CSI Reports Growth in Revenues and Net Income for Third Quarter

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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
fiscal 2018

    YOY %     Adjustments    

Adjusted
results

   

Change from
adjusted
fiscal 2018

    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
fiscal 2018

    YOY % Adjustments

Adjusted
results

   

Change from
adjusted
fiscal 2018

    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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Business Wire: 13:00 GMT Monday 14th January 2019

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