CSG Systems International Inc (CSGS) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen, and thank you for standing by. Welcome to the CSG Systems Q3 2013 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). I would now like to turn the conference over to Liz Bauer. Please go ahead, ma'am.

Thank you George, and thanks to everyone for joining us. Today's discussion will contain a number of forward-looking statements. These will include but are not limited to, statements regarding our projected financial results, our ability to meet our 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 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 on 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 provides investors with greater transparency to the information used by our Management Team and our financial and operational decision making. For more information regarding our use of non-GAAP financial measures, we refer you to today's earning release and non-GAAP reconciliation tables on our website, which will be also furnished to the SEC on the Form 8-K. With me today on the phone are Peter Kalan, our Chief Executive Officer, and Randy Wiese, our Chief Financial Officer.

With that, I would now like to turn the calling over to Peter.

Thanks Liz, and thanks to everyone for joining us on today's call. We had another solid quarter in both revenues and earnings, demonstrating the strength of our business model and our focus on execution. We continue to see strong activity and momentum building in two areas that we believe are important to the Company's long-term growth. Our content monetization platform which enable providers to compete in an all-digital world, and the expansion of our managed services offerings to our clients around the globe.

Two weeks ago I had the pleasure of spending time with our European Middle Eastern and African clients at our EMEA Client Conference. The conference provides these leaders with the opportunity to discuss their business challenges with us and their peers,as well as brainstorm on new ways to innovate for the future. As we have seen in other regions in the world, our clients are focused on several key issues that need to be addressed in order for them to continue to innovate, and win the battle for their customers' loyalty and share of wallet. The first issue that many operators are seeing is that their core lines of business, whether that be voice, messaging, or video are challenged to grow. This can be attributed to many factors, including now competitors, the rapid rise of the always-on connected mobile world, or just the challenging business environment.

As a result providers are looking for ways to reduce the investment in these declining or no growth areas. Many told me that they are not willing to invest in systems that support declining or no growth businesses, and are redirecting those dollars towards new areas of growth. Others expressed openness to a new way of running functions that were previously considered core, by outsourcing those functions to achieve improved operations and cost efficiencies. And others shared that they are looking at a more staged approach to their investments, in which new services are being developed and treated as a separate standalone business in order to provide maximum flexibility to the market, and not be encumbered by the processes, technologies, and governance structures associated with their legacy businesses.

I believe this all bodes well for CSG. While operators around the world spend north of 5% of revenue on their billing and back-office platforms, we have a proven reputation in helping some of the world's leading communication service providers, optimize and standardize their existing platforms, while continuing to provide a high-quality service. We have a process and a mindset aimed at identifying ways to manage and reduce the costs of system ownership, while continuing to move a business forward. Our 30 year approach to managed services is based on delivering not only enhanced technological and service results, but also an improved bottom line for our clients.

In the US operators have embraced a managed services offering over the years, and we are doing this for many of the industry's leaders. Overseas this is a fairly new concept that operators are showing more interest in. This past quarter we signed two more managed services contracts. This time with existing clients. One EMEA and one in our Americas region. These contracts expand our relationship from a come in and fix issues project arrangement, to a multi-year commitment in which we help optimize the operational functionality, and efficiencies through our maintenance and management of our solutions. This provides us with a tremendous opportunity to do what we do best, get broader and deeper in our clients' operations by helping them solve problems. This is much easier to do when you have a long-term commitment from a client, and working side-by-side with them in their daily operations. This model has served us well here in North America, and we believe it will serve us well with our clients around the world.

