Computer Services, Inc. (CSI) (OTCQX: CSVI) today reported growth in revenues and net income for the third quarter and nine months ended November 30, 2018.
CSI’s revenues rose 10.8% to $67.6 million for the third quarter of fiscal 2019 compared with $61.0 million for the third quarter of fiscal 2018. Third quarter net income rose 47.0% to $11.4 million compared with $7.7 million for the third quarter of fiscal 2018. Net income per share rose 49.1% to $0.82 compared with $0.55 for the third quarter of fiscal 2018. The results for the third quarter of fiscal 2019 included approximately $235,000 in non-operating income from a gain on a sale of an investment. Revenues included approximately $3.0 million in early contract termination fees in the third quarter of fiscal 2019 compared with $809,000 in early contract termination fees in the third quarter of fiscal 2018.
“CSI’s third quarter growth was fueled by increased demand for digital banking products, including mobile banking, internet banking and online bill pay, as well as growth in payments transaction volumes,” stated Steven A. Powless, chairman and CEO of CSI. “Our solid performance benefited from long-term contracts from core processing customers. Across all product lines, recurring revenues accounted for about 90% of total revenues for the quarter and the first nine months of fiscal 2019. We remain on track to report record results for fiscal 2019, marking our 19th consecutive year of revenue growth and 22nd consecutive year of growth in net income.”
Third Quarter Results
Consolidated revenues increased 10.8% to $67.6 million in the third quarter of fiscal 2019 compared with $61.0 million in the third quarter of fiscal 2018. The growth in revenues benefited from higher sales of core processing, payments, digital banking and regulatory compliance solutions. Revenues included approximately $3.0 million in early contract termination fees in the third quarter of fiscal 2019 compared with $809,000 in the third quarter of fiscal 2018. The early contract termination fees are generated by a customer terminating its service agreement 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 timing, and number and size of customers that are acquired, as well as how early in the contract term a customer is acquired.
Operating income increased 12.1% to $14.3 million in the third quarter of fiscal 2019 compared with $12.7 million for the third quarter of fiscal 2018. Operating margin was 21.1% in the third quarter of fiscal 2019 compared with 20.8% for the third quarter of fiscal 2018. Operating expenses included $285,000 in one-time compensation expenses related to the gain on the sale of an investment and retirement costs for a senior officer. There were no comparable one-time expenses in the third quarter of fiscal 2018. Excluding the effects of the one-time operating expense items, operating income increased 14.4%, or $1.8 million, in the third quarter of fiscal 2019 compared with the third quarter of fiscal 2018.
CSI’s results also included $235,000 in non-operating income in the third quarter of fiscal 2019. The non-operating income was due to the sale of an investment that also generated approximately $5.4 million in initial consideration in the second quarter of fiscal 2019. There was no comparable non-operating income generated in the third quarter of fiscal 2018.
The provision for income tax was $3.3 million for the third quarter of fiscal 2019 compared with $5.0 million in the third quarter of fiscal 2018. The decrease in the provision was primarily due to a reduction in the federal income tax rate as a result of the December 2017 passage of the Tax Cuts and Jobs Act. The estimated consolidated effective income tax rate for the third quarter was 22.75%, down from 39.25% in the third quarter of fiscal 2018.
Net income for the third quarter of fiscal 2019 rose 47.0% to $11.4 million compared with $7.7 million for the third quarter of fiscal 2018. Net income per share increased 49.1% to $0.82 for the third quarter of fiscal 2019 on 13.9 million weighted average shares outstanding compared with $0.55 for the third quarter of fiscal 2018 on 14.0 million weighted average shares outstanding.
During the third quarter of fiscal 2019, the company analyzed its program for qualified retiree medical benefits, a program that has been in place since 1992. The company and its actuaries concluded that a liability of $5.8 million arising from the post-retirement benefit program is appropriate. Since this liability would have been accrued over 26 years, the $5.8 million liability has been established with a corresponding offset to retained earnings and deferred taxes. The review also determined that the company’s post-retirement benefits expense and impact on income tax expense were not material to the income statements presented for the most recent fiscal periods.
“CSI’s balance sheet remains strong with no long-term debt at the end of the third quarter and growth in cash and cash equivalents since last year,” Powless continued. “Our strong cash flow has allowed CSI to continue investing in infrastructure and new technologies during fiscal 2019 to support our growing customer base, growth in transaction processing and new product development.
