CSG Systems International(CSGS) - 2019 Q4 - Annual Report

PART I Business Overview CSG is a global leader in revenue management, customer experience, and payment solutions, serving diverse industries with a focus on digital transformation and cloud-based services - CSG Systems International, Inc. is a leading global provider of revenue management, customer experience, and payment solutions, with over 35 years of experience[9] - The company's solutions are built on a combination of on-premise, public, and private cloud platforms, and managed services models[10] - Key market trends driving demand for CSG's solutions include increasing consumer choice, a changing competitive landscape with digital native providers, rapid technological advancements (AI, IoT, 5G, cloud), and the need for new revenue sources for Communications Service Providers (CSPs)[13][15][16][17] - CSG's strategic focus includes driving profitable growth through long-term client relationships, leading with technology innovation, delivering an exceptional customer experience, and attracting and retaining talent[21] Client Revenue Contribution (Millions) | Client | 2019 Revenue (Millions) | 2019 % of Total Revenues | 2018 Revenue (Millions) | 2018 % of Total Revenues | | :----- | :---------------------- | :----------------------- | :---------------------- | :----------------------- | | Comcast | $229 | 23% | $221 | 25% | | Charter | $195 | 20% | $179 | 20% | Research and Development Expenses (Millions) | Metric | 2019 (Millions) | 2018 (Millions) | | :----- | :-------------- | :-------------- | | R&D Expenses | $128.0 | $124.0 | | % of Total Revenues | 13% | 14% | - The company's solutions and services encompass robust, integrated real-time revenue management, comprehensive customer experience tools (processing over 1.5 billion messages annually), advanced cloud-based payment processing, and managed services for operational efficiency[27][28] - CSG competes with independent providers (e.g., Amdocs Limited, NEC Corporation), network equipment providers (e.g., Ericsson, Huawei), and client-developed internal solutions[34] - As of December 31, 2019, CSG had 4,339 employees, an increase of 374 from 2018[37] Risk Factors The company faces significant risks from client concentration, system security, data privacy, acquisition integration, rapid technological changes, and global operational challenges - CSG derives over 40% of its revenues from its two largest clients, Comcast and Charter, making it highly susceptible to changes in these relationships[45] - The company's solutions are mission-critical and rely on various computing environments and networks, making them vulnerable to extended interruptions, outages, or security breaches, including cyber-attacks and identity theft[48][50] - Processing confidential and personally identifiable information (PII) exposes CSG to data privacy laws (e.g., GDPR, CCPA) and the risk of security breaches, which could lead to contractual liability, fines, and reputational damage[52] - Acquisitions, a part of CSG's growth strategy, involve risks such as integration difficulties, failure to achieve financial targets, and diversion of management attention[57] - Dependence on the global communications industry means CSG is impacted by market conditions, industry consolidation (potentially leading to fewer, more powerful clients), and increased competition from traditional and digital native providers[59][60] - The market for business support solutions is characterized by rapid technological changes, requiring continuous R&D investment and posing risks related to solution development, integration, and market acceptance[63][65] - Operating globally subjects CSG to risks including compliance with U.S. and international anti-corruption laws (FCPA), economic sanctions (OFAC), foreign currency fluctuations, and reduced intellectual property protection in some countries[78][80][82] - The use of open-source software carries risks of intellectual property claims or the need for costly software re-engineering[83] Unresolved Staff Comments No unresolved staff comments are reported - No unresolved staff comments[90] Properties As of December 31, 2019, CSG operated over 25 leased global sites, totaling over 650,000 square feet, including its Colorado headquarters and four production facilities - As of December 31, 2019, CSG operated in over 25 leased sites worldwide, encompassing over 650,000 square feet[91] - Facilities are used for client services, training, support, product/operations support, systems/programming, professional services, R&D, sales/marketing, and general/administrative functions[92] - The company leases four statement production and mailing facilities in Omaha, Crawfordville, Austin, and Fort Worth[93] Legal Proceedings CSG is not currently a party to any material pending or threatened legal proceedings, despite routine operational litigation - CSG is not presently a party to any material pending or threatened legal proceedings[95] Mine Safety Disclosures This item is not applicable to CSG Systems International, Inc. - Not applicable[96] Executive Officers of the Registrant Key executive officers include Bret C. Griess (President and CEO), Rolland B. Johns (EVP and CFO), Brian A. Shepherd (EVP and Group President), and Kenneth M. Kennedy (EVP, President of Technology and Product) - Key executive officers are Bret C. Griess (President and CEO), Rolland B. Johns (EVP and CFO), Brian A. Shepherd (EVP and Group President), and Kenneth M. Kennedy (EVP, President of Technology and Product)[98] - Bret C. Griess has served as President and CEO since January 2016, having joined the company in 1996[99] - Rolland B. Johns became EVP and CFO in May 2018, overseeing finance, accounting, and treasury[100] - Brian A. Shepherd leads the global profit and loss organization as EVP and Group President since October 2017[101] - Kenneth M. Kennedy, President of Technology and Product since October 2017, oversees all product development, management, architecture, and operations[102] Board of Directors of the Registrant The Board of Directors includes Donald B. Reed (non-executive Chairman), Bret C. Griess (President and CEO), and diverse independent directors from finance, technology, and telecommunications - Donald B. Reed serves as the non-executive Chairman of the Board since January 2010[105] - The Board includes a mix of experienced professionals from various industries, including finance, engineering, and telecommunications[107][108][109][111][112][113][114][115][116] - Haiyan Song was appointed to the Board in January 2020, bringing expertise in security markets and computer science[115] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CSG's common stock is listed on NASDAQ as 'CSGS', with details on stock performance, equity compensation plans, and issuer share repurchases - CSG's common stock