The next trend that was discussed at our conference involved the unchecked growth that operators are experiencing from the explosive growth in connected devices and data consumption. While it is probably not a stretch to say that we have truly become a connected society, the challenge for communication providers is that with the exponential increase in the amount of traffic and events that are traveling across their networks and systems, most of this growth is not being monetized. As a result operators are looking for partners who can help them experiment with new and different business models and product offerings aimed, at monetizing the growth in volumes across their network. This means being able to monetize the areas of innovation that exist within the network, and the screens that people are watching. It also means working with a different mindset. One in which competitors work side-by-side to increase the size of the pie, versus focusing on a zero sum gain, and new ideas are trialed with a fail-fast mentality and discipline. This is a trend that we spotted years ago, and with the impetus behind our content direct solution. Our first mover advantage in helping operators monetize content in this new connected world is gaining momentum.

For example, this quarter we are helping Comcast launch a program called Xfinity-on-campus. This next-generation offering enables college students to sign up for the live and on demand contents that they want, delivered to their computer, tablet, phone, or any IP-connected device. Importantly, by delivering content via an app, Comcast doesn't need to install proprietary equipment in the student's location. In addition, because Content Direct is a cloud-based offering, Comcast was able to implement the solution quickly, and without a significant outlay in capital expenditures. This is just one example of how we are helping operators innovate and deliver their products and services in a meaningful personalized and interactive way to their consumers.

The final topic that many of our clients shared made me extremely proud of what our 3,600 employees have accomplished. As these clients talked about the factors that go into their decision making, one factor kept emerging that we believe is a differentiator for CSG. In determining whether or not an operator is going to handover management of their systems, they want to know that they can trust their partner, and know that when a bump occurs, which as anyone who has run a complex system knows happens, that their partner will work tirelessly to mitigate the risk, and the damage associated with such events. I can't tell you how much it pleased me it to hear our clients share examples of how our employees have done the right things, and how much they trust us as a partner. I believe that CSG has set the standard in doing the right thing as a trusted partner for our clients, and we have our employees to thank for this.

Finally, before I turn it over to Randy, I would like to summarize why I am optimistic about our future. First we have prospects for growth by enabling our North American cable and satellite clients to navigate in increasingly complex and competitive business environment. Second, we have over 500 Service Providers worldwide that are transforming and evolving their businesses, and they 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 finally we are actively competing and winning in several key growth areas. In emerging markets like Asia-Pacific and Latin America, with new service offerings like our International managed services, and we are in the forefront of the evolution of how content is distributed and monetized. From content creators and owners to traditional retailers, to cable satellite and communication Service Providers. While the business environment continues to be challenging, I can honestly say that I believe that we are in the best position to succeed in this evolving communications market.

I would like to take this opportunity to thank our employees who make me proud, as I have heard stories from our clients about their great work, commitment and dedication to driving towards successful outcomes. This is part of our DNA, and I am pleased to see our clients value this as well. With that, I would like to turn it over to Randy to review our financial performance for the quarter.

Thank you Peter, and welcome to all of you on the call today to discuss our financial results for the third quarter and the outlook for the remainder of 2013. We had another solid quarter of financial results. We continue to execute on our business plan, and we returned value to our shareholders through the initial payments of our recently declared quarterly dividend. Overall we are pleased with the progress we achieved this quarter, and are maintaining our guidance for the full year 2013. I would now like to walk you through our financial results in more detail so let us begin.

Total revenues for the third quarter were $186 million, down 2% from the same quarter last year, primarily due to the renewal discounts on the Comcast and Time Warner extensions from earlier this year. Sequentially revenues were consistent with the second quarter in spite of the reduction of approximately $2 million in quarterly revenues associated with our divesting of a small non-core print center on July 1st. Overall, we are pleased with the level of revenues reported for the third quarter. Breaking down revenues further, during the third 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 45% of our revenues for the third quarter. Additionally, during the quarter we generated 85% of our revenues from the Americas region, 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 third quarter was $29 million with a margin of 16%,which is in line with our expectations. As anticipated, this represents a decline from last year, primarily due to the impact of our recent client contract renewals. GAAP operating income for the quarter was $21 million, our margin of 11%. For the third quarter our adjusted EBITDA was $38 million, or 21% of our total revenues. Non-GAAP EPS for the third quarter was $0.52, which compares to $0.50 for the same period last year, and $0.57 for the second quarter of this year. Our non-GAAP effective income tax rate for the quarter was 36%. GAAP EPS for the third quarter was $0.47.

