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Edited Transcript of CSGS.OQ earnings conference call or presentation 4-Nov-20 10:00pm GMT

·21 min read

Q3 2020 CSG Systems International Inc Earnings Call ENGLEWOOD Nov 4, 2020 (Thomson StreetEvents) -- Edited Transcript of CSG Systems International Inc earnings conference call or presentation Wednesday, November 4, 2020 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Bret C. Griess CSG Systems International, Inc. - President, CEO & Director * Brian A. Shepherd CSG Systems International, Inc. - Executive VP & Group President of CSG * Liz Bauer CSG Systems International, Inc. - Senior VP, Chief Communications & IR Officer * Rolland B. Johns CSG Systems International, Inc. - Executive VP & CFO ================================================================================ Conference Call Participants ================================================================================ * Maxwell Osnowitz Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the CSG Systems International Third Quarter 2020 Earnings Announcement. (Operator Instructions) Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Liz Bauer, Senior Vice President, Chief Communication and Investor Relations Officer. Please go ahead, ma'am. -------------------------------------------------------------------------------- Liz Bauer, CSG Systems International, Inc. - Senior VP, Chief Communications & IR Officer [2] -------------------------------------------------------------------------------- Thank you, operator, and thanks to everyone for joining us. Today's discussion will contain a number of forward-looking statements. These will include, but are not limited to, statements regarding our projected financial results; our ability to meet our customers' needs through our products, services and performance; and our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic, operating and financial goals. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call. And we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new or future events. In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release as well as our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our website. Also, we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures when reviewed in conjunction with our GAAP financial measures, provide investors with greater transparency to the information used by our management team in our financial and operational decision-making. For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me today on the phone are Bret Griess, Chief Executive Officer; Rollie Johns, Chief Financial Officer; and Brian Shepherd, our Executive Vice President and Future CEO beginning January 1. With that, I'd now like to turn the call over to Bret. -------------------------------------------------------------------------------- Bret C. Griess, CSG Systems International, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Liz, and thank you all for joining us today. It goes without saying that we at CSG are hoping that you, your family, friends and loved ones are safe and well. While much time and energy has been focused on the negative impacts of the pandemic as well as social injustices, we are focused on the good that has come out of these issues and how we can use it to continue to grow and improve. To elaborate, we have seen our employees rally around one another and our customers, finding new ways to connect and collaborate, whether that be through virtual workshops, proofs of concept or ideation sessions. It also includes creative problem-solving by helping our clients to overcome supply shortages by sending headsets to our customer service agents homes when they move to a work-for-home environment, even though we don't sell headsets. And we have been and continue to be diligent and consistent in putting the health and safety of our employees first in all that we do. Finally, we're taking more substantial steps towards creating a more diverse and inclusive environment with the hiring of our first Diversity and Inclusion Officer who begins on December 2. And obviously, one person is not responsible for creating this environment alone. However, with his dedicated focus and expertise, we believe that we can and will do better going forward. We believe these actions are what create a sustainable, differentiated company. And again, just like I shared last quarter, while CSG is not immune from the impact of this pandemic, we are so fortunate compared to many with a predictable, resilient business that provides lots of visibility. Rollie will review the financial results in more detail, but I'd like to call out a few key highlights. Our third quarter adjusted revenue was $228 million, up 2% from last quarter. Non-GAAP earnings per share were $0.76. Our adjusted operating margin for the first 9 months of the year is 16.5%, in line with our long-term target range, and our operating free cash flow metrics continues to be strong with $116 million in operating cash flow and $91 million in free cash flow being generated in the first 3 quarters of the year. In short, we feel very good about our performance thus far in 2020 and our ability to continue to meet the non-GAAP financial expectations we set out in May as well as increase our cash flow guidance for the remainder of the year. So now let me share with you some highlights from the various parts of the business. First, we continue to see strength in our North American cable and satellite business. Recently, we enabled one of our large cable and satellite clients to rate traffic for its newly acquired wireless subscribers, which are being serviced on another network. In addition, in October, we surpassed over $1 billion in payments being processed through our kiosk solutions. These volumes demonstrate that customers want to be able to pay, add or upgrade their service through a host of different channels. We've also seen some positive activity with our streaming and OTT customers as consumers move quickly towards digital consumption in all aspects of life, with digital over-the-top entertainment, growing exponentially. For example, one of our long-time Ascendon clients, MBC or Middle East Broadcasting group, has seen almost a sevenfold increase in the subscribers in just the past