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8-K

Csg Systems International Inc (CSGS)

8-K 2020-08-05 For: 2020-08-05
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Added on April 08, 2026

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): August 5, 2020

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware 0-27512 47-0783182
(State or other jurisdiction<br><br><br>of incorporation) (Commission<br><br><br>File Number) (IRS Employer<br><br><br>Identification No.)
6175 S. Willow Drive, 10^th^ Floor, 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 Instructions 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))

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading<br><br><br>Symbol(s) Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share CSGS NASDAQ Stock Market LLC.

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 August 5, 2020, CSG Systems International, Inc. (“CSG”) issued a press release relating to the results of its operations for the quarter and six months ended June 30, 2020.  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 August 5, 2020
104 Cover Page Interactive Data File (embedded within the Inline XBRL document)

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:  August 5, 2020

CSG SYSTEMS INTERNATIONAL, INC.
By: /s/ David N. Schaaf
David N. Schaaf
Chief Accounting Officer

2

csgs-ex991_6.htm

EXHIBIT 99.1

FOR IMMEDIATE RELEASE

PRESS RELEASE

CSG Systems INTERNATIONAL reports

SECOND Quarter 2020 results

GREENWOOD VILLAGE, COLO. (August 5, 2020) — CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business transformation in the digital age, today reported results for the quarter ended June 30, 2020.

Financial Results:

• Second quarter 2020 financial results:
• Total revenue was $240.3 million and total non-GAAP adjusted revenue was $224.6 million.
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• GAAP operating income was $19.8 million, or 8.2% of total revenue, and non-GAAP operating income was $30.6 million, or 13.6% of non-GAAP adjusted revenue.
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• GAAP earnings per diluted share (EPS) was $0.32 and non-GAAP EPS was $0.59.
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• Cash flows from operations were $57.7 million, with non-GAAP free cash flow of $48.2 million.
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Shareholder Returns:

• CSG declared its quarterly cash dividend of $0.235 per share of common stock, or a total of approximately $8 million, to shareholders.

“We delivered another solid quarter during some very challenging times,” said Bret Griess, president and chief executive officer of CSG International.  “Our predictable, resilient business provides us with good visibility, driven by our ability to lengthen and strengthen our relationships and expand our footprint within existing customers, while continuing to diversify our revenue by adding new customers in existing and new verticals.  We feel very good about our performance thus far in 2020 and our ability to maintain our non-GAAP guidance in the midst of a global pandemic.”

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Financial Overview (unaudited)

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

Quarter Ended June 30, Six Months Ended June 30,
Percent Percent
2020 2019 Changed 2020 2019 Changed
GAAP Results:
Revenue $ 240,321 $ 245,856 (2 %) $ 485,938 $ 490,649 (1 %)
Operating Income 19,775 30,338 (35 %) 52,934 62,431 (15 %)
Operating Margin Percentage 8.2 % 12.3 % 10.9 % 12.7 %
EPS $ 0.32 $ 0.60 (47 %) $ 0.99 $ 1.19 (17 %)
Non-GAAP Results:
Adjusted Revenue $ 224,626 $ 228,078 (2 %) $ 451,919 $ 455,739 (1 %)
Operating Income 30,633 40,145 (24 %) 72,787 81,458 (11 %)
Adjusted Operating Margin Percentage 13.6 % 17.6 % 16.1 % 17.9 %
EPS $ 0.59 $ 0.85 (31 %) $ 1.46 $ 1.67 (13 %)

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 second quarter of 2020 was $240.3 million, a 2% decrease when compared to both revenue of $245.9 million for the second quarter of 2019 and $245.6 million for the first quarter of 2020.  These decreases can be mainly attributed to the extended sales and implementation cycles and processing volume reductions as a result of the impact of the COVID-19 pandemic, as well as foreign currency headwinds.  The year-over-year decrease also reflects pricing adjustments associated with the five-year Comcast extension effective January 1, 2020, however this was offset by the year-over-year growth in revenue management solutions.

GAAP operating income for the second quarter of 2020 was $19.8 million, or 8.2% of total revenue, compared to $30.3 million, or 12.3% of total revenue, for the second quarter of 2019, and $33.2 million, or 13.5% of total revenue, for the first quarter of 2020.  The decrease in operating income for the second quarter of 2020 can be primarily attributed to the write-off of approximately $10 million of deferred contract costs resulting from the discontinuance of a project implementation.