“We also increased our returns to shareholders during the first nine months of fiscal 2019 compared with the same period last year. We paid shareholders about $13.7 million in cash dividends during the first nine months of fiscal 2019, marking our 47th consecutive annual increase in our cash dividends. In addition, we repurchased $4.7 million of common stock during the first nine months of fiscal 2019, a 158% increase compared with $1.8 million repurchased during the same period last year. We also invested another $13.2 million in hardware and software during the first nine months of fiscal 2019,” Powless concluded.
Nine Months Results
Consolidated revenues for the first nine months of fiscal 2019 rose 6.8% to $199.6 million compared with $186.9 million for the first nine months of fiscal 2018. CSI’s increase in revenues benefited from growth across all major product lines compared with the first nine months of fiscal 2018. Revenues included approximately $8.6 million in early contract termination fees for the first nine months of fiscal 2019 compared with $7.0 million in the first nine months of fiscal 2018.
Operating income declined 3.5% to $40.0 million for the first nine months of fiscal 2019 compared with $41.4 million for the first nine months of fiscal 2018. Operating margin was 20.0% in the first nine months of fiscal 2019 compared with 22.2% in the first nine months of fiscal 2018. Operating expenses for the first nine months of fiscal 2019 included $1.2 million in a one-time operating charge related to payments processing business transaction accounts and $2.9 million primarily from one-time expenses related to the gain on the sale of an investment and the planned retirement of company executives. Excluding the effects of the one-time operating expense items, operating income increased 6.4%, or $2.6 million, in the first nine months of fiscal 2019 compared with the first nine months of fiscal 2018.
CSI’s results also included $4.1 million in non-operating income during the first nine months of fiscal 2019. The non-operating income was due to the sale of an investment that generated approximately $5.6 million in total initial consideration during the second and third quarters of fiscal 2019. There was no comparable non-operating income generated during the first nine months of fiscal 2018.
Net income for the first nine months of fiscal 2019 increased by 36.3% to $34.5 million compared with $25.3 million in the first nine months of fiscal 2018. Net income per share rose 37.0% to $2.48 per share for the first nine months of fiscal 2019 compared with $1.81 for the first nine months of fiscal 2018.
CSI’s cash flow from operations increased 16.3% to $47.5 million in the first nine months of fiscal 2019 compared with $40.8 million in the same period of fiscal 2018. The increase in operating cash flow was due primarily to higher net income and changes in other assets and liabilities. Cash and cash equivalents increased 39.4% to $60.8 million as of November 30, 2018, from $43.6 million as of November 30, 2017.
About Computer Services, Inc.
Computer Services, Inc. delivers core processing, managed services, digital banking, payments processing, print and electronic distribution, and regulatory compliance solutions to financial institutions and corporate customers across the nation. 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 the FinTech 100, Talkin’ Cloud 100 and MSPmentor Top 501 Global Managed Service Providers List. CSI’s stock is traded on OTCQX under the symbol CSVI. CSVI meets the financial media’s “Dividend Aristocrats” criterion of having 25+ years of consecutive annual dividend increases. For more information about CSI, visit www.csiweb.com.