year. In addition, a major global mass media and entertainment conglomerate is also using our Ascendon solution again this year to enable its gifting of its streaming service in several international locations just in time for the holiday season. Second, we continue to see positive signs in our global wireless and wireline markets. In spite of a slight slowdown in some activities, whether that be implementations or sales cycles as a result of the pandemic. Last quarter, we discussed the fact that our sales pipeline is stronger than it has ever been since I've been at the company. What leads me to say that is the absolute revenue dollars associated with our pipeline, the average size of the opportunities and the stage in the sales cycle that these opportunities are in. Net-net, we have larger-sized opportunities in our pipeline that are in more advanced stages of discussions with Tier 1 and Tier 2 service providers around the world, and we like our chances. Third, we continue to strengthen and lengthen our relationships with several customers, including Inmarsat. Inmarsat is a leader in providing global mobile satellite communications on land, sea and air. This past quarter, Inmarsat signed a multiyear managed services deal to provide core operational and support to upgrade several billing, rating, mediation and other third-party applications and migrate these to a cloud operating model. This win deeply embeds CSG and Inmarsat business across all 4 of their satellite verticals: government, aviation, maritime and enterprise. Next, companies around the world continue to look for ways to communicate with their customers in more personalized and relevant ways and as important, through their communications channel of choice, whether that be text, voice, e-mail or other channels. For example, our customer engagement team expanded yet again our footprint with JPMorgan Chase. This past quarter, we inked a deal with the collections area of Chase to help support the expected growth in collections due to the financial impacts of COVID-19. With our solution, Chase will be able to cross-reference and align customer accounts, allowing them to give customers a consolidated, improved and streamlined collection experience. In addition, our solution will help them improve collection rates, lower the number of overall touchpoints with the customer and the cost to service that customer. We are pleased with our continued efforts to land and expand our presence within this organization. Finally, the volumes from our payment solutions have stabilized. But we have not yet fully recovered the processing levels that we were at before the pandemic. It is important to remind everyone that we have not experienced the severe declines that other global payments providers have thanks to the markets that we serve, which includes governmental agencies, early education services, retail and small-to-medium businesses. All in all, I'm pleased with the progress that we're making, in particular, in a year in which there have been so many obstacles. We are executing well across a broad set of metrics. We are adding new logos from a diverse set of clients ranging from wireless to health care to retail to technology. We are diversifying our revenue from the new verticals, while at the same time, growing our revenue from the cable market. We are widening our business more by lengthening and strengthening our relationships with existing customers and earning more of their business. In addition, we are continuously evolving our cost structure to stay competitive in the market. And last but not least, we are distributing capital to shareholders while investing in new initiatives and acquisitions to drive longer-term top line growth. In summary, we are delivering even in these very challenging times. Before I close out, as most of you know, I will be leaving CSG at the end of the year and handing the reigns to Brian Shepherd, who I recruited in 2016 to join our leadership team. I brought Brian in to help me further our growth mindset and ambitions. He, along with a very talented team of leaders throughout the company, have delivered. I'm proud of what we have built. And I'm confident that our customers, employees, shareholders and communities in which we operate will benefit from Brian's leadership. In addition, I'd like to take this opportunity to thank our investors and analysts for your continued interest in our company. Over the years, we've had some constructive conversations that have helped us to understand how you look at our business and what you believe is best for creating long-term value. Finally, I'd like to thank our clients for their trust in us and thank our talented and dedicated employees across the globe, who are committed to helping our clients and our company achieve greatness. With that, I'll turn it over to Brian to say a few words. -------------------------------------------------------------------------------- Brian A. Shepherd, CSG Systems International, Inc. - Executive VP & Group President of CSG [4] -------------------------------------------------------------------------------- Thanks, Bret. First, on behalf of our 4,600 employees, our customers and our shareholders, thank you, Bret, for all that you've done for me personally and for all of us over your fantastic 24-year career here at CSG. You helped CSG build into a sustainable industry-leading company where our core values are at the heart of what we do and, just as importantly, how we do it. When you and I first met 5 years ago, you shared with me 4 priorities that you wanted to accomplish as CEO: first, you wanted to become more market-focused and responsive as we unleash the full potential of our people; second, you wanted to regain CSG's growth mindset; third, you plan to invest more in our people and our innovative technology so that CSG could bring even greater value to our customers because you clearly saw the gap between companies with average solutions and those companies like CSG, who provide industry-leading resilient product platforms that deliver on our commitments to our customers; and finally, you wanted to strengthen our values and our culture as you know, these are key differentiators for CSG to attract and retain great talent who then humbly serve our customers better and