GAAP EPS for the second quarter of 2020 was $0.32 as compared to $0.60 for the second quarter of 2019, and $0.66 for the first quarter of 2020.  The decline in GAAP EPS is primarily due to the write-off of deferred contract costs, discussed above, which had a negative impact on GAAP EPS for the second quarter of 2020 of $0.23.

Non-GAAP Results:  Non-GAAP adjusted revenue for the second quarter of 2020 was $224.6 million, a 2% decrease when compared to non-GAAP adjusted revenue of $228.1 million for the second quarter of 2019, and a 1% decrease when compared to $227.3 million for the first quarter of 2020.

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Non-GAAP operating income for the second quarter of 2020 was $30.6 million, or 13.6% of total non-GAAP adjusted revenue, compared to $40.1 million, or 17.6% of total non-GAAP adjusted revenue for the second quarter of 2019, and $42.2 million, or 18.5% of total non-GAAP adjusted revenue for the first quarter of 2020.

Non-GAAP EPS for the second quarter of 2020 was $0.59 compared to $0.85 for the second quarter of 2019, and $0.87 for the first quarter of 2020.

The changes in non-GAAP adjusted revenue, non-GAAP operating income, and non-GAAP EPS between quarters are primarily due to the factors discussed above.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments as of June 30, 2020 were $171.2 million compared to $131.3 million as of March 31, 2020 and $182.7 million as of December 31, 2019. CSG had net cash flows from operations for the second quarters ended June 30, 2020 and 2019 of $57.7 million and $15.6 million, respectively, and had non-GAAP free cash flow of $48.2 million and $6.0 million, respectively.

Summary of 2020 Financial Guidance

CSG’s is updating its financial guidance for the full year 2020, as follows:

As of<br><br><br>August 5, 2020 Previous
GAAP Measures:
Revenue No change $960 - $1,000 million
Operating Margin Percentage 11.1% - 11.7% 11.4% - 11.9%
EPS $1.99 - $2.22 $2.04 - $2.27
Cash Flows from Operating Activities No change $110 - $135 million
Non-GAAP Measures:
Adjusted Revenue No change $891 - $924 million
Adjusted Operating Margin Percentage No change 16.0% - 16.5%
EPS No change $2.87 - $3.10

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, August 5, 2020 at 5:00 p.m. EDT, to discuss CSG’s second quarter results for 2020.  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 800-437-2398 and ask the operator for the CSG Systems International conference call and David Banks, chairperson.

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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

For more than 35 years, CSG has simplified the complexity of business, delivering innovative customer engagement solutions that help companies acquire, monetize, engage and retain customers. Operating across more than 120 countries worldwide, CSG manages billions of critical customer interactions annually, and its award-winning suite of software and services allow companies across dozens of industries to tackle their biggest business challenges and thrive in an ever-changing marketplace. CSG is the trusted partner for driving digital innovation for hundreds of leading global brands, including AT&T, Charter Communications, Comcast, DISH, Eastlink, Formula One, Maximus, 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’s business may be disrupted and its results of operations and cash flows adversely affected by the COVID-19 pandemic;
• CSG derives approximately forty percent of its revenue from its two largest clients;
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• Continued market acceptance of CSG’s products and services;
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• CSG’s ability to continuously develop and enhance products in a timely, cost-effective, technically advanced and competitive manner;
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• CSG’s ability to deliver its solutions in a timely fashion within budget, particularly large and complex software implementations;
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• CSG’s dependency on the global telecommunications industry, and in particular, the North American telecommunications industry;
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• CSG’s ability to meet its financial expectations;
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• Increasing competition in CSG’s market from companies of greater size and with broader presence;
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• CSG’s ability to successfully integrate and manage acquired businesses or assets to achieve expected strategic, operating and financial goals;
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• CSG’s ability to protect its intellectual property rights;
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• CSG’s ability to maintain a reliable, secure computing environment;
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• CSG’s ability to conduct business in the international marketplace;
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• CSG’s ability to comply with applicable U.S. and International laws and regulations; and
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• Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates.
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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:

David Banks, Investor Relations

(303) 200-3127

E-mail: david.banks@csgi.com

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands, except per share amounts)

