Financial News

CSG Systems International Reports First Quarter 2023 Results

Q1 Organic Revenue Up 13% YoY Representing CSG’s Best Quarterly Result in Nearly Two Decades

Reiterating All 2023 Financial Guidance Targets

Fully Completed Charter Subscriber Migration from a Competitor’s System in Q1

Received “Prime” ESG Rating from ISS for Second Consecutive Year

CSG (NASDAQ: CSGS) today reported results for the quarter ended March 31, 2023.

Financial Results:

First quarter 2023 financial results:

  • Total revenue was $298.7 million.
  • GAAP operating income was $38.2 million, or an operating margin of 12.8 %, and non-GAAP operating income was $53.5 million, or a non-GAAP adjusted operating margin of 19.3%.
  • GAAP earnings per diluted share (EPS) was $0.68 and non-GAAP EPS was $1.04.
  • Cash flows from operations were $15.4 million, with non-GAAP free cash flow of $6.7 million.

Shareholder Returns:

  • CSG declared its quarterly cash dividend of $0.28 per share of common stock, or a total of approximately $9 million, to shareholders.

“Q1 2023 was a fantastic quarter for Team CSG. We delivered strong financial results across the board highlighted by 13% year-over-year organic revenue growth, our strongest quarterly result in nearly two decades. And with our strong start to the year, we are pleased to reiterate all 2023 financial guidance targets,” said Brian Shepherd, President and Chief Executive Officer of CSG. “We are also happy to report that we fully-completed the migration of Charter subscribers from a competitor’s billing system in Q1. On the Environmental, Social, and Governance (‘ESG’) front, we achieved a number of milestones in the quarter including issuing our inaugural Impact and Task Force on Climate-Related Financial Disclosures (‘TCFD’) reports and were awarded a ‘Prime’ ESG rating from ISS for the second consecutive year.”

Financial Overview (unaudited)

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

 

 

Quarter Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

Percent

 

 

 

 

2023

 

 

2022

 

 

Changed

 

 

GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

298,739

 

 

$

264,400

 

 

 

13.0

%

 

Operating Income

 

 

38,193

 

 

 

16,415

 

 

 

132.7

%

 

Operating Margin Percentage

 

 

12.8

%

 

 

6.2

%

 

 

 

 

 

EPS

 

$

0.68

 

 

$

0.19

 

 

 

257.9

%

 

Non-GAAP Results:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

$

53,511

 

 

$

40,186

 

 

 

33.2

%

 

Adjusted Operating Margin Percentage

 

 

19.3

%

 

 

16.3

%

 

 

 

 

 

EPS

 

$

1.04

 

 

$

0.86

 

 

 

20.9

%

 

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 first quarter of 2023 was $298.7 million, a 13.0% increase when compared to revenue of $264.4 million for the first quarter of 2022. The year-over-year increase can be primarily attributed to a strong quarter of software and services revenue, due mainly to the timing of the closure of deals, as well as increased payments volumes, conversions of customer accounts onto CSG solutions, and other ancillary services.

GAAP operating income for the first quarter of 2023 was $38.2 million, or 12.8% of total revenue, compared to $16.4 million, or 6.2% of total revenue, for the first quarter of 2022. The increase in operating income can be mainly attributed to the higher revenue generated in the first quarter of 2023, discussed above, and to a lesser extent, the $7.9 million decrease in restructuring and reorganization charges between years.

GAAP EPS for the first quarter of 2023 was $0.68, as compared to $0.19 for the first quarter of 2022. The increase in GAAP EPS is mainly due to the higher operating income in the first quarter of 2023, discussed above, and a $7.5 million loss on a derivative liability that CSG incurred in the first quarter of 2022 upon conversion of its convertible notes.

Non-GAAP Results: Non-GAAP operating income for the first quarter of 2023 was $53.5 million, or a non-GAAP adjusted operating margin of 19.3%, compared to $40.2 million, or a non-GAAP adjusted operating margin of 16.3% for the first quarter of 2022. The increase in non-GAAP operating income and non-GAAP adjusted operating margin can be mainly attributed to the higher revenue discussed above.

Non-GAAP EPS for the first quarter of 2023 was $1.04 compared to $0.86 for the first quarter of 2022. The increase in non-GAAP EPS is mainly due to the higher non-GAAP operating income in 2023, discussed above, offset by higher interest expense and foreign currency movements.

