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CSI Reports Results for Second Quarter

Computer Services, Inc. (“CSI” or the “Company”) (OTCQX: CSVI) today reported its results for the second quarter and first six months of fiscal 2023, which ended on August 31, 2022.

CSI’s revenues rose 8.9% to $83.9 million for the second quarter of fiscal 2023 compared with $77.1 million for the second quarter of fiscal 2022. Second quarter net income declined 15.0% to $12.3 million compared with $14.5 million for the second quarter of fiscal 2022. Net income per share was down 15.1% to $0.45 compared with $0.53 for the second quarter of fiscal 2022. The results for the second quarter included approximately $4.5 million in expenses related to financial and legal advisor fees related to the previously announced proposed acquisition of CSI by funds affiliated with Centerbridge Partners, L.P. and Bridgeport Partners (otherwise referred to herein as the “proposed acquisition”). Proforma adjusted net income, excluding the expenses related to the proposed acquisition and associated tax effect, was $15.7 million, or $0.57 per share, for CSI’s second quarter ended August 31, 2022 – See reconciliation of GAAP income to proforma adjusted net income included in the financial schedules of this release.

Second Quarter Results

Consolidated revenues increased 8.9% to $83.9 million in the second quarter of fiscal 2023 compared with $77.1 million in the second quarter of fiscal 2022. The growth in revenues benefited from higher sales in both the Enterprise Banking and Business Solutions groups, including growth in digital banking, payments processing, managed cybersecurity and document delivery revenues. The results for the second quarter of fiscal 2023 included $159,000 in early contract termination fees compared with $788,000 in the second quarter of fiscal 2022. Excluding the effect of early contract termination fees, net revenues increased 10.2% in the second quarter of fiscal 2023 compared with the second quarter of fiscal 2022. Early contract termination fees are generated when a customer terminates its contract prior to the end of the contracted term, a circumstance that typically arises when an existing CSI customer is acquired by another financial institution that is not a CSI customer. These fees can vary significantly from period to period based on the number and size of customers that are acquired and how early in the contract term a customer is acquired.

Operating expenses were up 16.1% to $67.7 million for the second quarter of fiscal 2023 compared with $58.3 million for the second quarter of fiscal 2022. The increase in operating expenses included approximately $4.5 million in expenses related to financial and legal advisor fees and other expenses related to the proposed acquisition. Excluding the $4.5 million in expenses related to the proposed acquisition, proforma adjusted operating expenses increased 8.5% to $63.2 million for the second quarter of fiscal 2023. The increase in proforma adjusted operating expenses for the second quarter of fiscal 2023 was primarily related to higher cost of goods sold on higher associated revenues and higher travel and software and hardware expenses.

Operating income declined 13.7% to $16.2 million for the second quarter of fiscal 2023 compared with $18.7 million for the second quarter of fiscal 2022. The decrease in operating income was due to the expenses related to the proposed acquisition. Excluding the expenses related to the proposed acquisition, operating income increased $1.9 million, or 10.2%, for the second quarter of fiscal 2023 compared with the second quarter of fiscal 2022. Operating margin was 19.3% in the second quarter of fiscal 2023 compared with 24.3% for the second quarter of fiscal 2022. Excluding the expenses related to the proposed acquisition, the proforma adjusted operating margin for the second quarter of fiscal 2023 was 24.6%.

The provision for income tax was $4.0 million for the second quarter of fiscal 2023 compared with $4.3 million in the second quarter of fiscal 2022. The decrease was due to lower taxable income in the second quarter of fiscal 2023 compared with the second quarter of fiscal 2022, net of a higher effective tax rate in the second quarter of fiscal 2023 compared with the second quarter of fiscal 2022.

Net income for the second quarter of fiscal 2023 declined 15.0% to $12.3 million compared with $14.5 million for the second quarter of fiscal 2022. Net income per share decreased 15.1% to $0.45 for the second quarter of fiscal 2023 on 27.5 million weighted average shares outstanding compared with $0.53 for the second quarter of fiscal 2022 on 27.5 million weighted average shares outstanding. Excluding approximately $4.5 million in expenses related to the proposed acquisition and $1.1 million of associated income tax effect, proforma adjusted net income for the second quarter of fiscal 2023 increased 8.3% to $15.7 million, or $0.57 per share.

Six Months Results

Consolidated revenues for the first six months of fiscal 2023 rose 7.3% to $164.9 million compared with $153.7 million for the first six months of fiscal 2022. CSI’s increase in revenues benefited from higher sales in both the Enterprise Banking and Business Solutions Groups, including growth in digital banking, payments processing, managed cybersecurity and document delivery revenues. Fiscal year-to-date revenues included $211,000 in early contract termination fees compared with $1.4 million in the first six months of fiscal 2022. Excluding the effect of the early contract termination fees from both periods, fiscal year-to-date revenues increased approximately 8.1% compared with the first half of fiscal 2022.

