8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): November 7, 2018

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	0-27512	47-0783182
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification No.)
6175 S. Willow Drive, Greenwood Village, CO		80111
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (303) 200-2000

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

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

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

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

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

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Item 2.02.  Results of Operations and Financial Condition.

The following information is furnished pursuant to Item 2.02 (Results of Operations and Financial Condition).  This information shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or incorporated in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.

On November 7, 2018, CSG Systems International, Inc. (“CSG”) issued a press release relating to the results of its operations for the quarter and nine months ended September 30, 2018.  A copy of such press release is attached to this Form 8-K as Exhibit 99.1 and hereby incorporated by reference.    

In the attached press release, CSG makes reference to non-GAAP financial measures.  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.  There are limitations with the use of non-GAAP financial measures since they are not based on any comprehensive set of accounting rules or principles, and 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.  A more detailed discussion of CSG’s use of non-GAAP financial measures, to include reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures, is contained in the attached press release and is posted to the Company’s website at www.csgi.com.

9.01. Financial Statements and Exhibits.

(d) Exhibits

99.1 Press release of CSG Systems International, Inc. dated November 7, 2018

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date:  November 7, 2018

CSG SYSTEMS INTERNATIONAL, INC.
By:	/s/ Jerod L. Sands
	Jerod L. Sands
	Chief Accounting Officer

EX-99.1

EXHIBIT 99.1

FOR IMMEDIATE RELEASE

PRESS RELEASE

CSG Systems INTERNATIONAL reports results  

for third Quarter 2018

GREENWOOD VILLAGE, COLO. (Nov. 7, 2018) — CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business transformation in the digital age, today reported results for the quarter ended September 30, 2018.

Key Highlights:

• Third quarter 2018 financial results:

• Total revenues were $213.1 million.

• GAAP operating income was $25.7 million, or 12.0% of total revenues, and non-GAAPoperating income was $35.6 million, or 16.7% of total revenues.

• GAAP earnings per diluted share (EPS) was $0.49. Non-GAAP EPS was $0.70.

• Cash flows from operations were $47.1 million.

• CSG declared its quarterly cash dividend of $0.21 per share of common stock, or a total of approximately $7 million, to shareholders.

• In September 2018, CSG announced a Board-approved capital allocation strategy, which included authorization to repurchase up to $150 million of CSG common stock over the next three years.

• On October 1, 2018, CSG acquired Forte Payment Systems, Inc., a leading provider of advanced payment solutions, based in Allen, Texas.

“This quarter reflects the balanced approach we took to drive business and shareholder value,” said Bret Griess, president and chief executive officer for CSG.  “In addition to the ongoing investment and focus that we have put into our people, our solutions and our clients, we also enhanced and expanded our addressable market with the acquisition of Forte Payment Systems, an innovator in the payments space.  And, thanks to the strong cash we generate from our highly visible and recurring revenues, going forward we will be able to return even more cash to our shareholders in the form of increased share repurchases.  We take these actions with one goal in mind, which is to increase our revenues and earnings.”

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Financial Overview (unaudited)

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

	Quarter Ended September 30,									Nine Months Ended September 30,
							Percent									Percent
	2018			2017			Changed			2018			2017			Changed
Revenues	$	213,055		$	199,195			7	%	$	627,792		$	584,378			7	%
GAAP Results:
Operating Income	$	25,653		$	28,376			(10	%)	$	75,507		$	79,637			(5	%)
Operating Margin Percentage		12.0	%		14.2	%	—				12.0	%		13.6	%	—
EPS	$	0.49		$	0.44			11	%	$	1.37		$	1.41			(3	%)
Non-GAAP Results:
Operating Income	$	35,578		$	36,452			(2	%)	$	106,455		$	105,784			1	%
Operating Margin Percentage		16.7	%		18.3	%	—				17.0	%		18.1	%	—
EPS	$	0.70		$	0.64			9	%	$	2.11		$	1.89			12	%

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

Total Revenues: Total revenues for the third quarter of 2018 were $213.1 million, a 7% increase when compared to revenues of $199.2 million for the third quarter of 2017, and consistent with revenues of $213.0 million for the second quarter of 2018.  The year-over-year increase in revenues can be primarily attributed to the acquisition of Business Ink on February 28, 2018.

