CSG Systems International Inc (CSGS) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the CSG Systems first quarter 2013 conference call. (Operator Instructions).

I would now like to turn the conference over to Liz Bauer. Please go ahead, ma'am.

Thank you, Lorenzo, and thank you, everyone, for joining us. Today's discussion will contain a number of Forward-looking statements. These will include but are not limited to statements regarding our projected financial results, our ability to meet our 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 judgments, they are subject to risks and uncertainties that could cause our actual results to differ materially. Please note that these Forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revision to these Forward-looking statements in light of new or future events.

In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release, as well as our most recently filed 10-K and 10-Q, which are all available in the investor relations section of our website.

Also, we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures when reviewed in conjunction with our GAAP financial measures provide investors with greater transparency to the information used by our management team in our financial and operational decision making.

For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me today are Peter Kalan, our Chief Executive Officer, and Randy Wiese, our Chief Financial Officer. With that, I would like to now turn the call over to Peter.

Thank you, Liz, and thanks to everyone for joining us on today's call. For the first quarter of 2013, we generated revenues of $181 million, and non-GAAP earnings per share of $0.48. While revenues were lighter than previous quarters due to some deals not signing in the current quarter, and the beginning impacts of the new contract pricing for Comcast, I remain confident in our business outlook.

Some of the deals that we anticipated to sign in the first quarter subsequently signed in April, and the remainder are still expected. I am quite pleased with several of the activities that have put us in a much stronger position to take advantage of the opportunities we see. Let me elaborate.

In March, we announced our new long-term agreement with Comcast Cable to provide them with customer care and billing solutions through February of 2017. Comcast has been a client of ours for over 20 years. They are innovating the way in which consumers interact with their devices, whether that be with their television, their PCs or tablets or even their phones. They are bringing new services to market like home security and business services, and aiming to create an interactive and engaging customer experience, by providing content anywhere on any device.

We are pleased to have been a part of Comcast's transformation over the years and look forward to continuing to help them successfully execute on their objectives in the future. We expect that our relationship will continue to grow as we develop new ways to help Comcast streamline their operations, roll out new products and services and, provide an engaging customer experience.

With the contract for Comcast now signed, for the first time since I have been with the Company, which is over 15 years, we have contracts in place with our three largest clients for the next four years. These clients represent approximately 45% of our revenues, and when we look at this over a period of time, we have grown revenues with these clients in the mid-single digits, inclusive of those years where we have signed extensions with pricing discounts.

In addition, we have demonstrated over time that with the increased visibility into our revenues, we are able to better manage our cost structure and increase our operating margins. When you combine these long-term contracts with our maintenance revenues, and regular ongoing implementation and services work for our worldwide clients, we have tremendous visibility into our revenues. This is an enviable position to be in and allows us to have even greater control in managing and investing in our business to ensure that we get even broader and deeper in our clients' operations.

In addition, by having a significant amount of our revenues under contract for several years, we have strong visibility into our cash generation. This allows us to continue to expand our product portfolio by enabling us to sell more into our existing clients as well as expand our geographic reach and add new clients.

As we have said before, our clients' worlds are changing dramatically, and we are committed to investing in our solutions and our people to ensure that they can compete successfully.

Next, I would like to share with you what type of activity we are seeing around the world. In our EMEA region, we entered the year with more revenues under contract than in previous years. During the quarter, we signed contracts for ongoing services work with a large multinational communication provider, as well as a major upgrade to our Singleview Version 8 platform with a major Eastern European telecom provider.

While the spending environment in this region has not improved markedly from previous quarters, we believe that we have the solutions and delivery models to compete effectively. In our APAC region, our pipeline has increased significantly, and the quality of the pipeline has improved dramatically. Decision making continues to be elongated, but we are optimistic about our opportunities in this region.

A year ago, we were still spending a significant amount of time on prospecting and ensuring that service providers knew about our capabilities. Today, we are focused on moving opportunities through our pipeline to closure. We believe that when operators do make decisions regarding their future mediation, interconnect and billing needs that we are in a strong position to win our fair share in this region.

