CSG SYSTEMS INTERNATIONAL, INC.
DISCLOSURES FOR NON-GAAP FINANCIAL MEASURES
Use of Non-GAAP Financial Measures and Limitations
To supplement its condensed consolidated financial statements presented in accordance with generally accepted accounting principles (GAAP), CSG uses non-GAAP operating income, non-GAAP adjusted operating margin percentage, non-GAAP EPS, non-GAAP adjusted EBITDA, and non-GAAP free cash flow. CSG believes that these non-GAAP financial measures, when reviewed in conjunction with its GAAP financial measures, provide investors with greater transparency to the information used by CSG's management in its financial and operational decision making. CSG uses these non-GAAP financial measures for the following purposes:
- Certain internal financial planning, reporting, and analysis;
- Forecasting and budgeting;
- Certain management compensation incentives; and
- Communications with CSG's Board of Directors, stockholders, financial analysts, and investors.
These non-GAAP financial measures are provided with the intent of providing investors with the following information:
- A more complete understanding of CSG's underlying operational results, trends, and cash generating capabilities;
- Consistency and comparability with CSG's historical financial results; and
- Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.
Non-GAAP financial measures are not measures of performance under GAAP, and therefore should not be considered in isolation or as a substitute for GAAP financial information. Limitations with the use of non-GAAP financial measures include the following items:
- Non-GAAPfinancial 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-GAAPfinancial 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
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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:
Adjusted Operating | ||||||
Non-GAAP Exclusions | Operating Income | Margin Percentage | EPS | |||
Transaction fees | - | X | - | |||
Restructuring and reorganization charges | X | X | X | |||
Executive transition costs | X | X | X | |||
Acquisition-related expenses: | ||||||
Amortization of acquired intangible assets | X | X | X | |||
Transaction-related costs | X | X | X | |||
Stock-based compensation | X | X | X | |||
Gain (loss) on debt extinguishment/conversion.... | - | - | X | |||
Gain (loss) on acquisitions or dispositions | - | - | X | |||
Unusual income tax matters | - | - | X |
CSG believes that excluding certain items in calculating its non-GAAP financial measures provides meaningful supplemental information regarding CSG's performance and these items are excluded for the following reasons:
- Transaction fees are primarily comprised of fees paid to third-party payment processors and financial institutions and interchange fees under CSG's payment services contracts. Transaction fees are included in revenue in CSG's Income Statement (and not netted against revenue) because CSG maintains control and acts as principal over the integrated service provided under its payment services customer contracts. However, CSG excludes expense associated with transaction fees from the numerator and denominator in calculating its non-GAAP adjusted operating margin percentage in order to provide comparability with historical and future periods and with its peer group and competitors.
- Restructuring and reorganization charges are expenses that result from cost reduction initiatives and/or significant changes to CSG's business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. These charges are not considered reflective of CSG's recurring business operating results. The exclusion of these items in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.
- Executive transition costs include expenses incurred related to a departure of a CSG executive officer under the terms of the related separation agreement. These types of costs are not considered reflective of CSG's recurring business operating results. The exclusion of these costs in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.
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- Acquisition-relatedexpenses include amortization of acquired intangible assets and transaction-related costs, to include earn-out compensation. Transaction-related costs, which typically include expenses related to legal, accounting, and other professional services, are direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG's recurring business operating results. The total amount of acquisition-related expenses can vary significantly between periods based on the number and size of acquisition activities, previously acquired intangible assets becoming fully amortized, and ultimate realization of earn-out compensation. In addition, the timing of these expenses may not directly correlate with underlying performance of the CSG's operations. Therefore, the exclusion of acquisition-related expenses in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.
- Stock-basedcompensation 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.
- Gains and losses related to the extinguishment/conversion of debt can be as a result of the refinancing of
CSG's credit agreement and/or repurchase, conversion, or settlement of CSG's convertible notes. These activities, to include any derivative activity related to debt conversions, are not considered reflective of CSG's recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG's non-GAAP EPS allows management and investors an additional means to compare CSG's current operating results with historical and future periods. - Gains or losses related to the acquisition or disposition of certain of CSG's business activities are not considered reflective of CSG's recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of these items allows investors to further evaluate the cash impact of these activities for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG's non-GAAP EPS allows management and investors an additional means to compare CSG's current operating results with historical and future periods.
- Unusual items within CSG's quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods
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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, executive transition costs, gains and losses related to the extinguishment of debt, and gains and losses on acquisitions or dispositions, as discussed above. Additionally, management uses non-GAAP free cash flow, among other measures, to assess its financial performance and cash generating capabilities, and believes that it is useful to investors because it shows CSG's cash available to service debt, make strategic acquisitions and investments, repurchase its common stock, pay cash dividends, and fund ongoing operations. CSG defines non-GAAP free cash flow as net cash flows from operating activities less the purchases of software, property and equipment.
Non-GAAP Financial Measures
Non-GAAP Operating Income and Non-GAAP Adjusted Operating Margin Percentage:
The reconciliation of GAAP operating income to non-GAAP operating income, and calculation of CSG's non- GAAP adjusted operating margin percentage, for the indicated periods are as follows (in thousands, except percentages):
Quarter Ended March 31, | |||||||
2024 | 2023 | ||||||
Non-GAAP Operating Income | |||||||
GAAP operating income | $ | 31,797 | $ | 38,193 | |||
Restructuring and reorganization charges (1) | 1,998 | 5,194 | |||||
Executive transition costs | 352 | - | |||||
Acquisition-related expenses: | |||||||
Amortization of acquired intangible assets | 2,852 | 3,209 | |||||
Transaction-related costs | - | 158 | |||||
Stock-based compensation (1) | 7,869 | 6,757 | |||||
Non-GAAP operating income | $ | 44,868 | $ | 53,511 | |||
Non-GAAP Adjusted Operating Margin Percentage | |||||||
Revenue | $ | 295,135 | $ | 298,739 | |||
Less: Transaction fees (2) | (25,062 | ) | (21,973 | ) | |||
Revenue less transaction fees | $ | 270,073 | $ | 276,766 | |||
Non-GAAP adjusted operating margin percentage | 16.6 | % | 19.3 | % |
- Restructuring and reorganization charges include stock-based compensation, which is not included in the stock-based compensation line in the tables above and following, and depreciation, which has not been recorded to the depreciation line item on CSG's Income Statement.