is listed on NASDAQ under the symbol 'CSGS'[119] Comparative Stock Performance | Year | CSG Systems International, Inc. | Russell 2000 Index | Data Preparation and Processing Services | | :--- | :------------------------------ | :----------------- | :--------------------------------------- | | 2014 | $100.00 | $100.00 | $100.00 | | 2015 | $146.72 | $95.59 | $110.52 | | 2016 | $200.85 | $115.95 | $129.67 | | 2017 | $185.42 | $132.94 | $159.46 | | 2018 | $137.31 | $118.30 | $174.32 | | 2019 | $227.96 | $148.49 | $245.10 | Equity Compensation Plan Information (Thousands) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price of outstanding options, warrants, and rights | Number of securities remaining available for future issuance | | :------------ | :--------------------------------------------------------------------------------------- | :--------------------------------------------------------------------------- | :----------------------------------------------------------- | | Equity compensation plans approved by security holders | — | $— | 3,660,880 | - As of December 31, 2019, 3,438,620 shares are available for stock-based awards and 222,260 shares for the employee stock purchase plan[123] Issuer Purchases of Equity Securities (Thousands) | Period | Total Number of Shares Purchased (1)(2) | Average Price Paid Per Share | Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs (2) | | :----- | :-------------------------------------- | :--------------------------- | :----------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------------------------ | | October 1 - October 31 | 37,679 | $51.42 | 36,800 | 5,015,967 | | November 1 - November 30 | 28,160 | $56.98 | 24,000 | 4,991,967 | | December 1 - December 31 | 31,314 | $54.08 | 30,400 | 4,961,567 | | Total | 97,153 | $53.89 | 91,200 | | Selected Financial Data CSG's five-year selected financial data shows consistent revenue growth, increased operating income and diluted EPS, stable dividends, active share repurchases, and growing assets Statements of Income Data (Thousands, Except Per Share Amounts) | Statements of Income Data (in thousands, except per share amounts) | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Revenues | $996,810 | $875,059 | $789,582 | $760,958 | $752,520 | | Operating income | $126,109 | $104,932 | $105,685 | $132,629 | $113,140 | | Net income | $82,770 | $66,130 | $61,364 | $62,882 | $62,567 | | Diluted net income per common share | $2.55 | $2.01 | $1.87 | $1.90 | $1.87 | | Dividend declared per share | $0.89 | $0.84 | $0.79 | $0.74 | $0.70 | Key Capital Activities (Thousands) | Key Capital Activities (in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :------------------------------------ | :------ | :------ | :------ | :------ | :------ | | Shares repurchased under Stock Repurchase Program | 576 | 704 | 500 | 318 | 1,838 | | Cost of shares repurchased under Stock Repurchase Program | $25,457 | $27,628 | $20,548 | $11,565 | $56,959 | | Dividends declared | $29,445 | $28,148 | $26,823 | $23,753 | $22,852 | Balance Sheet Data (Thousands) | Balance Sheet Data (at Period End, in thousands) | 2019 | 2018 | 2017 | 2016 | 2015 | | :----------------------------------------------- | :------------ | :------------ | :------------ | :------------ | :------------ | | Cash, cash equivalents and short-term investments | $182,657 | $162,880 | $261,360 | $276,498 | $240,936 | | Total assets | $1,283,030 | $1,114,362 | $904,534 | $891,879 | $862,731 | | Total debt | $356,822 | $359,826 | $331,736 | $416,260 | $279,130 | | Total stockholders' equity | $396,662 | $361,024 | $342,746 | $251,360 | $345,845 | - The 2019 results include a full twelve months of operations from the Business Ink and Forte acquisitions (2018 acquisitions), contributing approximately $165 million to revenue[129] - In 2019, CSG adopted ASU 2016-02 (Leases), recognizing lease liabilities and right-of-use assets, which materially grossed up the balance sheet but did not materially impact the income statement or cash flows[131] Management's Discussion and Analysis of Financial Condition and Results of Operations This section details CSG's financial performance, including a 14% revenue increase in 2019 driven by acquisitions and cloud solutions, strong liquidity, and critical accounting policies requiring significant judgment Forward-Looking Statements - The report contains forward-looking statements based on assumptions about future plans and industry expectations, subject to risks and uncertainties outlined in Item 1A, 'Risk Factors'[133] Acquisition Activity - In 2018, CSG acquired Business Ink (February 28) and Forte Payment Systems, Inc. (October 1), impacting year-over-year results due to timing[134] - On January 2, 2020, CSG acquired certain assets of Tekzenit, Inc. for an initial purchase price of approximately $10 million, with potential earn-out payments up to an additional $10 million[135] - Tekzenit is expected to contribute approximately $10 million to 2020 revenues and be neutral to slightly accretive to operating results[135] Impact of New Lease Accounting Pronouncement - CSG adopted ASC 842 (Leases) in January 2019, resulting in a material gross-up of Balance Sheet assets and liabilities (approximately $80 million) but no material impact on the Income Statement or Statement of Cash Flows[137] Management Overview Key Financial Metrics (Thousands) | Metric | 2019 (Thousands) | 2018 (Thousands) | Change (%) | | :----- | :--------------- | :--------------- | :--------- | | Revenues | $996,810 | $875,059 | 14% | | Transaction fees | $69,114 | $15,602 | 343% | | Operating income | $126,109 | $104,932 | 20.2% | | Operating income margin | 12.7% | 12.0% | 0.7 pp | | Diluted EPS | $2.55 | $2.01 | 26.9% | | Restructuring and reorganization charges | $4,834 | $8,661 | -44.1% | | Amortization of acquired intangible assets | $12,603 | $9,699 | 29.9% | | Earn-out compensation | $1,260 | $1,260 | 0% | | Transaction-related costs | $- | $3,653 | -100% | | Stock-based compensation | $20,896 | $19,650 | 6.3% | | Amortization of OID | $2,819 | $2,664 | 5.8% | - 2019 revenues increased by 14% to $996.8 million, primarily due to an additional $91 million from the full-year impact of Business Ink and Forte acquisitions, and growth in cloud solutions and managed services[141] - Operating income increased to $126.1 million (12.7% margin) in 2019 from $104.9 million (12.0% margin) in 2018, driven by higher revenues[142] - Diluted EPS rose to $2.55 in 2019 from $2.01 in 2018, also benefiting from a lower effective income tax rate due to a $4 million net income tax benefit from Comcast's stock warrant exercise[143] - Cash, cash equivalents, and short-term investments increased to $182.7 million as of December 31, 2019, from $162.9 million in 2018. Cash flows from operating activities increased to $151.1 million in 2019 from $143.3 million in 