CSG Systems International Inc (CSGS) 2008 Q2 法說會逐字稿

Welcome to the CSG Systems second quarter earnings conference call.

(OPERATOR INSTRUCTIONS) This conference is being recorded, today, Tuesday, July 22, 2008.

At this time, I'd like to turn the conference over to Mr.

Roger Metz.

Please go ahead, sir.

Thank you.

Thanks to everyone on the call for joining us.

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

In particular.

these will include statements regarding our projected financial results, our ability to meet our clients' 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 presentation, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new information 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 in our most recently filed 10-K and 10-Q which are all available in the investor relation section of our website.

With me today on the phone are Peter Kalan, Chief Executive Officer, and Randy Wiese, Chief Financial Officer.

Peter will begin.

Thank you, Roger.

Thanks to all of you for joining us today.

CSG continued to execute in the second quarter, posting strong revenues of $117 million and net income of $0.40 per share.

We also generated very strong cash flows, delivered new products and services, and most importantly achieved great successes with our clients.

Randy will share more detail on our financial performance after I conclude.

As we reach the midway point of 2008, I think it's important to reflect on CSG's successes during the first half of the year and where we are headed going forward.

On last quarter's conference call, we talked about the strong start to the year with solid financial performance coupled with customer wins such as the six-year media com renewal through 2014 which included the deployment of several additional products.

We also talked about our successes with interactive messaging, statement services, applications for customer service agents, and new solutions for managing digital content sales and service.

Following on the first quarter, we've stayed on a similar track of success again with solid financial results and noteworthy client wins.

Of course, the most visible of these was the Comcast renewal that we told you about last week.

We are very pleased to have this contract extension completed as we continue to deliver key services to Comcast while also providing our investors with increased visibility into the revenues of the company through the end of 2012.

In the second quarter we signed a new client in Brinks Home Security services to provide 670,000 monthly customer statements and letters.

This new client relationship coupled with ADT, another home security service provider that is also our client, provides CSG with a strong footprint in the home security market.

Also during the quarter, we continued to make progress on delivering many of our solutions in modular components so we can meet our clients' needs for applications and solutions in a variety of ways.

Along with our work force management application, interactive messaging services, and statement and marketing services, we are also componitizing our ACP solution to offer capabilities such as our product catalog and stand alone applications that can be used in conjunction with other vendors' products.

Going forward, we are focused on continuing to grow our revenues and profits while diversifying our revenue concentration in the markets we serve.

Our business proposition is to help our clients maximize the value of their customers through optimizing the interactions they have with their customers.

This is important to our clients as they are in extremely competitive marketplaces which requires the highest level of customer service along with the ability to roll out new services for purchase.

Through our offerings we help our clients build, engage, and transact with their customers.

Breadth of our solutions, which are integrated to provide management of customer interactions across the many customer touch points is a unique offering in the marketplace and sets CSG apart from our competition.

To grow, we have been expanding our capabilities through our investment in research and development and also through acquisitions.

We've seen our investment in products create and enhance solutions that have been helping our clients deliver new services to their customers, increasing the value of these relationships.

As an example, we have recently seen our clients eclipse 6 million customers for voice services on our system which translates to a penetration rate of approximately 20% of the cable subscribers we support.

This growth has principally been accomplished in approximately 30 months since our clients started aggressively marketing their digital voice services.

This has a testament to CSG's ability to evolve, adapt, and grow alongside our customers.

As our clients continue to evolve their businesses and provide new services, we will be a part of this.

We are providing solutions that improve our clients operational efficiencies and also improve the level of customer service delivered to the end consumer.

Products such as order work flow and Work Force Express are changing the way that our clients conduct their operations.

From a marketing and communication perspective, we are increasing our capabilities to provide enhanced communications to our clients' customers.

Through enhanced marketing services and the roll out of full color printing, we are providing capabilities that improve the messages that our clients convey, enhancing understanding and awareness by the consumer.

We will continue to add to our capabilities across the spectrum of build, engage, and transact.