Finally, our Americas region continues to have a broad mix of opportunities, ranging from getting broader and deeper in our clients' operations with new products and services to pursuing large transformational billing opportunities. The good news is that we are seeing large billing opportunities being contemplated as operators look out to -- look to roll out new services like LTE, or modernize their operations.

However, the challenge with these types of opportunities is that they have very long sales cycles. Our team is focused on helping operators work through their normal due diligence and reduce the risk associated with such important decisions.

In addition, service provider consolidation continues to be a dynamic that we see in both North America and Latin America. Historically, consolidation has been a positive for CSG, as operators turn to our team to help them provide a holistic approach to their customers. Our investments in ensuring that we have strong client relationships and deliver upon our promises typically gets rewarded during periods of consolidation and change.

I mentioned last quarter that we recently introduced our international managed services offering, and that we believe this opportunity could generate anywhere from $50 million to $100 million in the next several years. Well, I am pleased to report that we are seeing tremendous interest in this offering. We have a pipeline that can support the high end of our revenue expectations for managed services and are hopeful to have several announced contracts this year.

I believe this is a testament to CSG's reputation for having strong management processes, application management expertise, system operational skills, and an intense focus on helping our clients be successful. We have recently implemented our first managed services client in Europe.

We helped this operator transition their existing interconnect system from their premises into a managed services environment in four months. This involved migrating active data, history and revenue management processes for 1.6 million subscribers and 570 international roaming partners. While this is a smaller client, it provided us with the opportunity to prove out our approach and processes in this area. I am very optimistic about the opportunities that we have in this area.

Next, our Content Direct solution continues to see good response, both with existing clients and with prospects. This solution helps content providers, distributors, and aggregators create and manage an entire ecosystem that demands strong partner management, flexible pricing, and the agility to trial new and different business models.

Our Content Direct team continues to expand its client footprint now supporting the evolving digital content distribution initiative called Ultraviolet. This initiative involving 80-plus technology and entertainment companies is standardizing the way digital content is delivered to consumers across their various devices from the studios, through retailers, and traditional service providers. The Ultraviolet initiative has grown from a launch in the US to an international rollout in Canada, Europe, Australia, and New Zealand.

Our Content Direct solution is being used by studios and retailers to roll out these new services across multiple regions. We are pleased to be an enabler of this new ecosystem that is still in its infancy.

And finally, before I turn it over to Randy to review our financial results, I would like to share why I am so excited about the opportunities before us. Obviously, with our two largest client contracts renewed in one year, we are facing some revenue headwinds in the short term. However, we believe that we have set this Company up for revenue growth and operating margin improvement in subsequent years as we successfully execute on a number of opportunities.

First, we have lots of prospects for growth by enabling our North American cable and satellite clients to navigate an increasingly complex and competitive business environment. Second, we have over 500 service providers worldwide that are transforming and evolving their businesses that depend upon us to help them be successful. This base of clients provides us with opportunities to create new revenue streams with our broad suite of products and services aimed at helping them compete and prosper.

And third, we are now actively competing in several key growth markets, including the geographies of Asia Pacific and Latin America, along with international managed services and then providing services to providers of content distribution. Most certainly around our three largest client contracts, we are better able to manage our costs and investments with a long term view, helping control and reduce those costs as well as determine the best way to utilize our cash to create long-term value for our shareholders.

And we have a proven reputation of not only being a good operator, and stewards of the business, but good and trusted business partners for several of the industry's leading communication service providers.

In summary, I believe that with our major contract renewals secured into 2017, we have reduced the amount of risk associated with our revenue stream well into the future and that we are positioned to grow the revenues of the Company by doing more with existing clients and also adding to our client base.

Further, we have proven than we are prudent operators with the ability to drive bottom line results and improve our operating margins. I am optimistic about what the future holds for our clients, our employees, and our shareholders. With that, I will turn it over to Randy to review our first quarter results.

Thank you, Peter, and welcome to all of you on the call today to discuss our financial results for the first quarter as well as our 2013 outlook. As most of you are aware, we recently announced extensions for both Comcast and Time Warner. We now have contracts secured with our three largest clients into 2017, giving us greater visibility into our revenues and strong cash flows over the next four years and allowing us to strategically manage costs and invest in our business.