better. Looking back, Bret, everyone sees that you clearly succeeded in all 4. Over the last 6 weeks, I've had the great opportunity to meet with many of our investors, and one question has been at the top of everyone's list. What is going to change under my leadership as I take the range from Bret and try to fill his big shoes? My response has been consistent. You're not going to see any sharp turns, just a shared determination to accelerate CSG's growth. What Bret and the executive team set out to do 5 years ago has laid the foundation for us to continue to build a faster-growing, healthier, more future-ready and more sustainable CSG that always delivers. With this strong foundation, there's a phrase that you'll hear me and us talk repeatedly about, CSG has and will continue to earn the right, earn the right every day to accelerate our growth and the momentum we're creating in the marketplace. CSG is in the enviable position of having highly talented, highly engaged leaders and employees all around the globe who wake up every single day with one crystal clear goal in their minds. CSG will do whatever it takes to help our customers solve their toughest business challenges. We could not be more grateful to earn the right to serve so many of the most innovative brands in the world because we know our customers have choices. And every day, I can guarantee you that CSG teams in every geography are working relentlessly and creatively to win and retain the trust and the business of both our existing and new logo customers. So Bret, thank you for leading the way so well for so long for all of us. Our 4,600-plus employees are as committed as ever to continue your legacy of bringing great value to CSG, our customers and our shareholders. It's been an honor and a pleasure to work and learn from you, Bret. With that, I'll hand it over to Rollie to provide the CSG financial update. -------------------------------------------------------------------------------- Rolland B. Johns, CSG Systems International, Inc. - Executive VP & CFO [5] -------------------------------------------------------------------------------- Thanks, Brian. Before I get into the financials, Bret, I just want to say what a pleasure it has been working with you side-by-side over these last few years, and I wish you all the best, and you will certainly be missed. So welcome, everyone, to the call today to discuss our financial results for the third quarter and our outlook for the remainder of 2020. Our business is operating well amid the economic challenges of this global pandemic. As Bret highlighted, our resilient business model continues to generate strong cash flows in the face of the pandemic, which provides us with the stability necessary to continue to deliver on our strategic initiatives and create shareholder value, both now and into the future. So let's walk through our financial results. We reported revenue of $244 million and non-GAAP adjusted revenue of $228 million, which excludes transaction pays of $16 million for the quarter, both decreases of approximately 3% from the prior year. These year-over-year fluctuations are not unexpected when considering the pricing adjustments associated with the Comcast extension, the continued unfavorable movements in foreign currency and the impacts of COVID-19. However, when compared to the second quarter of 2020, revenue increased 2%. And with a 1% increase to non-GAAP adjusted revenue, which reflects the stabilization that we're beginning to see in our sales and implementation cycles, along with the rebound in our processing volumes. So moving on. Third quarter non-GAAP income was $39 million or 17.2% of non-GAAP adjusted revenue, bringing our year-to-date non-GAAP adjusted operating income to $112 million or 16.5% of non-GAAP adjusted revenue. Non-GAAP adjusted EBITDA was $52 million for the quarter, representing 23% of non-GAAP adjusted revenue. Non-GAAP EPS for the current quarter was $0.76, and our non-GAAP effective income tax rate was approximately 27% for the quarter. Moving onto the balance sheet and cash flow. We ended the quarter with $212 million of cash and short-term investments. We generated $65 million of cash flow from operations and $55 million of free cash flow for the quarter. Our year-to-date cash flow from operations and free cash flow were $116 million and $91 million, respectively. Year-to-date, we paid $23 million of dividends and repurchased $12 million of common stock under our stock repurchase program, which was resumed during the third quarter. We remain committed to balancing our use of cash and return on invested capital, focusing on internal investment, inorganic growth opportunities and providing a return to shareholders. So moving onto our financial outlook for the remainder of 2020. In spite of the lingering effects of COVID-19, we remain confident in our financial outlook for 2020. As such, I am pleased to report that we are increasing our 2020 cash flow guidance. In addition, our 2020 non-GAAP guidance remains unchanged. We are, however, updating the 2020 GAAP operating margin percentage and EPS guidance to reflect the inclusion of executive transition costs related to Bret's departure under the terms of his separation agreement. These costs are excluded from our non-GAAP results, as they are not reflective of our recurring operating results. With that said, our guidance is as follows: revenue and non-GAAP adjusted revenue remain unchanged, as we continue to expect revenue in the range of $960 million to $1 billion. And non-GAAP adjusted revenue, excluding transaction fees, in the range of $891 million to $924 million. We are maintaining our non-GAAP adjusted operating margin percentage in the range of 16% to 16.5%, consistent with our year-to-date performance and within our long-term range of 16% to 18%. Non-GAAP EPS also remains unchanged in the range of $2.87 to $3.10 based on a non-GAAP tax rate of approximately 27% and a share count of about 32 million shares for the year. We continue to expect adjusted EBITDA in the range of $198 million to $208 million. And finally, after a solid third quarter of cash flows, we are increasing our free cash flow expectation to a range of $100 million to $110 million. Based on expected operating cash flows of $125 million to $145 million, with CapEx still expected to be in the $25 million to $35 million range. In summary, we are pleased with this quarter's operating results in this challenging environment. Our continued strong cash flows demonstrate the resiliency of our business, allowing us to continue to execute on our long-term business objectives and return value to our shareholders. With that, I'll turn it over to the operator to facilitate the question-and-answer session. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) We'll take our first question from Tom Roderick with Stifel. -------------------------------------------------------------------------------- Maxwell Osnowitz, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- It's Max on for Tom. I know you said that the payments business was pretty steady, but I just wanted to see if you could talk a little bit more about what you're seeing with like small businesses that may have more COVID exposure and if you're worried about churn rates ticking up as when the year-end comes closer. -------------------------------------------------------------------------------- Bret C. Griess, CSG Systems International, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. As we said that our payments business was impacted, but not to the level that we see so many others in the retail space that have as with some of the businesses that where we focus our energies and efforts around government, early child, daycare type activities and school programs. It's leveled off nicely now as we go, and it's heading back to the -- in the positive direction. Not to our long-term plans, but that's to be expected, and we'll get there soon. Brian, do you have more to share on that with your go-to-market and closer activities with the payments business? -------------------------------------------------------------------------------- Brian A. Shepherd, CSG Systems International, Inc. - Executive VP & Group President of CSG [4] -------------------------------------------------------------------------------- No, you hit it well, Bret. We've seen 1% to 2% sequential quarter-over-quarter growth. We like the transaction volume, but we just got to keep selling new and performing well and see the volumes come back. -------------------------------------------------------------------------------- Maxwell Osnowitz, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [5] -------------------------------------------------------------------------------- Great. And then just, I guess, talking again about the economy starting to come back in the cost structure not necessarily in payments, but just overall. Are there certain components of the variable spend that you think will come back sooner than others? -------------------------------------------------------------------------------- Bret C. Griess, CSG Systems International, Inc. - President, CEO & Director [6] -------------------------------------------------------------------------------- That broke up a little bit, Max, but I think what I heard you ask is about the more macroeconomy and if there are sectors or parts that would come back quicker. Is that -- was that the question? Or can you repeat it? -------------------------------------------------------------------------------- Maxwell Osnowitz, Stifel, Nicolaus & Company, Incorporated, Research Division - Research Analyst [7] -------------------------------------------------------------------------------- Yes, sorry. I just -- exactly in macro, just in terms of your cost structure, like the variable spending, if there are parts that you think will come back quicker as the economy does come back to recovery -- with recovery? -------------------------------------------------------------------------------- Bret C. Griess, CSG Systems International, Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- Yes. As the economy evolves, we do see variances that are happening with the health care crisis in addition to some of the financial challenges that are happening. As we said, we have an extremely strong cash flow quarter and raising that cash flow guidance because of the stability in the business, the incredibly stable business model that we do have and have built over the years with the long-term recurring revenue. We see things in the digital transformation world, where some of the huge major transformational things that maybe move to the right a bit. But still, as we discussed, our pipeline is as healthy and as large as it's been in my career at CSG. There are sectors that will continue to evolve as we move through that, as we said, a bit of the payments front there. We also see a lot of things whereas the pandemic has hit what it's led to is digital models win. It's just easier to go online with the separation in that process. So we continue to see activities on that front as we move forward. I hope that got your question. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- At this time, it appears there are no additional questions in the queue. -------------------------------------------------------------------------------- Bret C. Griess, CSG Systems International, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Well, thank you. We appreciate it, Cody, and everyone, for taking the time. Once again, we'd like to thank everyone for your time today and continuing to care about CSG. We're proud of our performance for the 3 -- first 3 quarters of the year. We're very optimistic about what the future holds. And this being my last call as CEO of CSG, I'd just like to, again, I always end these in a grateful fashion because I have been so grateful to the phenomenal customers that have allowed us to help them solve their toughest business problems, an incredible Board that it continues to evolve and provide helpful and valuable input to us as a leadership team and, of course, our employees, the employees that have just made CSG a wonderful place for me a blessing and an honor to get a lead because these employees continue to learn, grow, evolve and improve those individuals, all of which lifts CSG in the whole. So thank you for everybody for your time. We appreciate it. Have a great rest of your day. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- That does conclude today's conference. Thank you all for your participation. You may now disconnect.