Forward-Looking Statements
This news 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; and (iii) other factors discussed in CSI's Annual Reports, Quarterly Reports, Information and Disclosure Statements and other documents posted from time to time on the OTCQX website (available at 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. AND SUBSIDIARIES | |||||||||||||||||
| Condensed Consolidated Statements of Income | |||||||||||||||||
| (Unaudited) | |||||||||||||||||
| (in thousands, except share and per share data) | |||||||||||||||||
| Three Months Ended November 30, | Nine Months Ended November 30, | ||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | ||||||||||||||
| Total Revenues | $ | 67,638 | $ | 61,046 | $ | 199,593 | $ | 186,914 | |||||||||
| Operating expenses | 53,376 | 48,326 | 159,642 | 145,501 | |||||||||||||
| Operating income | 14,262 | 12,720 | 39,951 | 41,413 | |||||||||||||
| Non-Operating Income | 235 | - | 4,093 | - | |||||||||||||
| Interest income, net | 234 | 26 | 523 | 90 | |||||||||||||
| Income before income taxes | 14,730 | 12,746 | 44,567 | 41,503 | |||||||||||||
| Provision for income taxes | 3,349 | 5,003 | 10,087 | 16,213 | |||||||||||||
| Net income | $ | 11,381 | $ | 7,743 | $ | 34,480 | $ | 25,290 | |||||||||
| Earnings per share | $ | 0.82 | $ | 0.55 | $ | 2.48 | $ | 1.81 | |||||||||
Shares used in computing earnings per common and common equivalent share | 13,903,858 | 13,957,966 | 13,922,796 | 13,968,154 | |||||||||||||
| |||||||||||||||||
| COMPUTER SERVICES, INC. AND SUBSIDIARIES | |||||||||||||
| Condensed Consolidated Balance Sheets | |||||||||||||
| (Unaudited) | |||||||||||||
| (in thousands, except share data) | |||||||||||||
| 11/30/2018 | 2/28/2018 | 11/30/2017 | |||||||||||
| ASSETS | |||||||||||||
| Current assets | |||||||||||||
| Cash and cash equivalents | $ | 60,752 | $ | 40,661 | $ | 43,595 | |||||||
| Accounts receivable | 34,627 | 30,529 | 26,698 | ||||||||||
| Income tax receivable | 99 | 3,851 | - | ||||||||||
| Prepaid expenses and other current assets | 17,528 | 16,332 | 13,390 | ||||||||||
| Total current assets | 113,006 | 91,373 | 83,683 | ||||||||||
| Property and equipment, net of accumulated depreciation | 39,579 | 37,044 | 37,263 | ||||||||||
| Software and software licenses, net of accumulated amortization | 21,188 | 23,123 | 23,859 | ||||||||||
| Goodwill | 60,115 | 60,115 | 60,115 | ||||||||||
| Intangible assets | 4,876 | 5,370 | 5,560 | ||||||||||
| Other assets | 46,382 | 29,972 | 30,519 | ||||||||||
| Total assets | $ | 285,147 | $ | 246,997 | $ | 240,999 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||
| Current liabilities | |||||||||||||
| Accounts payable | $ | 7,823 | $ | 7,663 | $ | 8,022 | |||||||
| Accrued expenses | 40,276 | 21,624 | 23,043 | ||||||||||
| Deferred revenue | 8,484 | 9,868 | 8,559 | ||||||||||
| Income tax payable | - | - | 484 | ||||||||||
Notes Payable | - | - | - | ||||||||||
| Total current liabilities | 56,583 | 39,155 | 40,109 | ||||||||||
| Long-term liabilities | |||||||||||||
| Deferred income taxes | 15,675 | 13,752 | 19,173 | ||||||||||
| Postretirement benefits | 5,598 | 5,359 | 5,374 | ||||||||||
| Other long-term liabilities | 1,977 | 2,234 | 2,262 | ||||||||||
| Total long-term liabilities | 23,250 | 21,345 | 26,809 | ||||||||||
| Total liabilities | 79,834 | 60,500 | 66,918 | ||||||||||
| Shareholders' equity | |||||||||||||
| Preferred stock; shares authorized, 5,000,000; none issued | - | - | - | ||||||||||
Common stock, no par; 60,000,000 shares authorized; 13,880,823 shares issued as of November 30, 2018; 13,931,722 shares issued as of February 28, 2018; 13,956,435 shares issued as of November 30, 2017; | 28,125 | 25,838 | 25,804 | ||||||||||
| Retained earnings | 177,188 | 160,659 | 148,277 | ||||||||||
| Total shareholders' equity | 205,313 | 186,497 | 174,081 | ||||||||||
| Total liabilities and shareholders' equity | $ | 285,147 | $ | 246,997 | $ | 240,999 | |||||||
Reconciliation of Generally Accepted Accounting Principles (GAAP)
This news release contains Non-GAAP financial measures such as adjusted operating expenses, adjusted operating income, adjusted earnings before taxes, adjusted provision for income taxes, adjusted net income, and adjusted earnings per share. These Non-GAAP financial measures are measurements of operational performance that are not prepared and presented in accordance with GAAP. Accordingly, these measures should not be considered as a substitute for data prepared and presented in accordance with GAAP. These Non-GAAP financial measures are used by the management of Computer Services, Inc. when evaluating results of operations. The company’s management believes these measures also provide users of the financial statements with additional and useful comparisons of current results of operations with past and future periods. Non-GAAP financial measures should not be construed as being more important than comparable GAAP measures. Please see the following table for a reconciliation of GAAP and adjusted earnings measures referenced in this news release.
