CSG SYSTEMS INTERNATIONAL INC - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	47-0783182
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

6175 S. Willow Drive, 10^th Floor

Greenwood Village, Colorado 80111

(Address of principal executive offices, including zip code)

(303) 200-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 Per Share

CSGS

NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 2, 2020, there were 32,945,906 shares of the registrant’s common stock outstanding.

CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q for the Quarter Ended September 30, 2020

INDEX

		Page No.

Part I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 (Unaudited)	3

	Condensed Consolidated Statements of Income for the Quarters and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Quarters and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Quarters and Nine Months Ended September 30, 2020 and 2019 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26

Item 4.	Controls and Procedures	27

Part II - OTHER INFORMATION

Item 1.	Legal Proceedings	28

Item 1A.	Risk Factors	28

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28

Item 6.	Exhibits	29

	Index to Exhibits	30

	Signatures	31

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands, except per share amounts)

	September 30,			December 31,
	2020			2019
ASSETS
Current assets:
Cash and cash equivalents	$	174,489		$	156,548
Short-term investments		37,605			26,109
Total cash, cash equivalents and short-term investments		212,094			182,657
Settlement assets		117,452			169,327
Trade accounts receivable:
Billed, net of allowance of $3,730 and $3,735		225,117			244,058
Unbilled		36,977			33,450
Income taxes receivable		3,341			4,297
Other current assets		42,205			35,293
Total current assets		637,186			669,082
Non-current assets:
Property and equipment, net of depreciation of $100,661 and $98,029		83,199			84,429
Operating lease right-of-use assets		115,726			94,847
Software, net of amortization of $135,644 and $125,437		28,769			32,526
Goodwill		266,636			259,164
Acquired client contracts, net of amortization of $100,864 and $93,767		50,225			55,105
Client contract costs, net of amortization of $39,206 and $31,526		45,038			50,746
Deferred income taxes		9,641			9,392
Other assets		35,396			27,739
Total non-current assets		634,630			613,948
Total assets	$	1,271,816		$	1,283,030
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	13,125		$	10,313
Operating lease liabilities		22,580			22,442
Client deposits		34,387			38,687
Trade accounts payable		36,617			32,704
Accrued employee compensation		59,534			77,527
Settlement liabilities		116,032			168,342
Deferred revenue		52,835			45,094
Income taxes payable		3,664			2,806
Other current liabilities		18,612			20,778
Total current liabilities		357,386			418,693
Non-current liabilities:
Long-term debt, net of unamortized discounts of $6,543 and $10,053		339,707			346,509
Operating lease liabilities		101,262			78,936
Deferred revenue		18,884			18,552
Income taxes payable		2,734			2,543
Deferred income taxes		10,388			6,376
Other non-current liabilities		31,528			14,759
Total non-current liabilities		504,503			467,675
Total liabilities		861,889			886,368
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000 shares authorized; zero shares issued and outstanding		-			-
Common stock, par value $.01 per share; 100,000 shares authorized; 33,125 and 32,891 shares outstanding		701			696
Additional paid-in capital		462,775			454,663
Treasury stock, at cost; 35,646 and 35,356 shares		(880,162	)		(867,817	)
Accumulated other comprehensive income (loss):
Unrealized gains on short-term investments, net of tax		30			16
Cumulative foreign currency translation adjustments		(44,265	)		(39,519	)
Accumulated earnings		870,848			848,623
Total stockholders' equity		409,927			396,662
Total liabilities and stockholders' equity	$	1,271,816		$	1,283,030

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(in thousands, except per share amounts)

	Quarter Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Revenue	$	244,108		$	251,414		$	730,046		$	742,063

Cost of revenue (exclusive of depreciation, shown separately below)		131,073			132,054			400,432			393,251
Other operating expenses:
Research and development		30,425			32,551			90,025			95,787
Selling, general and administrative		47,032			46,694			136,415			137,984
Depreciation		5,817			5,365			17,016			15,919
Restructuring and reorganization charges		814			1,330			4,277			3,271
Total operating expenses		215,161			217,994			648,165			646,212
Operating income		28,947			33,420			81,881			95,851
Other income (expense):
Interest expense		(3,641	)		(4,390	)		(11,894	)		(13,448	)
Amortization of original issue discount		(751	)		(709	)		(2,221	)		(2,099	)
Interest and investment income, net		254			392			1,086			1,328
Other, net		(2,067	)		108			(3,184	)		(123	)
Total other		(6,205	)		(4,599	)		(16,213	)		(14,342	)
Income before income taxes		22,742			28,821			65,668			81,509
Income tax provision		(9,176	)		(7,262	)		(20,222	)		(21,320	)
Net income	$	13,566		$	21,559		$	45,446		$	60,189

Weighted-average shares outstanding:
Basic		32,115			32,016			32,070			32,079
Diluted		32,273			32,518			32,296			32,472

Earnings per common share:
Basic	$	0.42		$	0.67		$	1.42		$	1.88
Diluted		0.42			0.66			1.41			1.85

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(in thousands)


	Quarter Ended						Nine Months Ended
	September 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019
Net income	$	13,566		$	21,559		$	45,446		$	60,189
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		7,667			(6,897	)		(4,746	)		(6,868	)
Unrealized holding gains (losses) on short-term investments arising during period		(14	)		(4	)		14			24
Other comprehensive income (loss), net of tax		7,653			(6,901	)		(4,732	)		(6,844	)
Total comprehensive income, net of tax	$	21,219		$	14,658		$	40,714		$	53,345

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

(in thousands)

	Shares of Common Stock Outstanding			Common Stock			Common Stock Warrants		Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Accumulated Earnings			Total Stockholders' Equity
For the Nine Months Ended September 30, 2020:
BALANCE, January 1, 2020		32,891		$	696		$	-	$	454,663		$	(867,817	)	$	(39,503	)	$	848,623		$	396,662
Comprehensive income:
Net income		-			-			-		-			-			-			21,514
Unrealized gain on short-term investments, net of tax		-			-			-		-			-			(24	)		-
Foreign currency translation adjustments		-			-			-		-			-			(15,084	)		-
Total comprehensive income																						6,406
Repurchase of common stock		(299	)		(2	)		-		(7,555	)		(6,408	)		-			-			(13,965	)
Issuance of common stock pursuant to employee stock purchase plan		14			-			-		564			-			-			-			564
Issuance of restricted common stock pursuant to stock-based compensation plans		476			5			-		(5	)		-			-			-			-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(7	)		-			-		-			-			-			-			-
Stock-based compensation expense		-			-			-		4,857												4,857
Dividends		-			-			-		-			-			-			(7,693	)		(7,693	)
BALANCE, March 31, 2020		33,075			699			-		452,524			(874,225	)		(54,611	)		862,444			386,831
Comprehensive income:
Net income		-			-			-		-			-			-			10,366
Unrealized gain on short-term investments, net of tax		-			-			-		-			-			52			-
Foreign currency translation adjustments		-			-			-		-			-			2,671			-
Total comprehensive income																						13,089
Repurchase of common stock		(11	)		-			-		(100	)		(367	)		-			-			(467	)
Issuance of common stock pursuant to employee stock purchase plan		18			-			-		683			-			-			-			683
Issuance of restricted common stock pursuant to stock-based compensation plans		12			-			-		-			-			-			-			-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(14	)		-			-		-			-			-			-			-
Stock-based compensation expense		-			-			-		5,255												5,255
Declaration of cash dividends		-			-			-		-			-			-			(7,769	)		(7,769	)
BALANCE, June 30, 2020		33,080		$	699		$	-	$	458,362		$	(874,592	)	$	(51,888	)	$	865,041		$	397,622
Comprehensive income:
Net income		-			-			-		-			-			-			13,566
Unrealized gain on short-term investments, net of tax		-			-			-		-			-			(14	)		-
Foreign currency translation adjustments		-			-			-		-			-			7,667			-
Total comprehensive income																						21,219
Repurchase of common stock		(143	)		-			-		(152	)		(5,570	)		-			-			(5,722	)
Issuance of common stock pursuant to employee stock purchase plan		16			-			-		591			-			-			-			591
Issuance of restricted common stock pursuant to stock-based compensation plans		183			2			-		(2	)		-			-			-			-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(11	)		-			-		-			-			-			-			-
Stock-based compensation expense		-			-			-		3,976												3,976
Declaration of cash dividends		-			-			-		-			-			-			(7,759	)		(7,759	)
BALANCE, September 30, 2020		33,125		$	701		$	-	$	462,775		$	(880,162	)	$	(44,235	)	$	870,848		$	409,927