2018[143] Significant Client Relationships Client Revenue Contribution (Millions) | Client | 2019 Revenue (Millions) | 2019 % of Total Revenues | 2018 Revenue (Millions) | 2018 % of Total Revenues | | :----- | :---------------------- | :----------------------- | :---------------------- | :----------------------- | | Comcast | $229 | 23% | $221 | 25% | | Charter | $195 | 20% | $179 | 20% | - A new Master Subscriber Management System Agreement with Comcast, effective January 1, 2020, extends the contractual relationship through December 31, 2024, for cloud services and December 31, 2025, for print and mail services[145] - The new Comcast agreement includes overall pricing adjustments of approximately 10%, which will reduce fees received from Comcast[146] - The agreement with Charter runs through December 31, 2021, with an option for a one-year extension[147] Stock-Based Compensation Expense Stock-Based Compensation Expense by Category (Thousands) | Category | 2019 (Thousands) | 2018 (Thousands) | 2017 (Thousands) | | :------- | :--------------- | :--------------- | :--------------- | | Cloud and related solutions | $3,624 | $3,568 | $3,573 | | Software and services | $893 | $904 | $895 | | Maintenance | $67 | $64 | $357 | | Research and development | $2,657 | $2,483 | $3,103 | | Selling, general and administrative | $13,655 | $12,631 | $12,854 | | Restructuring | $(977) | $(292) | $267 | | Total stock-based compensation expense | $19,919 | $19,358 | $21,049 | Amortization of Acquired Intangible Assets Amortization Expense by Category (Thousands) | Category | 2019 (Thousands) | 2018 (Thousands) | 2017 (Thousands) | | :------- | :--------------- | :--------------- | :--------------- | | Cloud and related solutions | $9,048 | $5,229 | $1,065 | | Maintenance | $3,555 | $4,470 | $5,799 | | Total amortization expense | $12,603 | $9,699 | $6,864 | - The increase in amortization of acquired intangible assets in 2019 is due to the full-year impact of intangible assets acquired with the Business Ink and Forte acquisitions in 2018[151] Critical Accounting Policies - Critical accounting policies include revenue recognition, impairment assessments of long-lived assets, income taxes, and loss contingencies, all requiring significant management judgments and estimates[153] - Revenue recognition under ASC 606 involves complex judgments for cloud-based solutions, software licenses, and bundled arrangements, particularly in identifying performance obligations, determining transaction prices (including variable consideration), and allocating value[154][155][156][158][159][160] - Impairment assessments of long-lived assets (property, equipment, software, client contracts) require highly subjective judgments on estimated future undiscounted cash flows and fair value[161] - Income tax accounting involves estimating liabilities across multiple jurisdictions, assessing the realization of deferred tax assets (with valuation allowances), and determining unrecognized tax benefits, including the complex calculation of R&D tax credits[162][163][165] - Loss contingencies require assessing the likelihood and estimating the amount of potential losses from legal, regulatory, vendor, service delivery, and labor matters[166] Detailed Discussion of Results of Operations - Total revenues for 2019 increased 14% to $996.8 million from $875.1 million in 2018, primarily due to the full-year impact of Business Ink and Forte acquisitions (additional $91 million) and growth in cloud solutions and managed services[168] Revenue by Type (Thousands) | Revenue Type | 2019 (Thousands) | 2018 (Thousands) | 2017 (Thousands) | | :----------- | :--------------- | :--------------- | :--------------- | | Cloud and related solutions | $896,164 | $766,377 | $651,010 | | Software and services | $52,364 | $58,101 | $62,892 | | Maintenance | $48,282 | $50,581 | $75,680 | | Total revenues | $996,810 | $875,059 | $789,582 | - Cloud and related solutions revenues increased 17% in 2019, driven by acquisitions and existing cloud/managed services arrangements. Software and services revenues decreased 10%, and maintenance revenues decreased 5%, reflecting a strategic shift towards recurring managed services and cloud-based solutions[169][171][172][173] - Total operating expenses increased 13% to $870.7 million in 2019, with over 85% of the increase attributed to the full-year impact of Business Ink and Forte operating expenses, including $53.5 million in transaction fees and $3.8 million in acquisition amortization[176] Cost of Revenues (Exclusive of Depreciation) (Thousands) | Cost of Revenues (Exclusive of Depreciation) | 2019 (Thousands) | 2018 (Thousands) | 2017 (Thousands) | | :------------------------------------------- | :--------------- | :--------------- | :--------------- | | Cloud and related solutions | $472,391 | $392,801 | $315,006 | | Software and services | $31,719 | $34,870 | $39,018 | | Maintenance | $21,012 | $22,149 | $40,787 | | Total cost of revenues | $525,122 | $449,820 | $394,811 | - R&D expense increased 3% to $128.0 million in 2019, mainly due to the acquired Forte business, representing 12.8% of total revenues (down from 14.2% in 2018)[186][188] - SG&A expense increased 13% to $191.3 million in 2019, primarily due to the acquired Forte business and increased employee-related costs, remaining stable at 19.2% of total revenues[189] - Depreciation expense increased 17% to $21.4 million in 2019, driven by acquired assets from Business Ink and Forte, and higher capital expenditures in 2018[190] - Restructuring and reorganization charges decreased to $4.8 million in 2019 from $8.7 million in 2018, reflecting workforce reductions and facility abandonments[191] - Operating income for 2019 was $126.1 million (12.7% margin), up from $104.9 million (12.0% margin) in 2018, primarily due to higher revenues[192] Effective Income Tax Rate | Income Tax Provision | 2019 | 2018 | 2017 | | :------------------- | :--- | :--- | :--- | | Effective Tax Rate | 22% | 24% | 30% | - The 2019 effective income tax rate was positively impacted by an approximately $4 million net income tax benefit from Comcast's exercise of stock warrants[195] Liquidity - As of December 31, 2019, CSG had $182.7 million in cash, cash equivalents, and short-term investments, up from $162.9 million in 2018[198] - The 2018 Credit Agreement refinancing increased liquidity by approximately $30 million and includes a $200 million revolving loan facility, which had no outstanding borrowings as of December 31, 2019[199][200] Cash, Cash Equivalents and Short-Term Investments by Geographical Region (Thousands) | Geographical Region | December 31, 2019 (Thousands) | December 31, 2018 (Thousands) | | :------------------ | :---------------------------- | :---------------------------- | | Americas | $125,309 | $110,385 | | Europe, Middle East and Africa | $50,477 | $45,884 | | Asia