| COMPUTER SERVICES, INC. | ||||||||||||||||||||||||||||||||
| Third Quarter and Fiscal YTD 2019 Reconciliation of GAAP and Adjusted Earnings | ||||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||
| (in thousands, except share and per share data) | ||||||||||||||||||||||||||||||||
| Three months ended November 30, | GAAP results |
Change from | YOY % | Adjustments |
Adjusted |
Change from | YOY % | |||||||||||||||||||||||||
| Total revenues | $ | 67,638 | $ | 6,592 | 10.8 | % | - | $ | 67,638 | $ | 6,592 | 10.8 | % | |||||||||||||||||||
| Operating expenses¹ | 53,376 | 5,050 | 10.5 | % | (285 | ) | 53,091 | 4,765 | 9.9 | % | ||||||||||||||||||||||
| Operating income | 14,262 | 1,542 | 12.1 | % | 285 | 14,547 | 1,827 | 14.4 | % | |||||||||||||||||||||||
| Non-Operating income² | 235 | 235 | nmf | (235 | ) | - | - | nmf | ||||||||||||||||||||||||
| Interest income, net | 234 | 208 | 812.7 | % | - | 234 | 208 | 812.7 | % | |||||||||||||||||||||||
| Income before income taxes | 14,730 | 1,985 | 15.6 | % | 50 | 14,780 | 2,035 | 16.0 | % | |||||||||||||||||||||||
| Provision for income taxes³ | 3,349 | (1,654 | ) | -33.1 | % | 13 | 3,362 | (1,641 | ) | -32.8 | % | |||||||||||||||||||||
| Net income | 11,381 | 3,639 | 47.0 | % | 37 | 11,418 | 3,675 | 47.5 | % | |||||||||||||||||||||||
| Earnings per share | $ | 0.82 | $ | 0.27 | 49.1 | % | $ | 0.00 | $ | 0.82 | $ | 0.27 | 49.1 | % | ||||||||||||||||||
| Weighted average shares outstanding | 13,903,858 | (54,108 | ) | -0.4 | % | 13,903,858 | 13,903,858 | (54,108 | ) | -0.4 | % | |||||||||||||||||||||
| Nine months ended November 30, | GAAP results |
Change from | YOY % | Adjustments | Adjusted |
Change from | YOY % | |||||||||||||||||||||||||
| Total revenues | $ | 199,593 | $ | 12,678 | 6.8 | % | - | $ | 199,593 | $ | 12,678 | 6.8 | % | |||||||||||||||||||
| Operating expenses¹ | 159,642 | 14,141 | 9.7 | % | (4,098 | ) | 155,544 | 10,043 | 6.9 | % | ||||||||||||||||||||||
| Operating income | 39,951 | (1,463 | ) | -3.5 | % | 4,098 | 44,049 | 2,635 | 6.4 | % | ||||||||||||||||||||||
| Non-Operating income² | 4,093 | 4,093 | nmf | (4,093 | ) | - | - | nmf | ||||||||||||||||||||||||
| Interest income, net | 523 | 433 | 481.8 | % | - | 523 | 433 | 481.8 | % | |||||||||||||||||||||||
| Income before income taxes | 44,567 | 3,064 | 7.4 | % | 5 | 44,572 | 3,069 | 7.4 | % | |||||||||||||||||||||||
| Provision for income taxes³ | 10,087 | (6,127 | ) | -37.8 | % | 1 | 10,087 | (6,126 | ) | -37.8 | % | |||||||||||||||||||||
| Net income | 34,480 | 9,190 | 36.3 | % | 4 | 34,485 | 9,195 | 36.4 | % | |||||||||||||||||||||||
| Earnings per share | $ | 2.48 | $ | 0.67 | 37.0 | % | $ | 0.00 | $ | 2.48 | $ | 0.67 | 37.0 | % | ||||||||||||||||||
| Weighted average shares outstanding | 13,922,796 | (45,358 | ) | -0.3 | % | 13,922,796 | 13,922,796 | (45,358 | ) | -0.3 | % | |||||||||||||||||||||
¹ Operating expense adjustments remove a one-time charge related to the
reconciliation of certain accounts and one-time compensation items
related to the non-operating gain on the sale of an investment and the
planned retirement of company executives.
² Non-operating
adjustments back out the company's gain on the sale of an investment.
³
Provision for income tax adjustments reflect the tax effect of the
aggregate net adjustments for each period.
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