, except per share amounts):

2022 Guidance Range

Low Range

High Range

Amounts

EPS (8)

Amounts

EPS (8)

GAAP net income

$

35,400

$

1.13

$

42,400

$

1.35

GAAP income tax provision (7)

14,200

17,600

GAAP income before income taxes

49,600

60,000

Restructuring and reorganization charges.

47,300

47,300

Executive transition costs

1,300

1,300

Acquisition-related expenses:

Amortization of acquired intangible assets

14,300

14,300

Transaction-related costs

500

500

Stock-based compensation

28,400

28,400

Loss on debt extinguishment/conversion

7,500

7,500

Non-GAAP income before income taxes

148,900

159,300

Non-GAAP income tax provision (7)

(40,900

)

(43,800

)

Non-GAAP net income

$

108,000

$

3.44

$

115,500

$

3.68

(7) For 2022, the estimated effective income tax rate for GAAP and non-GAAP purposes is expected to be approximately 29% and 27.5%, respectively.

(8) The weighted-average diluted shares outstanding are expected to be approximately 31.4 million.

Non-GAAP Adjusted EBITDA:

CSG’s calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG’s non-GAAP adjusted EBITDA measure to GAAP net income is provided below for CSG’s 2022 full year financial guidance (in thousands, except percentages):

2022 Guidance Range

Low Range

High Range

GAAP net income

$

35,400

$

42,400

GAAP income tax provision (7)

14,200

17,600

Interest expense

13,900

13,900

Loss on derivative liability upon debt conversion

7,500

7,500

Interest and investment income and other, net

(800

)

(800

)

GAAP operating income

70,200

80,600

Restructuring and reorganization charges

47,300

47,300

Executive transition costs

1,300

1,300

Acquisition-related expenses:

Amortization of acquired intangible assets

14,300

14,300

Transaction-related costs

500

500

Stock-based compensation

28,400

28,400

Amortization of other intangible assets

14,100

14,100

Amortization of client contract costs

19,500

19,500

Depreciation

24,000

24,000

Non-GAAP adjusted EBITDA

$

219,600

$

230,000

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenue

%

22.0

%

22.3

Non-GAAP Free Cash Flow:

CSG’s calculation of non-GAAP free cash flow and the reconciliation of CSG’s non-GAAP free cash flow measure to cash flows from operating activities is provided below for the indicated period (in thousands):

2022 Guidance Range

Low Range

High Range

Cash flows from operating activities

$

60,000

$

75,000

Purchases of software, property and equipment

(35,000

)

(35,000

)

Non-GAAP free cash flow

$

25,000

$

40,000

Contact Details

CSG

John Rea

+1 210-687-4409

tammy.hovey@csgi.com

Company Website

https://www.csgi.com

View source version on newsdirect.com: https://newsdirect.com/news/csg-systems-international-reports-third-quarter-2022-results-548058491

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