Overall, we have made significant progress in solidifying key client relationships and advancing our pipeline thus far in 2013 and thus remain very comfortable in our financial outlook for the year. I would now like to walk you through the results in more detail. Total revenues for the first quarter were $181 million, down 2% from the same quarter last year.

Sequentially, revenues in the quarter decreased $17 million or 9% from the fourth quarter. And looking at these comparisons, let me highlight a few things to provide some additional color. First historically our software revenues in the first quarter are seasonally lower than those in the fourth quarter. Our sequential decline in this quarter was even more pronounced than prior years since we came off exceptionally strong year-end software sales.

The timing of software-related services revenues can fluctuate between quarters based on the timing of deals, but we find these spending patterns generally even out over time. Second, this quarter includes one month of the price discount associated with the Comcast extension, and finally -- third, this quarter reflects the delay in the timing of several deals that our teams anticipated closing in the first quarter.

As Peter mentioned earlier, some of these deals have already been signed subsequent to quarter end, and we expect to timely close the remainder of these deals. Breaking down revenues further, during the first quarter, we had three clients that each individually generated revenues of 10% or more of our total revenues. Comcast, Dish and Time Warner, together they were 46% of our revenues for the first quarter.

Additionally, during the quarter, we generated 11% of our revenues from the Europe, Middle East and Africa region and 4% of our revenues from the Asia Pacific region. Moving on, our non-GAAP operating income for the first quarter was $28 million, with a margin of approximately 15%, a decline both year-over-year and sequentially due to lower revenues.

Our first quarter expenses were in line with our expectations, and we expect the margin percentage to trend up from this level for the year as our revenues increase. GAAP operating income for the first quarter was $18 million or a margin of 10%. For the first quarter, our adjusted EBITDA was $37 million or 20% of our total revenues. Non-GAAP EPS for the first quarter was $0.48, which compares to $0.60 for the same period last year, and $0.67 for the fourth quarter.

These EPS decreases are related to the lower revenues I discussed earlier. Our non-GAAP effective income tax rate for the quarter was 36% and foreign currency movements did not have a material impact on these results. GAAP EPS for the first quarter was $0.46. Now on to the cash flows and balance sheet.

Our cash flows from operations for the quarter were $23 million. Our cash generation capability continues to be a strong characteristic of our business model. We ended the quarter with $173 million of cash and short-term investments and a total of $296 million in par value debt on our balance sheet. We saw the benefits of the recent refinancing of our term credit facility with a sequential decrease of $700,000 in interest expense for the quarter.

Additionally, during the quarter we spent $4 million on capital expenditures and approximately $7 million for 329,000 shares of our common stock purchased under our repurchase program. Our solid balance sheet provides us with the flexibility to continue to invest in our Company to create long-term shareholder value. Now let us move along to our guidance for 2013.

Overall, we are maintaining our previous full year guidance. For revenue, we continue to expect revenues of $740 million to $760 million. Let me provide some additional color around these expectations.

First, this guidance includes the pricing adjustments related to our recent long-term contract extensions with Comcast and Time Warner with full quarter impacts from both of these starting in the second quarter. Second, as I mentioned earlier, we saw a delay in the timing of several deals that our teams anticipated closing in the first quarter. We have signed some of these deals after the end of the quarter, and expect to timely sign the remainder of those deals.

Finally, we currently have a growing pipeline and strong deal activity that will feed our revenue stream in future quarters. We therefore remain confident in our annual revenue guidance.

Moving on, we are also maintaining our expectation for a non-GAAP operating margin of approximately 16% for the full year 2013. As we grow our revenues and continue to prudently manage our cost, we expect our operating margin percentage will expand from our first quarter performance. We continue to anticipate adjusted EBITDA will be in the range of $153 million to $158 million or 21% of expected total revenues.

