CSG Systems International Inc (CSGS) 2015 Q1 法說會逐字稿

Good afternoon. Welcome to the CSG Systems first quarter 2015 earnings announcement conference call. Today's conference is being recorded. All participants are in a listen-only mode. A question-and-answer session will follow today's presentation and instructions will be provided at that time. At this time I would like to turn the conference over to your host, Liz Bauer. Please go ahead.

Thank you, Danny. 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 convert the backlog of customer accounts on to our solutions in a timely manner. 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 revisions 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 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 on the phone are Peter Kalan, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer. With that, I'd now like to turn the call over to Peter.

Thank you, Liz. And thank you to everyone for joining us today. For the first quarter we reported total revenues of $186 million and non-GAAP earnings per share of $0.51. During the quarter we continue to solidify our leadership position in the North American video market with three key renewals. First, we signed a seven year contract extension with Eastlink, a cable and broadband provider based in Canada.

Second, we signed a five year extension with the Canadian satellite provider. And third, we signed a five year extension with Charter Communications, the fourth largest cable operator in the United States. Charter is a long time client of CSG who chose to consolidate on our platform a little over five years ago to help drive standardization and improved efficiencies. Charter understood that the standardization enabled them to also provide an enhanced customer experience. We are pleased to have the opportunity to continue to help Charter grow revenues, expand margins and drive an enhanced customer experience for many years to come.

For those of who you follow the industry, Charter is one of several players looking to increase their size and scale through consolidation. And this phenomenon is not just happening here in the United States but all across the world. And we don't see it ending anytime soon. I want to provide you my perspective on how consolidation is impacting companies like, us both in the short term and longer term. On the positive side, consolidation is opening up doors for us to go in and discuss with operators what we do best. Drive standardization and automation which not only increases efficiencies and effectiveness but improves the bottom line.

This plays to our strength in managed services and enables us to change the conversation from being a vendor to being a trusted partner helping our clients execute upon innovation driven transformation. We have proven that by working side by side with our clients, helping them solve problems and successfully execute upon their business plans, that this opens the doors for many other opportunities within our clients' operations. We are seeing this play out with their Tier one managed services clients in APAC and EMEA.

And while we've made the most tangible progress in these two regions so far, both in securing long-term contracts and in building a healthy pipeline, we are beginning to gain traction in the Latin American market where we are the market leader in mediation and wholesale billing. We remain on track to hit our goal of $50 million to $100 million in annual recurring revenues from our international managed services in the next three to four years. On the flip side, the consolidation that is occurring in the market is delaying some decisions and more near-term opportunities as service providers try to plan for various what if scenarios that continue to change.

As many of you know, three of our largest clients, Comcast, Time Warner and Charter, have been at the forefront of much of the consolidation activity. With Comcast's recent decision to walk away from its planned acquisition of Time Warner it feels a little bit like the reset button has been hit. Every day the newspapers speculate to what each of these operators will do next in order to gain scale going forward. To clear up any confusion as what it means to CSG I would like to refresh everyone on our relationships and contracts with these clients.

First, as I mentioned earlier, we extended our contract through the end of 2019 with Charter Communications. Our newly extended contract includes pricing and incentives for Charter from future possible acquisitions. Second, our contract with Comcast, our largest client, goes through mid 2019 and provides Comcast with the incentives to standardize and consolidate the 10 million customer accounts that have been processed by our competitor on to our platform. To date, we've completed approximately 20% of these conversions and had previously expected to complete another 2 to 4 million subscribers in the back half of this year.

We now expect that some of the markets originally planned to be converted in 2015 are being re-timed into next year, resulting in fewer accounts being converted in 2015. As we work along side Comcast on the conversion planning, we weren't surprised that some conversions were moved as a result of the internal resources dedicated to the planning efforts involved with the previously planned Time Warner acquisition. An acquisition of this size is significant and priorities had to be made. And we remain focused on helping Comcast deliver standardization to their operations and new services to their customers. It is a critical step to helping them achieve their goals.

And finally, our contract with Time Warner, our third largest client goes through March of 2017. And we currently do the billing for approximately 40% of Time Warner's customers. When we originally provided our guidance for 2015, Comcast planned acquisition of Time Warner and the subsequent customer swaps between the two companies in Charter was factored into our guidance. We had expected a revenue headwind from our existing Time Warner customer accounts falling under the Comcast contract upon the closing of that acquisition. Randy will go through in more detail how the deal being called off and Comcast moving some of its planned conversions into early 2016 impacts our financial guidance for the rest of year.