Balance Sheet and Cash Flows

Cash, cash equivalents, and short-term investments as of March 31, 2023 were $167.7 million compared to $150.4 million as of December 31, 2022. CSG had net cash flows provided by (used in) operations for the first quarters ended March 31, 2023 and 2022 of $15.4 million and ($5.5) million, respectively, and had non-GAAP free cash flow (deficit) of $6.7 million and ($15.9) million, respectively.

Summary of Financial Guidance

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

GAAP Measures:

 

 

Revenue

 

$1,130 - $1,170 million

Non-GAAP Measures:

 

 

Adjusted Operating Margin Percentage

 

16.5% - 17.0%

EPS

 

$3.35 - $3.65

Adjusted EBITDA

 

$231 - $242 million

Free Cash Flow

 

$80 - $120 million

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

Conference Call

CSG will host a conference call on Wednesday, May 3, 2023 at 5:00 p.m. ET, to discuss CSG’s first quarter for 2023. The call will be carried live and archived on the Internet. A link to the conference call is available at http://ir.csgi.com. In addition, to reach the conference by phone, call 1-888-412-4131 and use the passcode 2327393.

Additional Information

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

About CSG

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

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

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

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands)

 

 

 

March 31,

2023

 

December 31,

2022

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

167,681

 

 

$

150,365

 

Short-term investments

 

 

-

 

 

 

71

 

Total cash, cash equivalents, and short-term investments

 

 

167,681

 

 

 

150,436

 

Settlement and merchant reserve assets

 

 

177,300

 

 

 

238,653

 

Trade accounts receivable:

 

 

 

 

 

 

Billed, net of allowance of $5,254 and $5,528

 

 

255,774

 

 

 

274,189

 

Unbilled

 

 

73,262

 

 

 

52,830

 

Income taxes receivable

 

 

2,236

 

 

 

1,270

 

Other current assets

 

 

55,285

 

 

 

48,577

 

Total current assets

 

 

731,538

 

 

 

765,955

 

Non-current assets:

 

 

 

 

 

 

Property and equipment, net of depreciation of $107,836 and $105,466

 

 

68,648

 

 

 

71,787

 

Operating lease right-of-use assets

 

 

42,470

 

 

 

49,687

 

Software, net of amortization of $152,074 and $150,337

 

 

20,935

 

 

 

22,774

 

Goodwill

 

 

305,104

 

 

 

304,036

 

Acquired customer contracts, net of amortization of $123,694 and $120,080

 

 

42,891

 

 

 

45,417

 

Customer contract costs, net of amortization of $33,191 and $30,601

 

 

54,437

 

 

 

54,735

 

Deferred income taxes

 

 

22,177

 

 

 

26,206

 

Other assets.

 

 

7,808

 

 

 

7,956

 

Total non-current assets

 

 

564,470

 

 

 

582,598

 

Total assets

 

$

1,296,008

 

 

$

1,348,553

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Current portion of long-term debt

 

$

37,500

 

 

$

37,500

 

Operating lease liabilities

 

 

19,220

 

 

 

21,012

 

Customer deposits

 

 

34,429

 

 

 

40,472

 

Trade accounts payable

 

 

36,121

 

 

 

47,720

 

Accrued employee compensation

 

 

49,836

 

 

 

68,321

 

Settlement and merchant reserve liabilities

 

 

176,329

 

 

 

237,810

 

Deferred revenue

 

 

54,794

 

 

 

46,033

 

Income taxes payable

 

 

7,956

 

 

 

5,455

 

Other current liabilities

 

 

25,550

 

 

 

22,886

 

Total current liabilities

 

 

441,735

 

 

 

527,209

 

Non-current liabilities:

 

 

 

 

 

 

Long-term debt, net of unamortized discounts of $2,469 and $2,656

 

 

403,781

 

 

 

375,469

 

Operating lease liabilities

 

 

45,097

 

 

 

53,207

 

Deferred revenue

 

 

21,756

 

 

 

21,991

 

Income taxes payable

 

 

3,510

 

 

 

3,410

 

Deferred income taxes

 

 

120

 

 

 

117

 

Other non-current liabilities

 

 

11,786

 

