CSG Systems International Inc (CSGS) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen.

Thank you so much for standing by.

Welcome to the CSG Systems second quarter earnings conference call.

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

Following the presentation the conference will be open for questions.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded today Tuesday the 24th of July, 2007.

I would now like to turn the conference over to Mr.

Roger Metz, Vice President of Investor Relations.

Please go ahead.

Thank you, Michael, and thanks to everyone on the call.

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

In particular, financial projections, our ability to meet our clients' needs through our products and services and performance 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 on our most recently filed 10-Q and 10-K.

Currently, the Company does not intend 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 website.

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 thanks to all of you for joining us today.

We are pleased to announce another quarter of strong financial results and to discuss some of the exciting things happening at CSG.

For the second quarter 2007, revenues were approximately $99.5 million, within the range of the financial guidance we gave you in April.

Our income from continuing operations was $0.37 per diluted share, also within the range of April's guidance.

In addition, we repurchased 1.8 million shares of CSG stock during the quarter for a total of $47 million, furthering the progress of our $350 million buyback program.

Randy will provide more detail on our financial results in a few minutes, but first, I would like to share a few highlights of the quarter with you.

We view our second quarter's financial performance as indicative of the continued strong acceptance of our solutions.

Our clients continue to turn to us as trusted and valued partner as they aim to strengthen customer relationships and roll out new products in this very competitive and ever-changing marketplace.

As our clients continue to increase penetration of voice-over IP services within their respective markets, CSG continues to provide the needed services to support this very important growth initiative with reliable, scalable solutions.

We were also very pleased to have recently announced some Workforce Express and printing mail contracts with existing customers, including portions of those clients that utilize our competitor's core billing engines.

We view this as a testament to the continued strength of our already proven product set and our ability to deliver relevant solutions to our clients.

We also completed the last significant migration of cable subscribers to our ACP platform in the second quarter and as a result, nearly 100% of our cable clients are enjoying the rich benefits of our ACP solution designed to help manage their bundled portfolio's of services.

Finally, as competition continues to be fierce in the converging communications space, CSG's focus on listening to our customers and supporting our needs and requirements continues to result in successful deployments of new solutions, such as care express kiosk and order work flow.

This quarter we announced the acquisition of ComTec, a New Jersey-based provider of statement processing solutions.

Print and mail has long been an important component of CSG's end-to-end suite of customer management tools.

This transaction builds upon our strategy of providing a wide array of solutions that maximize the value of our clients' interactions with their customers.

Through the addition of ComTec, enhanced production and electronic presentation hardware and software technologies, we broadened our statement processing suite.

ComTec's technology adds intensive highlight color functionality and customized statement printing capabilities that provide a personalized statement down to the household level.

Furthermore, we expanded our customer footprint into new verticals, such as telecom, home security, healthcare, financial services, and utilities.

As you can see, we are very committed to insuring our clients have the tools they need to make each and every interaction with their customers both meaningful and efficient.

We continue to look both internally and externally for opportunities to enhance our clients' customer interactions in innovative ways and look forward to reporting more on the evolution of this strategy in the future.

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

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

We are also excited about the innovative ways we are expanding our reach with new products and into new industry verticals.

Finally, I would like to extend a warm welcome to the ComTec employees who have joined CSG during the past quarter.

We are excited to have them on board as an integral part of our Company.

I would also like to thank all of our employees who continue to work hard each and every day to advance our own Company as well as our clients' businesses.

Thanks for your continued support of CSG.

Now I'll turn it over to Randy, who will review our second quarter financial results and provide updated financial guidance before we open up the call for your questions.

Randy?

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

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

Total revenues for the second quarter came in at $99.5 million, which is within the range of our guidance for the quarter.

This represents a 5% increase when compared to $95 million for the second quarter of 2006 and a 1% increase when compared to $98.7 million for the first quarter of 2007.

