CSG Rides the Comcast Wave

7/25/2008 8:00 PM Eastern

CSG Systems International stock has been riding a strong wave of optimism since July 14, when the billing-software provider said it had renewed its pact with Comcast through 2012. And last week, the Englewood, Colo.-based company continued to ride that good cheer after reporting strong second quarter results.

CSG stock was up nearly 35% ($4.01 per share) in the 11 days between July 11 and July 22. On July 22 after market close, CSG reported a strong second quarter, with revenue up 17% to $116.9 million. Although net income was down 15% in the period to $13 million (40 cents per share) — based on higher costs — the billing vendor increased its earnings forecast for the year from $1.55 to $1.62 per share to $1.58 to $1.64 per share. That increased guidance helped boost the stock another 9.2% ($1.43 each) to $16.94 per share on July 23.

CSG stock had been languishing in the $11 to $13 range for most of the year. Its biggest bump came on July 15 — the stock rose $2.68 per share (21%) to $15.44 each — the day after it announced the extension of the Comcast deal. The agreement was set to expire on Dec. 31.

Reaching the Comcast pact was critical: As the largest MSO in the country, with 24 million customers, Comcast is CSG’s largest customer by far, accounting for about 27% of the billing vendor’s total second-quarter revenue. And the two have a history.

CSG’s On a Roll
Shares of billing vendor CSG Systems are up 33% each in the past two weeks, fueled by a renewed pact with Comcast and strong financial results. Below are closing stock prices for CSG shares since July 14.
Date Price Gain/(Loss) % Gain/(Loss)

Back in 2002, shortly after it acquired AT&T Broadband, Comcast attempted to drastically reduce the amount it paid the billing vendor, claiming that CSG had violated the “most favored nation” status in its deal with AT&T and overcharged the telco. That led to a flurry of lawsuits, culminating in an arbitration ruling on Oct. 8, 2003 that did not allow Comcast to terminate the contract, but forced CSG to pay Comcast $120 million in damages. The day that arbitration ruling was announced, CSG stock dropped more than 40% ($6. 22 per share) to $9.28 per share. Although CSG appealed the award — it sought to reduce it by about $50 million because of a mathematical error it claimed the court made — that appeal was rejected.

Kaufman Bros. IT services and enterprise software analyst Karl Keirstead said that there was some serious doubt that CSG would be able to renew the Comcast deal, but not because of the past relationship between the two companies. The early consensus on the Street — which he did not subscribe to — was that rival billing vendor Amdocs would win the contract, Keirstead said, fueled by Amdocs’s own “very bullish” comments over the past six months about its chances of displacing CSG.

Comcast already uses Amdocs’s mobile workforce-management software for its field technicians and also uses the company’s software for some of its billing functions.

While Keirstead and CSG investors were pleasantly surprised that Comcast picked CSG, the analyst believes the stock may have reached its peak for a while. Keirstead reduced his rating on the stock to “hold” from “buy” shortly after the Comcast deal was announced.

“Two days following the Comcast renewal the stock was up 34%, and I just felt that it had reached a point where it was going to begin leveling off,” Keirstead said. “The Comcast win was pretty well baked into the stock and given that my thesis for going long on that stock in the first place was a view that they would likely retain that deal, I felt like my call had played out and that I didn’t have a good reason to suggest that investors continue to own it.”

Keirstead said his decision to take the rating down wasn’t based on any concerns about the company’s performance, which he said has been pretty consistent over the years.

“CSG doesn’t really seem to post disappointments or surprises,” Keirstead said. “Their business model has a recurring revenue theme, so they tend not to surprise much up or down heading into the quarter.”

That said, the analyst also stressed that CSG has gained some considerable ground over the past 30 days.

“Give them credit, they renewed Comcast and they posted a good quarter and they took up their guidance for 2009,” Keirstead said. “They’ve done a lot of things right in the past month.”

Now investors will look toward CSG’s next big renewal deal — with Dish Network, CSG’s second largest customer behind Comcast. On a conference call with analysts to discuss second quarter results, CSG CEO Peter Kalan said that he was optimistic that a deal could be reached in the third or fourth quarter of this year.

“We still believe we are in a position to get some extension or renewal in the second half of this year,” Kalan said on the call.

Keirstead said that he also believes that CSG will land the Dish Network deal, adding that on the heels of the Comcast win this one should be easier. But the analyst added that once that deal is locked in, he does not expect another similar rise in CSG stock

“Most investors believe that they will renew Dish, so once they do it might be a modest catalyst for the stock, but not that much because it’s already baked into expectations,” Keirstead said.

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