 

 

11,901

 

Total non-current liabilities

 

 

486,050

 

 

 

466,095

 

Total liabilities

 

 

927,785

 

 

 

993,304

 

Stockholders' equity:

 

 

 

 

 

 

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

outstanding

 

 

-

 

 

 

-

 

Common stock, par value $.01 per share; 100,000 shares authorized; 31,678 and 31,269

shares outstanding

 

 

712

 

 

 

708

 

Additional paid-in capital

 

 

493,184

 

 

 

495,189

 

Treasury stock, at cost; 38,210 shares

 

 

(1,018,034

)

 

 

(1,018,034

)

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

Unrealized gain on short-term investments, net of tax

 

 

1

 

 

 

1

 

Cumulative foreign currency translation adjustments

 

 

(55,987

)

 

 

(58,830

)

Accumulated earnings

 

 

948,347

 

 

 

936,215

 

Total stockholders' equity

 

 

368,223

 

 

 

355,249

 

Total liabilities and stockholders' equity

$

1,296,008

 

$

1,348,553

 

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 

 

Quarter Ended

 

 

March 31,

2023

 

March 31,

2022

 

Revenue

$

298,739

 

 

$

264,400

 

 

 

 

 

 

 

 

 

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

 

155,021

 

 

 

138,418

 

 

Other operating expenses:

 

 

 

 

 

 

Research and development

 

35,464

 

 

 

32,981

 

 

Selling, general and administrative

 

59,147

 

 

 

57,342

 

 

Depreciation

 

5,720

 

 

 

6,138

 

 

Restructuring and reorganization charges

 

5,194

 

 

 

13,106

 

 

Total operating expenses

 

260,546

 

 

 

247,985

 

 

Operating income

 

38,193

 

 

 

16,415

 

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

(7,219

)

 

 

(3,272

)

 

Interest and investment income, net

 

569

 

 

 

130

 

 

Loss on derivative liability upon debt conversion

 

-

 

 

 

(7,456

)

 

Other, net

 

(2,432

)

 

 

812

 

 

Total other

 

(9,082

)

 

 

(9,786

)

 

Income before income taxes

 

29,111

 

 

 

6,629

 

 

Income tax provision

 

(8,183

)

 

 

(516

)

 

Net income

$

20,928

 

 

$

6,113

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding:

 

 

 

 

 

 

Basic

 

30,418

 

 

 

31,416

 

 

Diluted

 

30,609

 

 

 

31,810

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

Basic

$

0.69

 

 

$

0.19

 

 

Diluted

 

0.68

 

 

 

0.19

 

 

 

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 

 

Quarter Ended

 

 

March 31,

2023

 

March 31,

2022

 

Cash flows from operating activities:

 

 

 

 

 

 

Net income

$

20,928

 

 

$

6,113

 

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities-

 

 

 

 

 

 

Depreciation

 

5,757

 

 

 

6,138

 

 

Amortization

 

11,471

 

 

 

13,870

 

 

Asset impairment

 

1,595

 

 

 

10,705

 

 

Gain (loss) on short-term investments and other

 

(125

)

 

 

15

 

 

Loss on derivative liability upon debt conversion

 

-

 

 

 

7,456

 

 

Unrealized foreign currency transactions (gain) loss, net

 

41

 

 

 

(136

)

 

Deferred income taxes

 

4,079

 

 

 

(55

)

 

Stock-based compensation

 

6,412

 

 

 

5,581

 

 

Subtotal

 

50,158

 

 

 

49,687

 

 

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

 

 

 

 

 

 

Trade accounts receivable, net

 

(1,825

)

 

 

182

 

 

Other current and non-current assets and liabilities

 

(6,871

)

 

 

(6,069

)

 

Income taxes payable/receivable

 

1,647

 

 

 

(1,735

)

 

Trade accounts payable and accrued liabilities

 

(36,071

)

 

 

(42,550

)

 

Deferred revenue

 

8,359

 

 

 

(5,064

)

 

Net cash provided by (used in) operating activities

 

15,397

 

 

 

(5,549

)

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of software, property and equipment

 

(8,700

)

 

 

(10,375

)

 

Proceeds from sale/maturity of short-term investments

 

71

 

 

 

21,887

 

 

Net cash provided by (used in) investing activities

 