GAAP Results:  GAAP operating income for the third quarter of 2018 was $25.7 million, or 12.0% of total revenues, compared to $28.4 million, or 14.2% of total revenues, for the third quarter of 2017, and $24.1 million, or 11.3% of total revenues, for the second quarter of 2018.  GAAP EPS for the third quarter of 2018 was $0.49, as compared to $0.44 for the third quarter of 2017, and $0.46 for the second quarter of 2018.  

Non-GAAP Results:  Non-GAAP operating income for the third quarter of 2018 was $35.6 million, or 16.7% of total revenues, compared to $36.5 million, or 18.3% of total revenues, for the third quarter of 2017, and $35.6 million, or 16.7% of total revenues for the second quarter of 2018.  Non-GAAP EPS for the third quarter of 2018 was $0.70, compared to $0.64 for the third quarter of 2017, and $0.73 for the second quarter of 2018.

The year-over-year increase in GAAP and non-GAAP EPS is primarily due to a lower effective tax rate resulting primarily from the U.S. Tax Reform enacted in December 2017.

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Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments at September 30, 2018 were $199.3 million, compared to $186.4 million as of June 30, 2018 and $261.4 million as of December 31, 2017.  CSG had net cash flows from operations for the third quarters ended September 30, 2018 and 2017 of $47.1 million and $38.3 million, respectively, and had non-GAAP free cash flow of $29.7 million and $33.7 million, respectively.  For the nine months ended September 30, 2018 and 2017, CSG generated net cash flows from operations of $73.3 million and $102.8 million, respectively and had non-GAAP free cash flow of $29.2 million and $79.5 million, respectively.

Summary of 2018 Financial Guidance

CSG is updating its financial guidance for the full year 2018, to include the fourth quarter impact of the acquisition of Forte Payment Systems, Inc. as follows:  

	As of November 7, 2018	Previous
GAAP Measures:
Revenues	$865 - $875 million	$845 - $865 million
Operating Margin Percentage	11.7%	12.6%
EPS	$1.78 - $1.90	$1.89 - $2.02
Cash Flows from Operating Activities	$105 - $115 million	$130 - $150 million
Non-GAAP Measures:
Adjusted Revenues	$853 - $863 million	N/A
Operating Margin Percentage	16.5%	16.9%
Adjusted Operating Margin Percentage	16.7%	N/A
EPS	$2.81 - $2.93	$2.81 - $2.93

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, November 7, 2018 at 5:00 p.m. Eastern Time, to discuss CSG’s third quarter results for 2018.  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.

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About CSG

CSG simplifies the complexity of business transformation in the digital age for the most respected communications, media and entertainment service providers worldwide.  With over 35 years of experience, CSG delivers revenue management, customer experience and digital monetization solutions for every stage of the customer lifecycle.  The company is the trusted partner driving digital transformation for leading global brands, including Arrow Electronics, AT&T, Bharti Airtel, Charter Communications, Comcast, DISH, Eastlink, iflix, MTN, TalkTalk, Telefonica, Telstra and Verizon.

At CSG, we have one vision: flexible, seamless, limitless communications, information and content services for everyone.  For more information, visit our website at csgi.comand follow us on LinkedIn, TwitterandFacebook.

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 sixty percent of its revenues from its three 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 sales, which are subject to greater volatility;

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

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

• CSG’s ability to protect its intellectual property rights;

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

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

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

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

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:

Liz Bauer, Chief Communications and Investor Relations Officer

(303) 804-4065

E-mail: liz.bauer@csgi.com

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands, except per share amounts)