Pacific | $6,871 | $6,611 | | Total | $182,657 | $162,880 | - Cash flows from operating activities increased to $151.1 million in 2019 from $143.3 million in 2018, primarily driven by recurring revenue from cloud-based and managed services[203][206] Gross Billed Trade Accounts Receivable (Thousands) | Quarter Ended | Gross Billed Trade Accounts Receivable (Thousands) | Allowance (Thousands) | Net Billed (Thousands) | DBOs | | :------------ | :----------------------------------------------- | :-------------------- | :--------------------- | :--- | | 2019: | | | | | | March 31 | $247,833 | $(2,897) | $244,936 | 65 | | June 30 | $268,656 | $(2,861) | $265,795 | 67 | | September 30 | $245,972 | $(3,356) | $242,616 | 67 | | December 31 | $247,793 | $(3,735) | $244,058 | 63 | | 2018: | | | | | | March 31 | $217,018 | $(3,967) | $213,051 | 70 | | June 30 | $243,874 | $(3,961) | $239,913 | 67 | | September 30 | $250,913 | $(4,182) | $246,731 | 68 | | December 31 | $238,942 | $(3,115) | $235,827 | 66 | - Purchases of software, property, and equipment were $37.3 million in 2019, down from $57.1 million in 2018[217] - CSG repurchased 576,000 shares of common stock for $25.5 million in 2019 under its Stock Repurchase Program, and an additional 117,000 shares for $5.1 million for tax withholdings[221][222] - Cash dividends paid totaled $29.1 million in 2019[224] - Comcast exercised 0.4 million vested common stock warrants in Q4 2019, resulting in a net cash settlement of $12.9 million[225] - Principal repayments on long-term debt were $7.5 million in 2019[227] Contractual Obligations and Other Commercial Commitments and Contingencies Contractual Obligations (Thousands) | Obligation Type | Total (Thousands) | Less than 1 Year (Thousands) | Years 2-3 (Thousands) | Years 4-5 (Thousands) | More than 5 Years (Thousands) | | :-------------- | :---------------- | :--------------------------- | :-------------------- | :-------------------- | :---------------------------- | | Long-term debt | $542,707 | $25,164 | $57,402 | $117,728 | $342,413 | | Facility and equipment leases | $105,839 | $17,749 | $35,229 | $27,952 | $24,909 | | Purchase obligations | $376,799 | $84,563 | $130,680 | $107,945 | $53,611 | | Total | $1,025,345 | $127,476 | $223,311 | $253,625 | $420,933 | - Approximately $490 million of total contractual obligations and commercial commitments are reflected on the Balance Sheet[233] Off-Balance Sheet Arrangements - CSG has no off-balance sheet arrangements[234] Capital Resources - Current capital sources include $182.7 million in cash, cash equivalents, and short-term investments (64% in U.S. Dollars), strong operating cash flows, and a $200 million revolving loan facility with no outstanding borrowings[236][237][238] - Potential uses of capital include common stock repurchases (5.0 million shares authorized), cash dividends (expected quarterly), acquisitions (e.g., Tekzenit), equity method investments, capital expenditures, and long-term debt obligations[240][241][242][243][244][245][246] - Expected debt service cash outlay for the next twelve months includes $9.8 million for 2016 Convertible Notes interest and $10.3 million for 2018 Credit Agreement mandatory repayments plus $5.1 million in cash interest[248][249] - Management believes current liquidity and future operating cash flows will be sufficient to meet capital requirements for at least the next twelve months, with additional debt sources available if needed[250] Quantitative and Qualitative Disclosures About Market Risk CSG faces market risks from interest rate fluctuations, cash equivalent values, and foreign currency exchange rates, mitigated by fixed-rate debt, short-term investments, and natural hedges for U.S. dollar-denominated revenues - CSG's market risks include interest rate risk, market value fluctuations of cash equivalents and short-term investments, and foreign currency exchange rate risk[251] - The 2016 Convertible Notes have a fixed interest rate, while the 2018 Credit Agreement has variable interest rates based on adjusted LIBOR plus an applicable margin[252] - Cash and cash equivalents ($156.6 million in 2019) and short-term investments ($26.1 million in 2019) have minimal market risk due to short maturities and strict investment guidelines[254][255] - Settlement assets ($169.3 million in 2019) represent cash held on behalf of clients for payment processing services, held in trust at major financial institutions[256] - The fair value of the 2016 Convertible Notes was estimated at $262.8 million as of December 31, 2019, impacted by interest rates and common stock price/volatility[258] - Approximately 88% of CSG's revenues in 2019 were generated in U.S. dollars, and the company attempts to maximize natural hedges for foreign currency exposure[259][260] Foreign Currency Monetary Balances (Thousands) | Currency | December 31, 2019 Monetary Liabilities (Thousands) | December 31, 2019 Monetary Assets (Thousands) | December 31, 2018 Monetary Liabilities (Thousands) | December 31, 2018 Monetary Assets (Thousands) | | :------- | :----------------------------------------------- | :-------------------------------------------- | :----------------------------------------------- | :-------------------------------------------- | | Pounds sterling | $(30) | $1,786 | $(3) | $1,848 | | Euro | $(76) | $11,284 | $(448) | $7,482 | | U.S. Dollar | $(117) | $18,890 | $(632) | $18,044 | | South African Rand | $- | $7,602 | $- | $270 | | Other | $(6) | $1,065 | $(7) | $957 | | Totals | $(229) | $40,627 | $(1,090) | $28,601 | Financial Statements and Supplementary Data This section provides CSG's consolidated financial statements, management's report on internal control, independent auditors' reports, and detailed notes on accounting policies and financial items Management's Report on Internal Control Over Financial Reporting - Management is responsible for establishing and maintaining adequate internal control over financial reporting[268] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2019, based on COSO criteria, and concluded it was effective[270] Reports of Independent Registered Public Accounting Firm - KPMG LLP issued an unqualified opinion on the effectiveness of CSG's internal control over financial reporting as of December 31, 2019[274] - KPMG LLP also issued an unqualified opinion on the consolidated financial statements for the three-year period ended December 31, 2019[282] - Critical audit matters included the evaluation of contract modifications with significant clients and the assessment of estimated total expected hours to complete software and services projects, both involving significant auditor judgment[288][290] Consolidated Balance Sheets Consolidated Balance Sheets (Thousands) | Asset/Liability (in thousands) | December 31, 2019 | December 31, 2018 | | :----------------------------- | :---------------- | :---------------- | | ASSETS | | | | Cash and cash equivalents | $156,548 | $139,277 | | Short-term investments | $26,109 | $23,603 | | Total cash, cash equivalents and short-term investments | $182,657 | $162,880 | | Settlement assets | $169,327 | $124,627 | | Billed, net of allowance | $244,058 | $235,827 | | Unbilled | $33,450 | $37,227 | | Total current assets | $669,082 | $599,567 | | Property and equipment, net | $84,429 | $81,813 | | Operating lease right-of-use assets | $94,847 | $- | | Software, net | $32,526 | $36,400 | | Goodwill | $259,164 | $255,816 | | Acquired client contracts, net | $55,105 | $65,456 | | Client contract costs, net | $50,746 | $37,289 | | Total non-current assets | $613,948 | $514,795 | | Total assets | $1,283,030 | $1,114,362 | | LIABILITIES AND STOCKHOLDERS' EQUITY | | | | Current portion of long-term debt | $10,313 | $7,500 | | Operating lease liabilities | $22,442 | $- | | Client deposits | $38,687 | $36,889 | | Trade accounts payable | $32,704 | $45,386 | | Accrued employee compensation | $77,527 | $61,107 | | Settlement liabilities | $168,342 | $123,613 | | Deferred revenue | $45,094 | $40,236 | | Total current liabilities | $418,693 | $350,391 | | Long-term debt, net | $346,509 | $352,326 | | Operating lease liabilities | $78,936 | $- | | Total non-current liabilities | $467,675 | $402,947 | | Total liabilities | $886,368 | $753,338 | | Common stock | $696 | $693 | | Common stock warrants | $- | $9,082 | | Additional paid-in capital | $454,663 | $441,417 | | Treasury stock, at cost | $(867,817) | $(842,360) | | Accumulated earnings | $848,623 | $795,127 | | Total stockholders' equity | $396,662 | $361,024 | | Total liabilities and stockholders' equity | $1,283,030 | $1,114,362 | Consolidated Statements of Income Consolidated Statements of Income (Thousands, Except Per Share Amounts) | Income Statement (in thousands, except per share amounts) | 2019 | 2018 | 2017 | | :-------------------------------------------------------- | :-------- | :-------- | :-------- | | Revenues | $996,810 | $875,059 | $789,582 | | Cost of revenues (exclusive of depreciation) | $525,122 | $449,820 | $394,811 | | Research and development | $127,994 | $124,034 | $113,215 | | Selling, general and administrative | $191,329 | $169,308 | $153,695 | | Depreciation | $21,422 | $18,304 | $13,380 | | Restructuring and reorganization charges | $4,834 | $8,661 | $8,796 | | Total operating expenses | $870,701 | $770,127 | $683,897 | | Operating income | $126,109 | $104,932 | $105,685 | | Interest expense | $(17,748) | $(17,667) | $(16,794) | | Amortization of original issue discount | $(2,819) | $(2,664) | $(2,790) | | Interest and investment income, net | $1,785 | $2,646 | $3,246 | | Loss on extinguishment of debt | $- | $(810) | $- | | Other, net | $(1,604) | $550 | $(1,637) | | Total other | $(20,386) | $(17,945) | $(17,975) | | Income before income taxes | $105,723 | $86,987 | $87,710 | | Income tax provision | $(22,953) | $(20,857) | $(26,346) | | Net income | $82,770 | $66,130 | $61,364 | | Basic earnings per common share | $2.58 | $2.04 | $1.89 | | Diluted earnings per common share | $2.55 | $2.01 | $1.87 | Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (Thousands) | Comprehensive Income (in thousands) | 2019 | 2018 | 2017 | | :---------------------------------- | :-------- | :-------- | :-------- | | Net income | $82,770 | $66,130 | $61,364 | | Foreign currency translation adjustments | $3,418 | $(14,203) | $16,479 | | Unrealized holding gains on short-term investments arising during period | $14 | $90 | $71 | | Other comprehensive income (loss), net of tax | $3,432 | $(14,113) | $16,550 | | Total comprehensive income, net of tax | $86,202 | $52,017 | $77,914 | Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $361.0 million in 2018 to $396.7 million in 2019, driven by net income and stock-based compensation, partially offset by common stock repurchases and dividends[304] - Key changes in stockholders' equity for 2019 include $82.8 million in net income, $19.9 million in stock-based compensation expense, $(30.5) million in common stock repurchases, and $(29.3) million in dividends[304] - The exercise of common stock warrants by Comcast resulted in a $(12.9) million impact to stockholders' equity in 2019[304] Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Thousands) | Cash Flow (in thousands) | 2019 | 2018 | 2017 | | :----------------------- | :-------- | :-------- | :-------- | | Net cash provided by operating activities | $151,076 | $143,341 | $127,195 | | Net cash used in investing activities | $(56,636) | $(86,139) | $(29,904) | | Net cash used in financing activities | $(78,228) | $(37,509) | $(105,494) | | Effect of exchange rate fluctuations on cash | $1,059 | $(2,659) | $4,095 | | Net increase (decrease) in cash and cash equivalents | $17,271 | $17,034 | $(4,108) | | Cash and cash equivalents, beginning of period | $139,277 | $122,243 | $126,351 | | Cash and cash equivalents, end of period | $156,548 | $139,277 | $122,243 | - Cash provided by operating activities increased in 2019, while cash used in investing activities decreased, mainly due to lower acquisition-related payments compared to 2018[308] - Cash used in financing activities increased in 2019, primarily due to cash settlement of common stock warrants and continued stock repurchases and dividend payments[308] Notes to Consolidated Financial Statements 1. General - CSG Systems International, Inc. is a Delaware corporation, formed in October 1994, based in Greenwood Village, Colorado[311] - The company is a revenue management, customer experience, and payment solutions provider primarily serving the global communications industry, with over 35 years of experience[311] 2. Summary of Significant Accounting Policies - Financial statements are prepared in conformity with U.S. GAAP, consolidating all accounts of the company and its subsidiaries[312][313] - Foreign currency translation adjustments are included in comprehensive income, while transaction gains/losses are in net income[314] - Critical estimates include revenue recognition, impairment assessments of long-lived assets, income taxes, and loss contingencies[315] - CSG adopted ASC 606 (Revenue from Contracts with Customers) on January 1, 2018, using the cumulative effect method, increasing beginning retained earnings by approximately $7 million[316] - Revenue from cloud and related solutions (SaaS, managed services, payment processing) is primarily variable, based on monthly volumes/usage, and recognized as services are performed[318][320][323][324] - Software and services revenues, often bundled, involve complex allocation of consideration based on stand-alone selling prices and an hours-based method for recognizing revenue over time for implementation services[328][330][331] - Maintenance revenues are recognized ratably over the