(8,629

)

 

 

11,512

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

Proceeds from issuance of common stock

 

893

 

 

 

650

 

 

Payment of cash dividends

 

(9,088

)

 

 

(8,885

)

 

Repurchase of common stock

 

(9,306

)

 

 

(23,660

)

 

Deferred acquisition payments

 

(274

)

 

 

-

 

 

Proceeds from long-term debt

 

30,000

 

 

 

245,000

 

 

Payments on long-term debt

 

(1,875

)

 

 

(244,176

)

 

Settlement and merchant reserve activity

 

(61,482

)

 

 

(23,543

)

 

Net cash used in financing activities

 

(51,132

)

 

 

(54,614

)

 

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

 

327

 

 

 

1,351

 

 

 

 

 

 

 

 

 

Net decrease in cash, cash equivalents, and restricted cash

 

(44,037

)

 

 

(47,300

)

 

 

 

 

 

 

 

 

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

 

389,018

 

 

 

391,902

 

 

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

$

344,981

 

 

$

344,602

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid during the period for-

 

 

 

 

 

 

Interest

$

7,005

 

 

$

5,876

 

 

Income taxes

 

2,211

 

 

 

2,230

 

 

 

 

 

 

 

 

 

Reconciliation of cash, cash equivalents, and restricted cash:

 

 

 

 

 

 

Cash and cash equivalents

$

167,681

 

 

$

181,457

 

 

Settlement and merchant reserve assets

 

177,300

 

 

 

163,145

 

 

Total cash, cash equivalents, and restricted cash

$

344,981

 

 

$

344,602

 

 

 

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

 

Revenue by Significant Customers: 10% or more of Revenue

 

 

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

 

March 31, 2023

 

December 31, 2022

 

March 31, 2022

 

 

Amount

 

% of

Revenue

 

Amount

 

 

% of

Revenue

 

Amount

 

 

% of

Revenue

Charter

 

$

61,532

 

 

21

%

 

$

58,006

 

 

 

20

%

 

$

52,069

 

 

 

20

%

Comcast

 

 

53,415

 

 

18

%

 

 

55,383

 

 

 

19

%

 

 

52,524

 

 

 

20

%

Revenue by Vertical

 

 

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

 

March 31,

 

December 31,

 

March 31,

 

 

2023

 

2022

 

2022

Broadband/Cable/Satellite

 

 

52

%

 

 

53

%

 

 

54

%

Telecommunications

 

 

20

%

 

 

20

%

 

 

19

%

All other

 

 

28

%

 

 

27

%

 

 

27

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

Revenue by Geography

 

 

 

Quarter Ended

 

Quarter Ended

 

Quarter Ended

 

 

March 31,

 

December 31,

 

March 31,

 

 

2023

 

2022

 

2022

Americas.

 

 

84

%

 

 

86

%

 

 

84

%

Europe, Middle East and Africa

 

 

12

%

 

 

9

%

 

 

12

%

Asia Pacific

 

 

4

%

 

 

5

%

 

 

4

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

 

EXHIBIT 2

CSG SYSTEMS INTERNATIONAL, INC.

DISCLOSURES FOR NON-GAAP FINANCIAL MEASURES

Use of Non-GAAP Financial Measures and Limitations

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

  • Certain internal financial planning, reporting, and analysis;
  • Forecasting and budgeting;
  • Certain management compensation incentives; and
  • Communications with CSG’s Board of Directors, stockholders, financial analysts, and investors.

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

  • A more complete understanding of CSG’s underlying operational results, trends, and cash generating capabilities;
  • Consistency and comparability with CSG’s historical financial results; and
  • Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.

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

  • Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles;
  • The way in which CSG calculates non-GAAP financial measures may differ from the way in which other companies calculate similar non-GAAP financial measures;
  • Non-GAAP financial measures do not include all items of income and expense that affect CSG’s operations and that are required by GAAP to be included in financial statements;
  • Certain adjustments to CSG’s non-GAAP financial measures result in the exclusion of items that are recurring and will be reflected in CSG’s financial statements in future periods; and
  • Certain charges excluded from CSG’s non-GAAP financial measures are cash expenses, and therefore do impact CSG’s cash position.