Looking at the components of total revenues, processing revenues for the second quarter were $90.3 million, up 3% when compared to $87.7 million for the same period last year, and up 1% when compared to $89.6 million for the first quarter of 2007.

Software maintenance and services revenues were $9.2 million for the current quarter, which compares to $7.3 million in the second quarter of 2006, and $9.1 million for the first quarter of 2007.

Comcast continued as our largest client comprising approximately 28% of the Company's total revenues for the second quarter, down slightly from the first quarter, as we expected.

EchoStar continued as our second largest client and represented approximately 21% of the Company's total revenues for the quarter, consistent with that of the first quarter.

We finished the second quarter with 45.1 million subscriber accounts on our processing system, down from 45.4 million subscribers at the end of the first quarter.

The decrease in subscribers is primarily due to the expected transition of the Verizon FiOS subscribers onto internal Verizon system during the quarter, and to a lesser degree, certain smaller subscriber deconversion led to the cleanup of some of the Adelphia subscriber matters between Time Warner and Comcast.

We expect our subscriber levels to trend up slightly over the remainder of the year.

The second quarter 2007 gross margin was approximately 50%, which is relatively consistent when compared to the prior year's quarterly gross margin of 51% and 49% for the first quarter of 2007.

The operating margin percentage for the second quarter was approximately 21%, consistent with that of the first quarter of 2007 and in line with our expectations for the quarter.

Our effective income tax rate was 36% for the second quarter, which was at the low end of our range of 36 to 38%.

Income from continuing operations for the second quarter was $15.6 million, or $0.37 per diluted share, which is within the range of our guidance for the quarter.

This compares to $0.33 per share for the same period last year and $0.35 per diluted share for the first quarter of 2007.

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

For the second quarter, stock-based compensation was $2.9 million.

Depreciation expense totaled $3 million, and amortization of intangible assets was $4.3 million.

These non-cash charges totaled $10.2 million, or approximately $0.15 per diluted share.

Turning to the balance sheet, as of June 30, cash and short-term investments totaled approximately $338 million, down approximately $29 million from the previous quarter.

Our net bill trade accounts receivable totaled approximately $103 million, which is consistent with the previous quarter.

The billed trade accounts receivable reflected days billed outstanding, or DBOs of approximately 61 days for the second quarter, consistent with our expectations and with the most recent previous quarters.

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

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

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

Cash flows from operations for the second quarter were $24.5 million.

This is lower than our guidance of 29 to $31 million, primarily as a result of unexpected changes in certain operating assets and liabilities at quarter-end.

Our cash flows from the core operation of the Company remain very strong and consistent with our most recent quarters.

We repurchased 1.8 million shares of the Company's stock under our stock repurchase program during the second quarter at a total price of approximately $47.5 million, or approximately $26.30 per share.

Through June 30, we have purchased approximately 6.4 million shares for approximately $165 million, or approximately $25.89 per share leaving approximately $185 million left on our $350 million buyback commitment.

We are making good progress on our buyback program, with nearly 50% of the plan repurchases completed within approximately 11 months of the announced commitment in August 2006.

As we have stated in previous quarters, since we are utilizing a 10-B-51 plan to facilitate the repurchase of our shares, the number of shares repurchased under stock repurchase plan is highly dependent upon various market factors to include our stock price, which can be difficult to predict.

As a result, the amount and the timing of share repurchases can vary significantly between quarters.

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

However, before I get into the numbers, I would like to note that these guidance estimates include the expected impact of our acquisition of ComTec on a GAAP basis, which closed during the first part of July.

We expect ComTec to add approximately 10 to $12 million of revenue for the remainder of the year and expect it to have a slightly dilutive impact to our results of operations on a GAAP basis.

The expected impact of ComTec includes estimates for certain acquisition-related expenses associated primarily with our planned integration efforts and estimates for the amortization of acquired intangible assets, as we have not yet completed our purchase accounting for the acquisition.