And now onto the balance sheet and cash flows. We ended the quarter with $194 million of cash and short-term investments, and increase of $5 million from the ending balance quarter, largely due to our cash flow generation. We had a total of $289 million in par value debt on our balance sheet at quarter end. We had strong cash flows from operations for the quarter coming in at $25 million. We spent approximately $8 million on capital expenditures, thus resulting in $17 million in free cash flow for the quarter. Year-to-date our cash flows from operations are now $87 million, and our free cash flow is $68 million.

During the third quarter we repurchased 6,000 shares of our common stock under our repurchase program and declared a cash dividends in the amount of $0.15 per share, or approximately $5 million. Together these moves are consistent with our goal to return 25% to 50% of our annual free cash flow to our shareholders. Our strong cash flow generation and solid balance sheet allow us to return capital to our shareholders, while still having sufficient means available to strategically grow our business.

Now let's move on to our guidance for 2013. Overall, we are maintaining the full year guidance that we shared with you last quarter. For revenues our guidance remains at $740 million to $760 million. As mentioned last quarter, this guidance considers the reduction in our second half 2013 revenues of approximately $5 million due to the sale of a small print center on July 1st. As a result, we continue to expect to come in more towards the mid-point of our revenue range. We are maintaining our expectation for a non-GAAP operating margin of approximately 16% for the full year 2013, which is in line with our first nine months of the year performance.

We anticipate EBITDA to be in the range of $153 million to $158 million, or 21% of our expected total revenues. We are maintaining our 2013 non-GAAP EPS guidance range of $2.05 to $2.15. We are also maintaining our guidance for operating cash flows to the year to be in the reaping of $110 million to $120 million. Our expectation for our 2013 non-GAAP effective income tax remains at approximately 36%. We continue to expect capital expenditures in the $35 million range for the year, which is relatively in line with our historical spending levels. 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 are pleased with our third quarter performance, the investments that we have made in our people and solutions have added value to our clients' businesses around the globe, as evidenced in this quarter's solid results in our expanded presence within the operations of our client base. These achievements demonstrate the key pillars of our strong business model, cash flow generation, solid balance sheet, and favorable shareholder returns. We look forward to sharing our continued successes in the upcoming quarters.

With that, I will open up to the operator, so we can take any questions.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question is from Mark Sue with RBC Capital Markets. Please go ahead.

Thank you. Good afternoon. If I could get a sense of regional, some of the regional dynamics. I think things are a little bit stronger in EMEA, and a little bit weaker in Asia. Maybe you can help us understand the dynamics there?Is it really just revenue recognition?And then if I can understand the success behind the new wins that you announced, one in EMEA and one in the Americas, would the competitive displacement, or if you could just help us understand why you were able to secure these two new wins?Thank you.

Sure. Mark, I will first give a comment about what we see not on the specific revenues but the dynamics and the regional markets you talked about, and Randy can add if there is anything from a financial perspective that influenced the percentages that came. We continue to see strengthening for us in the Asia-Pacific region. The rebuilding of our client and market facing teams continues to build pipeline. We are in the process of deploying the managed services contract that we talked about last quarter, and we continue to see the managed services opportunities grow in that region, and so the investments that we have made to rebuild are positive, and we think the opportunities are improving.

In EMEA, we have been through a long cycle where it has been tough because of, especially in Western Europe the broader economic and financial conditions. We are re-focusing in EMEA. We have put a new leader in place, which now has been about 2.5 months, and he is getting very focused because we believe at some point the EMEA market is going to turn around for us, and that we have got a strong client base there that we will be able to expand our relationships with, and do more with. So EMEA as a general market is not rebounding for us from what we see near-term opportunities, but we do see that longer-term we are in a good spot to pick up, and the investments that we are making around the leadership there will pay off. Randy, from a perspective of anything specific in the financials?

