CSGS recent announcement of it winning the remaining portion of billing services from Charter Communications (CHTR)
Currently CHTR splits its billing services for its 5.5mm subscribers 60/40 between Convergys (CVG) ICOMS (Integrated Communications Operations Management System) solution and CSGS. CHTR is consolidating solely under CSGS for all billing services starting 2010. CHTR is listed as CSGS’s 4th largest customer representing around 10% of its revenue and signing the remaining half of CHTR billing needs is believed should generate as much as a 8-10% increase in CSGS revenue in the coming year.
Chapter 11 for CHTR actually GOOD news for CSGS!
CHTR turning to Chapter 11 has already turned negative on CSGS shares as the market has taken the position that CSGS will stand to loose the 10% of its revenue which CHTR represents. However historically this has not played out. For example, when Adelphia entered a similar situation in the early 2000s its first priority during reorganization was focusing on billing and revenue management – the result was a significant uptick in business for CSGS. During this time Adelphia dropped all its billing related consulting projects redirecting much of the related cash savings to CSGS for off the shelf products. CHTR evidently is proceeding in a similar fashion – canceling all its billing consulting projects and has approached CSGS for comprehensive solutions. However for CHTR to benefit fully from CSGS solutions, it needs to convert all its subscribers to CSGS which it has decided to do. The result will be an uptick in consulting projects with CSGS in 2009 in addition to the previously mentioned bump in subscription revenue in 2010.
CVG’s loss is CSGS gain – times two!
CHTR decision to abandon CVG coincides with a recent CVG decision to abandon its service bureau based business and move to a software model – it is believed that CVG is actively shopping its service bureau division. Meanwhile, CVG should see better than expected revenues from CHTR for the coming year which includes charges for normal services plus de-conversion charges for helping move these accounts to CSGS. Starting in 2010, CVG’s revenues from CHTR will go away completely. CVG is also looking at the potential for a small gain from the sale of its service bureau business. However, CVG and CSGS are similar in size (Market Cap: CVG – $840mm versus CSGS – $511mm), so CVG losing a Tier 1 customer (even lowly CHTR) will hurt. There are also potential opportunities for CSGS to attract CVG’s service bureau customers who don’t want to change hands – it is believe that CSGS is actively selling these operators. We believe Oracle (ORCL) might be the sleeper here having continually bought billing businesses over the years – they will likely make a serious bid for the CVG division.
Loss of DISH as a customer is over stated
Amdocs (DOX) has had people permanently placed at Echostar (DISH) for the last couple years in an effort to secure this business away from CSGS and last years decision by DISH to only extend the service contract with CSGS for one year further lead the market to believe that CSGS would stand to loose DISH as a customer in 2009. However as DOX’s revenue predominantly comes from services (about 30% product and 70% services), it is believed that DISH would have some measure of pause before going with DOX considering its history. Previously, DISH spent more than $60 million in going deep with another predominately service revenue company in Siebel (now part of ORCL) which eventually got shelved as after all that money spent there wasn’t much product to show. It is believed that while DISH is more than happy to leverage DOX expertise placed onsite, it really has no interest to spend time and resources for a major conversion of its billing system. DISH is finding itself in a commodity business as the low cost option with no bundles to offer – so unless it can find a billing system significantly cheaper than CSGS it is unlikely to switch. Worst cast, even if DISH decided at the end of 2009 to not renew its contract with CSGS, CSGS is in so deep with DISH it could take a couple years (or more) for DISH to untangle itself during which time CSGS could double dip with service revenue plus de-conversion charges.
Data center migration
CSGS’s migration to a new data center will cost it as much as $18mm (half of which it will incur in 2009 with the other half in 2010). The move comes after several years with no cost reduction from it existing data center provider – First Data Corporation (FDC). While CSGS will take a small hit this year and next, the savings of migrating will pay off long term. It also sends a message to its new data center provider that CSGS wants it to remain competitive – if not it will pay to move its business elsewhere.
Revenue growth for 2009
The major sources of revenue increase in 2008 will continue to improve in 2009. CSGS is continuing to reap benefits from the acquisition of Prairie Voice in 2007 as it continues to rework its packaging of services and integration. CHTR will also be a significant source of revenue growth in 2009 (especially professional services tied to the conversion) leading up to a 8-10% bump in 2010. The big wildcard for CSGS is whether it can diversify its revenue and become a $700mm or larger company. Clearly its recent acquisitions are opening doors for it in other markets and CSGS is focusing on providing value to industries outside of cable and satellite. Meanwhile look for CSGS to sign smaller deals with WildBlue, BlockBuster (BBI), and advertisers.
CSGS is also a pretty safe play out of the aspect that Cable is a fairly conservative industry right now, so an opportunity for CSGS to grow revenues in a meaningful way under these market conditions should be attractive news for investors. We also know that CSGS is one of the most frugal billing service providers with a history of running very lean (staffing wise) and being risk averse.