Because of the inherent in certainties of making such estimates for these types of matters, the actual impact of ComTec on our financial performance for 2007, may vary from our current expectations, as we work through our integration efforts and complete the purchase accounting during the remainder of the year.

We are providing these details around ComTec at this point to help you initially understand the expected financial impact to our business.

However, going forward, we do not intend to provide separate stand-alone information on the actual or expected performance of ComTec.

Now on to the numbers.

For the third quarter, we expect revenues to range between $105 million and $107 million and expect full year revenues to range between $412 million and $416 million.

We expect our operating margin for the third quarter and the remainder of the year to be approximately 20 to 21%, which represents an approximate 1 percentage point decrease in our operating margin when compared to our previous expectations with the decrease primarily attributed to the dilutive effect of the ComTec acquisition.

We expect our effective income tax rate for the third quarter and full year 2007 to range between 36 to 37%, a slight improvement from our previous expectations, as we continue to focus on ways to manage our effective income tax rate down.

We expect income from continuing operations for the third quarter range between $0.36 and $0.38 per diluted share, with full year expectations ranging between $1.46 and $1.50 per diluted share.

Absent any unexpected changes in certain operating assets and liabilities, we expect cash flows from operations for the third quarter will range between 30 and $32 million, and full year expectations ranging between 121 and $125 million.

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

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

Non-cash charges led to the depreciation and amortization expense and stock-based compensation for the third quarter are expected to be approximately $11.7 million, or $0.18 per diluted share.

And our expected to be approximately $42.7 million, or $0.66 per diluted share for the full year.

In summary, we had another solid quarter, as demonstrated by our strong financial performance, our acquisition of ComTec, and the continued progress we have made on our stock buyback program.

These are all indications that as a Company, CSG's very focused on creating value for both our customers and our investors.

We continue to look for new growth opportunities and look forward to reporting continued successes in the upcoming quarters.

I will now turn it over to the moderator for

All right.

Thank you, sir.

Ladies and gentlemen, at this time, we will begin the question- and-answer session.

(OPERATOR INSTRUCTIONS) Our first question comes from Liz Grausam with Goldman Sachs.

Please go ahead.

Thanks.

Just wanted to ask about your subscriber growth.

We've seen flat subs for almost the last year and a half.

I know it's bounced around for a number of, a number of individual reasons, but can you give us an outlook as to how you see your soap growth and then also your pricing moving forward and whether or not we should expect any more, any more changes from kind of one-time items?

I would say, Liz, this is Ed for the second half of the year, which is kind of as far out as we're going right now, I would expect it to be fairly stable.

As Randy mentioned, probably a slight uptick in subs.

So I don't expect any unusual items that would impact the pricing in the second half.

Okay, great.

And then really opportunity for growth obviously closed a small acquisition this quarter.

Can you help us understand from both your organic R&D initiatives and products you're building out and potentially some, some reactions you had early from customers on your initiatives, and then also from your M&A pipeline, what we should be looking for from the Company to add incremental growth and opportunities for your business.

Sure.

Liz, this is Peter.

On the first piece from the R&D investment, one of the things -- one of the components that we are consistently focused on investing on is to support the future needs of our clients as they roll out new products and services, and as a part of that, since they typically are paying us on a transaction basis for those services, you don't see the growth of those come into our revenue stream until there's significant volume of those services on.

And as we've seen, we've been investing in our business services to support that, as well as some of their other, their voice-over IP services and those build up over time.

And so we are seeing our clients push their products, their consumer products and their business products into the marketplace and we are supporting them on that, but it take as while before those revenues come in.

From an M&A perspective, similar to what we did with ComTec, you're going to see us look for capabilities and functionalities that will help us expand managing interactions and managing the touch points on behalf of our clients.

Whether it's in the electronic or paper print services or other types of touch points that may be out there, either electronic or physical, we're going to look to see if we can expand that because we know that in the coming years, that customer service and that touch point interaction management is going to become very instrumental in the competitive battles that are going on between the communication service providers, and we think that having these types of capabilities and helping our clients operationalize their customer service is going to be an important part of what they, they do and how we help them.