	Shares of Common Stock Outstanding			Common Stock			Common Stock Warrants		Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Accumulated Earnings			Total Stockholders' Equity
For the Nine Months Ended September 30, 2019:
BALANCE, January 1, 2019		33,158		$	693		$	9,082	$	441,417		$	(842,360	)	$	(42,935	)	$	795,127		$	361,024
Comprehensive income:
Net income		-			-			-		-			-			-			19,251
Unrealized gain on short-term investments, net of tax		-			-			-		-			-			18			-
Foreign currency translation adjustments		-			-			-		-			-			3,847			-
Total comprehensive income																						23,116
Repurchase of common stock		(352	)		-			-		(4,134	)		(9,290	)		-			-			(13,424	)
Issuance of common stock pursuant to employee stock purchase plan		15			-			-		512			-			-			-			512
Issuance of restricted common stock pursuant to stock-based compensation plans		462			4			-		(4	)		-			-			-			-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(3	)		-			-		-			-			-			-			-
Stock-based compensation expense		-			-			-		3,693												3,693
Dividends		-			-			-		-			-			-			(7,411	)		(7,411	)
BALANCE, March 31, 2019		33,280			697			9,082		441,484			(851,650	)		(39,070	)		806,967			367,510
Comprehensive income:
Net income		-			-			-		-			-			-			19,379
Unrealized gain on short-term investments, net of tax		-			-			-		-			-			10			-
Foreign currency translation adjustments		-			-			-		-			-			(3,818	)		-
Total comprehensive income																						15,571
Repurchase of common stock		(148	)		-			-		(383	)		(6,536	)		-			-			(6,919	)
Issuance of common stock pursuant to employee stock purchase plan		15			-			-		603			-			-			-			603
Issuance of restricted common stock pursuant to stock-based compensation plans		6			-			-		-			-			-			-			-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(91	)		(1	)		-		1			-			-			-			-
Stock-based compensation expense		-			-			-		4,807												4,807
Declaration of cash dividends		-			-			-		-			-			-			(7,248	)		(7,248	)
BALANCE, June 30, 2019		33,062		$	696		$	9,082	$	446,512		$	(858,186	)	$	(42,878	)	$	819,098		$	374,324
Comprehensive income:
Net income		-			-			-		-			-			-			21,559
Unrealized gain on short-term investments, net of tax		-			-			-		-			-			(4	)		-
Foreign currency translation adjustments		-			-			-		-			-			(6,897	)		-
Total comprehensive income																						14,658
Repurchase of common stock		(97	)		-			-		(216	)		(4,731	)		-			-			(4,947	)
Issuance of common stock pursuant to employee stock purchase plan		12			-			-		515			-			-			-			515
Issuance of restricted common stock pursuant to stock-based compensation plans		34			-			-		-			-			-			-			-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(32	)		-			-		-			-			-			-			-
Stock-based compensation expense		-			-			-		4,795			-			-			-			4,795
Declaration of cash dividends		-			-			-		-						-			(7,309	)		(7,309	)
BALANCE, September 30, 2019		32,979		$	696		$	9,082	$	451,606		$	(862,917	)	$	(49,779	)	$	833,348		$	382,036

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)

	Nine Months Ended
	September 30, 2020			September 30, 2019
Cash flows from operating activities:
Net income	$	45,446		$	60,189
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation		17,016			15,919
Amortization		32,998			34,579
Amortization of original issue discount		2,221			2,099
Asset impairment		10,438			365
Gain on short-term investments and other		(120	)		(285	)
Deferred income taxes		3,844			6,124
Stock-based compensation		14,088			13,295
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net		13,322			(8,748	)
Other current and non-current assets and liabilities		(9,228	)		(15,312	)
Income taxes payable/receivable		1,542			3,468
Trade accounts payable and accrued liabilities		(24,618	)		(7,978	)
Deferred revenue		8,736			3,812
Net cash provided by operating activities		115,685			107,527

Cash flows from investing activities:
Purchases of software, property and equipment		(24,201	)		(27,706	)
Purchases of short-term investments		(49,100	)		(25,446	)
Proceeds from sale/maturity of short-term investments		37,743			38,029
Acquisition of and investments in business, net of cash acquired		(11,491	)		(17,194	)
Net cash used in investing activities		(47,049	)		(32,317	)

Cash flows from financing activities:
Proceeds from issuance of common stock		1,838			1,630
Payment of cash dividends		(23,441	)		(21,980	)
Repurchase of common stock		(19,926	)		(25,683	)
Payments on long-term debt		(7,500	)		(5,625	)
Net cash used in financing activities		(49,029	)		(51,658	)
Effect of exchange rate fluctuations on cash		(1,666	)		(2,199	)

Net increase in cash and cash equivalents		17,941			21,353

Cash and cash equivalents, beginning of period		156,548			139,277
Cash and cash equivalents, end of period	$	174,489		$	160,630

Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest	$	12,941		$	14,521
Income taxes		14,756			11,779

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL

We have prepared the accompanying unaudited condensed consolidated financial statements as of September 30, 2020 and December 31, 2019, and for the quarters and nine months ended September 30, 2020 and 2019, in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position and operating results have been included. The unaudited Condensed Consolidated Financial Statements (the “Financial Statements”) should be read in conjunction with the Consolidated Financial Statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 10-K”), filed with the SEC. The results of operations for the quarter and nine months ended September 30, 2020 are not necessarily indicative of the expected results for the entire year ending December 31, 2020.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue. The majority of our future revenue is related to our revenue management solution client contracts that include variable consideration dependent upon a series of monthly volumes and/or daily usage of services and have contractual terms ending from 2020 through 2028. Our client contracts may also include guaranteed minimums and fixed monthly or annual fees. As of September 30, 2020, our aggregate amount of the transaction price allocated to the remaining performance obligations is approximately $1 billion, which is made up of fixed fee consideration and guaranteed minimums expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied). We expect to recognize approximately 70% of this amount by the end of 2022, with the remaining amount recognized by the end of 2028. We have excluded from this amount variable consideration expected to be recognized in the future related to performance obligations that are unsatisfied.

The nature, amount, timing, and uncertainty of our revenue and how revenue and cash flows are affected by economic factors is most appropriately depicted by geographic region (using the location of the client as the basis of attributing revenue to the individual regions) as follows (in thousands):

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Americas (principally the U.S.)	$	210,864	$	218,694	$	637,787	$	643,814
Europe, Middle East, and Africa		23,429		23,284		66,595		70,516
Asia Pacific		9,815		9,436		25,664		27,733
Total revenue	$	244,108	$	251,414	$	730,046	$	742,063

Deferred revenue recognized during the quarters ended September 30, 2020 and 2019 was $6.1 million and $5.7 million, respectively, and during the nine months ended September 30, 2020 and 2019 was $33.4 million and $35.5 million, respectively.

Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of three months or less at the date of the purchase to be cash equivalents. As of September 30, 2020 and December 31, 2019, our cash equivalents consist primarily of institutional money market funds, commercial paper, and time deposits held at major banks.

As of September 30, 2020 and December 31, 2019, we had $1.6 million and $2.7 million, respectively, of restricted cash that serves to collateralize outstanding letters of credit. This restricted cash is included in cash and cash equivalents in our Condensed Consolidated Balance Sheets (“Balance Sheets” or “Balance Sheet”).

Short-term Investments and Other Financial Instruments. Our financial instruments as of September 30, 2020 and December 31, 2019 include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and debt. Because of their short maturities, the carrying amounts of cash equivalents, accounts receivable, and accounts payable approximate their fair value.

Our short-term investments and certain of our cash equivalents are considered “available-for-sale” and are reported at fair value in our Balance Sheets, with unrealized gains and losses, net of the related income tax effect, excluded from earnings and reported in a separate component of stockholders’ equity. Realized and unrealized gains and losses were not material in any period presented.

Primarily all short-term investments held by us as of September 30, 2020 and December 31, 2019 have contractual maturities of less than two years from the time of acquisition. Our short-term investments as of September 30, 2020 and December 31, 2019 consisted almost entirely of fixed income securities. Proceeds from the sale/maturity of short-term investments for the nine months ended September 30, 2020 and 2019 were $37.7 million and $38.0 million, respectively.

Our short-term investments as of September 30, 2020 and December 31, 2019 were $37.6 million and $26.1 million, respectively.

The following table represents the fair value hierarchy based upon three levels of inputs, of which Levels 1 and 2 are considered observable and Level 3 is unobservable, for our financial assets measured at fair value (in thousands):

	September 30, 2020						December 31, 2019
	Level 1		Level 2		Total		Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	28,548	$	—	$	28,548	$	4,847	$	—	$	4,847
Commercial paper		—		6,098		6,098		—		26,964		26,964
Short-term investments:
Corporate debt securities		—		35,432		35,432		—		22,159		22,159
Asset-backed securities		—		2,173		2,173		—		3,950		3,950
Total	$	28,548	$	43,703	$	72,251	$	4,847	$	53,073	$	57,920

Valuation inputs used to measure the fair values of our money market funds and corporate equity securities were derived from quoted market prices. The fair values of all other financial instruments are based upon pricing provided by third-party pricing services. These prices were derived from observable market inputs.

We have chosen not to measure our debt at fair value, with changes recognized in earnings each reporting period. The following table indicates the carrying value (par value for convertible debt) and estimated fair value of our debt as of the indicated periods (in thousands):

	September 30, 2020				December 31, 2019
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
2018 Credit Agreement (carrying value including current maturities)	$	129,375	$	129,375	$	136,875	$	136,875
2016 Convertible debt (par value)		230,000		240,350		230,000		262,775

The fair value for our credit agreement was estimated using a discounted cash flow methodology, while the fair value for our convertible debt was estimated based upon quoted market prices or recent sales activity, both of which are considered Level 2 inputs.

