CSG Systems International Inc (CSGS) 2007 Q1 法說會逐字稿

Welcome to the CSG Systems Q1 earnings conference call.

During today's presentation, all parties will be a listen-only mode.

Following the presentation, the conference will be open for your questions.

(OPERATOR INSTRUCTIONS) This conference is being recorded today, Tuesday, April 24 of 2007.

I would now like to turn our conference over to Roger Metz, please go ahead.

Thank you, Rose.

Today's discussion will contain a number of forward-looking statements.

In particular, around any financial projections, our ability to meet our clients' needs through our products and services and performance, our ability to maintain good customer relations, and our ability to successfully integrate and manage acquired businesses or assets 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 actual results to vary.

In addition to factors noted during our presentation, these risk factors are discussed in more detail in our most recently filed 10-Q and 10-K.

Currently, the company has no intention to update this information during the quarter.

If you did not receive a copy of our press release, you can obtain a copy from our Web site.

Today we have with us Ed Nafus, Chief Executive Officer; Randy Wiese, Chief Financial Officer; and Peter Kalan, Executive Vice President.

Ed will begin.

Thank you, Roger, and greetings to all from snowy Denver, Colorado.

We are pleased to announce another quarter of strong financial results on CSG Systems.

For the first quarter 2007, revenues were approximately $99 million at the top end of the range of financial guidance we gave you in January.

Our income from continuing operations was $0.35 per diluted share, which reflected a $0.02 per diluted share benefit from a lower than expected tax rate and higher than expected share repurchases.

We repurchased 3 million shares of stock during the quarter for $75 million toward our announced $350 million buyback program which highlights our continuing commitment to returning capital back to our shareholders.

We believe that these results are indicative of our strong position in the marketplace and the value-added role we play in our clients businesses.

Randy will review these financial results in more detail, but first I'd like to start by sharing some highlights of our successful start to 2007.

In the past, we have told you that our growth would come from a combination of several items, including increased utilization of CSG's existing product set, sales of our newly developed products and services, and the evolution of our technology and expertise to expand our range of services and innovative ways.

While we expect to see further traction with these initiatives as the year progresses, some of these elements are already impacting our financial results in a positive way.

CSG benefits as our clients increase their use of our existing products and services.

Some of this growth naturally happens as our clients' businesses grow.

Certainly one of the best examples of this is the successful rollout by many cable operators of voice over IP.

Our customers are also seeing increased adoption rates, electronic billing and customer care technologies as evidenced by our recent announcement that we crossed the 5 million subscriber milestone with our Care Express product, additionally with a large client by Workforce Express during the quarter to use across large portions of its subscriber base that are on a non-CSG billing system.

As we approach full conversion of cable customer base to our next generation Advanced Convergent Platform, or ACP, we see customers increasing reliance on CSG to support various products and provide a higher quality customer experience.

For example, we announced earlier this month that Millennium Digital has expanded its use of ACP to include Care Express, as well as the processing of its high speed data subscribers.

A second growth driver for CSG the deployment of our newer products and service.

We continue to invest R&D dollars at an intensive pace, developing solutions aimed at helping our clients better manage their customer relationships and multiplace service offerings and prepare for their deployment of business services.

We are pleased with our progress and in fact are seeing good market traction with some of these new offerings.

We now have several clients trialing our kiosk product, which makes it very easy for consumers to manage their accounts and pay bills at walk-in locations.

We also signed a contract with one of our larger customers in the first quarter to implement our newly announced order work flow product, a guided order process for call center representatives that reduces call times and order fallout.

We also continue to see great interest in other product initiatives, such as our product catalog and business services platform.

We recently had the opportunity to share our latest offerings, as well as our product road map with our clients at our annual executive client conference and marketing summit.

Client participation and feedback were both excellent and we enjoyed the opportunity to strengthen our client relationships as well as validate that our road map is very much in line with what our clients need in an increasingly competitive environment.

We believe that there are additional growth opportunities for CSG as we evolve our technology and expertise to expand our range of services in innovative ways, both within our current clients as well as to a broader footprint.