I would say EMEA kind of fluctuates from the $17 million to $20 million range on any given quarter, if you kind look at the last several quarters, it is really the timing of what is going and the level of efforts that are put forth on some of the larger projects, so I would say there is nothing unusual there. Probably on APAC, the one thing that you see is you see it coming down a little bit from the second quarter. That is really a result of the success we had in the second quarter when we announced our first managed services win. There was some software and professional services revenues that were booked in the second quarter as we worked on some of the installations, so it is really just kind of the sequence and I think of the projects, the way I look at it.

And then, Mark, on your second question about the two wins that I referenced around our managed services, these are with existing clients who are currently using our products, so I would not view them as competitive wins, except competitive against the internal resources of our clients, and what we are doing is we are taking on a broodier responsibility for what I will call the responsibility for what I will call the support and the application operations on behalf of our clients.

I see. And then as we look into 2014, trying to get a sense of some of your planning assumptions. Should we think of steady trends with some of the North American, your large North American cable and satellite customers, some expectation improvements in Europe, and then just opportunistically just continued investments and broadening the pipeline in Asia, should there be kind of the dynamics we should see for next year?

From a market dynamic we continue to think that the North American cable and satellite clients will continue to evolve their businesses, which we think is good for us. We are past all the major renewals which should give us a base from which to build from a reported revenue. And so we think those are good markets for us. Asia-Pacific we expect to continue to broaden for us. We expect to see EMEA to start having better results for us. May not happen on the nearer term, but longer-term we expect that we are going to see the benefits of our offerings, and so those are the major pieces. We expect that overall that we are going to be able to keep up with what is happening in those markets, from kind of the spend with our clients, and the telco providers in those spaces for IT services.

Okay. That is helpful. You thank you very much, and good luck.

Thanks, Mark.

Thanks, Mark.

Thank you. Our next question is from [Matt Vangliat] with Stifel. Please go ahead.

Yes. Thank you. On for Tom this evening. First question on Time Warner and Comcast, are there any early signs that they are seeing much of a growth in their customer base, as they have started to roll out some of their new products, and some of their new features?

Well, it is not appropriate for me to talk about how their business is performing based on their initiatives, because that is for them to really report on, and we have a fiduciary responsibility not to report what we see happening in their business. What is important for us is, as I referenced in my prepared comments, that with folks like Comcast, they are clearly evolving their business, and it is creating opportunities for us to bring new solutions, such as our Content Direct, as they think about new ways approach the market. We believe from our investment that we have made in Content Direct, and what we have done in other applications, that we are expecting to benefit and that the market will evolve and we will be beneficiaries of that over time.

I think one good evidence to look at there, Matt, is that both of the revenues for Comcast and Time Warner grew from the second quarter, so that is a good indication of some success we are having with them.

Okay. And then segue to that, on the Content Direct product line, are you seeing an inflection point in terms of the demand for the product, both at the cable MSOs and other Service Providers that are looking towards the IP-based content, to either add-on or to compete with the cable?

I think we are clearly seeing a strengthening of pipeline opportunities. We still believe we are in the early innings of the evolution of how consumers truly shift their buying behavior and consumption of content and information, but that being said, we are seeing the pipelines build up. What we need to see is as well as having the platform used by clients, we need to see volumes driven by the consumers who these clients support. And we think we are still early on that, but I think we all watch the market and believe that over time whether it is the evolution of the cable and satellite operators, whether it is the content owners, or whether it is independent aggregators, or call it electronic super stores, they are all going to have some influence, and we think we are in a good position to really participate with all of those guys.