December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents 144,019 $ 156,548
Short-term investments 27,183 26,109
Total cash, cash equivalents and short-term investments 171,202 182,657
Settlement assets 139,248 169,327
Trade accounts receivable:
Billed, net of allowance of 4,057 and 3,735 244,413 244,058
Unbilled 35,941 33,450
Income taxes receivable 7,516 4,297
Other current assets 44,448 35,293
Total current assets 642,768 669,082
Non-current assets:
Property and equipment, net of depreciation of 100,883 and 98,029 84,689 84,429
Operating lease right-of-use assets 117,304 94,847
Software, net of amortization of 131,835 and 125,437 29,141 32,526
Goodwill 262,774 259,164
Acquired client contracts, net of amortization of 96,491 and 93,767 52,776 55,105
Client contract costs, net of amortization of 37,827 and 31,526 41,561 50,746
Deferred income taxes 9,193 9,392
Other assets 29,176 27,739
Total non-current assets 626,614 613,948
Total assets 1,269,382 $ 1,283,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt 12,188 $ 10,313
Operating lease liabilities 21,771 22,442
Client deposits 37,278 38,687
Trade accounts payable 34,494 32,704
Accrued employee compensation 45,689 77,527
Settlement liabilities 137,894 168,342
Deferred revenue 52,195 45,094
Income taxes payable 7,632 2,806
Other current liabilities 21,626 20,778
Total current liabilities 370,767 418,693
Non-current liabilities:
Long-term debt, net of unamortized discounts of 7,726 and 10,053 342,274 346,509
Operating lease liabilities 102,609 78,936
Deferred revenue 16,772 18,552
Income taxes payable 2,706 2,543
Deferred income taxes 13,334 6,376
Other non-current liabilities 23,298 14,759
Total non-current liabilities 500,993 467,675
Total liabilities 871,760 886,368
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; 33,080 and 32,891 shares outstanding 699 696
Additional paid-in capital 458,362 454,663
Treasury stock, at cost; 35,507 and 35,356  shares (874,592 ) (867,817 )
Accumulated other comprehensive income (loss):
Unrealized gains on short-term investments, net of tax 44 16
Cumulative foreign currency translation adjustments (51,932 ) (39,519 )
Accumulated earnings 865,041 848,623
Total stockholders' equity 397,622 396,662
Total liabilities and stockholders' equity 1,269,382 $ 1,283,030

All values are in US Dollars.

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

Quarter Ended Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Revenue $ 240,321 $ 245,856 $ 485,938 $ 490,649
Cost of revenue (exclusive of depreciation, shown separately below) 138,153 132,234 269,359 261,197
Other operating expenses:
Research and development 29,263 30,645 59,600 63,236
Selling, general and administrative 44,999 45,372 89,383 91,290
Depreciation 5,634 5,441 11,199 10,554
Restructuring and reorganization charges 2,497 1,826 3,463 1,941
Total operating expenses 220,546 215,518 433,004 428,218
Operating income 19,775 30,338 52,934 62,431
Other income (expense):
Interest expense (4,040 ) (4,498 ) (8,253 ) (9,058 )
Amortization of original issue discount (740 ) (700 ) (1,470 ) (1,390 )
Interest and investment income, net 303 417 832 936
Other, net (1,048 ) 1,280 (1,117 ) (231 )
Total other (5,525 ) (3,501 ) (10,008 ) (9,743 )
Income before income taxes 14,250 26,837 42,926 52,688
Income tax provision (3,884 ) (7,458 ) (11,046 ) (14,058 )
Net income $ 10,366 $ 19,379 $ 31,880 $ 38,630
Weighted-average shares outstanding:
Basic 32,100 32,093 32,047 32,111
Diluted 32,258 32,458 32,308 32,448
Earnings per common share:
Basic $ 0.32 $ 0.60 $ 0.99 $ 1.20
Diluted 0.32 0.60 0.99 1.19