We believe that there are opportunities to help our clients to continue to shift interactions with their customers to more cost efficient platforms while also enhancing the delivery of customer sales and service.

We are looking to expand upon our already strong position of web interactions where today we support 7 million consumers or a scale of interactive messaging where today we average over 23 million messages a month.

We are focused on bringing to market expanded E-commerce applications, new marketing capabilities and solutions that provide alternatives to customer service agents.

The breadth of our offerings has built a strong market position in cable and satellite and this is still an important market to us.

While growing our capabilities and relationships with the cable and satellite clients, we are also focused on developing additional vertical markets that generate strong growth and revenue diversification.

We are looking to grow in vertical markets that have high numbers of customers, large volumes of customer interactions and where the service offerings are becoming more complex.

One year ago virtually all our revenues were derived from cable and satellite operators in North America.

As of June 30, 2008, approximately 12% of our revenues are derived from markets other than cable and satellite, and we will continue to increase our diversification by building upon the relationships and capabilities we have in new markets.

Many of the solutions that support our cable and satellite clients, as well as the solutions we've acquired over the past 12 months, have cross vertical applicability that we will continue to exploit by bundling and selling solutions into these new verticals.

We have modular applications and services that can be used by clients to support specific business needs working in conjunction with other vendors' applications.

And since our applications are integrated with our other CSG capabilities, we can also provide a wider scope of products and services to support our clients' businesses.

We are building presence in utilities in municipals, telcos, financial institutions and home security services.

We have started to cross sell our capabilities into these new markets and believe that through enhancement in products and acquisitions of new capabilities, we will see momentum build in these new markets and believe that through enhancement in products and acquisitions of new capabilities, we will see momentum build in these new markets.

The expansion of marketing and statement services, E-commerce capabilities, interactive messaging, and self care will provide a suite of capabilities that we believe will be valuable to clients and prospects as they run their businesses.

Today's marketplace is more competitive than ever and as consumers have increased choices in where to purchase their services, great customer service has become a requirement.

CSG's clients are able to engage with their customers more intelligently.

Every communication and interaction with the customer is an information exchange providing additional insight that our clients use to enhance each subsequent customer experience.

Going forward, we will continue to deliver innovative ways to enable our clients to build strong customer relationships, provide compelling products and services and allow them to more effectively engage with and transact with their customers.

At CSG we strive to make customer service not just a requirement but a competitive advantage for our clients.

In summary, we're pleased with the continued strength of our operations, our progress in integrating and growing our required businesses, and the continued confidence that both long-term and new clients have placed in CSG.

We have great employees, strong relationships with our clients and a very solid financial profile all of which provide a strong foundation for us to continue delivering solutions that help our clients build their businesses one customer interaction at a time with outstanding applications and solutions that help them build, engage, and transact with their customers.

We look forward to carrying the momentum from the first half of the year through the second half into 2009 and beyond to the benefit of our clients and shareholders alike.

With that, I'll turn it over to Randy to walk through our financial performance and outlook.

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

I'm happy to financial results for second quarter 2008 as well as our outlook for the remainder of the year.

Total revenues for the second quarter were $116.9 million.

This represents an increase of 17% when compared to $99.5 million of revenues for the same period in 2007 and an increase of 3% when compared to $113.6 million reported for first quarter of 2008.

The increase in year-over-year revenues relates to the additional revenues generated from the businesses we have acquired over the past 12 months with the remaining portion of the increase related to organic growth factors.

A sequential quarterly increase relates primarily to our most acquisition of DataProse which was completed on April 30, 2008.

We finished the quarter with 45.4 million subscriber accounts on our processing systems which was relatively consistent with the previous quarter.

Comcast continued as our largest client comprising approximately 27% of our total revenues for quarter, relatively consistent when compared to the first quarter.

DISH Network continued as our second largest client and represented approximately 18% of our total revenues for quarter, a slight decrease when compared to 19% for the first quarter.

Net income for the quarter was $13.3 million or $0.40 per diluted share.