	September 30,			December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	197,172		$	122,243
Short-term investments		2,130			139,117
Total cash, cash equivalents and short-term investments		199,302			261,360
Trade accounts receivable:
Billed, net of allowance of $4,182 and $4,149		246,731			219,531
Unbilled		36,847			31,187
Income taxes receivable		7,452			13,839
Other current assets		38,706			28,349
Total current assets		529,038			554,266
Non-current assets:
Property and equipment, net of depreciation of $108,266 and $123,126		78,265			44,651
Software, net of amortization of $116,761 and $108,986		31,953			26,906
Goodwill		210,697			210,080
Client contracts, net of amortization of zero and $97,109		-			43,626
Acquired client contracts, net of amortization of $81,286 and zero		39,863			-
Client contract costs, net of amortization of $37,038 and zero		35,584			-
Deferred income taxes		11,011			14,057
Other assets		10,898			10,948
Total non-current assets		418,271			350,268
Total assets	$	947,309		$	904,534
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	7,500		$	22,500
Client deposits		36,079			31,053
Trade accounts payable		39,054			38,420
Accrued employee compensation		56,578			62,984
Deferred revenue		41,388			41,885
Income taxes payable		448			1,216
Other current liabilities		21,590			24,535
Total current liabilities		202,637			222,593
Non-current liabilities:
Long-term debt, net of unamortized discounts of $15,641 and $18,264		353,109			309,236
Deferred revenue		13,578			12,346
Income taxes payable		2,372			2,415
Deferred income taxes		5,881			4,584
Other non-current liabilities		11,313			10,614
Total non-current liabilities		386,253			339,195
Total liabilities		588,890			561,788
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; 33,451 and 33,516 shares outstanding		693			689
Common stock warrants; 439 warrants vested; 1,425 issued		9,082			9,082
Additional paid-in capital		436,412			427,091
Treasury stock, at cost; 34,470 and 34,075 shares		(831,585	)		(814,732	)
Accumulated other comprehensive income (loss):
Unrealized loss on short-term investments, net of tax		(7	)		(88	)
Cumulative foreign currency translation adjustments		(37,364	)		(28,734	)
Accumulated earnings		781,188			749,438
Total stockholders' equity		358,419			342,746
Total liabilities and stockholders' equity	$	947,309		$	904,534

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

	Quarter Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
Revenues:
Cloud and related solutions	$	186,473		$	164,789		$	551,390		$	481,445
Software and services		14,283			15,726			39,573			46,680
Maintenance		12,299			18,680			36,829			56,253
Total revenues		213,055			199,195			627,792			584,378
Cost of revenues (exclusive of depreciation, shown separately below):
Cloud and related solutions		95,092			79,856			277,212			233,194
Software and services		8,669			9,725			25,816			31,404
Maintenance		5,291			10,136			16,612			30,487
Total cost of revenues		109,052			99,717			319,640			295,085
Other operating expenses:
Research and development		31,477			30,324			91,809			85,103
Selling, general and administrative		39,243			35,816			120,515			109,981
Depreciation		4,831			3,344			13,293			9,975
Restructuring and reorganization charges		2,799			1,618			7,028			4,597
Total operating expenses		187,402			170,819			552,285			504,741
Operating income		25,653			28,376			75,507			79,637
Other income (expense):
Interest expense		(4,456	)		(4,186	)		(13,202	)		(12,638	)
Amortization of original issue discount		(671	)		(634	)		(1,984	)		(2,147	)
Interest and investment income, net		675			800			2,256			2,310
Loss on extinguishment of debt		-			-			(810	)		-
Other, net		(709	)		(970	)		(347	)		(1,123	)
Total other		(5,161	)		(4,990	)		(14,087	)		(13,598	)
Income before income taxes		20,492			23,386			61,420			66,039
Income tax provision		(4,391	)		(8,806	)		(16,188	)		(19,641	)
Net income	$	16,101		$	14,580		$	45,232		$	46,398
Weighted-average shares outstanding:
Basic		32,507			32,561			32,541			32,383
Diluted		32,806			32,901			32,939			32,825
Earnings per common share:
Basic	$	0.50		$	0.45		$	1.39		$	1.43
Diluted		0.49			0.44			1.37			1.41

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

	Nine Months Ended
	September 30, 2018			September 30, 2017
Cash flows from operating activities:
Net income	$	45,232		$	46,398
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation		13,293			9,975
Amortization		31,974			21,670
Amortization of original issue discount		1,984			2,147
Asset impairment		1,428			2,135
Gain on short-term investments and other		(65	)		(76	)
Loss on extinguishment of debt		810			-
Deferred income taxes		2,150			1,487
Stock-based compensation		14,805			16,659
Subtotal		111,611			100,395
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net		(15,952	)		7,567
Other current and non-current assets		(21,763	)		(1,788	)
Income taxes payable/receivable		5,365			1,715
Trade accounts payable and accrued liabilities		(13,174	)		(16,007	)
Deferred revenue		7,182			10,940
Net cash provided by operating activities		73,269			102,822
Cash flows from investing activities:
Purchases of property and equipment		(44,047	)		(23,370	)
Purchases of short-term investments		(53,285	)		(116,203	)
Proceeds from sale/maturity of short-term investments		190,467			150,768
Acquisition of and investments in business, net of cash acquired		(71,443	)		-
Acquisition of and investments in client contracts		-			(10,082	)
Net cash provided by investing activities		21,692			1,113
Cash flows from financing activities:
Proceeds from issuance of common stock		1,701			1,259
Payment of cash dividends		(21,197	)		(20,405	)
Repurchase of common stock		(24,034	)		(24,764	)
Proceeds from long-term debt		150,000			-
Payments on long-term debt		(123,750	)		(11,250	)
Settlement of convertible notes		-			(34,771	)
Payments of deferred financing costs		(1,490	)		-
Net cash used in financing activities		(18,770	)		(89,931	)
Effect of exchange rate fluctuations on cash		(1,262	)		2,396
Net increase in cash and cash equivalents		74,929			16,400
Cash and cash equivalents, beginning of period		122,243			126,351
Cash and cash equivalents, end of period	$	197,172		$	142,751
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest	$	14,181		$	13,638
Income taxes		8,426			16,407