And finally on the managed services demand, it seems to be ahead of expectations. Is there anything internally that you guys are looking at that might need additional CapEx versus maybe initial plans, to help support the demand and being able to meet those, grow the pipeline and kind of close the sale through that process?

From a CapEx perspective, Matt, I don't think that has been anything that we are seeing a stress point on the business, because primarily for a lot of these wins we are actually helping our clients run the applications on their hardware, though we are open to doing it on our own proprietary hardware, or proprietary data centers if we need to. So we haven't seen that. We have been investing to make sure that we have the skills and capabilities in our people, as we go out and both market and prospect, and then deliver the results to make sure we have it, but that is part of our core operations, and not a CapEx piece.

Great. Thank you, guys.

Thanks, Matt.

Thanks.

Thank you. Next is Paul Thomas with Goldman Sachs. Please go ahead.

Thanks. Good afternoon guys. Just looking at the decline in revenues outside of the top five customers, I guess a question asked earlier, with the driver there pretty much the divestiture from the small print operation, or was there any other changes at customers worth pointing out?

If you are talking about sequentially it was primarily the divestiture of the revenues, if it is year-over-year it is primarily-- yes. Sequentially it is the divestiture. If it is year-over-year it is more the renewal of both the Time Warner and Comcast.

Can I ask a clarifying question? Did you say the top five?

Outside of the top five,so looking at revenue from other customers?

Oh, okay. I am sorry. I misinterpreted that.

First question is to make sure the clarification of period there, are you looking sequentially?

Yes. Sequentially.

Yes. It is primarily the print divestiture.

Okay. And then on uses of cash, you have introduced a dividend this year, but I was wondering what the appetite would be for a larger buy back program, similar to what you did in 2006? Asyour cash balance heads past $200 million, or should we think about uses beyond dividend as just being for acquisitions?

Well, we came out as we instituted the dividend, Paul, and said that we were targeting between 25% and 50% of our cash flow, our free cash flow to be returned to the shareholders using different vehicles, whether it is dividend or share buybacks, and so we continually evaluate that. It will fluctuate from quarter to quarter how much we do, and so we are constantly evaluating that, but we do believe this is a dynamic market, and we want to make sure that we still have capital available, both from the balance sheet perspective and readily available cash if we see opportunities to add to our capabilities, or do something from an M&A perspective.

Okay. Thanks a lot, guys.

Thanks Paul.

Thanks.

Thank you. And next is Sterling Auty with JPMorgan. Please go ahead.

Yes. Thanks. Hi, guys.

Hey Sterling.

Hi Sterling.

Hey. So I am bouncing between calls, so my apologies if some of this is repetitive, but in some of the commentary about, I think it was Asia in particular, doing piece meal or smaller add-ons in terms of services, et cetera, does that mean that you expect a smaller recovery, or I should say a longer recovery, where it just kind much inches along until we get back to what you would consider normalized growth rate for the region?

I don't think that my comment was specific to Asia-Pacific. It was just what some clients that I have met with in the last quarter were commenting that they, instead of doing big projects they are breaking them up into smaller projects, to both change the rate of their CapEx investment as well as de-risking projects. This is something that we have seen for some time, not unique to this quarter, but APAC we continue to see a strong pipeline there, and this has been a good year for growth for us in Asia-Pacific. And we are still expecting that to build as we move forward.

I got you. And on the Time Warner and the Comcast, I think in previous large contract renewals you price it, and then a certain amount of time to get you back to kind of the revenue run rate, and I believe the last couple of have been about four quarters. How would you characterize the trajectory of the growth off the bottom post the price cut?

I would say I would expect similar, it is kind of early to tell, but I think if history repeats itself, we have done a very good job of getting back within four to six or seven quarters, I think that you saw a little bit of evidence this quarter, you see a nice little uptick in Q2 going to Q3, and they both had the full amount of thediscount in the second quarter, so I think it is early, it is early but we like the direction it is going.