Equity Method Investment. During the nine months ended September 30, 2020, we made an additional $1.5 million investment in a payment technology and services company. As of September 30, 2020, we held a 15% noncontrolling interest with a carrying value of $8.0 million.

3. LONG-LIVED ASSETS

Goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30, 2020 were as follows (in thousands):


January 1, 2020 balance	$	259,164
Tekzenit, Inc. acquisition		9,083
Adjustments related to prior acquisitions		(45	)
Effects of changes in foreign currency exchange rates		(1,566	)
September 30, 2020 balance	$	266,636

See Note 5 for discussion regarding the Tekzenit, Inc. acquisition.

Other Intangible Assets. Our other intangible assets subject to ongoing amortization consist primarily of acquired client contracts and software. As of September 30, 2020 and December 31, 2019, the carrying values of these assets were as follows (in thousands):

	September 30, 2020							December 31, 2019
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Acquired client contracts	$	151,089	$	(100,864	)	$	50,225	$	148,872	$	(93,767	)	$	55,105
Software		164,413		(135,644	)		28,769		157,963		(125,437	)		32,526
Total intangible assets	$	315,502	$	(236,508	)	$	78,994	$	306,835	$	(219,204	)	$	87,631

The total amortization expense related to other intangible assets for the third quarters of 2020 and 2019 were $6.3 million and $5.9 million, respectively, and for the nine months ended September 30, 2020 and 2019 were $18.9 million and $17.3 million, respectively. Based on the September 30, 2020 net carrying value of our other intangible assets, the estimated total amortization expense for each of the five succeeding fiscal years ending December 31 are: 2020 – $25.3 million; 2021 – $18.4 million; 2022 – $13.9 million; 2023 – $10.0 million; and 2024 – $6.7 million.

Client Contract Costs. As of September 30, 2020 and December 31, 2019, the carrying values of our client contract cost assets, related to those contracts with a contractual term greater than one year, were as follows (in thousands):

	September 30, 2020							December 31, 2019
	Gross							Gross
	Carrying		Accumulated			Net		Carrying		Accumulated			Net
	Amount		Amortization			Amount		Amount		Amortization			Amount
Client contract costs	$	84,244	$	(39,206	)	$	45,038	$	82,272	$	(31,526	)	$	50,746

During the nine months ended September 30, 2020, we recorded an impairment charge of $10.3 million for the write-off of capitalized client contract costs related to a discontinued project implementation. This non-cash impairment charge is included primarily in cost of revenue in our Condensed Consolidated Statements of Income (“Income Statement”).

The total amortization expense related to client contract costs for the third quarters of 2020 and 2019 were $4.2 million and $3.7 million, respectively, and for the nine months ended September 30, 2020 and 2019 were $12.8 million and $16.1 million, respectively.

4. DEBT

Our long-term debt, as of September 30, 2020 and December 31, 2019, was as follows (in thousands):

	September 30,			December 31,
	2020			2019
2018 Credit Agreement:
Term loan, due March 2023, interest at adjusted LIBOR plus 1.5% (combined rate of 1.72% as of September 30, 2020 and 3.44% as of December 31, 2019)	$	129,375		$	136,875
Less – deferred financing costs		(1,294	)		(1,715	)
2018 term loan, net of unamortized discounts		128,081			135,160
$200 million revolving loan facility, due March 2023, interest at adjusted LIBOR plus applicable margin	—			—
Convertible Notes:
2016 Convertible Notes – Senior convertible notes; due March 15, 2036; cash interest at 4.25%		230,000			230,000
Less – unamortized original issue discount		(3,783	)		(6,004	)
Less – deferred financing costs		(1,466	)		(2,334	)
2016 Convertible Notes, net of unamortized discounts		224,751			221,662
Total debt, net of unamortized discounts		352,832			356,822
Current portion of long-term debt, net of unamortized discounts		(13,125	)		(10,313	)
Long-term debt, net of unamortized discounts	$	339,707		$	346,509

2018 Credit Agreement

During the nine months ended September 30, 2020, we made $7.5 million of principal repayments on our $150 million aggregate principal five-year term loan (the “2018 Term Loan”). As of September 30, 2020, our interest rate on the 2018 Term Loan is 1.72% (adjusted LIBOR plus 1.50% per annum), effective through December 2020, and our commitment fee on the unused $200 million aggregate principal five-year revolving loan facility (the “2018 Revolver”) is 0.20%. As of September 30, 2020, we had no borrowings outstanding on our 2018 Revolver and had the entire $200.0 million available to us.

The interest rates under the 2018 Credit Agreement are based upon our choice of an adjusted LIBOR rate plus an applicable margin of 1.50% – 2.50%, or an alternate base rate plus an applicable margin of 0.50% – 1.50%, with the applicable margin, depending on our then-net secured total leverage ratio. We will pay a commitment fee of 0.200% – 0.375% of the average daily unused amount of the 2018 Revolver, with the commitment fee rate also dependent upon our then-net secured total leverage ratio. If the LIBOR rate is no longer available, then our interest rate under the Credit Agreement will be determined by the alternate base rate plus an applicable margin as discussed above.

2016 Convertible Notes

Upon conversion of the 2016 Convertible Notes, we will settle our conversion obligation by paying or delivering, as the case may be, cash, shares of our common stock, or a combination thereof, at our election. It is our current intent and policy to settle our conversion obligations as follows: (i) pay cash for 100% of the par value of the 2016 Convertible Notes that are converted; and (ii) to the extent the value of our conversion obligation exceeds the par value, we can satisfy the remaining conversion obligation in cash, shares of our common stock, or a combination thereof, at our election.

The 2016 Convertible Notes will be convertible at the option of the note holders upon the satisfaction of specified conditions and during certain periods. During the period from, and including, December 15, 2021 to the close of business on the business day immediately preceding March 15, 2022 and on or after December 15, 2035, holders may convert all or any portion of their 2016 Convertible Notes at the conversion rate then in effect at any time regardless of these conditions.

As a result of our quarterly dividend in September 2020 (see Note 9), the previous conversion rate for the 2016 Convertible Notes of 17.6222 shares of our common stock per $1,000 principal amount of the 2016 Convertible Notes, which is equivalent to an initial conversion price of $56.75 per share of our common stock, has been adjusted to 17.645 shares of our common stock per $1,000 principal amount of the 2016 Convertible Notes, which is equivalent to an initial conversion price of $56.67 per share of our common stock.

Holders may require us to repurchase the 2016 Convertible Notes for cash on each of March 15, 2022, March 15, 2026, and March 15, 2031, or upon the occurrence of a fundamental change (as defined in the 2016 Convertible Notes Indenture) in each case at a purchase price equal to the principal amount thereof plus accrued and unpaid interest.

We may redeem for cash all or part of the 2016 Convertible Notes if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. On or after March 15, 2022, we may redeem for cash all or part of the 2016 Convertible Notes regardless of the sales price condition described in the preceding sentence. In each case, the redemption price will equal the principal amount of the 2016 Convertible Notes to be redeemed, plus accrued and unpaid interest.

As of September 30, 2020, none of the conversion features have been achieved, and thus, the 2016 Convertible Notes are not convertible by the holders.

5. ACQUISITION

On January 2, 2020, we acquired Tekzenit Inc. (“Tekzenit”) for a purchase price of approximately $10 million. This acquisition will allow us to accelerate our go-to-market approach serving clients who are focused on improving their customers’ experience while transforming their business. The purchase agreement includes provisions for additional purchase price (“Provisional Purchase Price”) payments in the form of earn-out and qualified sales payments for up to $10 million over a three-year measurement period upon meeting certain financial and sales criteria. Of the Provisional Purchase Price amount, $6 million is considered contingent purchase price payments, of which $1.5 million was accrued upon acquisition. The remaining $4 million is tied to certain financial and sales criteria over a defined service period by the eligible recipients, and is therefore accounted for as post-acquisition compensation. As of September 30, 2020, we have not accrued any amounts related to the post-acquisition compensation payments due to the uncertainty of payment.

There were no material changes to the purchase accounting estimated fair values of assets acquired and liabilities assumed during the third quarter of 2020. As of September 30, 2020, the purchase accounting for the Tekzenit acquisition was complete. We recorded goodwill of $9.1 million and acquired client contracts of $2.9 million and liabilities assumed primarily include the contingent purchase price liabilities of $1.5 million.

6. RESTRUCTURING AND REORGANIZATION CHARGES

For the nine months ended September 30, 2020 and 2019, we recorded restructuring and reorganization charges of $4.3 million and $3.3 million, respectively.

Our restructuring activities during the nine months ended September 30, 2020 were primarily made up of organizational changes made to pursue global opportunities and efficiencies, for which we reduced our workforce by approximately 60 employees. As a result, we incurred restructuring and reorganization charges related to involuntary terminations of $3.3 million.