As we continue to enhance our ACP platform, you'll be seeing an increased capability of many of our applications to overlay or integrate with third party billing systems.

This separation of products from our core billing engine provides more flexibility for our clients and overtime will allow us to reach a broader customer base.

A great example of this is the Workforce Express contract that I mentioned earlier.

In addition, we are pursuing ways to help our clients to better use the customer data that resides in our billing system.

Combined and analyzed with data from other sources, this customer intelligence is very complementary to our customer care and statement processing businesses and provides an edge for our clients as they face competition from new entrants in their markets.

We also believe there is room to grow our print and mail operations and the highly successful marketing services that are tied to it.

We will continue to deliver innovative services and solutions in this arena and also use it as a way to expand our customers and industry reach.

Finally, we are enhancing our offerings to more effectively support the new and varied ways that our customers are delivering content to consumers.

We expect these growth efforts to come from a combination of both internally-developed applications and through acquisitions and partnerships.

As we look to the remainder of 2007, we'll stay focused on delivering leading edge technology and functionality to our clients.

It's an exciting time to be a part of the video communications market and we are proud of the commitment we have demonstrated to our clients and our industry in support of their growth and evolution.

Thanks for your continued support of CSG and we look forward to delivering results to our client which will translate into continuing strong results for our investors.

With that, I will turn it over to Randy Wiese, our CFO, who will review our first quarter results and provide updated 2007 guidance.

Randy?

Thank you, Ed, and welcome to all of you on the call today.

I'm pleased to share with you today the financial results for our first quarter of 2007, as well as our outlook for the remainder of 2007.

Total revenues for the first quarter came in at the high end of our guidance at $98.7 million.

This represents a 6% increase when compared to $93 million for the first quarter of 2006 and a 2% increase when compared to $96.6 million for the fourth quarter of 2006.

Looking at the components of total revenues, processing revenues for the first quarter were $89.6 million, up 4% when compared to $86.4 million for the same period last year and up 3% when compared to $87.3 million for the fourth quarter of 2006.

Software maintenance and service revenues were $9.1 million for the current quarter, which compares to $6.6 million for the first quarter of 2006 and $9.3 million for the fourth quarter of 2006.

Comcast continued as our largest client, comprising approximately 29% of the company's total revenues for the first quarter, which is up from 26% for the fourth quarter of 2006.

This increase is primarily due to the movement of additional subscribers who are already on our system to Comcast's ownership in the first quarter and some other special project work we did for Comcast during the quarter.

We expect the percentage of total revenues to be generated from Comcast for 2007 to range between 26 to 28%.

EchoStar continued as our second largest client and represented approximately 21% of the company's total revenues for the quarter.

We finished the first quarter with 45.4 million subscriber accounts on our processing system, which is consistent with the end of 2006.

Average annualized revenue per subscriber, or ARPU, for the first quarter was $7.90.

This compares to the fourth quarter 2006 ARPU of $7.72.

The sequential quarterly increase in ARPU relates primarily to a general increase in several revenue components, as was expected for the quarter.

Gross margin for the first quarter was approximately 49%, consistent with both the prior year's gross margin and the fourth quarter of 2006.

The operating margin percentage for the first quarter was approximately 21%, consistent with that of the fourth quarter of 2006 and in-line with our expectations for the quarter.

Our effective income tax rate was 35% for the first quarter, which was better than our previous expectation of 37 to 39%, with a lower tax rate primarily a result of the timing of the recognition of certain income tax benefits for the year.

In our original guidance, we expected certain 2007 income tax benefits to be reflected ratably across 2007.

However, after further analysis of this matter, under current accounting rules adopted in the first quarter, these benefits need to be reflected in their entirety in the first quarter income tax rate rather than spread across the year.

The quarterly timing differences related to this accounting for these income tax benefits will have no impact to our overall tax rate for 2007, but the lower income tax rate related to this matter for the quarter did positively impact our first quarter EPS results by approximately $0.01 per diluted share when compared to our guidance.