To the outside side observer this may look like there is a lot of uncertainty in this market. To those who work side by side with these companies, one thing is very certain to us. The video content and communications market is highly dynamic and driving lots of new innovations. And for those of us here at CSG, we are excited about what the future holds not only for our clients and consumers but also for us. In the last quarter, we've seen everything from cable, satellite and telephone providers experimenting with new video packages ranging from skinny bundles to high speed data service and premium video content being packaged together.

We've seen the justice department say that it had significant concerns that the Comcast Time Warner merger would make Comcast, "An unavoidable gatekeeper for internet based services that rely on a broadband connection to reach consumers". Thereby resulting in Comcast walking away from the deal. But validating the tremendous value the broadband pipe that the cable industry has. We've seen disruptors like Netflix partnering with established cable and Telco operators to carry their products directly. And we've seen the preferences of cord cutters and cord neverers driving innovation and creativity from service providers pursuing share of mind and wallet with this growing group.

And finally several content providers have started pursuing new ways to reach consumers directly. For example, in February we helped ESPN sell live and on demand access to the Cricket World Cup. A 49 game, six week tournament over the internet. This was the first time ESPN had sold sports content directly to consumers that was not tied to its streaming service that is bundled with its TV subscription and was not carried on ESPN's traditional cable channels. While cricket is huge worldwide, it's considered a niche sport in US. By offering cricket via this new direct-to-consumer channel, ESPN was able to try a new way of reaching consumers without cannibalizing its existing distribution channels.

With our cloud based content monetization solution, we were able to help ESPN innovate the customer experience in several ways. From the way in which the consumer obtained and viewed content, to how they paid for that content. Our solution enables companies like ESPN to understand their customers' profiles, preferences and entitlements. While providing them with an e-wallet mechanism that enables customers to have multiple avenues to pay for their services. In addition, our platform enabled service providers to generate new revenues by doing everything from selling digital services over an IP network to monetizing their network through these services. Our modular approach enable the operators to be successful without a wholesale replacement of their existing platform.

It's an evolutionary transformation and has proven successful. And giving customers content on any screen, any time and anywhere is gaining momentum. We've seen a 20% to 25% year-over-year increase in the revenues generated by our clients from new digital service offerings like OTT, e-books and music that are currently being managed and enabled with our content monetization solution. This growth is doing everything from opening up new markets for our clients, offsetting declining revenues associated with other parts of their business, to improving the overall experience with the customer. We are proud of the real estate and the client relationships that we have as a result of our first mover advantage.

And there is no doubt that consumers are evolving in their preferences regarding content, media and entertainment. For those of you who have kids you can totally relate to this as you watch your sons and daughters spend more time viewing content and engaging with others on their phones and tablets. As a result there is an increasing interest by content owners and aggregators of content which includes cable and satellite companies to find new ways to engage and meet the desires of consumers. We understood early on that the broadband pipe was a differentiator and that data and video traffic over the internet would be a massive opportunity or a massive challenge for our clients' business models. The cable and satellite companies have some unique advantages.

They have long tenured and large relationships with content owners and the ability to reach a large customer base with their new offers. Incumbency has its advantages. Second, the broadband pipe is an incredible enabler and backbone of the digital services that consumers demand and expect. It provides the platform on which companies can evolve services and build new relationships. We are pleased with how our investment in revenue and content and monetization platforms have enabled our clients to try new business models, innovate the customer experience and pursue new consumers.

And while the revenues that we generate are small in comparison to the revenues generated from traditional video delivery, we believe that helping our clients to deliver digital services will accelerate our revenue growth in future years as consumer demand for premium content and services increases. So when we look at the business landscape and our role as an enabler and trusted advisor to so many companies, we get very excited. And the reason for our excitement is based on what we can do for our clients, our shareholders and our employees. First, we are growing our recurring revenues through market share wins in North American cable market and through early successes on our international managed services initiatives and will continue to do so.

Second, we are providing the next generation solutions our clients need to compete effectively by monetizing their video and digital service offerings in new ways. Third, we are expanding our margins to the scale of our processing business and through the realignment of our investments. And we have a strong balance sheet with strong cash flows which allows us the flexibility to return cash flows to investors while continuing to invest in our business.

Before I turn it over to Randy to walk through the first quarter results, I'd like to thank our employees who continue to put our client relationships at the center of their focus. As I said earlier, this is a highly dynamic industry and the dedication and creativity that our employees demonstrate everyday in helping our clients look for new ways to deliver upon their promises and pursue new promises is tremendously satisfying.

With that I'll turn it over to Randy.