The activity in the business restructuring and reorganization reserves during the nine months ended September 30, 2020 was as follows:


	Termination
	Benefits			Other			Total
January 1, 2020 balance	$	822		$	-		$	822
Charged to expense during period		3,270			1,007			4,277
Cash payments		(3,206	)		(373	)		(3,579	)
Adjustment for asset impairment		—			(634	)		(634	)
Other		(147	)		—			(147	)
September 30, 2020 balance	$	739		$	-		$	739

As of September 30, 2020, $0.7 million of the business restructuring and reorganization reserves were included in current liabilities

7. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Warranties. We generally warrant that our solutions and related offerings will conform to published specifications, or to specifications provided in an individual client arrangement, as applicable. The typical warranty period is 90 days from the date of acceptance of the solution or offering. For certain service offerings we provide a warranty for the duration of the services provided. We generally warrant that services will be performed in a professional and workmanlike manner. The typical remedy for breach of warranty is to correct or replace any defective deliverable, and if not possible or practical, we will accept the return of the defective deliverable and refund the amount paid under the client arrangement that is allocable to the defective deliverable. Our contracts also generally contain limitation of damages provisions in an effort to reduce our exposure to monetary damages arising from breach of warranty claims. Historically, we have incurred minimal warranty costs, and as a result, do not maintain a warranty reserve.

Solution and Services Indemnifications. Our arrangements with our clients generally include an indemnification provision that will indemnify and defend a client in actions brought against the client that claim our products and/or services infringe upon a copyright, trade secret, or valid patent. Historically, we have not incurred any significant costs related to such indemnification claims, and as a result, do not maintain a reserve for such exposure.

Claims for Company Non-performance. Our arrangements with our clients typically cap our liability for breach to a specified amount of the direct damages incurred by the client resulting from the breach. From time-to-time, these arrangements may also include provisions for possible liquidated damages or other financial remedies for our non-performance, or in the case of certain of our outsourced customer care and billing solutions, provisions for damages related to service level performance requirements. The service level performance requirements typically relate to system availability and timeliness of service delivery. As of September 30, 2020, we believe we have adequate reserves, based on our historical experience, to cover any reasonably anticipated exposure as a result of our nonperformance for any past or current arrangements with our clients.

Indemnifications Related to Officers and the Board of Directors. We have agreed to indemnify members of our Board of Directors (the “Board”) and certain of our officers if they are named or threatened to be named as a party to any proceeding by reason of the fact that they acted in such capacity. We maintain directors’ and officers’ (D&O) insurance coverage to protect against such losses. We have not historically incurred any losses related to these types of indemnifications, and are not aware of any pending or threatened actions or claims against any officer or member of our Board. As a result, we have not recorded any liabilities related to such indemnifications as of September 30, 2020. In addition, as a result of the insurance policy coverage, we believe these indemnification agreements are not significant to our results of operations.

Legal Proceedings. From time-to-time, we are involved in litigation relating to claims arising out of our operations in the normal course of business.

8. EARNINGS PER COMMON SHARE

Basic and diluted earnings per common share (“EPS”) amounts are presented on the face of the accompanying Income Statements.

No reconciliation of the basic and diluted EPS numerators is necessary as net income is used as the numerators for all periods presented. The reconciliation of the basic and diluted EPS denominators related to the common shares is included in the following table (in thousands):

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Basic weighted-average common shares		32,115		32,016		32,070		32,079
Dilutive effect of restricted common stock		158		292		226	216
Dilutive effect of Stock Warrants		-		210		-		177
Diluted weighted-average common shares		32,273		32,518		32,296		32,472

The Convertible Notes have a dilutive effect only in those quarterly periods in which our average stock price exceeds the current effective conversion price (see Note 4).

The stock warrants have a dilutive effect only in those quarterly periods in which our average stock price exceeds the exercise price of $26.68 per warrant (under the treasury stock method), and are not subject to performance vesting conditions (see Note 9).

Potentially dilutive common shares related to non-participating unvested restricted stock excluded from the computation of diluted EPS, as the effect was antidilutive, were not material in any period presented.

9. STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION PLANS

Stock Repurchase Program. We currently have a stock repurchase program, approved by our Board, authorizing us to repurchase our common stock from time-to-time as market and business conditions warrant (the “Stock Repurchase Program”). During the third quarters of 2020 and 2019 we repurchased approximately 139,000 shares of our common stock for $5.5 million (weighted-average price of $39.93 per share) and approximately 92,000 shares of our common stock for $4.7 million (weighted-average price of $51.09 per share), respectively, and during the nine months ended September 30, 2020 and 2019 we repurchased approximately 290,000 shares of our common stock for $12.3 million (weighted-average price of $42.55 per share) and approximately 485,000 shares of our common stock for $20.6 million (weighted-average price of $42.37 per share), respectively, under a SEC Rule 10b5-1 Plan. In early April 2020, we suspended stock repurchases under the Stock Repurchase Program and terminated our SEC Rule 10b5-1 Plan. In September 2020, we entered into a new SEC Rule 10b5-1 Plan.

As of September 30, 2020, the total remaining number of shares available for repurchase under the Stock Repurchase Program totaled 4.7 million shares.

Stock Repurchases for Tax Withholdings. In addition to the above-mentioned stock repurchases, during the third quarters of 2020 and 2019 we repurchased and then cancelled approximately 4,000 shares of common stock for $0.1 million and approximately 4,000 shares of common stock for $0.2 million, respectively, and during the nine months ended September 30, 2020 and 2019 we repurchased and then cancelled approximately 163,000 shares of common stock for $7.8 million and approximately 112,000 shares of common stock for $4.7 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

Stock Incentive Plan. In May 2020, our stockholders approved an increase of 3.6 million shares authorized for issuance under the Amended and Restated 2005 Stock Incentive Plan, from 21.4 million shares to 25.0 million shares.

Cash Dividends. During the third quarter of 2020, the Board approved a quarterly cash dividend of $0.235 per share of common stock, totaling $7.8 million. During the third quarter of 2019, the Board approved a quarterly cash dividend of $0.2225 per share of common stock, totaling $7.3 million. Dividends declared for the nine months ended September 30, 2020 and 2019 totaled $23.2 million and $22.0 million, respectively.

Warrants. In 2014, in conjunction with the execution of an amendment to our current agreement with Comcast Corporation (“Comcast”), we issued stock warrants (the “Warrant Agreement”) for the right to purchase up to 2.9 million shares of our common stock (the “Stock Warrants”) as an additional incentive for Comcast to convert customer accounts onto our Advanced Convergent Platform (“ACP”) based on various milestones. The Stock Warrants have a ten-year term and an exercise price of $26.68 per warrant.

As of September 30, 2020, 1.0 million Stock Warrants remain issued, none of which were vested. The remaining unvested Stock Warrants will be accounted for as a client contract cost asset once the performance conditions necessary for vesting are considered probable.

Stock-Based Awards. A summary of our unvested restricted common stock activity during the quarter and nine months ended September 30, 2020 is as follows (shares in thousands):

	Quarter Ended					Nine Months Ended
	September 30, 2020					September 30, 2020
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Unvested awards, beginning		1,143		$	41.98		1,117		$	42.60
Awards granted		183			39.15		695			40.86
Awards forfeited/cancelled		(26	)		41.02		(54	)		41.82
Awards vested		(39	)		48.55		(497	)		43.72
Unvested awards, ending		1,261		$	41.39		1,261		$	41.39

Included in the awards granted during the nine months ended September 30, 2020 are performance-based awards for 0.1 million restricted common stock shares issued to members of executive management and certain key employees, which vest in the first quarter of 2022 upon meeting certain pre-established financial performance objectives over a two-year performance period. Also, during the third quarter of 2020, market-based awards for 0.1 million restricted common stock shares were granted to certain members of

executive management which vest upon meeting pre-established share price targets over a four-year period. Certain of these awards become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment.

The other restricted common stock shares granted during the nine months ended September 30, 2020 are primarily time-based awards, which vest annually over two to four years with no restrictions other than the passage of time. Certain shares of the restricted common stock become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment, or death.

We recorded stock-based compensation expense for the third quarters of 2020 and 2019 of $4.0 million and $4.8 million, respectively, and for nine months ended September 30, 2020 and 2019 of $14.1 million and $13.3 million, respectively.

Modifications to Stock-Based Awards. In August 2020, we entered into a Separation Agreement (the “Separation Agreement”), with our President and Chief Executive Officer (“CEO”) which includes a provision that accelerates the vesting of approximately 198,000 shares of unvested restricted stock at December 30, 2020, the resignation date. This modification resulted in a reversal of stock-based compensation expense in the third quarter of 2020 of $2.7 million. The fair value of the modified award of $8.3 million is being recognized ratably from the date of modification through the resignation date, of which $2.3 million was recognized in the third quarter of 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this MD&A should be read in conjunction with the Financial Statements and Notes thereto included in this Form 10-Q and the audited consolidated financial statements and notes thereto in our 2019 10-K.

Forward-Looking Statements

This report contains a number of forward-looking statements relative to our future plans and our expectations concerning our business and the industries we serve. These forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are outlined within Part II Item 1A. Risk Factors of this report and in Part I Item 1A. Risk Factors of our 2019 10-K. Readers are strongly encouraged to review those sections closely in conjunction with MD&A.