Income from continuing operations for the first quarter of 2007 was $15.8 million, or $0.35 per diluted share, which compares to $0.33 per diluted share for the same period last year, and $0.30 per diluted share for the fourth quarter of 2006.

The financial results for CSG include several non-cash items.

For the first quarter, stock-based compensation was $2 million, depreciation expense was $2.9 million, and amortization of intangible assets was $4.2 million.

These non-cash charges totalled $9.1 million, or approximately $0.13 per diluted share.

Turning to the balance sheet, as of March 31, cash and short-term investments totaled approximately $368 million, down approximately $48 million from the end of the year.

Our net billed trade accounts receivable totalled approximately $103 million, which is down approximately $7 million from the previous quarter.

The billed trade accounts receivable reflected days billed outstanding, or DBOs, of approximately 63 days for the first quarter, which is within our target range of 55 to 65 days.

As of the end of the first quarter, the company had $230 million in contingent convertible debt outstanding, which matures in the year 2024.

Holders of these securities can convert at any time after CSG's common stock trades at a price in excess of $34.80 for a scheduled period of time.

The first scheduled put or call option for redemption of securities is in 2011.

Cash flows from operations for the first quarter were $35.7 million.

This is higher than our guidance of 20 to $22 million, primarily as a result of unanticipated working capital benefits in the quarter, primarily as a result of the timing of a $10 million monthly invoice payment from a key client coming in before quarter end.

During the first quarter, we repurchased 3 million shares of the company's stock under the stock repurchase program at a total price of approximately $75 million or approximately $25.11 per share.

This amount exceeded our previously communicated assumption used in our EPS guidance for the quarter, but the lower corresponding outstanding shares for the quarter resulting in a $0.01 per diluted share benefit for the quarter when compared to our guidance.

As we have stated in previous quarters, since we are utilizing a 10B51 plan to facilitate the repurchase of our share, the number of shares repurchased under our stock repurchase plans are highly dependent upon various market factors that include our stock price, which can be very difficult to predict.

As a result, the amount and the timing of the share repurchases can vary significantly between quarters and from our projected quarterly buyback levels.

Through March 31, we have purchased approximately 4.6 million shares for approximately $118 million, or $25.73 per share, leaving approximately $232 million left on our $350 million buyback commitment..

The time to complete this buyback cannot be reasonably estimated due to the various market factors that impact the pace at which we buy back our shares.

In summary, our income from continuing operations came in at $0.35 per diluted share for the quarter, which exceeded the high end of our guidance, primarily as a result of the better than expected income tax rate for the quarter and the impact of lower outstanding shares for the quarter due to higher than expected stock repurchases for the quarter, both of which I'd mentioned earlier in my comments.

On a combined basis, these two items provided a positive benefit of approximately $0.02 per diluted share for the first quarter when compared to our guidance.

Absent the impact of these two items, we would have accomplished the midpoint of our $0.32 to $0.34 per dilutive share guidance for the quarter.

Next I would like to provide you with an overview of our financial expectations for the second quarter and the full year 2007.

For the second quarter, we expect revenues will range between $99 million to $101 million and expect full-year revenues to range between $400 million and $406 million.

Expect our operating margin for the second quarter to be approximately 21%, which is consistent with that of the first quarter.

We expect our full-year operating margin to be approximately 21 to 22%, which represents a slight compression in our operating margin when compared to our previous expectations.

We now expect certain development efforts and product infrastructure buildout projects to take a bit longer and require slightly greater resources to complete when compared to our previous full-year expectation.

These operating margin levels are reflective of our commitment to expand our R&D and support function expenses in order to address the opportunities we see with our customers' changing business needs.

We expect our effective income tax rate for the second quarter and full-year 2007 to range between 36 to 38%, which is lower than our previous expectation of 37 to 39% for the year.

With a slight improvement related to our estimated R&D income tax credits for the year coming in slightly better than our previous expectations.

We expect income from continuing operations for the second quarter will range between $0.35 and $0.37 per diluted share, with full-year expectations ranging between $1.46 and $1.52 per diluted share.