This compares to $0.37 per share for the same period last year and $0.45 per share for the first quarter of 2008.

Earnings per share grew 8% year-over-year results from the lower number of outstanding shares in the second quarter of 2008 following the completion of our stock repurchase program in late 2007.

The operating margin percentage for the second quarter came in at approximately 19%, unexpected decrease when compared to approximately 20% for the first quarter.

As you may recall, we anticipated that our operating margin percentage would trend down over the remainder of 2008 as we continue to commit dollars to further invest in products and solutions through enhanced R&D and other support efforts and the impact of the DataProse acquisition.

Our effective income tax rate for the second quarter was 37%, up from 36% in the first quarter due primarily to timing matters.

The financial results for CSG includes several non-cash charges related to depreciation, amortization, and stock-based compensation.

These non-cash charges for the second quarter totaled $12 million or approximately $0.24 per diluted share impact.

Turning to the balance sheet.

As of June 30, cash and short-term investments totaled $148 million, relatively consistent when compared to March 31 balance of $147 million.

Our net billed trade accounts receivable totaled approximately $106 million, down approximately $19 million from the previous quarter.

This decrease is primarily due to a client's delayed first quarter payment of $10 million that was not received until the first week of April.

This resulted in the payment of four monthly invoices by this client during the second quarter.

The remainder of the decrease for the quarter can be attributed to normal fluctuations in the timing of client payments at quarter end.

Cash flows from operations for second quarter were approximately $47 million, an increase of approximately $26 million over the first quarter.

The second quarter cash flows were positively impacted by the decrease in accounts receivables that I just mentioned and other favorable changes in working capital.

Our cash flows from operations continue to be very strong.

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

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

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

We did not purchase -- repurchase any shares through our stock repurchase program during the second quarter of 2008.

Next, I'd like to provide you with an update to our financial expectations for the full year 2008.

Overall, our expectations are consistent with or slightly better than our previous guidance.

Revenues are expected to range between $470 and $475 million, which represents a tightening of the lower end of the range as we are now halfway through the year and have greater visibility into the numbers.

This guidance represents an increase in revenue of 12% to 13% for 2008 when compared to 2007.

We expect our earnings for 2008 to range between $1.58 and $1.64 per diluted share.

This represents a slight increase from our previous EPS guidance with the increase related primarily to a slight improvement in our expected full-year results of operations.

This guidance reflects an operating margin expectation of approximately 18% for the full year of 2008 which is consistent with our previous expectations.

We expect our full year effective income tax rate to range between 35% to 36% which is also consistent with our previous expectations.

We expect cash flows from operations to range between $115 and $120 million, which are unchanged from our previous guidance.

This assumes there is no significant net impact related to unexpected fluctuations in working capital items for the year.

At this time we expect our call tall expenditures to be $20 to $25 million which is consistent with previous expectations.

We expect the total of our non-cash items depreciation, amortization, and stock-based compensation to be approximately $45 million.

With the completion of our stock buyback program in late 2007, we no longer have a 10(b)51 plan in place.

As a result, as we have done in the past under similar circumstances, we do not assume any stock repurchases in our guidance.

We will continue to evaluate the best use of our capital throughout 2008 which may or may not include additional share repurchases.

In summary, we had another strong quarter.

Our business continues to operate solidly and we are committed to growing the revenues and profits of our company expanding on our customer relationships and delivering a long-term shareholder value.

We are excited about the overall opportunities we see for the business and look forward to reporting on continued success in the future.

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

Thank you, sir.

(OPERATOR INSTRUCTIONS) The first question comes from the line of Ashwin Shirvaikar with Citigroup.

Please go ahead.

Thank you.

Hey, guys.

Congratulations, nice quarter.

Thank you.

My first question is you mentioned you're spending R&D dollars on modularization componetization, things like that.

Is that in response to a specific client request?

No, Ashwin.

It is not a specific request of a client.

It is as we watched our clients evolve their business and has how we think also the best way to build products, we're trying to be responsive to both aspects.