- Transaction fees are primarily comprised of fees paid to third-party payment processors and financial institutions and interchange fees under CSG's payment services contracts. Transaction fees are included in revenue in CSG's Income Statement (and not netted against revenue) because CSG maintains control and acts as principal over the integrated service provided under its payment services customer contracts. However, CSG excludes expense associated with transaction fees from the numerator and denominator in calculating its non-GAAP adjusted operating margin percentage in order to provide comparability with historical and future periods and with its peer group and competitors.
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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 | |||||||||||||||
March 31, 2024 | March 31, 2023 | |||||||||||||||
Amounts | EPS (4) | Amounts | EPS (4) | |||||||||||||
GAAP net income | $ | 19,467 | $ | 0.68 | $ | 20,928 | $ | 0.68 | ||||||||
GAAP income tax provision (3) | 7,998 | 8,183 | ||||||||||||||
GAAP income before income taxes | 27,465 | 29,111 | ||||||||||||||
Restructuring and reorganization charges (1) | 1,998 | 5,194 | ||||||||||||||
Executive transition costs | 352 | - | ||||||||||||||
Acquisition-related costs: | ||||||||||||||||
Amortization of acquired intangible assets | 2,852 | 3,209 | ||||||||||||||
Transaction-related costs | - | 158 | ||||||||||||||
Stock-based compensation (1) | 7,869 | 6,757 | ||||||||||||||
Non-GAAP income before income taxes | 40,536 | 44,429 | ||||||||||||||
Non-GAAP income tax provision (3) | (11,553 | ) | (12,662 | ) | ||||||||||||
Non-GAAP net income | $ | 28,983 | $ | 1.01 | $ | 31,767 | $ | 1.04 | ||||||||
- For the quarters ended March 31, 2024 and 2023, the GAAP effective income tax rates were approximately 29% and 28%, respectively, and the non-GAAP effective income tax rates were 28.5% for both periods.
- The outstanding diluted shares for the quarters ended March 31, 2024 and 2023 were 28.8 million and 30.6 million, respectively.
Non-GAAP Adjusted EBITDA:
CSG's calculation of non-GAAP adjusted EBITDA and the reconciliation of CSG's non-GAAP adjusted EBITDA
measure to GAAP net income is provided below for the indicated periods (in thousands, except percentages):
Quarter Ended | |||||||
March 31, | |||||||
2024 | 2023 | ||||||
GAAP net income | $ | 19,467 | $ | 20,928 | |||
GAAP income tax provision | 7,998 | 8,183 | |||||
Interest expense (5) | 7,506 | 7,219 | |||||
Interest and investment income and other, net | (3,174 | ) | 1,863 | ||||
GAAP operating income | 31,797 | 38,193 | |||||
Restructuring and reorganization charges (1) | 1,998 | 5,194 | |||||
Executive transition costs | 352 | - | |||||
Acquisition-related expenses: | |||||||
Amortization of acquired intangible assets (6) | 2,852 | 3,209 | |||||
Transaction-related costs | - | 158 | |||||
Stock-based compensation (1) | 7,869 | 6,757 | |||||
Amortization of other intangible assets (6) | 2,565 | 3,453 | |||||
Amortization of customer contract costs (6) | 5,028 | 4,622 | |||||
Depreciation (1) | 5,636 | 5,720 | |||||
Non-GAAP adjusted EBITDA | $ | 58,097 | $ | 67,306 | |||
Non-GAAP adjusted EBITDA as a percentage of revenue less transaction | |||||||
fees (2) | 21.5% | 24.3% | |||||
- Interest expense includes amortization of deferred financing costs as provided in Note 6 below.
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- Amortization on the statement of cash flows is made up of the following items for the indicated periods (in thousands):
Quarter Ended | ||||||
March 31, | ||||||
2024 | 2023 | |||||
Amortization of acquired intangible assets | $ | 2,852 | $ | 3,209 | ||
Amortization of other intangible assets | 2,565 | 3,453 | ||||
Amortization of customer contract costs | 5,028 | 4,622 | ||||
Amortization of deferred financing costs | 864 | 187 | ||||
Total amortization | $ | 11,309 | $ | 11,471 | ||
Non-GAAP Free Cash Flow:
CSG's calculation of non-GAAP free cash flow and the reconciliation of CSG's non-GAAP free cash flow measure
to cash flows from operating activities are provided below for the indicated periods (in thousands):
Quarter Ended | ||||||
March 31, | ||||||
2024 | 2023 | |||||
Cash flows from operating activities | $ | (29,351 | ) | $ | 15,397 | |
Purchases of software, property and equipment | (4,774) | (8,700) | ||||
Non-GAAP free cash flow (deficit) | $ | (34,125 | ) | $ | 6,697 | |
Non-GAAP Financial Measures - 2024 Financial Guidance
Refer to the "Non-GAAP Financial Measures - 2024 Financial Guidance" in Exhibit 2 to CSG's earnings release dated February 7, 2024, which can be found on the Investor Relations page of CSG's website at csgi.comfor the reconciliation of CSG's 2024 financial guidance.
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CSG Systems International Inc. published this content on 01 May 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 02 May 2024 11:52:27 UTC.