Our expectation for our 2013 non-GAAP effective income tax rate remains at approximately 36% as we see the benefit of last year's tax strategies playing out as expected. We are maintaining guidance for our 2013 non-GAAP EPS in the range of $2.05 to $2.15 and our operating cash flows for the year in the range of $110 million to $120 million.

We continue to expect capital expenditures in the $35 million range for the year, which is relatively in line with our historical spending levels. Our guidance reinforces our solid cash generating business model and strong capital structure. Our 2013 guidance does not anticipate any significant impact from foreign currency movements.

And finally, consistent with our past practices, our guidance does not assume any share buybacks under our repurchase program for the remainder of the year.

To summarize, we have solidified our three largest client relationships giving us greater visibility in our revenues and cash flows into 2017. We continue to manage our business prudently and invest wisely in our people and products. We believe our results are indicative of our solid business model, consistent execution, and strong balance sheet.

We believe we are well positioned to grow our business going forward, and we look forward to sharing our continued successes over the coming year. With that, I will open it up to the operator so that we can take any questions.

Thank you, sir. (Operator instructions.) Our first question comes from the line of Mark Sue with RBC Capital Markets. Please go ahead.

Thank you and good afternoon. We understand the contract renewals for the next four years, which is providing you some revenue visibility on top of this now steady base. Where do you have the most confidence in your ability to re-accelerate the top line? Will it be a particular region? Will it be particular services? Will it be LTE? Just so that how we could think about what the drivers are to re-accelerate in the second half and into 2014 would be helpful.

Mark, this is Peter. There are several things that I would like outline for you that are providing the opportunities for growth from our new base lines that we have as a business. One is in our traditional markets of cable and satellite where we have deep and long relationships. We see clients looking to roll out new products and services whether it is security, home security services, business services, as well as roll out products on top of it like offer management and effectively sales management tools.

We have the ability to bring products across to our clients where they are not being deployed today. Sometimes across the top of other platforms, and importantly, their businesses are continuing to evolve, and our history has been that we have grown those relationships as a mid to high single digit growth rate, inclusive of the discounts we gave. So we have a very good history of mining those relationships and really building upon the confidence that they have already got in our products and services as their businesses evolve.

But on top of that, as we look around the world, we are very excited about several pieces. One is between Asia Pacific and Latin America, we are seeing more opportunities than we have before for replacement of legacy billing systems, whether that be for LTE rollouts or if that is just to drive operating efficiency and drive out some of their old systems.

We are seeing opportunities to drive managed services around the world. In all four regions we see clients who are looking to turn over their existing operational managements of the systems that we have previous sold them to us, to build upon our expertise, and in some cases, even new clients are looking to open the relationship with us on a managed service basis as well. And we still think there is a very unique opportunity that we have with our Content Direct business.

We are building real estate effectively through the deployment of the system to supporting current aggregators, current content owners, and really building across the ecosystem like the Ultraviolet, and we believe as the market and the way that content gets delivered evolves over time. We think we are going to be in a very good position to do that. So there is not one or two items. It is multiple items, whether it is LTE rollouts or really just people leveraging the existing networks that they have to try to get more out of them.

I see. So if anything, your pipeline -- the tangible thing actually feels better now as we move into the year?

Oh, absolutely. Our pipelines I think probably are the most robust across the products that we have, the services that we have as well as the regions. We are very excited.

We are disappointed that the first quarter, we did not get everything closed that we wanted to, but we have deals that are cued up that we believe that if we can get through the approval processes and the decision making at our clients that we are in a very good position to deliver the targeted results that we set for this year.

I see. And on the financial model, as you expand your pipeline and look to re-accelerate your topline, if I look at your gross margins, they have been declining over the last several quarters. How do you convince, as your customers are doing more with CSG, that you can actually preserve some pricing power. So that there is none of these recurring negotiations with price, and you can actually see margin improvements over time because of the value that you add?

Well, some of the areas where we -- where we typically have discussions, Mark, on pricing pressures is on our large complete managed services offerings that we have for our cable and satellite clients, and what we have a very strong history of doing is driving operational performance and using technology to drive down cost. And as we do that over periods of times, what we look to do, based on the size and the position that our large clients have, is to share those benefits back with them.