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EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

Revenues by Geography

	Quarter Ended			Quarter Ended			Quarter Ended
	September 30,			June 30,			September 30,
	2018			2018			2017
Americas		85	%		85	%		85	%
Europe, Middle East and Africa		10	%		10	%		8	%
Asia Pacific		5	%		5	%		7	%
Total Revenues		100	%		100	%		100	%

Revenues by Significant Customers: 10% or more of Revenues

	Quarter Ended			Quarter Ended			Quarter Ended
	September 30,			June 30,			September 30,
	2018			2018			2017
Comcast		26	%		25	%		28	%
Charter		21	%		21	%		23	%
DISH		9	%		10	%		11	%

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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 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.

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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		EPS
Restructuring and reorganization charges		X		X
Acquisition-related costs		X		X
Stock-based compensation		X		X
Amortization of acquired intangible assets		X		X
Amortization of original issue discount (“OID”)		—		X
Gain (loss) on extinguishment of debt		—		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:

• 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 costs relate to direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG’s recurring core business operating results.  These costs typically include expenses related to legal, accounting, and other professional services.  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.

• 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.

• Amortization of acquired intangible assets is the result of business acquisitions.  A portion of the purchase price in an acquisition is allocated to acquired intangible assets (e.g., software, client relationships, etc.), which are then amortized to expense over their estimated useful lives.  This annual amortization expense is generally unchanged from the initial estimates, regardless of performance of the acquired business in any one period.  Also, the value assigned to acquired intangible assets in a business combination is based on various estimates and valuation techniques, and does not necessarily represent the costs CSG

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would incur to develop such capabilities internally.  Additionally, amortization of acquired intangible assets can be inconsistent in amount and frequency, and can be significantly affected by the timing and size of an acquisition.  The exclusion of these expenses in calculating CSG’s non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to acquisitions included in CSG’s results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG’s business.

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

• Gains and losses related to the 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, 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.

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Non-GAAP Financial Measures

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					Quarter Ended
	September 30, 2018					September 30, 2017
			% of					% of
	Amounts		Revenues			Amounts		Revenues
GAAP operating income	$	25,653		12.0	%	$	28,376		14.2	%
Restructuring and reorganization charges (1)		2,799		1.4	%		1,618		0.8	%
Acquisition-related charges		261		0.1	%		-		-	%
Stock-based compensation (1)		4,695		2.2	%		4,700		2.4	%
Amortization of acquired intangible assets		2,170		1.0	%		1,758		0.9	%
Non-GAAP operating income	$	35,578		16.7	%	$	36,452		18.3	%

	Nine Months Ended					Nine Months Ended
	September 30, 2018					September 30, 2017
			% of					% of
	Amounts		Revenues			Amounts		Revenues
GAAP operating income	$	75,507		12.0	%	$	79,637		13.6	%
Restructuring and reorganization charges (1)		7,028		1.2	%		4,597		0.8	%
Acquisition-related charges		2,619		0.4	%		-		-	%
Stock-based compensation (1)		14,928		2.4	%		16,344		2.8	%
Amortization of acquired intangible assets		6,373		1.0	%		5,206		0.9	%
Non-GAAP operating income	$	106,455		17.0	%	$	105,784		18.1	%

(1) Stock-based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges.  

