CSG Takes Hit After a 2002 Warning


Even though it beat analysts' third-quarter estimates, CSG Systems International Inc. stock sank to a new 52-week low last week after the company said 2002 results would not meet expectations.

CSG, which provides billing services to cable operators, said in a conference call last Monday that cable-industry consolidation hurt the decision-making process for buying CSG's services.

In the third quarter, earnings were up 26 percent to $29.6 million, or 54 cents per share, beating analysts' consensus estimates by a penny. Revenue rose 22 percent to $124.4 million and cash flow was up 24 percent to $52.3 million.

CSG tanked last Tuesday — the first full day of trading after the earnings announcement. It dropped nearly 19 percent, or $7.44, to $31.76. CSG's previous 52-week low was $35.02.

In a conference call with analysts last Monday, CSG chairman and CEO Neal Hansen said that although the company was reiterating its 2001 guidance, the results would likely be at the low end of those estimates. CSG had estimated that revenue for the year would be $475 million to $495 million. Earnings per share would remain unchanged at $2.04.

UBS Warburg LLC and Credit Suisse First Boston Corp. analysts lowered per-share earnings estimates for CSG last Tuesday. UBS dropped its 2002 earnings estimates from $2.50 to $2.09 and CS First Boston lowered its estimate to $2.03 from $2.50.

For 2002, CSG said it expects revenue of $480 million to $510 million and earnings per share in the range of $2.00 to $2.15, below the current analyst consensus estimate of $2.48.

Janco Partners analyst Stacey Bingler Forbes also lowered her earnings estimates, adding that company estimates for 2002 revenue represent between 1.1 percent and 7.4 percent growth. Forbes said CSG has historically grown revenue by 20 percent to 25 percent per year.

Earnings estimates work out to negative 2 percent to 5.4 percent growth for next year, while historical earnings growth has been in the 25 percent to 30 percent range.

Consolidation has been a factor in the stock's decline for most of the year, Forbes added: Its 52-week high was $64.70 per share. Forbes added that the economy also played a role in CSG's revised guidance.

"The cable companies in particular are very leveraged right now," Forbes said. "They're trying to figure out where the best use of their money is going to be, they're trying to differentiate themselves from DBS and they're trying to expand into VOD [video-on-demand] and interactive and get digital out to all of their subs.

"They've got a lot on their plate and they're trying not to spend any more money while they're doing it."

But she added that signing on one big customer could reverse CSG's fortunes.

"If they sign a contract with Charter, or Liberty or DirecTV, any of these situations will provide much higher growth," she said.

DirecTV could be a distinct possibility, especially since the direct-broadcast satellite service provider has agreed to merge with EchoStar Communications Corp. CSG already is the exclusive provider for EchoStar's Dish Network, a deal that lasts through 2004.

"It [a DirecTV deal] almost becomes a shoo-in in that situation," Forbes said, adding that DirecTV's contract with rival billing services provider DST Innovis Inc. expires in mid-2003.

Charter uses CSG billing services for about half of its systems and could eventually consolidate into one provider, Forbes added.

"Charter has 7 million subscribers. I think they want to consolidate and integrate and get some economies of scale running," Forbes said. "Some of their CSG contracts go through 2012. It puts CSG in a nice negotiating position. If they're going to have some of their subscribers on CSG until 2012, why not put all of them on."

One major uncertainty is the fate of CSG's largest customer — AT&T Broadband — which was the target of an unsolicited $51 billion buy-out offer from Comcast Corp., a DST Innovis customer.

While AT&T has yet to make a decision whether to accept a revised Comcast offer — it rejected the initial bid in August — or sell the unit to another company, the possibility of a sale has put some pressure on the stock.