CSG Systems International Inc (CSGS) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the CSG Systems International Second Quarter 2017 Earnings Announcement Conference Call.

(Operator Instructions) Today's conference is being recorded.

At this time, I would like to turn the conference over to Liz Bauer, Senior Vice President, Chief Communications and Investor Relations Officer.

Please go ahead, ma'am.

Thank you, 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 onto 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 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 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 -- 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 Bret Griess, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer.

With that, I'll turn the call over to Bret.

Thank you, Liz, and thank you all for joining us.

I'm pleased to report that for the second quarter of 2017, we continued to execute according to plan.

For the second quarter, we grew revenues to $193 million, generated non- GAAP earnings of $0.62 per share and produced cash flows from operations of $35 million.

Importantly, for the first 6 months of the year, we've grown revenues 2% and generated cash flows from operations of $64 million and free cash flow of $46 million.

We have a very healthy business that is growing as a result of our continued investments, our market share gains and growth in our managed services clients.

Randy will review our financial performance in more details later in the call.

Before I discuss some highlights from our second quarter activities, I want to remind our investors of the 4 key initiatives that we laid out at the beginning of the year, all aimed at increasing shareholder value.

These include: first, continuing to drive revenue growth, in particular through our cloud-based and managed services offerings; second, expanding our broadband and cable footprint globally and getting broader and deeper in our international clients' operations by helping them solve their business challenges; third, investing in our platforms and go-to-market strategies, like our next-generation Ascendon cloud-based solution, a highly cost competitive and effective platform that allows operators to launch and generate revenues from digital services quickly; and fourth, continuing our relentless focus on executing extremely well on behalf of our clients.

Our proven reputation for doing what we say has served us and our clients extremely well.

Let me share with you how we are doing on those initiatives.

First, we extended and expanded our contract with Charter Communications, the nation's second largest cable and broadband operator, through the end of 2021.

This is a very important extension for us.

This new contract consolidates the various contracts that we had with Time Warner and Bright House Networks and provides us with opportunity to do even more for Charter.

Currently, Charter utilizes us and a competitor to provide customer care and revenue management services.

We provide our services to approximately 15 million of Charter's 25 million customers.

In addition, Charter utilizes our field force automation solution, Workforce Express.

In their footprint for all the legacy Time Warner locations use a competitor's solution.

With this new contract, Charter will be rolling out our industry-leading field force automation solution across all their locations, including the former Time Warner and Bright House locations.

Our field force automation solution helps operators drive significant improvements in their overall customers' experience and lowers total operating costs.

The return on investment with this solution is quick and powerful.

This is an example of how we continue to work day in and day out to earn more of our customers' spend.

While our clients are looking for ways to reduce their overall spend, improve the customer experience and drive new revenues, our cloud-based and preintegrated solutions allow them to operate more efficiently, and more importantly, more effectively.

We're thrilled that we have earned the right to do more for Charter as they continue to drive for a differentiated and superior customer experience.

Next, we continue to grow our relationship with our largest client, Comcast.

We converted another 2.7 million Comcast residential customers off of a competitor's legacy platform and on to our advanced convergent platform this quarter.

This brings the total number of Comcast residential customers converted on to our platform to almost 10 million since 2014.

Next, we continue to make solid progress on our efforts towards converting our traditional software clients into longer-term managed services engagements.

This past quarter, we signed several small new contracts, including one with TELUS, an existing customer; and one of the new customer, La Poste, France's postal organization.

I've discussed the importance of strengthening and lengthening our revenues by getting in and running our own applications on behalf of our clients.

Most of these large organizations spend lots of money with large systems integrators or have lots of folks on staff, maintaining and fine tuning hundreds of applications.

By having our professionals working side-by-side with our clients, we can optimize the performance of our solutions, identify new opportunity to automate or improve processes and drive cost out of their overall operations.

As a result of this focus on driving more value for our customers, we have more than doubled our global managed services revenues over the last 12 months, helping us increase the visibility and predictability in our overall enterprise revenues.

Next, we continue to generate strong momentum and excitement with our Ascendon next-generation digital services platform.

One of our large DBS clients will be using our Ascendon platform to creating more personalized and robust digital experience for their customers.

By utilizing this next-generation platform, they will make it easy for consumers to enroll in new services, register their mobile devices and apply personal preferences for video content to the various members of their household.

In addition, their customers will be able to pay for the various services using an e-wallet that includes credit card, debit card and PayPal options.

And this operator will have the flexibility to offer discounts, coupons and vouchers as well as bundled pricing.

We believe that Ascendon will enable them to offer a truly differentiated video experience that enables their customers to watch their content on the go any time.

And finally, we continue to focus our attention on helping our clients execute very well on their business, while providing the scalability, security and reliability that is required to compete today.

While providing these capabilities as table stakes for any service providers, having a partner like CSG who is relentlessly focused on this allows our customers to dedicate their time and resources to other critical business drivers, like delivering a differentiated customer experience or disrupting their own structures from a cost basis.