We believe long term that by componetizing we can build more flexibility into our own operations and into our own development methodologies as well as we believe it can broaden the market in which we can sell our products.

Okay.

As I like forward to the back half of this year and into 2009, given that you've signed Comcast and hopefully you'll sign DISH.

After that should I expect because you don't have any major contracts coming up for a couple of years, should I expect the SG&A dollars to taper off?

Should I see any particular trend in that or in R&D?

Ashwin, with respect to SG&A I think over the last several quarters it's been in the 11% or so of revenues.

I wouldn't expect any significant change in a that going forward.

With respect to R&D, you saw it jump up a little bit as a percentage of revenue.

I think it's about 14.6% of revenues for quarter compared to about 14% for the first quarter.

I think in the near term you should expect it to stay in that general range.

Lower range or higher range?

The range of 14 to 14.6 is probably a good range to look at in the near term.

And last question.

You had signed this Brink's home security contract.

That is an interesting client on the print mail side.

As you grow that part of your business that's not related to cable, generally speaking, what's the margin and cash flow profile of those clients?

Is there sort of a conversion of those clients or just take on a contract?

How does it work?

Randy and I will tag team this.

One is as we bring in new clients such as Brinks.

They're building upon existing products that we have as well as in these relationships we'll be looking to cross sell and bring additional products to them on top of what we additionally sell as the initial contract.

From a margin perspective, I think Randy it's safe to say they're all fairly comparable?

I would say that is a fair statement, Peter, yes.

So you shouldn't see necessarily a change in our margin profile based on these incremental sells.

Comparable to your core business?

Correct.

And cash flow profile?

Yes, the same.

So you're not making a big investment to get these clients?

Not at all, Ashwin.

As Peter alluded to, a lot of the product sets are already in place.

We're utilizing products that we have and, therefore, there's no significant investment up front.

That should be a good return on capital?

Yes.

Exactly.

Got it.

Thank you.

Thank you.

Our next question comes from the line of Karl Keirstead with Kaufman Bros.

Please go ahead.

Good afternoon.

Unless I missed it, you usually provide an organic growth rate number or at least a range for the quarter.

Could your just repeat what that was for the second quarter?

Karl, this is Randy.

I know you ask this question every time.

I never give the number but I always give you some information to kind of get there.

If you look back at some of the numbers that we've disclosed for these acquired businesses, I think what you'll get to is the fact that we probably came towards the middle of the range of the 4% to 6% organic growth rate that I talk about.

So we were able to achieve that again this quarter.

Okay, great.

And one second quarter, it's not a significant point, but your software maintenance revenue line dipped to the $7.5 million range.

Has not been there since early '06.

Can your just explain what might have happened in the quarter?

There's two things.

One, if you recall from the first quarter it was a very strong quarter for software.

We had software sales in the first quarter that we did not anticipate recurring in the second quarter.

And also we had some large professional services projects that we completed and recognized the revenue in the first quarter that we did not have comparable type of revenues in the second quarter.

I think if you look at the margins, Karl, the margin in the first quarter was very high.

It was about 45% on the software and services line.

And I think if you look at the second quarter it was more like 37% which is kind of in line with Q3 and Q4 of last year.

Got it.

Thank you very much.

Thank you.

Our next question comes from the line of Scott Sutherland Wedbush Morgan Securities.

Please go ahead.

Great, thank you, good afternoon.

Good afternoon, Scott.

Just a couple questions.

Following up on the organic growth, can you talk about DataProse?

Is that coming in line with expectations for the quarter or better or worse?

DataProse is in line with our expectations for quarter.

A couple of longer questions.

Talking about these new products, the voice bill printing and presentation and these other verticals as well as the interactive messaging and work flow management.

Are you seeing any better traction, worse traction in those.

Which ones are your most optimistic about?

I guess you have to look at where we are in the different markets, Scott.

We've had very good success in the cable and satellite market where we've had broader relationships to begin with, and so we've seen good strength in interactive messaging.