And so we're looking at companies like that, expect things to be more of similar size to what we've done with ComTec, and we think that there's some opportunities for us to do that in the coming quarters.

Thank you.

You're welcome.

All right.

Thank you.

Our next question comes from Ashwin Shirvaikar with Citigroup.

Please go ahead.

Hi.

Thanks for taking my question.

Ed, CSG stock has been sort of range-bound over the past year or so.

And as sort of a management team of a public company, I'm assuming you're not happy with that kind of performance.

Are you willing to be more aggressive with your buyback or take other actions to sort of have these stock performance get better?

Well, obviously, Ashwin, we would like to see the performance of the stock be better than it has been certainly in the recent couple of quarters, but we're very committed to the path that we're on with regard to the actions that we think we're taking, that will strengthen the Company's product line and strengthen the Company's performance over time, and that is, that is probably something that like I say, has not maybe shown as a real short-term uptick in the stock price, but that isn't a sole driver, even though we do care very much about that.

We want to do the right things for the business and for our clients and for the shareholders that will result in a stronger company over time.

Okay, and just one of the drivers obviously you look at operating margins and other driver operating cash, and any comments on any of the operating margins, anything you can do to sort of stabilize it here?

It's indicated down to three quarters in a row I think.

Actually this quarter it is consistent with the last couple, Ashwin.

It's been at 21%.

No, but expectations you guided them down, right?

They went down 20 to 21, but primarily because of the ComTec acquisition.

If you back out the 1 percentage point from that it's pretty consistent going forward as well.

I think in the past we've said that right now the last 12 to 18 months we've been in a very heavy R&D investment mode, which has put a lot of pressure on the operating margin.

I think if you look year-over-year, the R&D as a percentage of revenue is probably up almost 300 basis points.

So that's an indication of what the pressure has been of late, Ashwin.

I think we've said that our plan is hopefully by the end of the year we can level out the absolute dollars of R&D going into 2008 and then hopefully get a little bit of leverage on that as we grow the revenues.

You don't really see a next big slug of R&D, say, for example, to work with Comcast on their wireless initiative or something like that?

We don't at this time.

Our R&D investment spend is pretty heavy right now.

We have proven to be very good operators in the past if we see an opportunity, a revenue opportunity where an R&D investment is appropriate, we'll make the right business decision, but as of this time, we don't see another big influxion point in the R&D.

Okay, thank you.

All right.

Thank you.

Our next we comes from Tom Roderick with Thomas Weisel Partners.

Please go ahead.

Hi, guys, good afternoon.

Hi, Tom.

Just wanted to ask a little bit more on the print business here, given that the ComTec acquisition closes here and it certainly seems like there are some new opportunities outside of the classic, the classic cable business here.

Can you just talk about the importance of the print business going forward?

Will you look to opportunistically add additional companies that help fill out that portfolio, and what other verticals or industry segments do you view as having potential in the print segment?

I'll take this one, Tom.

This is Peter.

The print and mail business is, is what we believe one of multiple touch points that we believe are important to manage and so we look to add feature functionality to that and ComTec provides additional capabilities both from the electronics side and the platform they use for color and highlight capabilities, and so we think that's an important way for marketing and communicating through this statement to the end consumer on behalf of our clients.

We are looking across all venues to figure out how to manage interactions on behalf of our clients and so print is one piece of it and is not our primary way, but ComTec was an opportunity that presented itself to us that as we looked at the opportunities, we thought was important to pursue.

ComTec does support other verticals today.

They are, they do have a cable marketplace presence, but they are also in the utilities and the, the -- not financial services.

I'm sorry.

The security services business, and the -- within ComTec, we believe that there is going to be additional services that we can take to those markets that we have within our product suites and we'll be looking to see if they have addressability and capabilities in other markets.