Thank you, Peter. And welcome to all of you on the call today to discuss our financial results for the first quarter and our outlook for the remainder of 2015. We continue to make good progress on many of our key initiatives to strengthen our business and position us for future growth opportunities while delivering capital back to our shareholders. Now I'd like to walk you through our financial results in more detail.

Total revenues for the first quarter were $186 million, down slightly from the same period last year. Sequentially revenues in the quarter decreased 4% from the fourth quarter mainly due to the seasonally higher software and services revenues we typically see in the fourth quarter. Our first quarter revenues reflect the continued strength we are seeing in our processing revenues to include our international managed services offering and the successes we are seeing with our content monetization platform that was previously mentioned by Peter. The strength in this area of our business was more than offset by lower revenues within our international software and services business driven in part by foreign currency headwinds and long sale cycles on larger projects.

Moving on, our non-GAAP operating income for the first quarter was $31 million with a margin of 16.6%. GAAP operating income for the quarter was $22 million or a margin 12%. Let me expand a bit on our operating results for the quarter. As a result of continued good expense management, we were able to overcome the impact of a significant cost overrun we experienced on a large software and services implementation project which allowed us to deliver our operating margin in line with our expectations for the quarter.

Moving on, for the first quarter our non-GAAP adjusted EBITDA was $38 million, or 21% of total revenues. Our non-GAAP effective income tax rate was 37% for the quarter, as expected. Non-GAAP EPS for the first quarter was $0.51 which compares to $0.52 for the same period last year. GAAP EPS for the quarter was $0.28. We had a negative EPS impact of approximately $0.03 for the quarter associated with below the operating line impact of foreign currency translations and debt refinancing cost.

And now on to our cash flows and balance sheet. Overall, we ended the quarter with $170 million of cash and short-term investments, a decrease of $32 million from our year end balance, driven mainly by our stock repurchases for the quarter which I will touch on shortly. We generated $19 million of cash flow from operations for the quarter and free cash flow of $12 million. During the quarter, we received approximately $30 million of proceeds from our debt refinancing completed in February and we returned $63 million of cash to investors through our quarterly dividend and stock repurchase program. This includes $50 million under an accelerated stock repurchase plan, or an ASR plan, which we executed in early March. The execution of the ASR marks the first step in our planned share repurchase of $150 million of our outstanding shares over the next three years.

Moving on to our outlook for the remainder of the year. Before I address our 2015 financial guidance, I want to provide some background information expected to impact our financial outlook for the remainder of the year. We had previously anticipated that Comcast merger with Time Warner and related transactions with Charter would result in approximately $12 million in reduced revenues for us in 2015, based on the estimated closing date of the transactions. With the merger now terminated, we will not experience this revenue headwind. However, this benefit has essentially been offset in its entirety by two key items of similar size thus set our full year revenues remain in line with our previous guidance.

These two items are as follows. First, as Peter mentioned, the planned Time Warner acquisition by Comcast impacted the pace of conversions and related buying patterns of Comcast compared to our original expectations for 2015. Understandably, Comcast has been focused on integration planning during the last few months as move some of their previously planned conversions of Comcast subscribers as well as reduce spending on some other projects. We view much of this 2015 expected revenue shortfall from Comcast as timing for the year only. And we'll anticipate full conversion of the Comcast subscribers over time.

Second, we saw continued fluctuations in currency rates this quarter such that we anticipate further headwinds from foreign currency movements when compared to our original expectations for the year. Although we generate about 85% of revenues in US dollars, because of the significance of the more recent movements of the US dollar against various foreign currencies this is becoming more impactful to our revenues than we have historically experienced.

With that background let me provide you with an update on our financial guidance for 2015. As I noted, we are maintaining the high end of our revenue guidance at $770 million. But we are raising the bottom end of the revenue range from $750 million to $755 million. Although the high end of our anticipated revenue gains remains unchanged, we are expecting an improvement in our operating results with the favorable change in the mix of the revenues and our continued focus on expense management being the primary drivers here. With that in mind, we have revised our financial guidance as follows. We now expect our non-GAAP operating margin to be approximately 17.5% for 2015, up from our previous expectations of 16.5%, a full percentage point.

In addition, we are increasing our 2015 non-GAAP EPS guidance range to $2.33 to $2.40 which represents a $0.10 increase on the high side. This EPS guidance reflects an expected income tax rate of 37%, unchanged from our previous expectation and includes outstanding shares of approximately 32.5 million for the year. This share number is slightly higher than our previous expectations as a result of an increase in our stock price from earlier this year. We now expect non-GAAP adjusted EBITDA to be within a range of $162 million to $165 million, up approximately $7 million to $8 million from our previous estimate, which represents 21% of expected total revenues. Finally, we expect cash flow from operations to fall within the range of $105 million to $120 million for the year, up $5 million from our previous expectations. And we expect capital expenditures to be unchanged from our previous expectation of $30 million for the year.

