CSI Reports Results for Second Quarter

PADUCAH, Ky.--(BUSINESS WIRE)--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.