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

Non-GAAP Financial Measures: Basis of Presentation

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

Non-GAAP Exclusions

 

Operating

Income

 

Adjusted

Operating

Margin

Percentage

 

EPS

Transaction fees

 

 

X

 

Restructuring and reorganization charges

 

X

 

X

 

X

Executive transition costs

 

X

 

X

 

X

Acquisition-related expenses:

 

 

 

 

 

 

Amortization of acquired intangible assets

 

X

 

X

 

X

Transaction-related costs

 

X

 

X

 

X

Stock-based compensation

 

X

 

X

 

X

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:

  • Transaction fees are primarily comprised of fees paid to third-party payment processors and financial institutions and interchange fees under CSG’s payment services contracts. Transaction fees are included in revenue in CSG’s Income Statement (and not netted against revenue) because CSG maintains control and acts as principal over the integrated service provided under its payment services customer contracts. However, CSG excludes expense associated with transaction fees from the numerator and denominator in calculating its non-GAAP adjusted operating margin percentage in order to provide comparability with historical and future periods and with its peer group and competitors.
  • Restructuring and reorganization charges are expenses that result from cost reduction initiatives and/or significant changes to CSG’s business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. These charges are not considered reflective of CSG’s recurring business operating results. The exclusion of these items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  • Executive transition costs include expenses incurred related to a departure of a CSG executive officer under the terms of the related separation agreement. These types of costs are not considered reflective of CSG’s recurring business operating results. The exclusion of these costs in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  • Acquisition-related expenses include amortization of acquired intangible assets and transaction-related costs, to include earn-out compensation. Transaction-related costs, which typically include expenses related to legal, accounting, and other professional services, are direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring business operating results. The total amount of acquisition-related expenses can vary significantly between periods based on the number and size of acquisition activities, previously acquired intangible assets becoming fully amortized, and ultimate realization of earn-out compensation. In addition, the timing of these expenses may not directly correlate with underlying performance of the CSG’s operations. Therefore, the exclusion of acquisition-related expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.
  • Stock-based compensation results from CSG’s issuance of equity awards to its employees under incentive compensation programs. The amount of this incentive compensation in any period is not generally linked to the level of performance by employees or CSG. The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to compensation included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.
  • 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 extinguishment/conversion of debt can be as a result of the refinancing of CSG’s credit agreement and/or repurchase, conversion, or settlement of CSG’s convertible notes. These activities, to include any derivative activity related to debt conversions, are not considered reflective of CSG’s recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.
  • Gains or losses related to the acquisition or disposition of certain of CSG’s business activities are not considered reflective of CSG’s recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG’s non-GAAP EPS allows management and investors an additional means to compare CSG’s current operating results with historical and future periods.
  • Unusual items within CSG’s quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to compare CSG’s current financial results with historical and future periods.

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

Non-GAAP Financial Measures

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

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

 

 

Quarter Ended

March 31,

 

 

2023

 

2022

Non-GAAP Operating Income

 

 

 

 

 

 

GAAP operating income

 

$

38,193

 

 

$

16,415

 

Restructuring and reorganization charges (1)

 

 

5,194

 

 

 

13,106

 

Executive transition costs

 

 

-

 

 

 

1,275

 

Acquisition-related expenses:

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,209

 

 

 

3,656

 

Transaction-related costs

 

 

158

 

 

 

13

 

Stock-based compensation (1)

 

 

6,757

 

 

 

5,721

 

Non-GAAP operating income

 

$

53,511

 

 

$

40,186

 

 

 

 

 

 

 

 

Non-GAAP Adjusted Operating Margin Percentage

 

 

 

 

 

 

Revenue

 

$

298,739

 

 

$

264,400

 

Less: Transaction fees (2)

 

 

(21,973

)

 

 

(18,038

)

Revenue less transaction fees

 

$

276,766

 

 

$

246,362

 

Non-GAAP adjusted operating margin percentage

 

 

19.3

%

 

 

16.3

%

(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.
 

(2)

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

Non-GAAP EPS:

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

 

 

Quarter Ended

 

 

Quarter Ended

 

 

 

March 31, 2023

 

 

March 31, 2022

 

 

 

Amounts

 

EPS (4)

 

 

Amounts

 

EPS (4)

 

GAAP net income.