Company Overview

We are one of the world’s leading providers of revenue management, customer experience, and payment solutions that enable a growing list of companies around the world to monetize relationships with their customers in an era of rapid change and digital transformation. We leverage more than 35 years of experience to deliver innovative customer engagement solutions that help our clients acquire, monetize, engage, and retain their customers. Our diverse worldwide workforce draws from real-world knowledge and extensive expertise to design and implement business solutions that make our clients’ hardest decisions simpler so that they can focus on delivering differentiated and real-time experiences to their customers.

We offer revenue management, customer experience, and payment solutions for every stage of the customer lifecycle so service providers can deliver an outstanding customer experience that adapts to their customers’ rapidly changing demands. Our proven solutions are built on a combination of on-premise, public and private cloud platforms, either customized or pre-integrated, as well as managed services models that adapt to fit our clients’ unique business needs and enable the transformative change required to create personalized experiences that drive loyalty and retention.

We focus our research and development (“R&D”) and acquisition investments on expanding our offerings in a timely and efficient manner to address the complex, transformative needs of service providers. Our scalable, modular, and flexible solutions combined with our domain expertise and our ability to effectively migrate clients to our solutions, provide the industry with proven solutions to improve their profitability and consumers’ experiences. We have specifically architected our solutions to offer service providers a phased, incremental approach to transforming their businesses, thereby reducing the business interruption risk associated with this evolution.

We generate our revenue primarily from the global communications markets; however, we serve an expanding group of clients in other markets including financial services, healthcare, media and entertainment companies, and government entities. A summary of our revenue by industry for the indicated periods was as follows:

	Quarter Ended
	September 30, 2020			June 30, 2020			September 30, 2019
Broadband/Cable/Satellite		59	%		60	%		59	%
Telecommunications		18	%		18	%		20	%
Other		23	%		22	%		21	%
Total revenue		100	%		100	%		100	%

Revenue by geographic regions for the indicated periods was as follows:

	Quarter Ended
	September 30, 2020			June 30, 2020			September 30, 2019
Americas (principally the U.S.)		86	%		87	%		87	%
Europe, Middle East, and Africa		10	%		9	%		9	%
Asia Pacific		4	%		4	%		4	%
Total revenue		100	%		100	%		100	%

We are a S&P Small Cap 600 company.

Impact of COVID-19

In March 2020, the World Health Organization declared a global pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak which has led to a global health emergency. This outbreak has negatively affected the U.S. and the global economy, created a significant disruption of the financial markets, disrupted global supply chains, and has resulted in mandated closures, orders to shelter-in-place, and significant travel restrictions. While we have taken measures to protect the health and safety of our employees, to include work from home options for those employees whom are able to conduct business from home and significantly reduced travel, we are still conducting business as usual and are working with our clients to minimize any potential disruption. At this time, we do not believe that our work from home options and limited staffing in select office locations have adversely impacted our internal controls, financial reporting systems, or our operations.

The full extent of the impact of the COVID-19 pandemic on our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict. See Part II Item 1A. Risk Factors of this report for additional details. While the outbreak did not negatively impact our operating results for the first quarter of 2020, we began to realize these impacts to revenue during the second quarter of 2020 as we experienced extended sales and implementation cycles related to our revenue management and customer experience solutions, as well as processing volume reductions. During the third quarter of 2020, we began to see some stabilization in the impacted areas of our business and we continued to build our sales pipeline, driven in large part by the accelerating demand for digital transformation. However, we continue to experience revenue headwinds as a result of continued foreign currency fluctuations. Although we have started to see improvements, we still anticipate that these impacts to revenue will continue for the remainder of 2020, or until economic conditions improve. We will continue to diligently monitor and manage our expense levels in line with our anticipated revenue profile for the remainder of 2020 and beyond.

As we continue to manage our business in this uncertain environment, our priorities will remain the health and safety of our employees, providing our clients with world-class services and solutions, and prudently managing our liquidity to ensure our continued financial strength. As of September 30, 2020, we had approximately $212 million in cash, cash equivalents and short-term investments, and an additional $200 million available to borrow under our revolving credit facility. Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, though we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business results.

Management Overview of Quarterly Results

Third Quarter Highlights. A summary of our results of operations for the third quarter of 2020, when compared to the third quarter of 2019, is as follows (in thousands, except per share amounts and percentages):

	Quarter Ended
	September 30, 2020			September 30, 2019
Revenue	$	244,108		$	251,414
Transaction fees (1)		16,413			16,364
Operating Results:
Operating income	$	28,947		$	33,420
Operating income margin		11.9	%		13.3	%
Diluted EPS	$	0.42		$	0.66
Supplemental Data:
Restructuring and reorganization charges (2)	$	814		$	1,330
Executive transition costs (2)		1,786			-
Acquisition-related costs:
Amortization of acquired intangible assets		3,051			3,153
Transaction-related costs		15			-
Stock-based compensation (2)		4,500			4,801
Amortization of OID		751			709

(1)

Transaction fees are primarily comprised of interchange and other payment-related fees that we pay, in conjunction with the delivery of service to clients under our payment services contracts, to third-party payment processors and financial institutions. Because we control the integrated service provided under our payment services client contracts, these transaction fees are presented gross, and not netted against revenue.

(2)

Stock-based compensation included in the table above excludes amounts that have been recorded in restructuring and reorganization charges and executive transition costs.

Revenue. Revenue for the third quarter of 2020 was $244.1 million, a 3% decrease when compared to revenue of $251.4 million for the third quarter of 2019, with the decrease mainly attributed to the pricing adjustments associated with the Comcast five-year extension effective January 1, 2020, as well as foreign currency headwinds.

Operating Results. Operating income for the third quarter of 2020 was $28.9 million, or a 11.9% operating margin percentage, compared to $33.4 million, or a 13.3% operating margin percentage for the third quarter of 2019. The decrease in operating income is primarily due to the lower revenues generated in the third quarter of 2020, discussed above.

Diluted EPS. Diluted EPS for the third quarter of 2020 was $0.42 compared to $0.66 for the third quarter of 2019, with the decrease mainly due the lower operating income, discussed above, and foreign currency losses included in other income.

Cash and Cash Flows. As of September 30, 2020, we had cash, cash equivalents and short-term investments of $212.1 million, as compared to $171.2 million as of June 30, 2020 and $182.7 million as of December 31, 2019. Our cash flows from operating activities for the quarter ended September 30, 2020 were $65.2 million. See the Liquidity section below for further discussion of our cash flows.

Executive Transition Costs

In August 2020, we announced that effective December 30, 2020, Bret Griess, our current President and CEO will step down and effective January 1, 2021, Brian Shepherd, our current Executive Vice President and Group President will become President and CEO.

As a result of these changes, we entered into a Separation Agreement, dated August 26, 2020 with Mr. Griess. Under the terms of the Separation Agreement, Mr. Griess will be entitled to the following:

•

Compensation, benefits, and other payments pursuant to the terms of his Employment Agreement. The additional compensation, totaling approximately $8 million, is being expensed ratably over his remaining service period, for which approximately $6 million will be paid in 2021 and approximately $2 million will be paid in 2022. During the third quarter of 2020, we recognized $2.2 million of the additional compensation expense.

•

Accelerated vesting of approximately 198,000 shares of unvested restricted stock on December 30, 2020. This award modification resulted in a reversal of previously recognized stock-based compensation expense in the third quarter of 2020 of $2.7 million. The value of the modified award of $8.3 million is being recognized ratably from the date of the modification through December 30, 2020, resulting in $2.3 million of stock-based compensation being recognized in the third quarter of 2020.

The net impact of the executive transition costs for the third quarter of 2020 was $1.8 million, and is recorded in selling, general and administrative expense (“SG&A”). The remaining executive transition costs of approximately $12 million will be recognized in the fourth quarter of 2020.

Significant Client Relationships

Client Concentration. A large percentage of our historical revenue have been generated from our two largest clients, which are Comcast and Charter Corporation Inc. (“Charter”).

Revenue from these clients for the indicated periods were as follows (in thousands, except percentages):

	Quarter Ended
	September 30, 2020					June 30, 2020					September 30, 2019
	Amount		% of Revenue			Amount		% of Revenue			Amount		% of Revenue
Comcast	$	52,483		22	%	$	53,282		22	%	$	58,446		23	%
Charter		53,202		22	%		51,364		21	%		49,575		20	%

The percentages of net billed accounts receivable balances attributable to our largest clients as of the indicated dates were as follows:

	As of
	September 30,			June 30,			December 31,
	2020			2020			2019
Comcast		22	%		20	%		24	%
Charter		26	%		31	%		24	%

See our 2019 10-K for additional discussion of our business relationships and contractual terms with Comcast and Charter.

Risk of Client Concentration. We expect to continue to generate a significant percentage of our future revenue from our largest clients mentioned above. There are inherent risks whenever a large percentage of total revenue are concentrated with a limited number of clients. Should a significant client: (i) terminate or fail to renew their contracts with us, in whole or in part, for any reason; (ii) significantly reduce the number of customer accounts processed on our solutions, the price paid for our services, or the scope of services that we provide; or (iii) experience significant financial or operating difficulties, it could have a material adverse effect on our financial condition and results of operations.

Critical Accounting Policies

The preparation of our Financial Statements in conformity with U.S. GAAP requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Financial Statements.