software maintenance period[334] - As of December 31, 2019, the aggregate transaction price allocated to remaining performance obligations is approximately $1 billion, with 80% expected to be recognized by the end of 2022[335] Revenue by Type (Thousands) | Revenue Type | 2019 (Thousands) | 2018 (Thousands) | | :----------- | :--------------- | :--------------- | | Cloud and related solutions | $896,164 | $766,377 | | Software and services | $52,364 | $58,101 | | Maintenance | $48,282 | $50,581 | | Total revenues | $996,810 | $875,059 | - Billed accounts receivable represents unconditional rights to consideration, while unbilled accounts receivable is for work completed but not yet billed[339] - Deferred revenue represents consideration received in advance of services[340] - Cash equivalents primarily consist of institutional money market funds, commercial paper, and time deposits[341] Fair Value Measurements (Thousands) | Financial Instrument (in thousands) | December 31, 2019 Level 1 | December 31, 2019 Level 2 | December 31, 2019 Total | December 31, 2018 Level 1 | December 31, 2018 Level 2 | December 31, 2018 Total | | :---------------------------------- | :------------------------ | :------------------------ | :---------------------- | :------------------------ | :------------------------ | :---------------------- | | Cash equivalents: | | | | | | | | Money market funds | $4,847 | $— | $4,847 | $4,392 | $— | $4,392 | | Commercial paper | $— | $26,964 | $26,964 | $— | $9,078 | $9,078 | | Short-term investments: | | | | | | | | Corporate debt securities | $— | $22,159 | $22,159 | $— | $16,357 | $16,357 | | U.S. government agency bonds | $— | $— | $— | $— | $3,724 | $3,724 | | Asset-backed securities | $— | $3,950 | $3,950 | $— | $3,522 | $3,522 | | Total | $4,847 | $53,073 | $57,920 | $4,392 | $32,681 | $37,073 | - CSG is exposed to credit risk in cash deposits, cash equivalents, short-term investments, and accounts receivable, mitigated by monitoring and credit evaluations[350] Allowance for Doubtful Accounts (Thousands) | Allowance for Doubtful Accounts (in thousands) | 2019 | 2018 | 2017 | | :--------------------------------------------- | :------ | :------ | :------ | | Balance, beginning of year | $3,115 | $4,149 | $3,080 | | Additions to expense | $778 | $462 | $2,434 | | Write-offs | $(158) | $(1,659) | $(1,392) | | Recoveries | $— | $— | $5 | | Other | $— | $163 | $22 | | Balance, end of year | $3,735 | $3,115 | $4,149 | - R&D expenses were $128.0 million in 2019, $124.0 million in 2018, and $113.2 million in 2017; no material R&D costs were capitalized in these periods[356] - Goodwill is evaluated for impairment annually or more frequently if circumstances indicate potential impairment[358] Earnings Per Share Denominators (Thousands) | EPS Denominators (in thousands) | 2019 | 2018 | 2017 | | :------------------------------ | :----- | :----- | :----- | | Basic weighted-average common shares | 32,051 | 32,488 | 32,415 | | Dilutive effect of restricted stock | 282 | 218 | 444 | | Dilutive effect of Stock Warrants | 132 | 149 | 6 | | Diluted weighted-average common shares | 32,465 | 32,855 | 32,865 | - CSG made an additional $4.0 million investment in a payment technology and services company in 2019, holding an 8% noncontrolling interest with a carrying value of $6.6 million[363] - Stock-based compensation cost is measured at grant date fair value and recognized over the service period[364] - CSG adopted ASC 842 (Leases) in January 2019, recognizing right-of-use assets and lease liabilities for leases over twelve months, resulting in an approximately $80 million balance sheet gross-up[366][367] 3. Segment Reporting and Significant Concentration - CSG operates as one reportable segment as of December 31, 2019[368] - The company's solutions and services primarily serve the North American cable and satellite markets with its ACP platform and related solutions, and globally with public cloud revenue management and payments solutions[369] Revenues by Geographic Region (Thousands) | Geographic Region | 2019 Revenues (Thousands) | 2018 Revenues (Thousands) | 2017 Revenues (Thousands) | | :---------------- | :------------------------ | :------------------------ | :------------------------ | | Americas | $866,831 | $740,885 | $669,712 | | Europe, Middle East and Africa | $91,685 | $89,924 | $72,120 | | Asia Pacific | $38,294 | $44,250 | $47,750 | | Total revenues | $996,810 | $875,059 | $789,582 | - Revenues attributable to operations in the Americas were 87% in 2019, 85% in 2018, and 85% in 2017[370] Client Revenue Concentration | Client | 2019 % of Total Revenues | 2018 % of Total Revenues | | :----- | :----------------------- | :----------------------- | | Comcast | 23% | 25% | | Charter | 20% | 20% | - As of December 31, 2019 and 2018, Comcast and Charter represented approximately 24% of net billed accounts receivable balances for both periods[373] 4. Long-Lived Assets Property and Equipment (Thousands) | Property and Equipment (in thousands) | 2019 | 2018 | | :------------------------------------ | :-------- | :-------- | | Computer equipment | $88,701 | $84,814 | | Leasehold improvements | $25,778 | $22,494 | | Operating equipment | $59,864 | $58,521 | | Furniture and fixtures | $8,115 | $9,262 | | Total | $182,458 | $175,091 | | Less - accumulated depreciation | $(98,029) | $(93,278) | | Property and equipment, net | $84,429 | $81,813 | Goodwill (Thousands) | Goodwill (in thousands) | 2019 | 2018 | | :---------------------- | :-------- | :-------- | | January 1 balance | $255,816 | $210,080 | | Adjustments related to prior acquisitions | $640 | $(60) | | Goodwill acquired during period | $- | $51,591 | | Effects of changes in foreign currency exchange rates | $2,708 | $(5,795) | | December 31 balance | $259,164 | $255,816 | Acquired Client Contracts (Thousands) | Acquired Client Contracts (in thousands) | December 31, 2019 Gross Carrying Amount | December 31, 2019 Accumulated Amortization | December 31, 2019 Net Amount | December 31, 2018 Gross Carrying Amount | December 31, 2018 Accumulated Amortization | December 31, 2018 Net Amount | | :--------------------------------------- | :-------------------------------------- | :----------------------------------------- | :--------------------------- | :-------------------------------------- | :----------------------------------------- | :--------------------------- | | Acquired client contracts | $148,872 | $(93,767) | $55,105 | $148,148 | $(82,692) | $65,456 | - Aggregate amortization for client contracts was $10.4 million in 2019, $7.9 million in 2018, and $17.9 million in 2017[377] - The weighted-average remaining amortization period for acquired client contracts as of December 31, 2019, was approximately 109 months[378] Software Assets (Thousands) | Software Assets (in thousands) | December 31, 2019 Gross Carrying Amount | December 31, 2019 Accumulated Amortization | December 31, 2019 Net Amount | December 31, 2018 Gross Carrying Amount | December 31, 2018 Accumulated Amortization | December 31, 2018 Net Amount | | :----------------------------- | :-------------------------------------- | :----------------------------------------- | :--------------------------- | :-------------------------------------- | :----------------------------------------- | :--------------------------- | | Acquired software | $75,370 | $(68,157) | $7,213 | $75,156 | $(65,719) | $9,437 | | Internal use software | $82,593 | $(57,280) | $25,313 | $80,625 | $(53,662) | $26,963 | | Total software | $157,963 | $(125,437) | $32,526 | $155,781 | $(119,381) | $36,400 | - Aggregate amortization for software was $12.9 million in 2019, $11.3 million in 2018, and $9.3 million in 2017[380] - The weighted-average remaining amortization period for software intangible assets as of December 31, 2019, was approximately 43 months[381] Client Contract Costs (Thousands) | Client Contract Costs (in thousands) | December 31, 2019 Gross Carrying Amount | December 31, 2019 Accumulated Amortization | December 31, 2019 Net Amount | December 31, 2018 Gross Carrying Amount | December 31, 2018 Accumulated Amortization | December 31, 2018 Net Amount | | :----------------------------------- | :-------------------------------------- | :----------------------------------------- | :--------------------------- | :-------------------------------------- | :----------------------------------------- | :--------------------------- | | Client contract incentives | $4,626 | $(1,612) | $3,014 | $28,366 | $(20,833) | $7,533 | | Capitalized costs | $68,085 | $(26,482) | $41,603 | $44,469 | $(20,230) | $24,239 | | Capitalized commission fees | $9,561 | $(3,432) | $6,129 | $7,505 | $(1,988) | $5,517 | | Total client contact costs | $82,272 | $(31,526) | $50,746 | $80,340 | $(43,051) | $37,289 | - Aggregate amortization for client contract costs was $20.8 million in 2019 and $20.8 million in 2018[383] 5. Debt Long-Term Debt (Thousands) | Long-Term Debt (in thousands) | December 31, 2019 | December 31, 2018 | | :---------------------------- | :---------------- | :---------------- | | 2018 Term Loan, net | $135,160 | $142,094 | | 2016 Convertible Notes, net | $221,662 | $217,732 | | Total debt, net | $356,822 | $359,826 | | Current portion of long-term debt, net | $(10,313) | $(7,500) | | Long-term debt, net | $346,509 | $352,326 | - The 2018 Credit Agreement, entered into on March 5, 2018, includes a $150 million term loan and a $200 million revolving loan facility, both due March 2023[385] - Interest rates on the 2018 Credit Agreement are variable, based on adjusted LIBOR plus an applicable margin[386] - CSG made $7.5 million in principal repayments on the 2018 Credit Agreement in 2019; no borrowings were outstanding on the 2018 Revolver as of December 31, 2019[388] - The 2016 Convertible Notes ($230 million, 4.25% interest) are due March 15, 2036, convertible at note holders' option under specified conditions, with a conversion rate of 17.5843 shares per $1,000 principal[391][392] - CSG intends to settle conversion obligations by paying cash for par value and common stock/cash for any excess value[393] Long-Term Debt Maturities (Thousands) | Long-Term Debt Maturities (in thousands) | 2020 | 2021 | 2022 | 2023 | Total | | :--------------------------------------- | :------ | :------ | :------ | :------ | :------ | | 2018 Term Loan | $10,313 | $14,062 | $15,000 | $97,500 | $136,875 | | 2016 Convertible Notes | $— | $230,000 | $— | $— | $230,000 | | Total long-term debt repayments | $10,313 | $244,062 | $15,000 | $97,500 | $366,875 | - Deferred financing costs of $1.7 million for the 2018 Credit Agreement and $2.3 million for the 2016 Convertible Notes are amortized to interest expense[399] - The weighted-average interest rate on debt borrowings was approximately 6% in 2019, up from 5% in 2018 and 2017[399] 6. Leases - CSG has operating leases for real estate (office, production facilities), outsourced data center environment, and operating equipment, with terms up to eight years and some renewal options[400] - The company elected not to recognize leases with initial terms of twelve months or less on the balance sheet and, for real estate leases starting in 2019, accounts for lease and non-lease components as a single lease component[401] Lease Expense (Thousands) | Lease Expense (in thousands) | 2019 | | :--------------------------- | :------ | | Operating lease expense | $24,670 | | Variable lease expense | $4,647 | | Short-term lease expense | $583 | | Sublease income | $(1,710) | | Total net lease expense | $28,190 | - Cash paid for operating lease liabilities was $24.0 million in 2019, with right-of-use assets obtained in exchange for new operating lease liabilities totaling $33.8 million[403] - Weighted-average remaining lease term for operating leases is 59 months, with a weighted-average discount rate of 4.32%[403] Future Minimum Lease Payments (Thousands) | Future Minimum Lease Payments (in thousands) | Amount | | :------------------------------------------- | :-------- | | 2020 | $25,976 | | 2021 | $25,134 | | 2022 | $20,251 | | 2023 | $15,097 | | 2024 | $13,848 | | Thereafter | $12,639 | | Total future minimum lease payments | $112,945 | | Less: Interest | $(11,567) | | Total | $101,378 | | Current operating lease liabilities | $22,442 | | Non-current operating lease liabilities | $78,936 | | Total | $101,378 | - An operating lease for office space commencing in 2020 will add approximately $23 million, and an upgrade to the outsourced data center processors will increase right-of-use assets and lease liabilities by approximately $12 million[406] 7. Acquisitions - On February 28, 2018, CSG acquired Business Ink for approximately $70 million, expanding operations, platform capabilities, and customer base[408] - On October 1, 2018, CSG acquired Forte Payment Systems, Inc. for approximately $93 million, accelerating payment solutions offerings and strengthening its position in revenue management[409] - The Forte acquisition included provisions for $18.8 million in potential future earn-out payments over a four-year period, with $2.5 million accrued as of December 31, 2019[409] - In January 2020, CSG acquired certain assets of Tekzenit, Inc. for an initial $10 million, with potential additional earn-out and sales payments up to $10 million, aimed at accelerating go-to-market for customer experience solutions[410] 8. Restructuring and Reorganization Charges - Restructuring and reorganization charges for 2019, 2018, and 2017 were $4.8 million, $8.7 million, and $8.8 million, respectively[415] - In 2019, charges included $2.5 million for reducing the workforce by approximately 70 employees, primarily in North America[412] - In 2018, charges included $6.2 million for