 

$

20,928

 

 

$

0.68

 

 

$

6,113

 

 

$

0.19

 

GAAP income tax provision (3)

 

 

8,183

 

 

 

 

 

 

 

516

 

 

 

 

 

GAAP income before income taxes

 

 

29,111

 

 

 

 

 

 

 

6,629

 

 

 

 

 

Restructuring and reorganization charges (1)

 

 

5,194

 

 

 

 

 

 

 

13,106

 

 

 

 

 

Executive transition costs

 

 

-

 

 

 

 

 

 

 

1,275

 

 

 

 

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

3,209

 

 

 

 

 

 

 

3,656

 

 

 

 

 

Transaction-related costs

 

 

158

 

 

 

 

 

 

 

13

 

 

 

 

 

Stock-based compensation (1)

 

 

6,757

 

 

 

 

 

 

 

5,721

 

 

 

 

 

Loss on debt extinguishment/conversion

 

 

-

 

 

 

 

 

 

 

7,456

 

 

 

 

 

Non-GAAP income before income taxes

 

 

44,429

 

 

 

 

 

 

 

37,856

 

 

 

 

 

Non-GAAP income tax provision (3)

 

 

(12,662

)

 

 

 

 

 

 

(10,410

)

 

 

 

 

Non-GAAP net income

 

$

31,767

 

 

$

1.04

 

 

$

27,446

 

 

$

0.86

 

(3)

For the quarters ended March 31, 2023 and 2022 the GAAP effective income tax rates were approximately 28% and 8%, respectively, and the non-GAAP effective income tax rates were approximately 28.5% and 27.5%, respectively. The first quarter of 2022 GAAP effective income tax rate was impacted by the combination of lower net income and a discrete tax benefit related to the vesting of equity-awards during the quarter.
 

(4)

The outstanding diluted shares for the quarters ended March 31, 2023 and 2022 were 30.6 million and 31.8 million, respectively.

Non-GAAP Adjusted EBITDA:

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

 

 

Quarter Ended

 

 

 

March 31,

 

 

 

2023

 

2022

 

GAAP net income

 

$

20,928

 

 

$

6,113

 

 

GAAP income tax provision

 

 

8,183

 

 

 

516

 

 

Interest expense (5)

 

 

7,219

 

 

 

3,272

 

 

Loss on derivative liability upon debt conversion

 

 

-

 

 

 

7,456

 

 

Interest and investment income and other, net

 

 

1,863

 

 

 

(942

)

 

GAAP operating income

 

 

38,193

 

 

 

16,415

 

 

Restructuring and reorganization charges (1)

 

 

5,194

 

 

 

13,106

 

 

Executive transition costs

 

 

-

 

 

 

1,275

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

Amortization of acquired intangible assets (6)

 

 

3,209

 

 

 

3,656

 

 

Transaction-related costs

 

 

158

 

 

 

13

 

 

Stock-based compensation (1)

 

 

6,757

 

 

 

5,721

 

 

Amortization of other intangible assets (6)

 

 

3,453

 

 

 

3,488

 

 

Amortization of customer contract costs (6)

 

 

4,622

 

 

 

6,537

 

 

Depreciation (1)

 

 

5,720

 

 

 

6,138

 

 

Non-GAAP adjusted EBITDA

 

$

67,306

 

 

$

56,349

 

 

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

 

 

24.3

%

 

 

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

 

 

 

 

March 31,

 

 

 

 

2023

 

 

2022

 

 

Amortization of acquired intangible assets

 

$

3,209

 

 

$

3,656

 

 

Amortization of other intangible assets

 

 

3,453

 

 

 

3,488

 

 

Amortization of customer contract costs

 

 

4,622

 

 

 

6,537

 

 

Amortization of deferred financing costs

 

 

187

 

 

 

189

 

 

Total amortization

 

$

11,471

 

 

$

13,870

 

 

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

 

 

 

March 31,

 

 

 

2023

 

2022

 

Cash flows from operating activities

 

$

15,397

 

 

$

(5,549

)

 

Purchases of software, property and equipment

 

 

(8,700

)

 

 

(10,375

)

 

Non-GAAP free cash flow (deficit)

 

$

6,697

 

 

$

(15,924

)

 

Non-GAAP Financial Measures – 2023 Financial Guidance

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

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

 

 

2023 Guidance Range

 