We have identified the most critical accounting policies that affect our financial position and the results of our operations. Those critical accounting policies were determined by considering the accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to the following items: (i) revenue recognition; (ii) impairment assessments of long-lived assets; (iii) income taxes; and (iv) loss contingencies. These critical accounting policies, as well as our other significant accounting policies, are discussed in our 2019 10-K.

Results of Operations

Revenue. Total revenue for the: (i) third quarter of 2020 was $244.1 million, a 3% decrease when compared to $251.4 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $730.0 million, a 2% decrease when compared to $742.1 million for the nine months ended September 30, 2019. These decreases reflect the pricing adjustments associated with the five-year Comcast extension effective January 1, 2020, discussed in our 2019 Form 10-K, as well as foreign currency headwinds. Additionally, our revenues for 2020 have been negatively impacted as a result of the COVID-19 pandemic, as we have experienced extended sales and implementation cycles related to our revenue management and customer experience solutions as well as processing volume reductions at certain payment solutions clients. However, our third quarter of 2020 revenue increased 2% when compared to our second quarter 2020 revenue of $240.3 million, thus, we believe that we are beginning to see some stabilization in areas of our business impacted by COVID-19.

We use the location of the client as the basis of attributing revenue to individual countries. Revenue by geographic regions for the third quarters and nine months ended September 30, 2020 and 2019 were as follows (in thousands):

	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Americas (principally the U.S.)	$	210,864	$	218,694	$	637,787	$	643,814
Europe, Middle East, and Africa		23,429		23,284		66,595		70,516
Asia Pacific		9,815		9,436		25,664		27,733
Total revenue	$	244,108	$	251,414	$	730,046	$	742,063

Total Operating Expenses. Our operating expenses for the: (i) third quarter of 2020 were $215.2 million, a 1% decrease when compared to $218.0 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 were $648.2 million, a slight increase when compared to $646.2 million for the nine months ended September 30, 2019. The decrease between the third quarters of 2020 and 2019 is mainly due to lower employee-related costs, offset to a certain degree by the executive transition costs described above. The increase in operating expenses between the nine months ended September 30, 2020 and 2019 can be attributed to an approximately $10 million impairment charge recorded in the second quarter of 2020 for the write-off of capitalized client contract costs related to a discontinued project implementation and the executive transition costs, offset to a certain degree by lower employee-related costs.

The components of total expenses are discussed in more detail below.

Cost of Revenue (Exclusive of Depreciation). The cost of revenue for the: (i) third quarter of 2020 was $131.1 million, a 1% decrease when compared to $132.1 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $400.4 million, a 2% increase when compared to $393.3 million for the nine months ended September 30, 2019. The decrease in cost of revenue between quarters can be primarily attributed to lower employee-related costs. The increase in cost of revenue between the nine months ended September 30, 2020 and 2019 is mainly due to the approximately $10 million impairment charge, discussed above, offset to a certain degree by lower employee-related costs. Total cost of revenue as a percentage of revenue for the: (i) third quarters of 2020 and

2019 was 53.7% and 52.5%, respectively; and (ii) nine months ended September 30, 2020 and 2019 was 54.9% and 53.0%, respectively.

R&D Expense. R&D expense for the (i) third quarter of 2020 was $30.4 million, a 7% decrease when compared to $32.6 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $90.0 million, a 6% decrease when compared to $95.8 million for the nine months ended September 30, 2019. These decreases in R&D expense are mainly attributed to lower employee-related costs, to include personnel and the related costs previously assigned to R&D projects being reassigned to cost of revenue projects. As a percentage of total revenue, R&D expense for the third quarters of 2020 and 2019 was 12.5% and 12.9%, respectively.

Our R&D efforts are focused on the continued evolution of our solutions that enable service providers worldwide to provide a more personalized customer experience while introducing new digital products and services. This includes the continued investment in our cloud-based solutions.

SG&A Expense. SG&A expense for the: (i) third quarter of 2020 was $47.0 million, a 1% increase when compared to $46.7 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $136.4 million, a 1% decrease when compared to $138.0 million for the nine months ended September 30, 2019. As stated above, included in SG&A for the quarter and nine months ended September 30, 2020 is $1.8 million of executive transition costs. Our SG&A costs as a percentage of total revenue for the third quarters of 2020 and 2019 were 19.3% and 18.6%, respectively, with the increase reflective of the lower revenue for the current quarter.

Depreciation. Depreciation expense for the: (i) third quarter of 2020 was $5.8 million, an 8% increase when compared to $5.4 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $17.0 million, a 7% increase when compared to $15.9 million for the nine months ended September 30, 2019. These increases can be primarily attributed to the increased level of capital expenditures on items such as technology, security, infrastructure, and modernization of equipment.

Restructuring and Reorganization Charges. Restructuring and reorganization charges for the: (i) third quarter of 2020 was $0.8 million, compared to $1.3 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $4.3 million compared to $3.3 million for the nine months ended September 30, 2019. See Note 6 to our Financial Statements for further discussion regarding our restructuring and reorganization activities.

Operating Income. Operating income for the: (i) third quarter of 2020 was $28.9 million, or 11.9% of total revenue, compared to $33.4 million, or 13.3% of total revenue for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $81.9 million, or 11.2% of total revenue, compared to $95.9 million, or 12.9% of total revenue for the nine months ended September 30, 2019. These decreases in operating income can be mainly attributed to the lower revenue generated during 2020, with the year-to-date also negatively impacted by the $10 million impairment charge, discussed above.

Other, Net. Other expense for the: (i) third quarter of 2020 was $2.1 million, compared to other income of $0.1 million for the third quarter of 2019; and (ii) nine months ended September 30, 2020 was $3.2 million, compared to other expense of $0.1 million for the nine months ended September 30, 2019, with the amounts mainly attributed to foreign currency losses.

Income Tax Provision. The effective income tax rates for the third quarters and nine months ended September 30, 2020 and 2019 were as follows:

Quarter Ended						Nine Months Ended
September 30,						September 30,
2020			2019			2020			2019
	40	%		25	%		31	%		26	%

The third quarter of 2020 rate reflects an adjustment for the income tax impact related to the Separation Agreement entered into during the quarter with our current President and CEO. Our estimated full year 2020 effective income tax rate is approximately 30%.

Liquidity

Cash and Liquidity

As of September 30, 2020, our principal sources of liquidity included cash, cash equivalents and short-term investments of $212.1 million, as compared to $171.2 million as of June 30, 2020, and $182.7 million as of December 31, 2019. We generally invest our excess cash balances in low-risk, short-term investments to limit our exposure to market and credit risks.

As part of our 2018 Credit Agreement, we have a $200 million senior secured revolving loan facility with a syndicate of financial institutions that expires in March 2023. As of September 30, 2020, there were no borrowings outstanding on the 2018 Revolver. The

2018 Credit Agreement contains customary affirmative covenants and financial covenants. As of September 30, 2020, and the date of this filing, we believe that we are in compliance with the provisions of the 2018 Credit Agreement.

Our cash, cash equivalents, and short-term investment balances as of the end of the indicated periods were located in the following geographical regions (in thousands):

	September 30,		December 31,
	2020		2019
Americas (principally the U.S.)	$	159,383	$	125,309
Europe, Middle East and Africa		46,214		50,477
Asia Pacific		6,497		6,871
Total cash, equivalents and short-term investments	$	212,094	$	182,657

We generally have ready access to substantially all of our cash, cash equivalents, and short-term investment balances, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls. As of September 30, 2020, we had $1.6 million of cash restricted as to use primarily to collateralize outstanding letters of credit.

Cash Flows from Operating Activities

We calculate our cash flows from operating activities in accordance with U.S. GAAP, beginning with net income, adding back the impact of non-cash items or non-operating activity (e.g., depreciation, amortization, amortization of OID, impairments, gain/loss from debt extinguishments, deferred income taxes, stock-based compensation, etc.), and then factoring in the impact of changes in operating assets and liabilities. See our 2019 10-K for a description of the primary uses and sources of our cash flows from operating activities.

Our 2020 and 2019 net cash flows from operating activities, broken out between operations and changes in operating assets and liabilities, for the indicated quarterly periods are as follows (in thousands):

						Net Cash
			Changes in			Provided by
			Operating			(Used In) Operating
			Assets and			Activities –
	Operations		Liabilities			Totals
Cash Flows from Operating Activities:
2020:
March 31	$	52,938	$	(60,151	)	$	(7,213	)
June 30		41,022	$	16,668			57,690
September 30		31,971		33,237			65,208
Total	$	125,931	$	(10,246	)	$	115,685


2019:
March 31	$	42,003	$	(29,177	)	$	12,826
June 30		46,072		(30,469	)		15,603
September 30		44,210		34,888			79,098
Total	$	132,285	$	(24,758	)	$	107,527

Cash flows from operating activities for the first quarters of 2020 and 2019 reflect the negative impacts of the payment of the 2019 and 2018 year-end accrued employee incentive compensation in the first quarter subsequent to the year-end accrual for these items. Additionally, cash flows from operating activities for the first and second quarters of 2020 and 2019 were negatively impacted by the timing of certain recurring key client payments that were delayed and received subsequent to quarter-end, of approximately $33 million and $26 million for the first and second quarters of 2020, respectively, and $14 million and $25 million for the first and second quarters of 2019, respectively. As of the end of the third quarters of 2020 and 2019, these recurring key client payments were up-to-date, resulting in the third quarters of 2020 and 2019 cash flows from operating activities having the benefit of an additional payment due to the timing delays in previous quarters.

