CSG Systems International, Inc.

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CSG Systems International, Inc.

7887 E. Belleview Avenue, Suite 1000
Englewood, Colorado 80111
U.S.A.
Telephone: (303) 796-2850
Toll Free: (800) 366-2744
Fax: (303) 804-4088
Web site: http://www.csgsystems.com

Public Company
Incorporated: 1994 as CSG Holdings, Inc.
Employees: 2,549
Sales: $529.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: CSGS
NAIC: 518219 Data Processing, Hosting, and Related Services

CSG Systems International, Inc. provides billing and customer care services to cable television, direct broadcast satellite (DBS), Internet, and telecommunications customers. Business is divided between two divisions: Global Software and Broadband. The NASDAQ-listed company serves more than 230 clients in some 40 countries, working in nearly two dozen languages and 35 different currencies. In addition to its headquarters in Englewood, Colorado, CSG maintains offices in Omaha, Nebraska; Cambridge, Massachusetts; and Miami, Florida. International offices are located in Toronto, London, Paris, Rome, Madrid, Buenos Aires, Rio de Janeiro, Mexico City, Singapore, Sydney, Tokyo, Kuala Lumpur, and Beijing. Major clients include AOL-Time Warner, Comcast, DirecTV, eBay, EchoStar Communications, Time Warner, and Verizon.

Parent Company's Founding in the Early 1970s

Before becoming an independent company, CSG was part of First Data Resources, cofounded in 1971 by CSG's first chairman, Neal Hansen. First Data started out serving the financial sector, and by 1976 had become the data processor for both Visa and MasterCard. In 1980 American Express acquired First Data in an effort to establish a financial services operation. With American Express's deep pockets, First Data, over the next decade, became the largest bank-processing company in the United States. The company branched into other sectors as well. In 1982 Hansen launched a new First Data division, called Cable Services Group, to serve the cable television industry. Hansen left a year later to become chairman and chief executive officer of Applied Communications, Inc. (ACI), an Omaha-based developer of customer-written software to process the electronic transfer of funds. It was here that he began working with George Haddix, who held a doctorate in mathematics and served on the faculties of three universities before devoting himself to a full-time business career. They sold the business to US West Inc. in 1987, stayed on, then in 1989 teamed up to start a consulting business, Hansen, Haddix and Associates, providing advisory management services to suppliers of software products and services.

Cable Services Group, in the meantime, became a dominant player in the cable television billing sector along with category leader CableData, but the unit was not performing nearly as well as First Data's core business. In 1992 American Express spun off First Data, which now faced the decision of whether to invest in its steady but complacent cable billing operation or put that money to better use by supporting its faster-growing financial business. In 1994 it placed Cable Services Group, Inc. on the block. Hansen and Haddix put together an investor group and bought the business for $137 million.

Cable Services Group took the name CSG Systems International, Inc. in November 1994. Hansen became chairman and CEO, and Haddix was named president and chief technical officer. The company started out with a reasonably good client list and two products: statement processing services and basic cable processing. CSG may have been profitable but was still in need of a turnaround. Haddix's eventual replacement as president, Jack Pogge, told Broadcast & Cable in a 1997 profile, "Neil Hansen is fond of saying that if there were a law against selling, none of the previous sales staff would have been convicted. Every few years, the local sales staff would take the local cable company representative out to play golf and drink beer and renew the contract—maybe." According to Broadcast & Cable, Hansen and Haddix made it clear it would no longer be business as usual: "The new attitude prompted a lot of departures. Of the 550 employees in CSG at the time of the buyout, 350 hit the road in the weeks and months following the deal…. More than just the sales department adopted a gung-ho attitude. Software development—essentially R&D—got religion and began work on new products and enhancements of existing products." CSG spent more than $37 million in two years on software development, resulting in a pair of key products: ACSR (Advanced Customer Service Representative), a cross-referencing tool that not only kept track of billing but also provided customer service reps with instant account information presented in an easy-to-navigate graphical user interface for accessing information as well as inputting an order or service call; and CSG VantagePoint, a cross-marketing tool to take advantage of the information available from the billing system.