Our voice services, of course, have been very strong in this face.

We've seen expansion on our E-care that's been by the sheer numbers that I talked about in my opening comments.

Very strong.

As we go into new markets, we're seeing the initial strength is around our presentment services as well as our messaging and we're looking at how do we bring other capabilities and cross sell and cross market these products together to bring a multifaceted solution set to our clients.

Okay, and my last question you made an interesting comment on ASP.

You're looking to modularize that platform to tie into other people's platforms.

What drove this decision and do you see you guys as more of a core platform?

Are you going to be focused on selling the suite or do you see a lot more opportunities on add on modules to other platforms?

Well, we've been going down the modularization and componetization path for some time.

We started it years ago with our Workforce product where for the longest time it was solely within our only our own ACP clients.

We found that we could take that asset and go to other billing platforms and integrate it and we've done that and have other clients who aren't traditional core CSG clients using Workforce.

And as we did the [Tilution] acquisition back in 2006, we saw that we would be bringing in their capabilities and we brought that in and looked to integrate that in a more modular component.

So this is something that's not been new.

It's really kind of in a strategic direction to say we wanted to continue to change the way the products are architected which allowed us to change how, one, we deliver products in our full suite but also make it available to other clients on an individual product or application basis.

We still think there's great value in the suite.

The best of suite is a very strong, compelling answer in the marketplace, but you can't always win every opportunity in a full best of suite and you have to go in with other products to lead.

We're doing that with Workforce.

We're doing that with presentment services and in the cases of either product catalog or other componetizations of ACP we'll be looking to do that as well.

One thing to that, Peter, is that increased inter-operability between other systems is one benefit of modularizness.

The other is that it has made us more agile in the ability to make system changes as well, so the modularization has benefits within the best of suite.

Great, thanks a lot.

Thank you.

Our next question comes from the line of Peter Jacobson with Brean Murray.

Please go ahead.

Thanks.

First on the outlook for 2009 revenue growth and operating margins that you provided on the last call.

Do those numbers still apply and, if so, does the growth rate apply against the higher guidance base for 2008?

Yes, Peter, this is Randy.

The targeted growth rate as I gave you last week for revenue and operating margin still apply this week.

No changes as of today.

And you could use the range, the high-low range and I think they're still okay.

Against the higher base?

That would be okay.

Okay, great.

And can you explain just at a summary level what goes into the amortization of intangible assets line item?

How much of that is associated with DataProse?

And how do you expect that to trend going forward?

Typically, we don't break it down the the specific dollar amounts.

I can tell you the components.

One component is the amortization of client investment contracts which comes through as a contra revenue item but we still report it as an amortization item.

The second is the amortization that has come from the acquisitions, the Tilution, [Comtec], and DataProse.

And from a trending standpoint, I think for if you look at our most recent press release, you can see the amount for the second quarter.

And I wouldn't see that trending anything significantly different over the next 12 to 18 months.

Okay.

So the increase versus last quarter is, I would assume most of that is associated with DataProse?

Right.

What should see is a downward pressure point for Comcast amortization.

If you remember from last week, I mentioned that we were going to spread that out over the life of the contract.

That will go down; however, that's been offset by an increase likely from DataProse and some other acquisitions.

The trend going forward from Q2 is probably pretty good.

Okay, great.

And then finally, are there any updates regarding the status of DISH Network?

Peter, none beyond what we said last week?

We still believe we are in position to get some type of extension and renewal in the second half of this year.

But nothing new to update beyond that.

All right.

Good quarter.

Thanks very much.

Thanks, Peter.

Thank you.

And the next question comes from the line of Larry Berlin with First Analysis.

Please go ahead.

Larry --

Your line is open.

If you're on mute.

Sorry guys.

I did have the mute on.

You were dead right.

How are you doing this afternoon?

We're doing well, Larry.

Quick question on the statements.

Do you some metric on like how many statements per month you guys generally generate?