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

Six Months Ended
June 30,<br><br><br>2020 June 30,<br><br><br>2019
Cash flows from operating activities:
Net income $ 31,880 $ 38,630
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation 11,199 10,554
Amortization 22,043 24,625
Amortization of original issue discount 1,470 1,390
Asset impairment 10,595 365
Gain on short-term investments and other (110 ) (170 )
Deferred income taxes 6,771 4,181
Stock-based compensation 10,112 8,500
Subtotal 93,960 88,075
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net (6,286 ) (31,751 )
Other current and non-current assets and liabilities (8,951 ) (16,222 )
Income taxes payable/receivable 1,332 (315 )
Trade accounts payable and accrued liabilities (36,381 ) (17,328 )
Deferred revenue 6,803 5,970
Net cash provided by operating activities 50,477 28,429
Cash flows from investing activities:
Purchases of software, property and equipment (14,334 ) (17,858 )
Purchases of short-term investments (35,112 ) (22,542 )
Proceeds from sale/maturity of short-term investments 34,185 28,753
Acquisition of and investments in business, net of cash acquired (9,991 ) (4,000 )
Net cash used in investing activities (25,252 ) (15,647 )
Cash flows from financing activities:
Proceeds from issuance of common stock 1,247 1,115
Payment of cash dividends (15,856 ) (14,808 )
Repurchase of common stock (14,515 ) (20,741 )
Payments on long-term debt (4,687 ) (3,750 )
Net cash used in financing activities (33,811 ) (38,184 )
Effect of exchange rate fluctuations on cash (3,943 ) (98 )
Net decrease in cash and cash equivalents (12,529 ) (25,500 )
Cash and cash equivalents, beginning of period 156,548 139,277
Cash and cash equivalents, end of period $ 144,019 $ 113,777
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest $ 7,327 $ 8,110
Income taxes 2,865 10,244

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EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

Revenue by Significant Customers: 10% or more of Revenue

Quarter Ended Quarter Ended Quarter Ended
June 30, 2020 March 31, 2020 June 30, 2019
Amount % of Revenue Amount % of Revenue Amount % of Revenue
Comcast $ 53,282 22 % $ 52,679 21 % $ 55,439 23 %
Charter 51,364 21 % 50,712 21 % 48,455 20 %

Revenue by Vertical

Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
2020 2020 2019
Broadband/Cable/Satellite 60 % 58 % 58 %
Telecommunications 18 % 17 % 19 %
All other 22 % 25 % 23 %
Total revenue 100 % 100 % 100 %

Revenue by Geography

Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
2020 2020 2019
Americas 87 % 88 % 87 %
Europe, Middle East and Africa 9 % 9 % 9 %
Asia Pacific 4 % 3 % 4 %
Total revenue 100 % 100 % 100 %

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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 adjusted revenue, non-GAAP operating income, non-GAAP adjusted operating margin percentage, non-GAAP EPS, non-GAAP adjusted EBITDA, and non-GAAP free cash flow.  CSG believes that these non-GAAP financial measures, when reviewed in conjunction with its GAAP financial measures, provide investors with greater transparency to the information used by CSG’s management in its financial and operational decision making.  CSG uses these non-GAAP financial measures for the following purposes:

• Certain internal financial planning, reporting, and analysis;
• Forecasting and budgeting;
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• Certain management compensation incentives; and
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• Communications with CSG’s Board of Directors, stockholders, financial analysts, and investors.
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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
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• Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.
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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;
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• 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;
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• 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
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• Certain charges excluded from CSG’s non-GAAP financial measures are cash expenses, and therefore do impact CSG’s cash position.
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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 Adjusted Revenue Operating Income Adjusted Operating Margin Percentage EPS
Transaction fees X — X —
Restructuring and reorganization charges — X X X
Acquisition-related expenses:
Amortization of acquired intangible assets — X X X
Earn-out compensation — X X X
Transaction-related costs — X X X
Stock-based compensation — X X X
Amortization of original issue discount (“OID”) — — — X
Gain (loss) on 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:

• 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 CSG.  Because CSG controls the integrated service provided under its payment services client contracts, these transaction fees are presented gross, and not netted against revenue; however, other payments companies who do not provide and/or control an integrated service present their revenue net of transaction fees.  The exclusion of these fees in calculating CSG’s non-GAAP adjusted revenue provides management and investors an additional means to use to compare CSG’s current revenue with historical and future periods, as well as with other payments companies.
• 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.
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• 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
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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.
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• 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.
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• 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.
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• 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.
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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 software, property and equipment.