So, Tom, when we look at acquisitions, we look at getting capabilities that are addressable to our existing clients, but also give us new markets that we can take our existing solutions to, to get some further expansion across the broader marketplace.

Thanks, Peter.

Maybe following up just one last question, on the print business itself, in listening to one of your competitor's conference calls earlier this week, there was some, or last week, there was some discussion about one of their customers bringing their print capabilities in-house.

Is that a trend that we should be concerned about in the cable industry, or is it, is the view on the cable segment to desire to push more and more in an outsource framework, much as they have done over the past several years.

Well, Tom in the U.S.

and the broader North American market, I believe all cable and DBS providers are outsourcing their statement services and so we have not seen any inclination of that being brought in-house.

There is a need for specialty equipment, capital investment, and specialty skills that would be needed to operate that, and it generally is best to be left to those that have scale and we haven't seen any inclination by any of our clients or anybody in the marketplace looking to in-source that versus out-source it.

Great.

That's helpful.

Thanks, Peter.

Thank you.

Ben Abramovitz with Icap Securities.

Please go ahead with your question.

Thanks, good evening, guys.

I have a question regarding the Comcast expansion into the SMB business.

I wonder if you could add color into where things stand between you and Comcast, some of the software you were doing.

Is there more revenue to come in the next, in the second half of the year from you preparing, or helping prepare Comcast for that business?

And then on the unexpected move in working capital at the end of the quarter, any type of clarification you could give around that would be helpful.

Thanks.

This is Ed.

Let me take the first part.

We're working with Comcast and actually quite a few of our clients with regard to preparing for commercial services product rollouts.

At this stage, I would not expect that there's any significant shifts that we would expect in the balance of this year, and it's still early days in terms of exactly how the services are going to roll out for that product.

As to the other question, I'll flip it over to Randy.

Yes, Ben, on the working capital change that you referenced there, there's nothing, there's nothing to be alarmed about that.

It's just some normal accruals or payables That occurred, right before, right after the quarter-end.

If you look at our press release, we go to -- we give you some detail in there to break it into two pieces.

We break it into the operations portion and then break it into the working capital portion.

If you at the operations portion the last several quarters, you'll see that we generally are very static at about 20 to $30 million and then we have over time had some unusual blips in the working capital at quarter-end just because of some timing, but if you look at the working capital over a long period of time, it basically neutralizes itself out.

A good example is if you look at 2006 cash flows, they were about $118 million, so they averaged about $30 million a quarter.

The first half of this year, they were about $60 million, so it's just a matter of timing.

I wouldn't look at it any more than that.

Okay.

So nothing permanent from a change in the business.

No.

Trying to pursue a new part of the business?

Absolutely not.

Just a matter of timing is the way I would position it.

Okay.

Thanks, guys.

Thank you.

Donna Jaegers with Janco Partners, please go ahead.

Hi, guys.

Most of the questions have been asked, but I was just curious, AMDOC's talked about maybe getting some traction with cable providers.

Are you seeing them getting any traction with your customers?

Hello, Donna, this is Ed.

As always, we don't speak on behalf of our customers or our competitors, but we're fully employed and quite busy, trying to keep up with the requirements that are coming at us each day, so I would just probably leave it at that.

Okay, thanks.

All right.

Thank you.

Scott Sutherland with Wedbush Morgan Securities, please go ahead.

Great, thank you.

Good afternoon.

I kind of want to follow up on the question of R&D.

Obviously you've increased your R&D spend and done some acquisitions to increase your capabilities and you mentioned earlier that you're going to flatten that out this year on a dollar basis.

With some of your competitors spending more dollars-- materially more dollars in their R&D spend than you guys, do you see you're doing it more efficiently or your vertical focus is more efficient or how do you think you can maintain the pace of incremental products to maintain the -- your products with competition?

I think the way I would look at it, Scott, is that we're probably more focused on our R&D efforts.

They are very much in response to client needs, client-driven needs, so they are very focused on specific tasks, so they are much more efficient in that manner, I believe.

