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TV-Billing Company Takes Radical Turn

Stocks in this article: CSGS DOX

NEW YORK ( TheStreet) -- CSG Systems (CSGS), a provider of outsourced billing and account management, has, indirectly, as many customers as the largest companies in the U.S.

The Englewood, Colo.-based company is focused largely on the cable and direct broadcast satellite (DBS) market in North America. CSG's Advanced Convergent Platform (ACP) enables its clients to handle the entire lifecycle of a customer, from account setup, order processing, invoice production, billing and cancellation. Over 45 million subscribers' services are processed through the company's systems. CSG's four largest clients account for nearly 65% of sales: Comcast (CMCSA), DISH Network (DISH), Time Warner (TWC) and Charter (CHTR).

CSG's many attractive points include:

Stable, recurring revenues: All of the company's main contracts run through at least 2012, and some farther out than that. High visibility and reliability allow the company to be more aggressive when making investments.

Very high switching costs: A client spends months to years and millions of dollars migrating on to CSG's platforms, and the cost in both time and potential business interruption makes it difficult to move off the system, unless there are significant economic reasons for doing so.

Cash-cow business: CSG has produced stable free cash flow margins right around 25% of sales over the past five years. Free cash flow has exceeded operating earnings in each of the past five years, a real rarity, and a sign of high quality earnings. Free cash yield at $20 is about 16% -- compare that to a bond yield!

Revenue growth has been stable at right about 5% to 7% a year, as the firm added subscribers on to its platform and enjoyed escalation clauses in its long-term contracts. The biggest risk in the stock has always been the heavy customer concentration, which in 2008 allowed Comcast to renegotiate its contract at lower payment rates. The threat of losing one of its "big four" customers has always kept the valuation relatively low. Additionally, a data center migration from First Data to Infocrossing has created some non-recurring costs that have held down earnings per share in 2010.

However, CSG is about to change dramatically.

In late September, CSG announced a transformational move with its $372 million bid to acquire U.K. billing provider Intec. Intec is a similar business to CSG, but focuses on the telecommunications market, servicing such multinational telecoms as Vodafone (VOD), China Mobile (CHL) and AT&T (T). Intec brought in about $266 million in 2009 at operating margins around 16% -- similar to CSG.

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