Our quarterly and full-year earnings per diluted share estimates are highly dependent on our outstanding diluted share amounts.

At this time, our earnings per share guidance assumes that we will repurchase approximately 6 million shares of our common stock under our stock repurchase program ratably during the remaining three quarters of 2007.

However, as we have stated over and over, the actual amounts and the timing of such repurchases are highly dependent upon various market factors, and as a result the amount and the timing of share repurchases can vary significantly between quarters or from this nine-month assumption.

Absent any unexpected, unusual fluctuations in our working capital items, we expect cash flows from operations for the second quarter will range between 29 and $31 million, and full-year expectations ranging between 125 and $131 million.

We expect capital expenditures will range between 15 and $18 million for the full year.

Our 2007 capital expenditures consist principally of hardware and software infrastructure to support our clients' expanding business needs, and our statement production equipment to continue to offer enhanced functionalities to our clients this area.

Non-cash charges related to depreciation and amortization expense and stock-based compensation for the second quarter are expected to be approximately $10.4 million or $0.16 per diluted share, and are expected to be approximately $42.3 million or $0.64 per diluted share for the full-year 2007.

In closing, we had another strong performance this quarter and made significant progress in our effort to return $350 million of cash to our shareholders through our stock repurchase program.

We believe that we have well positioned ourselves to strengthen and grow our business and support our clients as they expand their business.

We look forward to the continued strong performance in future quarters.

I will now turn it over to the moderator for questions.

Thank you.

(OPERATOR INSTRUCTIONS) Our first question comes from Marianne Wolk from Susquehanna.

Please go ahead.

Thanks, I wanted to ask you a few questions about your Workforce Express win.

Is this a customer that does use you for some billing services, or is this a customer that currently relies on in-house billing solutions or outsourced billing from another vendor?

And generally, I'm wondering, if a customer -- is it easier to sell solutions like this to a customer that has in-house solutions rather than outsourced?

If the customer we're talking about uses our billing services as well as those as a competitor and the workforce solution will overlay both systems when we've completed the installation.

In terms of the relative ease of sales, it probably depends more on the account situation than it does in terms of the -- I'm sure the sales guys would have their opinions on that, but in general the big hurdle is to get to a point where the product is usable over other billing systems, which is certainly the direction that we've taken.

Thanks very much.

Thank you.

Thank you.

Our next question comes from Tom Roderick from Thomas Weisel.

Hey, guys good afternoon.

Ed and Randy, can you guys address a little bit, certainly looks like you're looking to invest even more in the platform then had been previously thought, what the areas of investment where you're looking to add that and as you reflect back on the Tolution acquisition, how much of a role are those assets and those personnel playing in the development of some of the new services that you're looking at?

Thanks.

I think the projects are very consistent, what we've said in the past; it's the continued evolution of our ACP product and primarily the business services platform that we've been working on and some other development areas, such as the product catalog and order work flow.

So the projects are very consistent with what we've been talking about.

The slight compression in the margin is really just as a result -- as we begin to progress through these project, they're quite large and quite complex, as you start to get the requirements from the client and understand what the needs are to support their business, you can start to get a sense as to the complexity and the extent of the projects.

We thought it would be prudent to maybe somehow some slight compression in our margin just because of the inherent risk in project of this nature.

I think we can complete them within this range, it wouldn't surprise me if we came down to the lower end of the range in the 21 to 22% just because of the nature of the project.

We're progressing along very well, but more work to be done.

This is Ed.

The work really in terms of the Tolution and the really traditional CSG Group is really very much a joint effort and I think both groups are contributing greatly to the progress, but we're pleased with certainly the addition of the Tolution assets and talent.

Good.

Randy, can you briefly address, in a little bit more detail, what the prepayment that drove the cash flow from ops number higher this quarter?

Sounded like there was a $10 million prepayment.

That wasn't associated with any of the new larger sales, like the Workforce Express deal, was it?

That was an existing customer, just prepaying a standard monthly amount?

Tom, I wouldn't view it as a prepayment.

It was the client actually paying somewhat on time.