Going Public: 1996

With its house in order, CSG was soon ready to go public to raise funds and have stock available to grow the company through acquisitions. In February 1996, the company sold 2.9 million shares at $15 a share in an initial public offering of stock led by Alex. Brown & Sons. CSG's first acquisition came in June 1996 when it paid $4.7 million for Bytel Limited, a provider of customer management software systems to the cable industry in the United Kingdom, where it served 850,000 customers. The addition of Bytel gave CSG a base on which to grow its European business. Because it was so dependent on its domestic client base, CSG wanted to expand international sales, which did not even exist in 1995 and at the end of 1996 had increased to 8 percent of the company's $132 million in revenues. In addition, CSG's software and professional services revenues grew from less than 1 percent in 1995 to 14 percent in 1996.

The company's strong domestic growth, according to Broadcasting & Cable, was "largely a function of rapid change in telecommunications. There's more competition than ever before as cable companies, DBS providers and Baby Bells try to carve a chunk out of each other's traditional territories. It's no longer enough to provide a single service; all major players are jockeying to offer one-stop shopping for video, voice and data services, since those who are first to market often gain a strategic advantage." Pogge explained, "Convergence and the advent of DBS—that's what generated all the activity in the billing world…. People had to be able to bill for new product lines so they could start packaging products to compete with new entrants in the field. To do either you have to have a billing system." As companies came to realize how difficult it was to develop and operate such a billing system, they terminated their in-house efforts and hired companies including CSG, which by the end of 1997 emerged as the leader in cable television billing, due in large measure to a 15-year, $1.8 billion Master Subscriber contract it signed with Tele-Communications Inc., expanding the number of billed homes by nearly 50 percent. CSG also was helped by CableData's missteps. CableData, according to Broadcasting & Cable, "effectively shot itself in the foot on the digital cable front by charging excessively for its billing services. Indeed, that likely was what drove TCI and CSG together." In a separate but related transaction, CSG acquired the SummiTrak back-office billing system TCI had been developing for three years in a deal worth about $172 million. Although CSG did not need a new back-office system, it was able to cherry-pick specific applications from SummiTrak and also add a number of talented software engineers. The end of the year also brought the retirement of Haddix, with Pogge becoming president and COO. Revenues continued to trend upward, totaling $171.8 million in 1997, while net income improved from $25.2 million in 1996 to more than $36.1 million in 1997.

In the final two years of the 1990s, CSG completed another acquisition, paying $6 million and assuming $1.3 million in debt for US Telecom Advanced Technology Systems, Inc. CSG also continued to invest heavily in research and development, leading to the introduction of new products such as CSG WorkForce Express, an automated dispatch system for technicians; CSG Care Express, an Internet-based bill payment and customer do-it-yourself system; and CSG Real-Time Rating Engine, a system that allowed a transaction to be rated on a number of criteria. Some of the new systems were specifically geared toward the developing broadband market, which offered a great deal of promise for new business, although no one was certain when it would become a must-have product for consumers. Despite the delay in the expansion of that market, CSG enjoyed strong growth nevertheless. Sales increased to $236.6 million in 1998 and topped $322 million in 1999.

Y2K: Not an Issue

CSG entered the new century, after addressing the Y2K scare with relative ease, by enhancing the capabilities of existing products and introducing new ones and launching a new international sales effort. ACSR was web-enabled, giving it a Windows look, which helped to cut down on the training time of customer service reps. CSG also introduced CSG.net, a customer care and billing solution for the Internet protocol (IP) marketplace. Another product, CSG NextGen, was designed specifically with the international markets in mind, able to support multiple languages and currencies. CSG targeted "three-play" providers in Europe, Latin American, Asia—companies that used the same pipe to deliver voice, video, and data. Another development of note in 2000, AT&T Broadband acquired TCI, thus inheriting the 15-year Master Subscriber contract. AT&T submitted an arbitration claim questioning provisions of this agreement, and after the claim was dismissed the two sides worked out a new 12-year agreement.