reducing the workforce by approximately 170 employees and $2.7 million for closing a print facility, partially offset by a $2.3 million liability reversal[413] - As of December 31, 2019, $0.8 million of restructuring reserves were included in current liabilities[418] 9. Income Taxes Income Before Income Taxes (Thousands) | Income Before Income Taxes (in thousands) | 2019 | 2018 | 2017 | | :---------------------------------------- | :-------- | :-------- | :-------- | | Domestic | $99,000 | $80,234 | $89,095 | | Foreign | $6,723 | $6,753 | $(1,385) | | Total | $105,723 | $86,987 | $87,710 | Income Tax Provision (Thousands) | Income Tax Provision (in thousands) | 2019 | 2018 | 2017 | | :---------------------------------- | :-------- | :-------- | :-------- | | Current: | | | | | Federal | $16,616 | $7,814 | $13,422 | | State | $2,910 | $4,589 | $1,909 | | Foreign | $3,519 | $3,541 | $3,903 | | Total Current | $23,045 | $15,944 | $19,234 | | Deferred: | | | | | Federal | $(1,943) | $4,584 | $5,582 | | State | $624 | $(619) | $937 | | Foreign | $1,227 | $948 | $593 | | Total Deferred | $(92) | $4,913 | $7,112 | | Total income tax provision | $22,953 | $20,857 | $26,346 | - The effective income tax rates were 22% in 2019, 24% in 2018, and 30% in 2017, reflecting the impact of the U.S. Tax Cuts and Jobs Act[197][419] - CSG intends to indefinitely reinvest approximately $49 million of undistributed foreign earnings, thus no provision for foreign withholding taxes has been made[419] Deferred Income Tax Assets (Thousands) | Deferred Income Tax Assets (in thousands) | December 31, 2019 | December 31, 2018 | | :---------------------------------------- | :---------------- | :---------------- | | Deferred income tax assets | $71,343 | $51,533 | | Deferred income tax liabilities | $(48,411) | $(28,837) | | Valuation allowance | $(19,916) | $(19,814) | | Net deferred income tax assets | $3,016 | $2,882 | - As of December 31, 2019, CSG has acquired U.S. Federal NOL carryforwards of approximately $29 million, state NOL carryforwards of $51 million, and foreign subsidiary NOL carryforwards of $96 million[422] - The liability for unrecognized tax benefits was $1.5 million as of December 31, 2019, with an additional $0.6 million in accrued interest[426] - The Tax Cuts and Jobs Act reduced the U.S. corporate income tax rate from 35% to 21% effective after December 31, 2017[428] 10. Employee Retirement Benefit Plans - CSG sponsors a defined contribution plan for U.S. employees, with company matching and non-elective contributions totaling $11.3 million in 2019[429] - Total contributions to defined contribution-type plans for non-U.S. employees were $4.1 million in 2019[429] 11. Commitments, Guarantees and Contingencies - CSG has an agreement with Ensono, Inc. for outsourced computing services through September 30, 2025, for its ACP solutions, making it highly dependent on Ensono for system availability and security[431] - The company generally warrants its solutions and services for 90 days, with historical warranty costs being minimal, thus no warranty reserve is maintained[432] - Client arrangements typically include indemnification for intellectual property infringement claims, with no significant historical costs[433] - Liability for non-performance is typically capped, and adequate reserves are maintained for reasonably anticipated exposure[434] - CSG indemnifies its directors and officers and maintains D&O insurance, with no historical losses or current awareness of pending actions[435] 12. Stockholders' Equity - CSG repurchased 576,000 shares for $25.5 million in 2019 under its Stock Repurchase Program, with 5.0 million shares remaining available[437][438] - An additional 117,000 shares were repurchased and canceled for $5.1 million in 2019 to cover minimum tax withholding requirements for restricted stock vesting[439] - Total cash dividends approved by the Board were $0.89 per share ($29.4 million total) in 2019[441] - Stock warrants issued to Comcast in 2014 for 2.9 million shares at an exercise price of $26.68 per warrant, as an incentive for customer account conversions to ACP[442] - In December 2019, Comcast exercised its remaining 0.4 million vested Stock Warrants, resulting in a net cash settlement of $12.9 million[449] - As of December 31, 2019, 1.0 million Stock Warrants remain outstanding, none of which are vested[449] 13. Equity Compensation Plans - The Amended and Restated 2005 Stock Incentive Plan has 3.4 million shares available for issuance as of December 31, 2019[450] - Restricted stock awards are granted at no cost, typically vesting annually over three or four years (Time-Based Awards) or upon meeting financial/total shareholder return objectives (Performance-Based Awards)[452][453] Unvested Restricted Stock Activity (Shares in Thousands) | Unvested Restricted Stock Activity (shares in thousands) | Shares | Weighted-Average Grant Fair Value | | :------------------------------------------------------- | :----- | :-------------------------------- | | Unvested awards, beginning | 1,145 | $41.64 | | Awards granted | 530 | $41.69 | | Awards forfeited/cancelled | (168) | $42.41 | | Awards vested | (390) | $38.64 | | Unvested awards, ending | 1,117 | $42.60 | - The 1996 Employee Stock Purchase Plan allows U.S. employees to purchase common stock at 85% of market value, with 222,260 shares remaining eligible as of December 31, 2019[455] - Stock-based compensation expense was $19.9 million in 2019, with $28.6 million of unrecognized cost expected to be recognized over a weighted-average period of 2.2 years[456] 14. Unaudited Quarterly Financial Data 2019 Quarterly Financial Data (Thousands, Except Per Share Amounts) | 2019 Quarterly Data (in thousands, except per share amounts) | March 31 | June 30 | September 30 | December 31 | | :----------------------------------------------------------- | :------- | :-------- | :----------- | :---------- | | Total revenues | $244,793 | $245,856 | $251,414 | $254,747 | | Total cost of revenues (exclusive of depreciation) | $128,963 | $132,234 | $132,054 | $131,871 | | Operating income | $32,093 | $30,338 | $33,420 | $30,258 | | Income before income taxes | $25,851 | $26,837 | $28,821 | $24,214 | | Income tax provision | $(6,600) | $(7,458) | $(7,262) | $(1,633) | | Net income | $19,251 | $19,379 | $21,559 | $22,581 | | Basic earnings per common share | $0.60 | $0.60 | $0.67 | $0.71 | | Diluted earnings per common share | $0.59 | $0.60 | $0.66 | $0.70 | 2018 Quarterly Financial Data (Thousands, Except Per Share Amounts) | 2018 Quarterly Data (in thousands, except per share amounts) | March 31 | June 30 | September 30 | December 31 | | :----------------------------------------------------------- | :------- | :-------- | :----------- | :---------- | | Total revenues | $201,704 | $213,033 | $213,055 | $247,267 | | Total cost of revenues (exclusive of