We believe the above table illustrates our ability to generate recurring quarterly cash flows from our operations, and the importance of managing our working capital items. Variations in our net cash provided by operating activities are generally related to the changes in our operating assets and liabilities (related mostly to fluctuations in timing at quarter-end of client payments and changes in accrued expenses), and generally over longer periods of time, do not significantly impact our cash flows from operations.

Significant fluctuations in key operating assets and liabilities between 2020 and 2019 that impacted our cash flows from operating activities are as follows:

Billed Trade Accounts Receivable

Management of our billed accounts receivable is one of the primary factors in maintaining strong quarterly cash flows from operating activities. Our billed trade accounts receivable balance includes significant billings for several non-revenue items (primarily postage, sales tax, and deferred revenue items). As a result, we evaluate our performance in collecting our accounts receivable through our calculation of days billings outstanding (“DBO”) rather than a typical days sales outstanding (“DSO”) calculation.

Our gross and net billed trade accounts receivable and related allowance for doubtful accounts receivable (“Allowance”) as of the end of the indicated quarterly periods, and the related DBOs for the quarters then ended, are as follows (in thousands, except DBOs):

Quarter Ended	Gross		Allowance			Net Billed		DBOs
2020:
March 31	$	264,601	$	(3,888	)	$	260,713		72
June 30		248,470		(4,057	)		244,413		73
September 30		228,847		(3,730	)		225,117		68

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

As of September 30, 2020 and 2019, approximately 95%, for both periods, of our billed accounts receivable balance were less than 60 days past due.

The increase in DBOs during the first and second quarter of 2020 can be directly attributed to the delay of certain recurring key client payments, as noted above. We may experience future adverse impacts to our DBOs if we experience payment delays, which may be exacerbated as a result of the impact of the COVID-19 pandemic on our clients and their ability to pay in a timely manner. Additionally, as a global company, our ability to invoice certain clients outside of the U.S. may be dependent upon completion of local country billing protocols and processes which may be impacted or delayed due to the global pandemic. While we currently do not expect the impact to our net accounts receivable to be significant, the duration and severity of this global pandemic are still evolving and uncertain.

Accrued Employee Compensation

Accrued employee compensation decreased $18.0 million to $59.5 million as of September 30, 2020, from $77.5 million as of December 31, 2019, due primarily to the payment of the 2019 employee incentive compensation that was fully accrued at December 31, 2019, offset to a certain degree by the accrual for the 2020 employee incentive compensation.

Cash Flows from Investing Activities

Our typical investing activities consist of purchases/sales of short-term investments and purchases of software, property and equipment, which are discussed below. Additionally, during the first quarter of 2020 we acquired Tekzenit for approximately $10 million, which is included in our cash flows from investing activities. Additionally, as discussed in Note 2 to our Financial Statements, during the nine months ended September 30, 2020 and 2019, we made investments in a payment technology and services company for $1.5 million and $4.0 million, respectively. All of these activities are included in our cash flows from investing activities.

Purchases/Sales of Short-term Investments. For the nine months ended September 30, 2020 and 2019, we purchased $49.1 million and $25.4 million, respectively, and sold (or had mature) $37.7 million and $38.0 million, respectively, of short-term investments. We continually evaluate the appropriate mix of our investment of excess cash balances between cash equivalents and short-term investments in order to maximize our investment returns and liquidity, and will likely purchase and sell additional short-term investments in the future.

Software, Property and Equipment. Our capital expenditures for the nine months ended September 30, 2020 and 2019 for software, property and equipment were $24.2 million and $27.7 million, respectively, and consisted principally of investments in: (i) statement production equipment; (ii) computer hardware, software, and related equipment; and (iii) facilities and internal infrastructure items.

Cash Flows from Financing Activities

Our financing activities typically consist of activities associated with our common stock and our long-term debt.

Cash Dividends Paid on Common Stock. During the nine months ended September 30, 2020 and 2019, the Board approved dividends totaling $23.2 million and $22.0 million, respectively, and made dividend payments of $23.4 million and $22.0 million, respectively, through September 30, 2020 and 2019, with the differences attributed to dividends on unvested incentive shares that are paid upon vesting of those shares.

Repurchase of Common Stock. During the nine months ended September 30, 2020 and 2019, we repurchased approximately 290,000 and 485,000 shares of our common stock, respectively, under the guidelines of our Stock Repurchase Program for $12.3 million and $20.6 million, respectively, and paid $12.1 million and $21.0 million, respectively, through September 30, 2020 and 2019, with the differences attributed to the timing of share settlement.

Outside of our Stock Repurchase Program, during the nine months ended September 30, 2020 and 2019, we repurchased from our employees and then cancelled approximately 163,000 and 112,000 shares of our common stock, respectively, for $7.8 million and $4.7 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

Long-term Debt. During the nine months ended September 30, 2020 and 2019, we made principal repayments of 7.5 million and $5.6 million, respectively.

See Note 4 to our Financial Statements for additional discussion of our long-term debt.

Capital Resources

The following are the key items to consider in assessing our sources and uses of capital resources:

Current Sources of Capital Resources.

•

Cash, Cash Equivalents and Short-term Investments. As of September 30, 2020, we had cash, cash equivalents, and short-term investments of $212.1 million, of which approximately 72% is in U.S. dollars and held in the U.S. We have $1.6 million of restricted cash, used primarily to collateralize outstanding letters of credit. For the remainder of the monies denominated in foreign currencies and/or located outside the U.S., we do not anticipate any material amounts being unavailable for use in funding our business.

•

Operating Cash Flows. As described in the Liquidity section above, we believe we have the ability to generate strong cash flows to fund our operating activities and act as a source of funds for our capital resource needs.

•

Revolving Credit Facility. We currently have a $200 million revolving loan facility, our 2018 Revolver. As of September 30, 2020, we had no borrowing outstanding on our 2018 Revolver and had the entire $200 million available to us. Our long-term debt obligations are discussed in more detail in Note 4 to our Financial Statements.

Uses/Potential Uses of Capital Resources. Below are the key items to consider in assessing our uses/potential uses of capital resources:

•

Common Stock Repurchases. We have made repurchases of our common stock in the past under our Stock Repurchase Program. As of September 30, 2020, we had 4.7 million shares authorized for repurchase remaining under our Stock Repurchase Program. Our 2018 Credit Agreement may place certain limitations on our ability to repurchase our common stock.

Under our Stock Repurchase Program, we may repurchase shares in the open market or in privately negotiated transactions, including through an accelerated stock repurchase plan or under a SEC Rule 10b5-1 plan. The actual timing and amount of future share repurchases will be dependent on then current market conditions and other business-related factors. Our common stock repurchases are discussed in more detail in Note 9 to our Financial Statements.

During the nine months ended September 30, 2020, we repurchased approximately 290,000 shares of our common stock for $12.3 million (weighted-average price of $42.55 per share).

Outside of our Stock Repurchase Program, during the nine months ended September 30, 2020, we repurchased from our employees and then cancelled approximately 163,000 shares of our common stock for $7.8 million in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

•

Executive Transition. In August 2020, we entered into a Separation Agreement with our President and CEO which includes a commitment to pay additional compensation of approximately $8 million, for which approximately $6 million will be paid in 2021 and approximately $2 million will be paid in 2022.

•

Cash Dividends. During the nine months ended September 30, 2020, the Board declared dividends totaling $23.2 million. Going forward, we expect to pay cash dividends each year in March, June, September, and December, with the amount and timing subject to the Board’s approval.

•

Acquisitions. The 2018 Forte acquisition purchase agreement includes provisions for $18.8 million of potential future earn-out payments over a four-year measurement period. The earn-out payments are tied to performance-based goals and continued employment by the eligible recipients.

In January 2020, we acquired certain assets of Tekzenit, Inc. (“Tekzenit”) for a purchase price of approximately $10 million. The purchase agreement includes provisions for additional purchase price payments in the form of earn-out and qualified sales payments for up to $10 million over a three-year measurement period upon meeting certain financial and sales criteria.

As of September 30, 2020, we have made no earn-out or qualified sales payments for either of these acquisitions.

These acquisitions were funded from currently available cash. Our acquisition of Tekzenit is discussed in more detail in Note 5 to our Financial Statements. As part of our growth strategy, we are continually evaluating potential business and/or asset acquisitions and investments in market share expansion with our existing and potential new clients and expansion into verticals outside the global communications market.

•

Capital Expenditures. During the nine months ended September 30, 2020, we spent $24.2 million on capital expenditures. As of September 30, 2020, we had committed to purchase $1.5 million of equipment.

•

Stock Warrants. We have issued Stock Warrants with an exercise price of $26.68 per warrant to Comcast as an incentive for Comcast to convert new customer accounts to ACP. Once vested, Comcast may exercise the Stock Warrants and elect either physical delivery of common shares or net share settlement (cashless exercise). Alternatively, the exercise of the Stock Warrants may be settled with cash based solely on our approval, or if Comcast were to beneficially own or control in excess of 19.99% of the common stock or voting of the Company. As of September 30, 2020, approximately 1.0 million Stock Warrants remain issued, none of which are vested.