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Non-GAAP Financial Measures

Non-GAAP Adjusted Revenue:

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

Quarter Ended<br><br><br>June 30, Six Months Ended<br><br><br>June 30,
2020 2019 2020 2019
GAAP revenue $ 240,321 $ 245,856 $ 485,938 $ 490,649
Less:  Transaction fees (15,695 ) (17,778 ) (34,019 ) (34,910 )
Non-GAAP adjusted revenue $ 224,626 $ 228,078 $ 451,919 $ 455,739

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<br><br><br>June 30, Six Months Ended<br><br><br>June 30,
2020 2019 2020 2019
GAAP operating income $ 19,775 $ 30,338 $ 52,934 $ 62,431
Restructuring and reorganization charges (1) 2,497 1,826 3,463 1,941
Acquisition-related expenses:
Amortization of acquired intangible assets 3,033 3,174 6,084 6,355
Earn-out compensation - - - 1,260
Transaction-related costs 73 - 126 -
Stock-based compensation (1) 5,255 4,807 10,180 9,471
Non-GAAP operating income $ 30,633 $ 40,145 $ 72,787 $ 81,458
Non-GAAP adjusted revenue $ 224,626 $ 228,078 $ 451,919 $ 455,739
Non-GAAP adjusted operating margin percentage 13.6 % 17.6 % 16.1 % 17.9 %
(1) Stock-based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges.
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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
June 30, 2020 June 30, 2019
Amounts EPS (3) Amounts EPS (3)
GAAP net income $ 10,366 $ 0.32 $ 19,379 $ 0.60
GAAP income tax provision (2) 3,884 7,458
GAAP income before income taxes 14,250 26,837
Restructuring and reorganization charges (1) 2,497 1,826
Acquisition-related costs:
Amortization of acquired intangible assets 3,033 3,174
Transaction-related costs 73 -
Stock-based compensation (1) 5,255 4,807
Amortization of OID 740 700
Non-GAAP income before income taxes 25,848 37,344
Non-GAAP income tax provision (2) (6,850 ) (9,709 )
Non-GAAP net income $ 18,998 $ 0.59 $ 27,635 $ 0.85
Six Months Ended Six Months Ended
--- --- --- --- --- --- --- --- --- --- ---
June 30, 2020 June 30, 2019
Amounts EPS (3) Amounts EPS (3)
GAAP net income $ 31,880 $ 0.99 $ 38,630 $ 1.19
GAAP income tax provision (2) 11,046 14,058
GAAP income before income taxes 42,926 52,688
Restructuring and reorganization charges (1) 3,463 1,941
Acquisition-related expenses:
Amortization of acquired intangible assets 6,084 6,355
Earn-out compensation - 1,260
Transaction-related costs 126 -
Stock-based compensation (1) 10,180 9,471
Amortization of OID 1,470 1,390
Non-GAAP income before income taxes 64,249 73,105
Non-GAAP income tax provision (2) (17,026 ) (19,007 )
Non-GAAP net income $ 47,223 $ 1.46 $ 54,098 $ 1.67
(2) For the second quarter and six months ended June 30, 2020 the GAAP effective income tax rates were approximately 27% and 26%, respectively, and the non-GAAP effective income tax rates were approximately 27% for both periods.  For the second quarter and six months ended June 30, 2019 the GAAP effective income tax rates were approximately 28% and 27%, respectively, and the non-GAAP effective income tax rates were approximately 26% for both periods.
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(3) The outstanding diluted shares for the second quarter and six months ended June 30, 2020 were 32.3 million for both periods, and for the second quarter and six months ended June 30, 2019 were 32.5 million and 32.4 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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
GAAP net income $ 10,366 $ 19,379 $ 31,880 $ 38,630
GAAP income tax provision 3,884 7,458 11,046 14,058
Interest expense (4) 4,040 4,498 8,253 9,058
Amortization of OID 740 700 1,470 1,390
Interest and investment income and other, net 745 (1,697 ) 285 (705 )
GAAP operating income 19,775 30,338 52,934 62,431
Restructuring and reorganization charges (1) 2,497 1,826 3,463 1,941
Acquisition-related expenses:
Amortization of acquired intangible assets (5) 3,033 3,174 6,084 6,355
Earn-out compensation - - - 1,260
Transaction-related costs 73 - 126 -
Stock-based compensation (1) 5,255 4,807 10,180 9,471
Amortization of other intangible assets (5) 3,249 2,666 6,534 5,040
Amortization of client contract costs (5) 4,542 6,419 8,568 12,398
Depreciation 5,634 5,441 11,199 10,554
Non-GAAP adjusted EBITDA $ 44,058 $ 54,671 $ 99,088 $ 109,450
Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenue 20 % 24 % 22 % 24 %
(4) Interest expense includes amortization of deferred financing costs as provided in Note 5 below.
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(5) Amortization on the statement of cash flows is made up of the following items for the indicated periods (in thousands):
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Quarter Ended Six Months Ended
--- --- --- --- --- --- --- --- ---
June 30, June 30,
2020 2019 2020 2019
Amortization of acquired intangible assets $ 3,033 $ 3,174 $ 6,084 $ 6,355
Amortization of other intangible assets 3,249 2,666 6,534 5,040
Amortization of client contract costs 4,542 6,419 8,568 12,398
Amortization of deferred financing costs 431 417 857 832
Total amortization $ 11,255 $ 12,676 $ 22,043 $ 24,625