Also I would say that 14% of our revenues is quite a significant amount, may not be in absolute dollars with some of our competitors because they are much larger, but I think that's probably bodes very well with the comparison of their investment in revenues as well.

Okay.

Now you have all the cable customers over to ACP.

Do you see any other drivers on a leverage basis or being able to improve the operations of the business when they are offering new products?

I would say that, yes, we would probably see efficiencies more in the area, Scott, of the roll out of the of the new products and as the efficiencies of those products come to bear and grow, because obviously the up front costs and the up front efforts to get them in place and get them operational and always at very low volumes in the beginning that will have a positive impact over time.

Okay.

Couple quick questions.

Last two quarters you haven't had any subscribers, you actually lost a few hundred thousand this last quarter.

Have the migrations of Adelphia been mostly on a regional basis that have led to these losses or are there other reasons?

No, it's the primarily the regionalization of Adelphia.

It is a lot of stuff that we anticipating happening but over the time of when this started about a year ago, we've come out pretty much neutral on the Adelphia subscribers moving around.

One last one for Randy, ComTec, is that going to impact more subscribers you'll add to the model or is it just need mor of a RPU uptick or kind of a combination?

No, actually, we've been saying this the last couple of quarters is that our RPU measure that we've given historically is losing some of its relevance as we change the business.

ComTec is one that will impact it.

You have more revenue coming into the calculation with no correlation of subscribers.

So we're probably going to move more away from the disclosure on RPU because it is less relevant.

You have other revenue streams that were starting to also target, that also do not have a correlation subscribers.

A good example is the business services, the billing metric around that has not yet been determined, but it's a good chance it could be access lines or some other measure other than a subscriber.

So ComTec is one that clearly is-- impacts the RPU, so, again, it's probably something that we're going to gravitate away over time.

Okay, great.

Thank you.

All right.

Thank you.

Shaul Eyal with CIBC World Markets, please go ahead with your question.

Thank you.

Hi, good afternoon, guys.

Just one quick question.

As you start thinking ahead into the next couple of years with respect to contract renewals with your larger customers, how do you see yourself positioning CSG this time on a product basis, on a pricing basis, what do you have in mind?

Well, first of all, we certainly would be very intent on providing highly competitive products and making sure that the product is meeting the needs of all the clients, but particularly those clients on the renewals horizon.

And I don't see it as a big shift requirement at this stage, although there will always be modifications to the way we package and deliver services, because that is a fairly typical process that we go through in the industry.

So I don't, I don't think that we find ourselves at a disadvantage with regard to product offering.

It's pretty hard to speak toward the pricing at this stage in time because it will also depend a great deal on what products are included and what services are included at the time.

Okay.

Thank you.

You're welcome.

Thank you.

Ladies and gentlemen, if there any additional questions at this time, please press the star followed by the one now.

Again, please remember, if you're listening via speaker equipment, you do need to lift the handset prior to making that selection.

We have a follow-up from Donna Jaegers.

Please go ahead.

Yes, I was just curious how you're going to report the contact numbers.

Are those going to fall in processing and related or software?

That will be in processing related.

Okay, and can you give us any idea on their margin levels?

I would think based on my guidance, you can see probably for '07 they are slightly dilutive, so -- but our expectation is we've identified some synergies that we hope to implement over time and hopefully into '08 we can start to bring their margins up closer to what CSG has experienced over time.

Okay.

Thanks.

Thanks, Donna.

Thank you.

There are no further questions at this time.

Please continue with any closing comments.

Well, thank you, all, for joining us today.

Thanks to our employees for their continued support and efforts and thanks to our shareholders for sticking with us for another successful quarter.

Talk to you soon.

All right.

Thank you.

Ladies and gentlemen, this does conclude the CSG System second quarter earnings conference call.

At this time, you may disconnect.

Thank you for using ACT conferencing.

Have a very pleasant rest of your day.