And so as we look to broaden our relationships with those clients maybe there will be some opportunities for us to maximize some of the revenues we get on certain pieces, but as we look for the foreseeable future with the large contracts there is a strong likelihood that we will be working in concert with them to see how we can drive down operating costs and share those with them which shows up in pricing discounts. But we have a great history of building that back up and driving solid overall revenue growth inclusive of those discounts.

I see. That is helpful. All right. Thank you and good luck, gentleman.

Thank you.

Thank you, Mark.

Thank you. (Operator Instructions). Our next question is from the line of Sterling Auty with JPMorgan, please go ahead.

Hello. This is Lauren Choi for Sterling Auty.

Hello, Lauren.

Hello. In terms of the customers or the deal that you mentioned that got pushed out of Q1 but closed in Q2 and some are timely getting closed. Are these certain products? What type of products were they? And then also, you talked about some, is that like ten deals that were million-dollar deals or were they a bunch that were smaller? I wanted to get a sense of size.

I would share with you, Lauren, it is not a bunch, but it is a handful, and that handful has -- some of them are very sizable that would have multi periods of earnings and revenues from them, and that they all have multi-earnings aspects, and they are really targeted around everything from our Singleview product to our mediation products and WBMS products.

Okay. And if we think about the reasons why they got pushed, did you feel that it was more just macro-related or was there something going on specific to the service providers?

I do not think there is anything unique to the service providers. One of the things that we have seen over the periods is that all decisions are taking longer with all clients. When people try to get us to buy things as a Company, it takes longer, and we are more cautious about how we think about making any long-term commitments.

And I think it is just a general cautiousness in the market place, but it is not unique to the quarter. It is what we have seen for some time. The good thing is we saw a few of those deals get signed into April, and we still have very strong confidence based on all the activities we are doing on the other deals that we had anticipated that they will sign sooner than later.

Okay. And then as, you know, I guess a follow-up to the previous questions in terms of how you are thinking about the growth for the rest of the year, and your strong pipeline. Is there, like, certain types of products that are doing better than others? I know you went through a few of the areas that you are --like digital content area or some other areas. Was there anything specific where the deal that you mentioned, hey, if we close these two, it could be a changer for us? Are those in any specific areas that you can point to?

Well, there are probably three areas that I would talk about where we see pipeline growth and where we have expectations to drive the financial results -- the major areas for driving the financial results for 2013. There are several Singleview cells where we would be implementing the Singleview platform. These are larger in scale, and these would be to replace legacy systems, and in some cases they may be brand new systems as well as I think about the pipeline, but these are multi period opportunities for us to recognize revenue, both from a software and a services perspective.

We are also seeing the managed services piece. As I mentioned, the pipeline is growing. We have had one cell and one implementation on kind of a smaller scale, but we are seeing others that we anticipate will generate some revenue for us this year. We are also seeing our mediation and activation platforms continue to have some demand on them.

When you think about the amount of data traffic and the management of that data traffic and the understanding of that data traffic and volume that grows across the network, it is important whether it be from LTE or just from the sheer volume going off of the legacy networks to make sure you have systems that can manage that.

So those are some of the areas; we also always have fill-ins around rolling out products to some of our traditional cable and satellite clients, bringing opportunities to solve more problems for them whether it is new products rolling out or them using our platform and components of our platform that they previously have not rolled out. So there is a lot of areas, but probably the three big ones are the first three I mentioned.

Great. Thank you.

Thank you, Lauren.

Thank you. At this time, we have no further questions in the queue. I would like to pass the call back to Peter Kalan for closing remarks.

Thank you, Lorenzo, and thank you for those who joined. I know we probably had a lighter attendance on the call based on busy schedules of everyone, but I would but I would just close with we continue to have very strong confidence in the transformation of the business and the opportunities in front of us, and we look confidently towards our second quarter performing well and delivering the results that we expect and you would expect as well. Thank you.

Ladies and gentlemen, this concludes the CSG Systems first quarter 2013 conference call. You may now disconnect. Thank you for using ACT Conferencing.