Operating expenses increased 11.3% to $129.3 million for the first six months of fiscal 2023 compared with $116.2 million for the first six months of fiscal 2022. The increase in operating expenses included approximately $4.8 million in expenses related to financial and legal advisor fees and other expenses for the proposed acquisition. Excluding the $4.8 million in expenses related to the proposed acquisition, proforma adjusted operating expenses increased 7.1% to $124.5 million for the first six months of fiscal 2023. The increase in proforma adjusted operating expenses for the first six months of fiscal 2023 was primarily related to higher cost of goods sold on higher associated revenues and higher travel and marketing from the in-person customer conference held in April 2022 and higher software and hardware expenses.

Operating income declined 5.0% to $35.7 million for the first six months of fiscal 2023 compared with $37.5 million for the first six months of fiscal 2022. The decrease in operating income was due to expenses related to the proposed acquisition. Excluding the expenses related to the proposed acquisition, operating income increased $2.9 million, or 7.8%, for the first six months of fiscal 2023 compared with the first six months of fiscal 2022. Operating margin decreased to 21.6% for the first six months of fiscal 2023 compared with 24.4% for the first six months of fiscal 2022. Excluding the expenses related to the proposed acquisition, proforma adjusted operating margin for the first six months of fiscal 2023 was 24.5%.

Net income for the first six months of fiscal 2023 declined by 6.4% to $27.1 million compared with $28.9 million in the first six months of fiscal 2022. Net income per share was down 5.7% to $0.99 per share for the first six months of fiscal 2023 compared with $1.05 for the first six months of fiscal 2022. Excluding approximately $4.8 million in acquisition related fees and $1.2 million of related income tax effect, the proforma adjusted net income for the first six months of fiscal 2023 increased 6.2% to $30.7 million, or $1.12 per share.

About Computer Services, Inc.

Computer Services, Inc. delivers core processing, digital banking, managed cybersecurity, information technology services, payments processing, document delivery, and regulatory and cybersecurity compliance solutions to financial institutions and corporate customers, both foreign and domestic. Management believes exceptional service, dynamic solutions and superior results are the foundation of CSI’s reputation and have resulted in the Company’s inclusion in such top industry-wide rankings as IDC Financial Insights FinTech 100, Talkin’ Cloud 100 and MSP 501 Top Global Managed Service Providers, for which it ranked second in 2021. CSI has also been recognized by Aite Group, a leading industry research firm, as providing the “best user experience” in its AIM Evaluation: The Leading Providers of U.S. Core Banking Systems. CSI’s stock is traded on OTCQX under the symbol CSVI. For more information, visit csiweb.com.

Non-GAAP Financial Measures

This release contains information prepared in conformity with GAAP as well as non-GAAP information. It is management’s intent to provide non-GAAP financial information to enhance an investor’s understanding of the Company’s consolidated financial information as prepared in accordance with GAAP. This non-GAAP information should be considered by the reader in addition to, but not instead of, the financial information prepared in accordance with GAAP. Each non-GAAP financial measure and the most directly comparable GAAP financial measure are presented so as not to imply that more emphasis should be placed on the non-GAAP measure. The non-GAAP financial information presented may be determined or calculated differently by other companies.

Additional information about non-GAAP financial measures, including, but not limited to, adjusted net revenue, pro forma adjusted net income and pro forma adjusted diluted EPS, and a reconciliation of those measures to the most directly comparable GAAP measures is included in the financial schedules of this release.

Forward-Looking Statements

This release contains “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995. All statements except historical statements contained herein constitute “forward-looking statements.” Forward-looking statements are inherently uncertain and are based only on current expectations and assumptions that are subject to future developments that may cause results to differ materially.

Readers should carefully consider: (i) economic, competitive, technological and governmental factors affecting CSI’s operations, customers, markets, services, products and prices; (ii) risk factors affecting the financial services information technology industry generally including, but not limited to, cybersecurity risks that may result in increased costs for us to protect against the risks, as well as liability or reputational damage to CSI in the event of a breach of our security; (iii) risk factors affecting the United States economy generally including without limitation acts of terrorism, military actions including war, and viral epidemics and pandemics that alter human behaviors, including the COVID-19 pandemic and its effect on our business operations and financial results; (iv) increasing domestic and international regulation imposing burdensome requirements regarding the privacy of consumer data especially consumer financial transaction data of which CSI possesses substantial quantities; (v) risks related to the proposed acquisition of CSI by Centerbridge Partners, L.P. and Bridgeport Partners; and (vi) other factors discussed in CSI's Annual Reports, Quarterly Reports, news releases and other documents posted from time to time on the OTCQX website (www.otcmarkets.com), including without limitation, the description of the nature of CSI’s business and its management discussion and analysis of financial condition and results of operations for reported periods. Except as required by law or OTC Markets Group, Inc., CSI undertakes no obligation to update, and is not responsible for updating, the information contained or incorporated by reference in this report beyond the publication date, whether as a result of new information or future events, or to conform this document to actual results or changes in CSI’s expectations, or for changes made to this document by wire services or Internet services or otherwise.

