Csg Systems International, Inc. Business Information, Profile, and History

Company Perspectives:

Yesterday. Today. Tomorrow. You need solutions that aren't just focus ed on your billing processes, but that directly impact business and h ow you're able to get it done. At CSG Systems, we understand more tha n just billing. We understand business. More importantly, we understa nd your business.

History of Csg Systems International, Inc.

CSG Systems International, Inc. provides billing and customer care se rvices to cable television, direct broadcast satellite (DBS), Interne t, and telecommunications customers. Business is divided between two divisions: Global Software and Broadband. The NASDAQ-listed company s erves more than 230 clients in some 40 countries, working in nearly t wo dozen languages and 35 different currencies. In addition to its he adquarters in Englewood, Colorado, CSG maintains offices in Omaha, Ne braska; Cambridge, Massachusetts; and Miami, Florida. International o ffices are located in Toronto, London, Paris, Rome, Madrid, Buenos Ai res, Rio de Janeiro, Mexico City, Singapore, Sydney, Tokyo, Kuala Lum pur, and Beijing. Major clients include AOL-Time Warner, Comcast, Dir ecTV, 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 Re sources, cofounded in 1971 by CSG's first chairman, Neal Hansen. Firs t Data started out serving the financial sector, and by 1976 had beco me the data processor for both Visa and MasterCard. In 1980 American Express acquired First Data in an effort to establish a financial ser vices operation. With American Express's deep pockets, First Data, ov er the next decade, became the largest bank-processing company in the United States. The company branched into other sectors as well. In 1 982 Hansen launched a new First Data division, called Cable Services Group, to serve the cable television industry. Hansen left a year lat er to become chairman and chief executive officer of Applied Communic ations, Inc. (ACI), an Omaha-based developer of customer-written soft ware to process the electronic transfer of funds. It was here that he began working with George Haddix, who held a doctorate in mathematic s and served on the faculties of three universities before devoting h imself to a full-time business career. They sold the business to US W est Inc. in 1987, stayed on, then in 1989 teamed up to start a consul ting business, Hansen, Haddix and Associates, providing advisory mana gement services to suppliers of software products and services.

Cable Services Group, in the meantime, became a dominant player in th e cable television billing sector along with category leader CableDat a, but the unit was not performing nearly as well as First Data's cor e business. In 1992 American Express spun off First Data, which now f aced the decision of whether to invest in its steady but complacent c able billing operation or put that money to better use by supporting its faster-growing financial business. In 1994 it placed Cable Servic es Group, Inc. on the block. Hansen and Haddix put together an invest or 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 s ervices and basic cable processing. CSG may have been profitable but was still in need of a turnaround. Haddix's eventual replacement as p resident, Jack Pogge, told Broadcast & Cable in a 1997 pro file, "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 co mpany representative out to play golf and drink beer and renew the co ntract--maybe." According to Broadcast & Cable, Hansen and Haddix made it clear it would no longer be business as usual: "The n ew 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 rel igion and began work on new products and enhancements of existing pro ducts." CSG spent more than $37 million in two years on software development, resulting in a pair of key products: ACSR (Advanced Cust omer Service Representative), a cross-referencing tool that not only kept track of billing but also provided customer service reps with in stant account information presented in an easy-to-navigate graphical user interface for accessing information as well as inputting an orde r or service call; and CSG VantagePoint, a cross-marketing tool to ta ke 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 fun ds and have stock available to grow the company through acquisitions. In February 1996, the company sold 2.9 million shares at $15 a s hare 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 softwar e systems to the cable industry in the United Kingdom, where it serve d 850,000 customers. The addition of Bytel gave CSG a base on which t o grow its European business. Because it was so dependent on its dome stic 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 per cent of the company's $132 million in revenues. In addition, CSG' s software and professional services revenues grew from less than 1 p ercent in 1995 to 14 percent in 1996.