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 Six Months Ended
June 30, June 30,
2020 2019 2020 2019
Cash flows from operating activities $ 57,690 $ 15,603 $ 50,477 $ 28,429
Purchases of software, property and equipment (9,512 ) (9,572 ) (14,334 ) (17,858 )
Non-GAAP free cash flow $ 48,178 $ 6,031 $ 36,143 $ 10,571

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Non-GAAP Financial Measures – 2020 Financial Guidance

Non-GAAP Adjusted Revenue:

The reconciliation of GAAP revenue to non-GAAP adjusted revenue, as included in CSG’s 2020 full year financial guidance, is as follows:

2020 Guidance Range
Low Range High Range
GAAP revenues $ 960,000 $ 1,000,000
Less:  Transaction fees (69,000 ) (76,000 )
Non-GAAP adjusted revenues $ 891,000 $ 924,000

Non-GAAP Operating Income:

The reconciliation of GAAP operating income to non-GAAP operating income, as included in CSG’s 2020 full year financial guidance, is as follows (in thousands, except percentages):

2020 Guidance Range
Low Range High Range
Operating Income
GAAP operating income $ 106,800 $ 117,000
Restructuring and reorganization charges 3,500 3,500
Acquisition-related expenses:
Amortization of acquired intangible assets 11,500 11,500
Transaction-related costs 100 100
Stock-based compensation 20,700 20,700
Non-GAAP operating income $ 142,600 $ 152,800
Operating Margin Percentage
GAAP revenue $ 960,000 $ 1,000,000
GAAP operating margin percentage 11.1 % 11.7 %
Non-GAAP adjusted revenue $ 891,000 $ 924,000
Non-GAAP adjusted operating margin percentage 16.0 % 16.5 %

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Non-GAAP EPS:

The reconciliation of GAAP EPS to non-GAAP EPS as included in CSG’s 2020 full year financial guidance is as follows (in thousands, except per share amounts):

2020 Guidance Range
Low Range High Range
Amounts EPS (7) Amounts EPS (7)
GAAP net income $ 64,100 $ 1.99 $ 71,600 $ 2.22
GAAP income tax provision (6) 22,700 25,400
GAAP income before income taxes 86,800 97,000
Restructuring and reorganization charges 3,500 3,500
Acquisition-related expenses:
Amortization of acquired intangible assets 11,500 11,500
Transaction-related costs 100 100
Stock-based compensation 20,700 20,700
Amortization of OID 3,000 3,000
Non-GAAP income before income taxes 125,600 135,800
Non-GAAP income tax provision (6) (33,200 ) (35,900 )
Non-GAAP net income $ 92,400 $ 2.87 $ 99,900 $ 3.10
(6) For 2020, the estimated effective income tax rate for GAAP and non-GAAP purposes is expected to be approximately 27%.
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(7) The weighted-average diluted shares outstanding are expected to be approximately 32 million.
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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 CSG’s 2020 full year financial guidance (in thousands, except percentages):

2020 Guidance Range
Low Range High Range
GAAP net income $ 64,100 $ 71,600
GAAP income tax provision (6) 22,700 25,400
Interest expense 16,700 16,700
Amortization of OID 3,000 3,000
Interest and investment income and other, net 300 300
GAAP operating income 106,800 117,000
Restructuring and reorganization charges 3,500 3,500
Acquisition-related expenses:
Amortization of acquired intangible assets 11,500 11,500
Transaction-related costs 100 100
Stock-based compensation 20,700 20,700
Amortization of other intangible assets 12,400 12,400
Amortization of client contract costs 18,400 18,400
Depreciation 24,100 24,100
Non-GAAP adjusted EBITDA $ 197,500 $ 207,700
Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenues 22 % 22 %

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):

2020 Guidance Range
Low Range High Range
Cash flows from operating activities $ 110,000 $ 135,000
Purchases of software, property and equipment (25,000 ) (35,000 )
Non-GAAP free cash flow $ 85,000 $ 100,000

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