The Stock Warrants are discussed in more detail in Note 9 to our Financial Statements.

•

Long-Term Debt. As of September 30, 2020, our long-term debt consisted of the following: (i) 2016 Convertible Notes with a par value of $230.0 million; and (ii) 2018 Credit Agreement with term loan borrowings of $129.4 million.

2016 Convertible Notes

During the next twelve months, there are no scheduled conversion triggers on our 2016 Convertible Notes. As a result, we expect our required debt service cash outlay during the next twelve months for the 2016 Convertible Notes to be limited to interest payments of $9.8 million.

2018 Credit Agreement

Our 2018 Credit Agreement mandatory repayments and the cash interest expense (based upon current interest rates) for the next twelve months is $13.1 million, and $2.2 million, respectively. We have the ability to make prepayments on our 2018 Credit Agreement without penalty.

Our long-term debt obligations are discussed in more detail in Note 4 to our Financial Statements.

In summary, we expect to continue to have material needs for capital resources going forward, as noted above. We believe that our current cash, cash equivalents and short-term investments balances and our 2018 Revolver, together with cash expected to be generated in the future from our current operating activities, will be sufficient to meet our anticipated capital resource requirements for

at least the next twelve months. We also believe we could obtain additional capital through other debt sources which may be available to us if deemed appropriate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices. As of September 30, 2020, we are exposed to various market risks, including changes in interest rates, fluctuations and changes in the market value of our cash equivalents and short-term investments, and changes in foreign currency exchange rates. We have not historically entered into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

Long-Term Debt. The interest rate on our 2016 Convertible Notes is fixed, and thus, as it relates to our convertible debt borrowings, we are not exposed to changes in interest rates.

The interest rates on our 2018 Credit Agreement are based upon an adjusted LIBOR rate plus an applicable margin, or an alternate base rate plus an applicable margin. See Note 4 to our Financial Statements for further details of our long-term debt.

A hypothetical adverse change of 10% in the September 30, 2020 adjusted LIBOR rate would not have had a material impact upon our results of operations.

Market Risk

Cash Equivalents and Short-term Investments. Our cash and cash equivalents as of September 30, 2020 and December 31, 2019 were $174.5 million and $156.5 million, respectively. Certain of our cash balances are “swept” into overnight money market accounts on a daily basis, and at times, any excess funds are invested in low-risk, somewhat longer term, cash equivalent instruments and short-term investments. Our cash equivalents are invested primarily in institutional money market funds, commercial paper, and time deposits held at major banks. We have minimal market risk for our cash and cash equivalents due to the relatively short maturities of the instruments.

Our short-term investments as of September 30, 2020 and December 31, 2019 were $37.6 million and $26.1 million, respectively. Currently, we utilize short-term investments as a means to invest our excess cash only in the U.S. The day-to-day management of our short-term investments is performed by a large financial institution in the U.S., using strict and formal investment guidelines approved by our Board. Under these guidelines, short-term investments are limited to certain acceptable investments with: (i) a maximum maturity; (ii) a maximum concentration and diversification; and (iii) a minimum acceptable credit quality. At this time, we believe we have minimal liquidity risk associated with the short-term investments included in our portfolio.

Settlement Assets. We are exposed to market risk associated with cash held on behalf of our clients related to our payment processing services. As of September 30, 2020 and December 31, 2019, we had $117.5 million and $169.3 million, respectively, of cash collected on behalf of our clients which is held for an established holding period until settlement with the client. The holding period is generally one to four business days depending on the payment model and contractual terms with the client. During the holding period, cash is held in accounts with various major financial institutions in the U.S. in an amount equal to at least 100% of the aggregate amount owed to our clients. These balances can significantly fluctuate between periods due to activity at the end of the period and the day in which the period ends.

Long-Term Debt. The fair value of our convertible debt is exposed to market risk. We do not carry our convertible debt at fair value but present the fair value for disclosure purposes (see Note 2 to our Financial Statements). Generally, the fair value of our convertible debt is impacted by changes in interest rates and changes in the price and volatility of our common stock. As of September 30, 2020, the fair value of the 2016 Convertible Notes was estimated at $240.4 million, using quoted market prices.

Foreign Currency Exchange Rate Risk

Due to foreign operations around the world, our balance sheet and income statement are exposed to foreign currency exchange risk due to the fluctuations in the value of currencies in which we conduct business. While we attempt to maximize natural hedges by incurring expenses in the same currency in which we contract revenue, the related expenses for that revenue could be in one or more differing currencies than the revenue stream.

During the nine months ended September 30, 2020, we generated approximately 89% of our revenue in U.S. dollars. We expect that, in the foreseeable future, we will continue to generate a very large percentage of our revenue in U.S. dollars.

As of September 30, 2020 and December 31, 2019, the carrying amounts of our monetary assets and monetary liabilities on the books of our non-U.S. subsidiaries in currencies denominated in a currency other than the functional currency of those non-U.S. subsidiaries are as follows (in thousands, in U.S. dollar equivalents):

	September 30, 2020					December 31, 2019
	Monetary			Monetary		Monetary			Monetary
	Liabilities			Assets		Liabilities			Assets
Pounds sterling	$	-		$	1,988	$	(30	)	$	1,786
Euro		(241	)		8,009		(76	)		11,284
U.S. Dollar		(104	)		17,219		(117	)		18,890
South African Rand		-			2,529		-			7,602
Other		-			1,086		(6	)		1,065
Totals	$	(345	)	$	30,831	$	(229	)	$	40,627

A hypothetical adverse change of 10% in the September 30, 2020 exchange rates would not have had a material impact upon our results of operations based on the monetary assets and liabilities as of September 30, 2020.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

As required by Rule 13a-15(b), our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Internal Control Over Financial Reporting

As required by Rule 13a-15(d), our management, including the CEO and CFO, also conducted an evaluation of our internal control over financial reporting, as defined by Rule 13a-15(f), to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the CEO and CFO concluded that there has been no such change during the quarter covered by this report.

CSG SYSTEMS INTERNATIONAL, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time-to-time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not presently a party to any material pending or threatened legal proceedings.

Item 1A. Risk Factors

A discussion of our risk factors can be found in Item 1A. Risk Factors in our 2019 Form 10-K. There were no material changes to the risk factors disclosed in our 2019 Form 10-K during the third quarter of 2020, other than the addition of the following below.

Our Business May be Disrupted and Our Results of Operations and Cash Flows May be Adversely Affected by the Recent Coronavirus (COVID-19) Pandemic.

In March 2020, the World Health Organization declared a global pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak which has led to a global health emergency. This outbreak has adversely affected workforces, clients, economies, and financial markets globally. The significance of the impact on our operations is not yet certain and depends on numerous evolving factors that we may not be able to accurately predict or effectively respond to, including, among others:

•

the duration and scope of the pandemic;

•

the effect on global economic activity and the resulting impact on our client’s businesses, their credit and liquidity, and their demand for our solutions and services, as well as their ability to pay;

•

our ability to deliver and implement our solutions in a timely manner, including as a result of supply chain challenges, one or more print and mail facility closures for an extended period, restrictions on travel for our and client personnel, as well as shelter-in-place orders; and

•

actions taken by U.S., foreign, state, and local governments, suppliers, and individuals in response to the outbreak.

While we have significant sources of cash and liquidity and access to a committed credit line, a prolonged period of generating lower cash from operations could adversely affect our financial condition and the achievement of our strategic objectives.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to purchases of our common stock made during the third quarter of 2020 by CSG Systems International, Inc. or any “affiliated purchaser” of CSG Systems International, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.

Period	Total Number of Shares Purchased (1) (2)		Average Price Paid Per Share		Total 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)
July 1 - July 31		546	$	42.10		-		4,810,967
August 1 - August 31		2,282		45.32		-		4,810,967
September 1 - September 30		140,278		39.92		139,500		4,671,467
Total		143,106	$	40.02		139,500

(1)

The total number of shares purchased that are not part of the Stock Repurchase Program represents shares purchased and cancelled in connection with stock incentive plans.

(2)

See Note 9 to our Financial Statements for additional information regarding our share repurchases.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

The Exhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.

CSG SYSTEMS INTERNATIONAL, INC.

INDEX TO EXHIBITS


Exhibit Number		Description

10.26AK*		Forty-First Amendment to Consolidated CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Charter Communications Operating, LLC
10.26AL*		Forty-Second Amendment to Consolidated CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Charter Communications Operating, LLC
10.81		Forms of Agreement for Equity Compensation
10.82		Forms of Agreement for Equity Compensation
31.01		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

*	Portions of the exhibit have been omitted pursuant to SEC rules regarding confidential information.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 5, 2020

CSG SYSTEMS INTERNATIONAL, INC.

/s/ Bret C. Griess

Bret C. Griess

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Rolland B. Johns

Rolland B. Johns

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ David N. Schaaf

David N. Schaaf

Chief Accounting Officer

(Principal Accounting Officer)