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, 2018					September 30, 2017
	Amounts			EPS (3)		Amounts			EPS (3)
GAAP net income	$	16,101		$	0.49	$	14,580		$	0.44
GAAP income tax provision (2)		4,391					8,806
GAAP income before income taxes		20,492					23,386
Restructuring and reorganization charges (1)		2,799					1,618
Acquisition-related costs		261					-
Stock-based compensation (1)		4,695					4,700
Amortization of acquired intangible assets		2,170					1,758
Amortization of OID		671					634
Non-GAAP income before income taxes		31,088					32,096
Non-GAAP income tax provision (2)		(8,238	)				(11,016	)
Non-GAAP net income	$	22,850		$	0.70	$	21,080		$	0.64

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	Nine Months Ended					Nine Months Ended
	September 30, 2018					September 30, 2017
	Amounts			EPS (3)		Amounts			EPS (3)
GAAP net income	$	45,232		$	1.37	$	46,398		$	1.41
GAAP income tax provision (2)		16,188					19,641
GAAP income before income taxes		61,420					66,039
Restructuring and reorganization charges (1)		7,028					4,597
Acquisition-related costs		2,619					-
Stock-based compensation (1)		14,928					16,344
Amortization of acquired intangible assets		6,373					5,206
Loss on extinguishment of debt		810					-
Amortization of OID		1,984					2,147
Non-GAAP income before income taxes		95,162					94,333
Non-GAAP income tax provision (2)		(25,538	)				(32,394	)
Non-GAAP net income	$	69,624		$	2.11	$	61,939		$	1.89

(2) For the third quarter and nine months ended September 30, 2018 the GAAP effective income tax rates were approximately 21% and 26%, respectively, and the non-GAAP effective income tax rates were approximately 27% for both periods.  The difference between the GAAP and non-GAAP effective income tax rates relates primarily to certain discrete items recorded during the third quarter ended September 30, 2018 that were excluded from the calculation of the non-GAAP effective income tax rate.

For the third quarter and nine months ended September 30, 2017 the GAAP effective income tax rates were approximately 38% and 30%, respectively, and the non-GAAP effective income tax rates were approximately 34% for both periods.  The difference between the GAAP and non-GAAP effective income tax rates relates primarily to the timing treatment of the net income tax benefit from Comcast’s exercise of their vested stock warrants in January 2017.  The net income tax benefit from this item was spread ratably across 2017 in the non-GAAP effective income tax rate; however, the entire amount of the benefit was recorded as a discrete item, as required by GAAP, in the first quarter.  

(3) The outstanding diluted shares for the third quarter and nine months ended September 30, 2018 were 32.8 million and 32.9 million, respectively, and for the third quarter and nine months ended September 30, 2017 were 32.9 million and 32.8 million, respectively.

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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,
	2018			2017			2018			2017
GAAP net income	$	16,101		$	14,580		$	45,232		$	46,398
GAAP income tax provision		4,391			8,806			16,188			19,641
Interest expense (4)		4,456			4,186			13,202			12,638
Amortization of OID		671			634			1,984			2,147
Loss on extinguishment of debt		-			-			810			-
Interest and investment income and other, net		34			170			(1,909	)		(1,187	)
GAAP operating income		25,653			28,376			75,507			79,637
Restructuring and reorganization charges (1)		2,799			1,618			7,028			4,597
Stock-based compensation (1)		4,695			4,700			14,928			16,344
Amortization of acquired intangible assets (5)		2,170			1,758			6,373			5,206
Amortization of other intangible assets (5)		2,415			4,938			6,996			14,770
Amortization of client contract costs (5)		6,023			-			17,285			-
Acquisition-related costs		261			-			2,619			-
Depreciation		4,831			3,344			13,293			9,975
Non-GAAP adjusted EBITDA	$	48,847		$	44,734		$	144,029		$	130,529
Non-GAAP adjusted EBITDA as a percentage of revenues		23	%		22	%		23	%		22	%

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

(5) 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,
	2018		2017		2018		2017
Amortization of acquired intangible assets	$	2,170	$	1,758	$	6,373	$	5,206
Amortization of other intangible assets		2,415		4,938		6,996		14,770
Amortization of client contract costs		6,023		-		17,285		-
Amortization of deferred financing costs		409		556		1,320		1,694
Total amortization	$	11,017	$	7,252	$	31,974	$	21,670

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,
	2018			2017			2018			2017
Cash flows from operating activities	$	47,055		$	38,334		$	73,269		$	102,822
Purchases of property and equipment		(17,332	)		(4,632	)		(44,047	)		(23,370	)
Non-GAAP free cash flow	$	29,723		$	33,702		$	29,222		$	79,452