Company Perspectives:

Yesterday. Today. Tomorrow. You need solutions that aren't just focused on your billing processes, but that directly impact business and how you're able to get it done. At CSG Systems, we understand more than just billing. We understand business. More importantly, we understand your business.

Revenues approached $400 million in 2000, and net income totaled an impressive $90.5 million. With three-quarters of its sales under contract, CSG was well positioned for 2001, which saw sales increase to $477 million and net income to $113.9 million—this in spite of an economy lapsing into recession (proving that consumers were loathe to give up their cable or satellite television). During the course of the year, CSG also completed three important acquisitions. It picked up Athene Software's churn management software group and its Profit-Now product. (Churn is the number of participants who discontinue their use of a service divided by the average number of total participants.) CSG also paid $16.7 million in cash to acquire Planet Consulting, an e-business consulting firm that was involved in the development of secure, real-time transaction enablement on the Internet. Finally, CSG negotiated an acquisition that would be completed in early 2002, the $261.6 million cash purchase of the billing and customer care assets of Lucent Technologies Inc., known as Kenan Systems when Lucent acquired the business in 1999 for $1.48 billion. Now it was shed as Lucent tried to raise cash to focus on core activities. Kenan had been smothered under Lucent and looked to regain some momentum with new ownership. For CSG, the addition of Kenan was a major boost, bringing with it a great deal of credibility as well as market penetration in Europe, Asia, and South America, where Kenan had more than 200 service provider customers. Also in 2002 CSG completed the acquisition of the customer care and billing assets of IBM, thereby forging a key relationship with IBM and picking up more than 34 telecommunications customers spread across every sector.

As a result of these acquisitions, CSG experienced a significant increase in revenues, which totaled $611 million in 2002. But the company's expectations were higher, leading to the stock being bid down by investors. CSG responded by imposing steep job cuts. CSG also would come under something of a cloud in 2002 when in May AT&T filed a demand for arbitration, claiming that CSG should have been charging AT&T Broadband "most-favored nation" rates, instead of charging more than many other CSG customers were paying. Later in the year Comcast Corporation became involved when it merged with AT&T Broadband. CSG sued Comcast, accusing it of conspiring with AT&T Broadband to break CSG's contract with AT&T Broadband. CSG soon dropped its suit, but the arbitration matter went forward. In October 2003 the arbitrator ruled that CSG must pay $120 million in damages to Comcast, which inherited the dispute. CSG would continue to process former AT&T Broadband customers, but not new customers acquired by Comcast. It was a significant hit to absorb, prompting CSG to initiate new cost-cutting measures.

The deterioration in the global telecommunications industry finally had a significant impact on CSG, resulting in declining revenues in 2003 and 2004 to $529.7 million. But after recording a net loss of $26.3 million in 2003, CSG earned nearly $47.2 million in 2004. The year 2004 also saw changes in leadership. Pogge left the company, and at the end of the year Hansen announced his retirement. Pogge was replaced by John Bonde. Hansen was replaced as CEO in March 2005 by Ed Nafus, president of the company's Broadband Services Division. Hansen then retired as chairman of the board in July 2005, although he stayed on as a director. He was succeeded in this post by Bernard W. Reznicek, who had more than 40 years of experience in the electric utility industry, as the former chairman, president, and CEO of Boston Edison Company and president and CEO of Omaha Public Power District. Business was improved through the first half of 2005 and the company's new management team was optimistic about CSG's chances of achieving long-term sustainable growth. In October 2005 CSG padded its coffers by selling its billing services unit, which made software-based billing systems, to Comverse Technology Inc. for $251 million in cash.

Principal Subsidiaries

CSG Systems, Inc.; CSG Systems Software, Inc.; CSG Services, Inc.

Principal Competitors

Amdocs Limited; Convergys Corporation; DST Systems, Inc.

Key Dates:

1982:: The business is launched as Cable Services Group, a division of First Data Resources.
1994:: Neal Hansen and George Haddix lead an investment group to acquire Cable Services Group, creating CSG Systems International Inc.
1996:: CSG is taken public.
1997:: Haddix retires.
2002:: Lucent Technologies Inc. is acquired.
2005:: Hansen retires.