The company's strong domestic growth, according to Broadcasting &a mp; Cable, was "largely a function of rapid change in telecommuni cations. 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 mark et often gain a strategic advantage." Pogge explained, "Convergence a nd the advent of DBS--that's what generated all the activity in the b illing 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 com panies came to realize how difficult it was to develop and operate su ch a billing system, they terminated their in-house efforts and hired companies including CSG, which by the end of 1997 emerged as the lea der in cable television billing, due in large measure to a 15-year, & #36;1.8 billion Master Subscriber contract it signed with Tele-Commun ications Inc., expanding the number of billed homes by nearly 50 perc ent. CSG also was helped by CableData's missteps. CableData, accordin g to Broadcasting & Cable, "effectively shot itself in the foot on the digital cable front by charging excessively for its bill ing 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 Pogg e becoming president and COO. Revenues continued to trend upward, tot aling $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 acquisitio n, paying $6 million and assuming $1.3 million in debt for US Telecom Advanced Technology Systems, Inc. CSG also continued to inve st heavily in research and development, leading to the introduction o f new products such as CSG WorkForce Express, an automated dispatch s ystem for technicians; CSG Care Express, an Internet-based bill payme nt and customer do-it-yourself system; and CSG Real-Time Rating Engin e, a system that allowed a transaction to be rated on a number of cri teria. Some of the new systems were specifically geared toward the de veloping 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 th at 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 rela tive ease, by enhancing the capabilities of existing products and int roducing new ones and launching a new international sales effort. ACS R was web-enabled, giving it a Windows look, which helped to cut down on the training time of customer service reps. CSG also introduced C SG.net, a customer care and billing solution for the Internet protoco l (IP) marketplace. Another product, CSG NextGen, was designed specif ically with the international markets in mind, able to support multip le languages and currencies. CSG targeted "three-play" providers in E urope, Latin American, Asia--companies that used the same pipe to del iver voice, video, and data. Another development of note in 2000, AT& amp;T Broadband acquired TCI, thus inheriting the 15-year Master Subs criber contract. AT&T submitted an arbitration claim questioning provisions of this agreement, and after the claim was dismissed the t wo sides worked out a new 12-year agreement.

Revenues approached $400 million in 2000, and net income totaled an impressive $90.5 million. With three-quarters of its sales und er contract, CSG was well positioned for 2001, which saw sales increa se to $477 million and net income to $113.9 million--this in spite of an economy lapsing into recession (proving that consumers we re 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 i ts ProfitNow product. (Churn is the number of participants who discon tinue their use of a service divided by the average number of total p articipants.) CSG also paid $16.7 million in cash to acquire Plan et Consulting, an e-business consulting firm that was involved in the development of secure, real-time transaction enablement on the Inter net. Finally, CSG negotiated an acquisition that would be completed i n early 2002, the $261.6 million cash purchase of the billing and customer care assets of Lucent Technologies Inc., known as Kenan Sys tems 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 activ ities. Kenan had been smothered under Lucent and looked to regain som e momentum with new ownership. For CSG, the addition of Kenan was a m ajor boost, bringing with it a great deal of credibility as well as m arket 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, ther eby forging a key relationship with IBM and picking up more than 34 t elecommunications customers spread across every sector.

As a result of these acquisitions, CSG experienced a significant incr ease in revenues, which totaled $611 million in 2002. But the com pany's expectations were higher, leading to the stock being bid down by investors. CSG responded by imposing steep job cuts. CSG also woul d 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 Com cast Corporation became involved when it merged with AT&T Broadba nd. CSG sued Comcast, accusing it of conspiring with AT&T Broadba nd to break CSG's contract with AT&T Broadband. CSG soon dropped its suit, but the arbitration matter went forward. In October 2003 th e arbitrator ruled that CSG must pay $120 million in damages to C omcast, which inherited the dispute. CSG would continue to process fo rmer AT&T Broadband customers, but not new customers acquired by Comcast. It was a significant hit to absorb, prompting CSG to initiat e new cost-cutting measures.

The deterioration in the global telecommunications industry finally h ad a significant impact on CSG, resulting in declining revenues in 20 03 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 200 4. The year 2004 also saw changes in leadership. Pogge left the compa ny, 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 Bost on Edison Company and president and CEO of Omaha Public Power Distric t. Business was improved through the first half of 2005 and the compa ny's new management team was optimistic about CSG's chances of achiev ing long-term sustainable growth. In October 2005 CSG padded its coff ers by selling its billing services unit, which made software-based b illing systems, to Comverse Technology Inc. for $251 million in c ash.

Principal Subsidiaries: CSG Systems, Inc.; CSG Systems Softwar e, Inc.; CSG Services, Inc.

Principal Competitors: Amdocs Limited; Convergys Corporation; DST Systems, Inc.

Chronology

• Key Dates:
• 1982: The business is launched as Cable Services Group, a divi sion of First Data Resources.
• 1994: Neal Hansen and George Haddix lead an investment group t o acquire Cable Services Group, creating CSG Systems International In c.
• 1996: CSG is taken public.
• 1997: Haddix retires.
• 2002: Lucent Technologies Inc. is acquired.
• 2005: Hansen retires.