COMPUTER SERVICES, INC.
Condensed Consolidated Statements of Income
(Unaudited)
(in thousands, except share and per share data)
 

Three Months Ended August 31,

 

Six Months Ended August 31,

2022

 

2021

 

2022

 

2021

 
Revenues

$

83,893

 

$

77,051

 

$

164,939

 

$

153,707

 

Operating expenses

 

67,712

 

58,312

 

129,271

 

116,167

 

Operating income

 

16,181

 

18,739

 

35,668

 

37,540

 

Non-operating income

 

15

 

84

 

6

 

84

 

Interest income, net

 

155

 

38

 

203

 

78

 

Income before income taxes

 

16,351

 

18,861

 

35,877

 

37,702

 

Provision for income taxes

 

4,006

 

4,345

 

8,789

 

8,772

 

 

Net income

$

12,345

 

$

14,516

 

$

27,088

 

$

28,930

 

 

Earnings per common share

$

0.45

 

$

0.53

 

$

0.99

 

$

1.05

 

 
 
Shares used in computing earnings per common share

27,496,926

27,483,076

27,486,474

27,497,566

COMPUTER SERVICES, INC.
Condensed Consolidated Balance Sheets
(in thousands, except share data)
 
8/31/2022 2/28/2022 8/31/2021
(Unaudited) (Audited) (Unaudited)
ASSETS
Current assets
Cash

$

59,511

$

60,996

$

54,274

 

Funds held on behalf of clients

 

12,157

 

12,263

 

9,485

 

Accounts receivable, net

 

45,023

 

52,991

 

37,462

 

Income tax receivable

 

4,427

 

1,694

 

-

 

Deferred contract costs

 

25,384

 

22,763

 

20,691

 

Prepaid expenses and other current assets

 

14,229

 

12,498

 

12,278

 

Total current assets

 

160,730

 

163,205

 

134,190

 

Property and equipment, net

 

42,997

 

41,412

 

42,973

 

Software and software licenses, net

 

38,729

 

26,438

 

27,780

 

Deferred contract costs

 

144,449

 

129,390

 

118,514

 

Goodwill

 

60,115

 

60,115

 

60,115

 

Intangible assets, net

 

2,391

 

2,682

 

3,100

 

Right of use assets

 

5,105

 

4,931

 

5,417

 

Other assets

 

6,605

 

6,730

 

7,123

 

 
Total assets

$

461,120

$

434,903

$

399,212

 

 
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses

$

29,321

$

24,757

$

28,250

 

Deferred contract liabilities

 

74,147

 

62,695

 

55,826

 

Deferred revenue

 

13,502

 

12,690

 

11,153

 

Client funding obligation - settlement liabilities

 

12,157

 

12,263

 

9,485

 

Current portion of operating lease liabilities

 

2,005

 

2,138

 

2,370

 

Income tax payable

 

-

 

-

 

657

 

Total current liabilities

 

131,131

 

114,543

 

107,741

 

Long-term liabilities
Deferred income taxes, net

 

31,546

 

31,546

 

29,313

 

Deferred contract liabilities

 

14,734

 

13,389

 

12,029

 

Operating lease liabilities

 

3,417

 

2,964

 

3,226

 

Other liabilities

 

793

 

1,704

 

1,752

 

Total long-term liabilities

 

50,490

 

49,603

 

46,320

 

 
Total liabilities

 

181,621

 

164,146

 

154,061

 

 
Shareholders' equity
Preferred stock; shares authorized, 5,000,000; none issued

 

-

 

-

 

-

 

Common stock, no par; 60,000,000 shares authorized;
27,496,693 shares issued at August 31, 2022;
27,460,955 shares issued at February 28, 2022;
27,467,482 shares issued at August 31, 2021

 

39,210

 

35,303

 

34,789

 

Additional Paid in Capital

 

1,498

 

-

 

-

 

Retained earnings

 

238,791

 

235,454

 

210,899

 

Accumulated other comprehensive income, net

 

-

 

-

 

(538

)

Total shareholders' equity

 

279,499

 

270,757

 

245,151

 

 
Total liabilities and shareholders' equity

$

461,120

$

434,903

$

399,212

 

 

Reconciliation of GAAP to Non-GAAP Financial Measures

The Company believes that non-GAAP financial measures are important to enable investors to understand and evaluate its ongoing operating results. Accordingly, CSI includes non-GAAP financial measures when reporting its financial results to shareholders and potential investors in order to provide them with an additional tool to evaluate the Company’s ongoing business operations. CSI believes that the non-GAAP financial measures are representative of comparative financial performance that reflects the economic substance of CSI’s current and ongoing business operations.