Overall, we are pleased with a continued progress we are making on several key initiatives within our business. We continue to strengthen our leadership position in the North American video market. We continue to be an enabler of digital services around the world. And finally we continue to make steady progress towards establishing a sustainable managed services business internationally. We remain committed to providing value to shareholders through growing our business while also enhancing shareholder returns through dividends and share repurchases.

With that I'll turn the call over to the moderator for questions.

Thank you. (Operator Instructions). And we will take our first question now from Howard Smith with First Analysis.

Yes, good afternoon. I'd like to follow up for a moment on the discussion of the cost over run as well as managing the expenses in the quarter. It looked to me like SG&A came down substantially sequentially on that cost control and your cost to services is pretty high -- software and services. Are those expected to reverse going forward? In other words are we -- is that expense control on that SG&A kind of the new run rate?

Howard, this is Peter. I'll let Randy give some of the specifics of how he thinks about the SG&A side. We did have to take a one time financial charge for higher cost in the quarter associated with some higher cost on a very complex project which I can only tell you is very disappointing to me. We would expect that those -- that higher operating cost would not continue into the following quarters because we believe we fully recognize what the full cost to that project would be, at least the cost over runs. So we think that--

So that's all-in this quarter. Yes.

Yes. We took that in the first quarter. The benefits on the SG&A -- I will let Randy comment on that.

Yes. On the lost contract itself, was about a $5 million impact, negative impact to the quarter. And Howard, you can see that go through to the cost to good sold line through software and services, so you can see that the overall cost and the margin are kind of out of line what we would call more typical for that portion of our business.

Right.

It shows about a 7% margin for that and without this $5 million loss it would have been more in the normal range of 25% to 30%. So you can see it comes through the financials right there. As it relates to some of the cost savings, some of those were planned, we had started last year making some adjustments to some of our SG&A cost and you see the benefit of some of that coming through this quarter.

It's at about 18% right now for the quarter, the SG&A is. Historically, over the last four or five quarters it has been more in the probably 20% to 21%. Whether or not it stays at 18%, I think it might go up a little bit just because there were some discretionary spending items that we also held back on to the first quarter as well to kind offset some of this higher cost. So I think it is the SG&A is coming down as anticipated that is probably not the new run rate that you see there but it is going to be improved I think over time as we had anticipated. And I think we did a good job of managing although disappointed by the lost contract, we did a good job of responding to that and still delivering solid margins for the first quarter.

And Howard probably one of the questions that may be on your mind, your other investors is, to take a charge on a contract shows a challenge to a project and as many people may recall we had one in the first quarter of 2014. We've done a lot to make sure that we address this both on this specific project as well as within the business. We brought in new senior leadership for our services and delivery organization. We focused on the project leadership team and we've worked with partners to re-address some of the more challenging aspects of the project. And I think we've done the right thing to fix this specific challenge projects in front of us. But more importantly to ensure that we don't experience these type of issues going forward. So, don't know if that was going to be follow up but I --

No. That was it right there so I don't need to ask it so I will just leave it and get back in queue. Thanks much.

Okay.

From RBC Capital market we have Mark Sue. Please go ahead sir.

Thank you. This is actually Amit calling on behalf of Mark Sue. I just wanted to follow up on the $12 million in headwinds for the year related to Comcast re-pricing. I just wanted to check whether any of that is getting pushed into 2016 or was that related to the Time Warner side and, therefore goes away.

Well, there is -- let me clarify on the $12 million of headwind. When we talked about this over the last couple of quarters, the full year impact was always estimated to be about $15 million to $20 million and the timing of the closure of the deal this year equated to $12 million of headwind for 2015. So that headwind now will go away. Okay. It will go away. And as I went through my comments there were some corresponding items that offset that but the headwind itself is no longer in our guidance. And it will not be in 2016 at this point in time.

Yes. Because it was specifically, Amit, tied to the Time Warner acquisition. Since that acquisition is not going to take place we won't see a repricing associated with Time Warner. And therefore, our base run-rate would assume the levels that we're experiencing today on our revenues from those clients.

Alright. Just on the two million to four million that was expected in the back half of 2015, should we expect that more in terms of a first half of 2016 or is it more broad based in terms of the 2016 expectation?