So when we hear some of the projects like the one on college campuses, how would you characterize the economic model around those, and the size of those projects, meaning are those kind of singles where we need a bunch of them to pile on top, or are some of them doubles and triples in terms of size?

I think you think of those as singles, that we have to string quite a few singles together to score the run. These are not the amount of complexity and the amount of the services that we provide are not as complex as your traditional legacy cable subscriber is, so I think you look at these as dimes, nickels, quarters, as opposed to the full amount that we get from our cable operators.

And I would also say that similar to the on-campus piece that I mentioned in my prepared remarks, that is a much smaller market set than the 20-plus million subs that somebody like Comcast has. Can they take that larger potentially, but early on it is indicative of how they are thinking about their business, and so it may be a bunt single versus a full single to use Randy's parallel. He doesn't have a big beard like the Red Sox, though.

I got you. I got you. One last one, and I will jump back into the queue, or turn it over I should say. As we look at the margins in the quarter were a little bit better than I would have thought. People asked about I think the revenue mix dynamics between the large customers and the small, let me ask it this way. How did the revenue mix look in terms of through some of the lower margin, or away from some of the lower margin like the mail services versus some of the other higher margin? Was that a contributor to the margin that we saw this quarter?

I think what I would say is the margins are pretty close to my expectations. I am not sure if there is anything that I would read into that. If you look at the expenses quarter-over-quarter they are almost flat, except for SG&A is up a little bit, and that is as a results of us doing some investments and some market research that we are doing, so I would say there is really nothing all that, worth noting between the quarters, Sterling.

Yes it is not, Randy maybe this is much of a question to confirm, but when we see growth on our major clients after going through the repricing, it has nice margin dynamics, because we have got a lot of the fixed support infrastructure already in place for these clients, so growth on Time Warner and Comcast and others have a nice contribution to what we do on a -- perspective.

Yes. Exactly. And you can see it also just in the general mix of the gross margin and the processing, it is probably in the low-50's, 50, 51, 52 and your professional service and software is usually in the low-40s, so I think you probably saw a little bit of a bump in the processing revenues this quarter, and a little bit of downtick on the software and services, so a little bit of mix going on there.

Got it. Thank you, guys.

Thanks, Sterling.

Thank you. (Operator Instructions). Our next question is from Johnny Grobstein who is a student. Please go ahead.

Hi. I am calling, you actually just touched on the last, about the SG&A expense, ticking up a little bit from the investments and market research. However, I have noticed it has gone up since 2010 from 15% to 20% based on revenues. Is there a plan in place for that to move it in the other direction?

Johnny, I think if you look at the end of 2010, we acquired Intec, which had a higher SG&A as a result of being a software company, so I think what you are asking is directionally do we continue to expect that to grow, and I will turn that over to Randy to give you some perspective.

I think you saw it go from probably 15% to probably 18% or so shortly after the Intec acquisition, which is--

17.47, yes.

Which is kind of the change in the business model. Probably the last couple quarters, probably the last four quarters you saw it going up a little bit, and that is really kind of a couple of different things that are going on, investments into the business, some marketing investments, some market research in a couple of different areas, and the build-out of some of our IMS sales staff, or managed services staff. So there is a lot of investment going on within that line item is what you are seeing. I think longer-term you should probably see is it settle more back down into the 18% range. Through the growth in revenues, as you get additional leverage off of the SG&A platform, you should be able to get that back into the 18% range, I think it may stay elevated for a few quarters as we go through some of these investments.

Okay. Thank you.

Thanks, Johnny.

Alright. I am showing you now further questions. I will turn the call back to Peter Kalan for closing comments.

Thank you George. I just want to thank for all who participated for giving us your time to hear our story today, and we look forward to finishing up the year strongly, and reporting in the first part of 2014 our results of this year. And I would also like to give thanks to our employees who continue to work diligently, to make sure that we can deliver on our promises to our clients. Thank you.

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.