They typically paid a few days late, so they actually paid on time.

It wasn't really a prepayment, it was a timely payment and just a monthly invoicing payment.

There was no specific software license fees attached to it.

Okay, very good.

Thank you.

Our next question comes from Ashwin Shirvaikar from Citigroup.

Hi.

Congratulations on the quarter.

The question is, your accrual earnings are up modestly due to the buyback, but cash flow from operations guidance is up quite a bit, so can you go through your working capital assumptions and talk about the sustainability of this kind of difference?

Yes, Ashwin, the previous question kind of touched on your question, which is the $36 million of cash flow for the quarter was somewhat unusual with respect to we had one client, a large client, that made four monthly processing invoice payments during the quarter, so it's somewhat inflated by approximately $10 million for the quarter --

But you did not bring down your expectation for2Q?

The Q2 is at $0.29 to $0.31, so that assumes somewhat flat changes in our working capital, because our operations generates approximately 25 to $28 million of cash flow.

Okay, got it.

Thanks.

Our next question comes from Donna Jaegers.

Two quick questions.

One for Randy.

You mentioned during the comments how much you had left in the buyback program.

Can you repeat that number for me?

Yes.

I said we spent about $118 million so far, so there's about $232 million left.

Great, thanks.

I was just curious, on the direct marketing efforts that you typically have, as far as the direct mail effort, how was the -- how did that do in the quarter and what's your outlook for the second quarter on that in.

I think it was very much in-line with our expectations and we would expect similar types of revenues in future quarters as well.

Okay.

Thanks, Randy.

Thank you.

Our next question comes from Ben Abramovitz from ICAP.

Hi guys.

Two quick questions.

I guess one is on the R&D spend you're doing now, is that for contracts you expect to be in place, now products you're hoping that will role out, or basically some of your clients have directed you to these types of projects that they figure you'll get revenue at some point, either late '07 and into '08?

This is very consistent with our past discussions on our R&D.

Our R&D is very client directed based upon feedback directly from our client.

They're actively involved in our product road map and provide great input into our product road map.

These are products that we are anticipating rolling out to the benefit of our clients.

Would you consider this like a lower-risk type of R&D spend?

Ben, this is Peter.

It is lower risk because we see what the market needs are, but our clients still have to perform and deliver their products and services for us to get paid based on the incremental per transaction or per account basis and so it is not that it is funded R&D, but it is R&D that has been directed and it is in-line with what our clients' business operations are, but both parties still have to perform for it to be economically advantageous for us.

Okay.

Then just very quickly, I know the Verizon FIOS customers were supposed to migrate off the platform in Q1.

Is that complete as of the end of Q1?

They were still on our system as of March 31, but they'll be coming off in April.

Okay, roughly -- okay, I could look it up.

Thanks, guys.

Thank you.

Our next question comes from Scott Sutherland from Wedbush Morgan Securities.

Thank you and good afternoon.

A couple questions here.

One, what was the total number on cable subs on ACP platform and when is that expected to be completed?

We disclosed in our press release 90% of our cable customers have now been converted.

Okay, when do you expect that migration to be complete at this point?

I think what we'd expect -- there are quite a few number of subscribers that are being converted in the second quarter, but we would expect to be fully completed by the end of 2007.

Okay.

Can you kind of highlight what you're seeing in the competitive environment?

Have there been any changes there?

There's been some acquisitions over the last few quarters of some other billing companies, have you seen any changes from them?

Not really anything that we would note at this point.

Okay.

Last question is, you're buying back another 6 million shares, so what share count is your guidance based on for the year?

Well, you should be able to give the math on this.

We don't give share guidance, we just give the number of expected share repurchases.

Already done that, seeing if you guys had a different assumption there.

No.

Great, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) We have no further audio questions.

I'd now like to turn our call back to management for concluding comments.

Thank you very much for your support and we look forward to talking to you again in three months.

Thank you.

Ladies and gentlemen, this does conclude this CSG Systems Q1 earnings conference call.

You may now disconnect.

Thank you for your participation, and please have a pleasant day.