We still, Amit, we still have very high confidence that all these subscribers who are going to convert in 2016 and probably 2017 is the time period that we would be looking. We don't have specific timing of when to provide you that as we get further into the planning with Comcast we will be able to give more insight as we get later in the year. But, and as we give next year's guidance. Most importantly, we have great confidence of our plans and Comcast plans because last week we were -- had a chance to meet with the executives of Comcast, catch their expectations coming on the heels of the Time Warner merger being called off and understand that they are still heavily, heavily focused on standardization, understanding that we are the platform that's going to drive that standardization and through that, that they are going to be able to drive new revenues on top of that. So we are in a very confident position as we finish out this year and start looking into next year.

Just a point of clarification to make sure our previous expectations for two million to four million of those conversions in the back half the year that has now changed to one to two million conversions. So we do anticipate conversions yet this year and also reminder we did two million conversions last year well.

Right. And just a quick on the FX headwind. Could you discuss whether you have any hedging contacts in place or maybe plan to have some hedges just in terms of where the FOREX is right now?

Right. We look at this very closely. We have no synthetic hedges put in place at this time. We've been relying a lot on natural hedges which have been relatively effective for us but we watched it very close and whether or not we decide to get into a synthetic hedge, we will just keep evaluating it.

Great. Okay. Thank you. Good luck.

Thanks, Amit.

Thanks Amit.

Next we have Tom Roderick with Stifel.

Yes, hi, Matt Van Vliet on for Tom guys. First question on the Charter extension. Could you talk about if there is any repricing immediately involved in that or if there is any kind of contingent repricing and if so what are the timing and maybe the keys to kick that in?

So one is we do have some -- we provided some pricing plans in the event that Charter was to grow through acquisitions and so we do have pricing and incentives to bring business along in the future if they were to grow through acquisitions. From the base contract, I'll let Randy speak to some of those specifics on that.

Yes. I think probably the biggest point to make here is that we have set our guidance initially at the beginning of the year with expectations of the pricing under the contract and it hasn't changed so it is embedded within our guidance and it is not any aspect of our changing guidance.

And the results came in line with what we --

Correct.

Yes.

And so I guess the $12 million headwind previously was also going to include any subs that were shifted into whatever -- whether it was going to be a spin co or two Charter and that was all included in that number?

Correct. That encompassed all the swaps in the trades and the sales between Time Warner and Charter that were impacting subscribers on our systems. So yes they were inclusive of that.

All right. And then just second question on the content direct side, you talked about some of the success you had with the ESPN and some new monetization. What impact in the first quarter did you see from that on a year-over-year basis and how much of the growth in 2015 is from sort of these newer services?

Well, we don't get into the specifics of any results for any one client and the overall numbers for what we are doing for what I will call over the top and digital services is still, it pales in comparison to what we are doing on our traditional piece. So the year-over-year differences are not going to be overall material to our results, Matt. But I would tell you that what we are seeing is the clients that we've been working with, these kind of leading brands, start to see business models where they are generating revenues from the new services which means we are going to start seeing revenues come from that. We think as we get into out years that we are well positioned for that. Randy, anything from the financial perspective --

No. I think you covered it well. I mean you see a little bit of coming through on the top line. I think our processing revenues will be up $1.5 million to $2 million year-over-year. I'd say a piece of that is coming both from the new initiatives around managed services as well as content monetization. So you start to see it come in a little bit. But again, as Peter said, it is not a significant portion of our revenue stream yet.

And then just lastly, as you see a little bit of delay here in the Comcast implementations, and we have gotten in pretty detailed into that, but can you remind us on kind of how quickly to I guess profitability, do those customers become, maybe ask in different way, are you just pushing a little bit of profitability out into 2016 that you maybe expected to see before hand?

No. We talked about this in the past on the structure of the contract we had this. We set this up so the very first subset profitability, these were not lost leader subs. As they come on, they come in a profitable level immediately upon conversion. So there is no shifting of significant profits between years because of delay.

Alright. Thank you.

(Operator Instructions).

Well it sounds like we have come to the end of our questions and exhausted those that some of the listeners have. If nothing is coming through in the last second here I will just provide closing comments. Nothing is at the queue?

No, sir. There are no questions in the queue.

Alright. Well, I just want to thank everybody on the call for continued interest. This is a business that we are very proud of and believe strongly not only in the markets we serve but in the types of services and the way we provide them to our clients. And we want to thank everybody and we look forward to continued positive success for this Company and reporting in the next quarter. Thank you.

Ladies and gentlemen, that does conclude today's presentation. We appreciate everyone's participation.