Although non-GAAP financial measures are often used to measure the Company’s operating results and assess its financial performance, they are not necessarily comparable to similarly titled measures of other companies due to potential inconsistencies in the method of calculation. CSI believes that its provision of non-GAAP financial measures provides investors with important key financial performance indicators that are utilized by management to assess the Company’s operating results, evaluate the business and make operational decisions on a prospective, going-forward basis. Hence, management provides disclosure of non-GAAP financial measures to give investors an opportunity to see CSI as viewed by management, to assess CSI with some of the same tools that management utilizes internally and to be able to compare such information with prior periods. CSI believes that inclusion of non-GAAP financial measures provides investors with additional information to help them better understand its financial statements just as management utilizes these non-GAAP financial measures to better understand the business, manage budgets and allocate resources.

Reconciliation of GAAP Net Income to Non-GAAP Pro Forma Adjusted Net Income and Non-GAAP Adjusted EPS

COMPUTER SERVICES, INC.
Adjusted Consolidated Statements of Income
(Unaudited)
(in thousands, except share and per share data)
GAAP Results Change from Adjusted

Results
Adjusted Change
Three Months Ended August 31,

2022

2021

 

Adjustments

2022

from 2021
Revenues

$

83,893

 

$

6,842

 

8.9

%

$

-

 

$

83,893

 

$

6,842

 

8.9

%

Operating expenses¹

 

67,712

 

 

9,401

 

16.1

%

 

(4,464

)

 

63,248

 

 

4,937

 

8.5

%

Operating income

 

16,181

 

 

(2,558

)

(13.7

%)

 

4,464

 

 

20,645

 

 

1,905

 

10.2

%

Non-operating (loss) income

 

15

 

 

(68

)

(81.6

%)

 

-

 

 

15

 

 

(68

)

(81.6

%)

Interest income, net

 

155

 

 

117

 

307.9

%

 

-

 

 

155

 

 

117

 

307.9

%

Income before income taxes

 

16,351

 

 

(2,510

)

(13.3

%)

 

4,464

 

 

20,815

 

 

1,954

 

10.4

%

Provision for income taxes

 

4,006

 

 

(339

)

(7.8

%)

 

1,094

 

 

5,100

 

 

755

 

17.4

%

Net income

$

12,345

 

$

(2,171

)

(15.0

%)

$

3,370

 

$

15,715

 

$

1,199

 

8.3

%

 
Earnings per common share

$

0.45

 

$

(0.08

)

(15.1

%)

$

0.12

 

$

0.57

 

$

0.04

 

7.5

%

 

 

 

 

 

¹Operating expense adjustments remove one-time transaction expenses associated with the proposed acquisition of Computer Services, Inc. by Centerbridge Partners, L.P. and Bridgeport Partners.

 

 

 

 

 

 

 

 

 

 

 

GAAP Results

 

Change from

 

 

Adjusted

Results

 

Adjusted Change
Six Months Ended August 31,

 

2022

 

2021

 

Adjustments

 

2022

 

from 2021
Revenues

$

164,939

 

$

11,233

 

7.3

%

$

-

 

$

164,939

 

$

11,233

 

7.3

%

Operating expenses¹

 

129,271

 

 

13,104

 

11.3

%

 

(4,801

)

 

124,470

 

 

8,303

 

7.1

%

Operating income

 

35,668

 

 

(1,872

)

(5.0

%)

 

4,801

 

 

40,469

 

 

2,930

 

7.8

%

Non-operating (loss) income

 

6

 

 

(77

)

(92.3

%)

 

-

 

 

6

 

 

(77

)

(92.3

%)

Interest income, net

 

203

 

 

125

 

160.0

%

 

-

 

 

203

 

 

125

 

160.0

%

Income before income taxes

 

35,877

 

 

(1,825

)

(4.8

%)

 

4,801

 

 

40,678

 

 

2,978

 

7.9

%

Provision for income taxes

 

8,789

 

 

17

 

0.2

%

 

1,176

 

 

9,965

 

 

1,194

 

13.6

%

Net income

$

27,088

 

$

(1,842

)

(6.4

%)

$

3,625

 

$

30,713

 

$

1,784

 

6.2

%

 
Earnings per common share

$

0.99

$

(0.06

)

(5.7

%)

$

0.13

 

$

1.12

$

0.07

 

6.7

%

 
¹Operating expense adjustments remove one-time transaction expenses associated with the proposed acquisition of Computer Services, Inc. by Centerbridge Partners, L.P. and Bridgeport Partners.

 

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