Here's How CSG Systems International May Be Failing You

Keep your eye on margins.

Seth Jayson
Seth Jayson
Sep 9, 2012 at 12:00AM

Margins matter. The more CSG Systems International (Nasdaq: CSGS) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. Healthy margins often separate pretenders from the best stocks in the market. That's why we check up on margins at least once a quarter in this series. I'm looking for the absolute numbers, so I can compare them to current and potential competitors, and any trend that may tell me how strong CSG Systems International's competitive position could be.

Here's the current margin snapshot for CSG Systems International over the trailing 12 months: Gross margin is 50.4%, while operating margin is 14.9% and net margin is 6.1%.

Unfortunately, a look at the most recent numbers doesn't tell us much about where CSG Systems International has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter (LFQ). You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for CSG Systems International over the past few years.

Source: S&P Capital IQ. Dollar amounts in millions. FY = fiscal year. TTM = trailing 12 months.

Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them. To compare quarterly margins to their prior-year levels, consult this chart.

Source: S&P Capital IQ. Dollar amounts in millions. FQ = fiscal quarter.

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 50.6% and averaged 48.9%. Operating margin peaked at 20.1% and averaged 18.2%. Net margin peaked at 13.2% and averaged 8.6%.
  • TTM gross margin is 50.4%, 150 basis points better than the five-year average. TTM operating margin is 14.9%, 330 basis points worse than the five-year average. TTM net margin is 6.1%, 250 basis points worse than the five-year average.

With recent TTM operating margins below historical averages, CSG Systems International has some work to do.