Yes, Larry, if you look at our last press release when we announced DataProse it was about 67 million statements we do on a monthly basis right now.

Okay.

That gives us an idea there.

The second thing, a little bit more big picture and one of my colleagues brought this up.

What are you guys thinking the voice over IP in terms of adoption?

Is it running as expected?

Are people moving over to your systems as expected?

Is it slower or faster?

We continue to see a large number of accounts on our system.

I don't know if you were on the early part, Larry.

But I commented that we now have 6 million voice service accounts on our system which is about 20% of our cable subscribers which has principally been accomplished in the last 30 months.

So there's been strong growth.

I don't like to try to suggest whether there's continuing speed of growth the acceleration of the client because that's really more of a factor of our clients and their businesses.

We feel very confident that we've been able to keep with our client's needs and support them as they rapidly grow in this business?

And has that been a help to the revenue in the end?

Yes.

Okay.

Just want to make sure.

You never know.

We stopped being a nonprofit -- we've never been a nonprofit.

Before I knew you for sure.

Sort of the same question with sitting here in the newspapers all the buzz about all the new AT&T, Verizon offerings in the cable world.

Have you seen any change in subscription in the number of subscribers due to new offerings subsidies and does that affect you in any way?

That's generally a question I think you should ask to our clients.

We don't like to speak on their behalf.

I think the one consistency is we have about the same number of accounts on file as we did last quarter.

You can look the total number hasn't changed all that dramatically for us, Larry.

Thanks so much.

Thank you.

And our next question comes from the line of Tom Roderick with Thomas Weisel Partners.

Please go ahead.

Hi, guys.

This is [Chris Koe] in for Tom today.

Good job on the quarter.

Just a couple of quick housekeeping items.

I know you mentioned the reasons for the decline in software revenue.

I was wondering, is it reasonable to expect that to return to historical levels going forward?

I would say maybe within the next two quarters it may be trending more towards the Q2, maybe slightly up from Q2.

Okay.

So is there any insight you can provide us to the reason?

I can understand the timing issue.

It sounds like if it is going to stay down there a little bit then --

Two quarters because it's difficult to predict the timing of certain software transactions going forward.

I don't think you should look for underlying change in really what is going on in the business.

It's just the timing of transactions.

And as far as Randy you had mentioned on the Comcast call that you were assuming somewhere in the low 17s for the remainer of the year for operating margins.

Does that pretty much still hold?

If you did the math on the gins I provided you'll end up with something in that general range.

That's what I figured.

Just wanted to check.

And then as far as you guys mentioned the modularization -- I'm sorry to keep asking this question.

Apparently, we haven't paid enough attention to it before.

That kind of allows you to put module components on top of competitors solutions.

Can you give us an idea as of right now how many deployments are in that type of scenario and how high do you see the potential going?

Theoretically, you could deploy Workforce Express or interactive messaging on all your competitors' platforms if you live in an ideal world.

I wanted to see how you guys look at that.

From a Workforce perspective, Chris, we don't want to get in to penetrations or how much size there is.

They are competing solutions deployed in certain markets and clients, but we have had significant success with WorkfForce putting it on top of other clients' billing systems.

And we believe there still is market to do that further.

From an interactive messaging perspective, I think we're on the earlier stages of getting that penetrated, especially around appointment verification and collection management services.

And it's something that from an outbound messaging we look to see that grow.

And as the business that we acquired back about a year ago has had very strong success in other markets and has built their business in other markets in cable and satellite and so it's proven those types of capabilities have value to people running consumer oriented businesses.

Great, thank you.

Thank you.

(OPERATOR INSTRUCTIONS) I'm showing there are no further questions in the queue.

I will send it back over to management.

Thank you.

I'll just close by thanking our investors, our clients, and our employees who all help us be successful in running this business.

We look forward to continued strong performance in third and fourth quarter of this year and beyond.

We'll talk to you next quarter.

Thanks.

Thank you, ladies and gentlemen, that does conclude today's CSG Systems, Inc.'s second quarter earnings conference call.

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