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Non-GAAP Financial Measures – 2018 Financial Guidance

Non-GAAP Adjusted Revenues:

The reconciliation of GAAP revenues to non-GAAP adjusted revenues, as included in CSG’s 2018 full year financial guidance, is as follows:

	2018 Guidance Range
	Low Range			High Range
GAAP revenues	$	865,000		$	875,000
Less:  Transaction fees		(12,000	)		(12,000	)
Non-GAAP adjusted revenues (6)	$	853,000		$	863,000

(6) Non-GAAP adjusted revenues are defined as GAAP revenues less transaction fees.  Transaction fees are primarily comprised of interchange and other payment-related fees paid, in conjunction with the delivery of service to clients under its 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.  We believe non-GAAP adjusted revenues is a useful financial measure as: (i) it is a primary metric used by management to measure performance; and (ii) it provides comparability to other payments companies.

Non-GAAP Operating Margin Percentage:

The reconciliation of GAAP operating margin percentage to non-GAAP adjusted operating margin percentage, as included in CSG’s 2018 full year financial guidance, is as follows:

	2018
	Guidance
GAAP operating margin percentage		11.7	%
Restructuring and reorganization charges (7)		0.8	%
Acquisition-related costs (8)		0.3	%
Stock-based compensation (9)		2.3	%
Amortization of acquired intangible assets (10)		1.4	%
Non-GAAP operating margin percentage		16.5	%
Transaction fees (11)		0.2	%
Non-GAAP adjusted operating margin percentage		16.7	%

(7) This represents the pretax impact of restructuring and reorganization charges of an estimated $7 million on CSG’s GAAP operating margin percentage based on the midpoint of 2018 GAAP revenue guidance.

(8) This represents the pretax impact of acquisition-related costs of an estimated $3 million on CSG’s GAAP operating margin percentage based on the midpoint of 2018 GAAP revenue guidance.

(9) This represents the pretax impact of stock-based compensation expense of an estimated $20 million on CSG’s GAAP operating margin percentage based on the midpoint of 2018 GAAP revenue guidance.

(10) This represents the pretax impact of amortization of acquired intangible assets expense of an estimated $12 million on CSG’s GAAP operating margin percentage based on the midpoint of 2018 GAAP revenue guidance.

(11) This represents the pretax impact of transaction fees of an estimated $12 million on CSG’s GAAP operating margin percentage based on the midpoint of 2018 GAAP revenue guidance.

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Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2018 full year financial guidance is as follows (in thousands, except per share amounts):

	2018 Guidance Range
	Low Range					High Range
	Amounts			EPS (13)		Amounts			EPS (13)
GAAP net income	$	58,700		$	1.78	$	62,500		$	1.90
GAAP income tax provision (12)		21,600					23,100
GAAP income before income taxes		80,300					85,600
Restructuring and reorganization charges		7,000					7,000
Acquisition-related costs		2,600					2,600
Stock-based compensation		20,000					20,000
Amortization of acquired intangible assets		12,400					12,400
Loss on extinguishment of debt		800					800
Amortization of OID		2,700					2,700
Non-GAAP income before income taxes		125,800					131,100
Non-GAAP income tax provision (12)		(33,400	)				(34,700	)
Non-GAAP net income	$	92,400		$	2.81	$	96,400		$	2.93

(12) For 2018, the estimated effective income tax rate for GAAP and non-GAAP purposes is expected to be approximately 27%.

(13) The weighted-average diluted shares outstanding are expected to be approximately 33 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 2018 full year financial guidance at the mid-point (in thousands, except percentages):

	2018
GAAP net income	$	60,600
GAAP income tax provision		22,400
Interest expense		17,700
Amortization of OID		2,700
Loss on extinguishment of debt		800
Interest and investment income and other, net		(2,200	)
GAAP operating income		102,000
Restructuring and reorganization charges		7,000
Acquisition-related costs		2,600
Stock-based compensation		20,000
Amortization of acquired intangible assets		12,400
Amortization of other intangible assets		9,300
Amortization of client contract costs		23,600
Depreciation		18,400
Non-GAAP adjusted EBITDA	$	195,300
Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenues		23	%

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):

	2018
Cash flows from operating activities	$	110,000
Purchases of property and equipment		(60,000	)
Non-GAAP free cash flow	$	50,000