 

Low Range

 

High Range

Non-GAAP Operating Income

 

 

 

 

 

 

GAAP operating income

 

$

122,100

 

 

$

133,500

 

Restructuring and reorganization charges

 

 

5,200

 

 

 

5,200

 

Acquisition-related expenses:

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,200

 

 

 

12,200

 

Transaction-related costs

 

 

200

 

 

 

200

 

Stock-based compensation

 

 

33,900

 

 

 

33,900

 

Non-GAAP operating income

 

$

173,600

 

 

$

185,000

 

 

 

 

 

 

 

 

Non-GAAP Operating Margin Percentage

 

 

 

 

 

 

Revenue

 

$

1,130,000

 

 

$

1,170,000

 

Less: Transaction fees (2)

 

 

(78,000

)

 

 

(82,000

)

Revenue less transaction fees

 

$

1,052,000

 

 

$

1,088,000

 

Non-GAAP adjusted operating margin percentage

 

 

16.5

%

 

 

17.0

%

Non-GAAP EPS:

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

 

 

2023 Guidance Range

 

 

 

Low Range

 

 

 

 

High Range

 

 

 

Amounts

 

EPS (8)

 

 

 

 

Amounts

 

EPS (8)

 

GAAP net income

 

$

66,300

 

 

$

2.14

 

 

 

 

$

74,400

 

 

$

2.40

 

GAAP income tax provision (7)

 

 

26,700

 

 

 

 

 

 

 

 

 

30,000

 

 

 

 

 

GAAP income before income taxes

 

 

93,000

 

 

 

 

 

 

 

 

 

104,400

 

 

 

 

 

Restructuring and reorganization charges

 

 

5,200

 

 

 

 

 

 

 

 

 

5,200

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,200

 

 

 

 

 

 

 

 

 

12,200

 

 

 

 

 

Transaction-related costs

 

 

200

 

 

 

 

 

 

 

 

 

200

 

 

 

 

 

Stock-based compensation

 

 

33,900

 

 

 

 

 

 

 

 

 

33,900

 

 

 

 

 

Non-GAAP income before income taxes

 

 

144,500

 

 

 

 

 

 

 

 

 

155,900

 

 

 

 

 

Non-GAAP income tax provision (7)

 

 

(40,700

)

 

 

 

 

 

 

 

 

(42,900

)

 

 

 

 

Non-GAAP net income

 

$

103,800

 

 

$

3.35

 

 

 

 

$

113,000

 

 

$

3.65

 

(7)

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

(8)

The weighted-average diluted shares outstanding are expected to be approximately 31 million.

Non-GAAP Adjusted EBITDA:

CSG’s calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG’s non-GAAP adjusted EBITDA measure to GAAP net income is provided below for CSG’s 2023 full year financial guidance (in thousands, except percentages):

 

 

2023 Guidance Range

 

 

Low Range

 

High Range

GAAP net income

 

$

66,300

 

 

$

74,400

 

GAAP income tax provision (7)

 

 

26,700

 

 

 

30,000

 

Interest expense

 

 

31,500

 

 

 

31,500

 

Interest and investment income and other, net

 

 

(2,400

)

 

 

(2,400

)

GAAP operating income

 

 

122,100

 

 

 

133,500

 

Restructuring and reorganization charges

 

 

5,200

 

 

 

5,200

 

Executive transition costs

 

 

 

 

 

 

Acquisition-related expenses:

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

12,200

 

 

 

12,200

 

Transaction-related costs

 

 

200

 

 

 

200

 

Stock-based compensation

 

 

33,900

 

 

 

33,900

 

Amortization of other intangible assets

 

 

11,700

 

 

 

11,700

 

Amortization of client contract costs

 

 

20,000

 

 

 

20,000

 

Depreciation

 

 

25,700

 

 

 

25,700

 

Non-GAAP adjusted EBITDA

 

$

231,000

 

 

$

242,400

 

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

 

 

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):

 

 

2023 Guidance Range

 

 

Low Range

 

High Range

Cash flows from operating activities

 

$

102,000

 

 

$

148,000

 

Purchases of software, property and equipment

 

 

(22,000

)

 

 

(28,000

)

Non-GAAP free cash flow

 

$

80,000

 

 

$

120,000

 

 

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