CSG Systems International Reports Results for First Quarter 2019

CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business
transformation in the digital age, today reported results for the
quarter ended March 31, 2019.

Key Highlights:

• First quarter 2019 financial results:
  • Total revenues were $244.8 million and total non-GAAP
    adjusted revenues were $227.7 million.
  • GAAP operating income was $32.1 million, or 13.1% of
    total revenues, and non-GAAP operating income was $41.3
    million, or 18.1% of non-GAAP adjusted revenues.
  • GAAP earnings per diluted share (EPS) was $0.59 and
    non-GAAP EPS was $0.82.
  • Cash flows from operations were $12.8 million.
• CSG declared its quarterly cash dividend of $0.2225 per share
  of common stock, or a total of approximately $7 million, to
  shareholders.

“We continue to execute well against our strategy which has driven
growth rates above the industry average and a more diversified revenue
mix,” said Bret Griess, president and chief executive officer for CSG.
“We continue to take a holistic approach to creating long-term
sustainable value by balancing our investments in our customers and
solutions with our return of capital to our shareholders. This quarter
reflects a healthy balance of both.”

Financial Overview (unaudited)

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

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 www.csgi.com.

Results of Operations

GAAP Results: Total revenues
for the first quarter of 2019 were $244.8 million, a 21% increase when
compared to revenues of $201.7 million for the first quarter of 2018,
and 1% decrease when compared to $247.3 million for the fourth quarter
of 2018. The year-over-year increase in revenues can be primarily
attributed to the acquisitions of Forte on October 1, 2018 and Business
Ink on February 28, 2018, while the sequential quarterly decrease in
revenues is mainly due to the higher level of software and services
revenues CSG typically experiences in the fourth quarter.

GAAP operating income for the first quarter of 2019 was $32.1 million,
or 13.1% of total revenues, compared to $25.8 million, or 12.8% of total
revenues, for the first quarter of 2018, and $29.4 million, or 11.9% of
total revenues, for the fourth quarter of 2018.

GAAP EPS for the first quarter of 2019 was $0.59, as compared to $0.42
for the first quarter of 2018, and $0.64 for the fourth quarter of 2018.
The year-over-year increase in GAAP EPS is reflective of the higher
operating income for the quarter, while the sequential quarterly
decrease in GAAP EPS is mainly attributed to a higher effective income
tax rate for the first quarter of 2019.

Non-GAAP Results: Non-GAAP adjusted
revenues for the first quarter of 2019 were $227.7 million, a 13%
increase when compared to $201.7 million for the first quarter of 2018,
and a 2% decrease when compared to $231.7 million for the fourth quarter
of 2018.

Non-GAAP operating income for the first quarter of 2019 was $41.3
million, or 18.1% of total non-GAAP adjusted revenues, compared to $35.3
million, or 17.5% of total non-GAAP adjusted revenues for the first
quarter of 2018, and $41.4 million, or 17.9% of total non-GAAP adjusted
revenues for the fourth quarter of 2018.

Non-GAAP EPS for the first quarter of 2019 was $0.82, compared to $0.69
for the first quarter of 2018, and $0.95 for the fourth quarter of 2018.

These fluctuations in non-GAAP adjusted revenues and non-GAAP EPS
between periods are primarily due to the factors discussed above.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of March 31, 2019
were $141.9 million compared to $162.9 million as of December 31, 2018.
CSG had net cash flows from operations for the first quarters of 2019
and 2018 of $12.8 million and $29.9 million, respectively, and had
non-GAAP free cash flow of $4.5 million and $17.6 million, respectively.
Cash flows from operating activities for the first quarter of 2019 were
negatively impacted by the timing around a certain recurring client
payment at quarter-end which was subsequently collected.

Summary of 2019 Financial Guidance

CSG is updating its financial guidance for the full year 2019 as follows:

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 www.csgi.com.

Conference Call

CSG will host a conference call on Wednesday, May 1, 2019 at 5:00 p.m.
EDT, to discuss CSG’s first quarter results for 2019. 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, dial 1-800-458-4121 and
ask the operator for the CSG conference call and Liz Bauer, chairperson.

Additional Information

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

About CSG

CSG is a provider of software and services that help companies around
the world monetize and digitally enable the customer experience. For
more than 35 years, CSG has simplified the complexity of business,
providing revenue management and digital monetization, payments, and
customer engagement solutions to help our customers tackle any business
challenge and thrive in an ever-changing marketplace.

Operating across more than 120 countries worldwide, CSG manages billions
of critical customer interactions annually. CSG is the trusted partner
driving digital innovation for hundreds of leading global brands,
including Arrow Electronics, AT&T, Charter Communications, Comcast,
DISH, Eastlink, Formula One, iflix, MTN, and Telstra.

To learn more, visit our website at csgi.com
and connect with us on LinkedIn,
Twitter
and Facebook.

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 revenues from its two
  largest clients;
• 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 as a result of its
  dependency on software solution sales, which are subject to greater
  volatility;
• 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 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.

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.

EXHIBIT 1
CSG SYSTEMS INTERNATIONAL, INC.
SUPPLEMENTAL
REVENUE ANALYSIS

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 revenues, 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:

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 interchange and other
  payment-related fees paid in conjunction with the delivery of service
  to clients under CSG’s payment services contracts, to third-party
  payment processors and financial institutions by Forte, a CSG company
  acquired in October 2018. Because Forte controls the integrated
  service provided under its payment services client contracts, these
  transaction fees are presented gross, and not netted against revenues;
  however, other payments companies who do not provide and/or control an
  integrated service present their revenues net of transaction fees. The
  exclusion of these fees in calculating CSG’s non-GAAP adjusted
  revenues provides management and investors an additional means to use
  to compare CSG’s current revenues with historical and future periods,
  as well as with other payments companies.
• 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 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 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 core 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 of debt are a result of
  the refinancing of CSG’s credit agreement and/or repurchase of CSG’s
  convertible notes. These activities are not considered reflective of
  CSG’s recurring core business operating results. Any resulting gain or
  loss is generally 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.

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, and gains and losses related
to the extinguishment of debt, 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 property and equipment.

Non-GAAP Financial Measures

Non-GAAP Adjusted Revenues:

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

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):

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):

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):

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):

Non-GAAP Financial Measures – 2019 Financial
Guidance

Non-GAAP Adjusted Revenues:

The reconciliation of GAAP revenues to non-GAAP adjusted revenues, as
included in CSG’s 2019 full year financial guidance, is as follows:

Non-GAAP Operating Income:

The reconciliation of GAAP operating income to non-GAAP operating
income, as included in CSG’s 2019 full year financial guidance, is as
follows (in thousands, except percentages):

Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2019
full year financial guidance is as follows (in thousands, except per
share amounts):

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 2019 full year financial guidance (in thousands, except
percentages):

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):

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