Our migration of our Ascendon next-generation platform to the Amazon Web Services public cloud is changing the way that operators are thinking about CSG and about the way that they overhaul their fundamental cost structure and time-to-market assumptions.

Our domain expertise is running large-scale, business-critical applications.

And AWS's approach to the cloud delivery model is proving to be a significant differentiator for us as we talk to operators around the world.

As a result, we help make our clients hardest decisions simpler and smarter.

We are all in, making their business decisions our own and bringing flexible, robust, game-changing solutions and the industry's best thinking to the table.

We believe that we are the only provider positioned to do this and do it well.

Before I turn it over to Randy to review our second quarter results, I want to thank our employees for their hard work.

The industries that we serve are going through tremendous change.

This really is nothing new to the employees here at CSG.

Our employees are helping our clients navigate through the ever-changing marketplace with innovative approaches and solutions, and quite frankly, an attitude that is more focused on helping our clients succeed than anything else.

As I shared before, I like our position.

We have an enviable business model with strong fundamentals that position us well to drive shareholder value.

We have unrivaled domain expertise in the broadband and video markets.

We work with some of the largest and most innovative communication service providers in the world.

And we continue to grow our footprint, both with these clients and new clients around the globe.

We have proven technology and a solid reputation for operating our solutions really well.

We have a financially sound company.

We generate strong cash flow and have a strong balance sheet, which gives a tremendous flexibility for investing in our people, our solutions, our clients and still return capital to our shareholders.

And most important, we have talented and dedicated employees across the globe who are committed to helping our clients and our company achieve greatness.

With that, I'll turn it over to Randy.

Thank you, Bret, and welcome to all of you in the call today to discuss our financial results for the second quarter as well as our outlook for the remainder of 2017.

We are pleased with our continued solid results for this year and the progress we're making on our strategic initiatives.

Now I'd like to walk you through our financial results in more detail.

Total revenues for the second quarter were $193 million, an increase of 1% from the same period last year and sequentially consistent with the first quarter.

For the first half of the year, our total revenues were up 2%, and our cloud and related solutions revenue grew 6% over last year.

This growth was driven largely by the conversion of new customer accounts onto our cloud solutions, and the increased revenues from our recurring managed service offerings.

This strength helped to offset our anticipated decrease in software and services revenues as we continue to transition this part of our business into a more predictable recurring revenue model.

Our second quarter non-GAAP operating income was $35 million with a margin of 18%, which is in line with our expectations.

GAAP operating income for the second quarter was $24 million or a margin of 13%.

Our non-GAAP adjusted EBITDA was $43 million for the second quarter or 22% of our total revenues.

Our non-GAAP EPS for the second quarter was $0.62 compared to last year's $0.70.

Our non-GAAP effective income tax rate was in line with our expectations at 34% for the current quarter.

And finally, our GAAP EPS for the second quarter was $0.35 compared to $0.33 for the same period last year.

In summary, our financial results for the second quarter and the first half of 2017 reflect our continued solid execution, with the year-over-year decreases in our operating results reflecting our commitment to invest in the long-term strength and growth of our business.

We ended the quarter with $245 million of cash and short-term investments compared to $238 million at the end of the first quarter.

We generated $35 million of cash flow from operations and $25 million of free cash flow for the quarter.

And on a year-to-date basis, we generated $64 million of cash flow from operations and $46 million of free cash flow.

Additionally, we repurchased $10 million of cash of common stock under our buyback program and paid $14 million of dividends during the first half of the year.

Our ability to generate strong, consistent cash flows from operations continues as one of our fundamental business strengths.

This, plus our solid balance sheet, allows us to return cash to shareholders while also being well positioned to invest in future growth opportunities.

Let's move on to our outlook for 2017.

As a result of the solid execution so far this year, we are raising the bottom end of our revenue guidance and now expect our 2017 revenues to come in between $770 million to $785 million.

Our expectations for our non-GAAP operating margin percentage for the year are unchanged at approximately 18%, which is consistent with the first half of the year results.

Moving on, we are maintaining our 2017 non-GAAP EPS guidance range at $2.45 to $2.59, which reflects our outlook for a non-GAAP tax rate of 34%.

We continue to anticipate our outstanding shares to be approximately 33 million shares for the year.

We tightened the range for our non-GAAP adjusted EBITDA, which is now $173 million to $177 million.

We also continue to expect operating cash flows to be within the range of $105 million to $125 million with CapEx of $20 million to $25 million for the year.

In summary, we had a solid performance in the first half of the year, lining up nicely with our expectations.

We are growing our top line with new logo wins, transitioning our software clients to long-term managed services arrangements and by continuing to win market share in the cable space while also extending our long-term relationship with our second largest client, Charter.

In addition, we are investing in our people, our products and our clients to drive long-term value while continuing to return cash to our shareholders.

We like where we're at, and we're happy with what we've accomplished so far this year.

With that, I'll turn it over to the operator for questions.

(Operator Instructions) And we'll take our first question from Tom Roderick with Stifel.

It's Matt Van Vliet on for Tom.

So another good quarter here.

I guess, digging in straight off, you talked about managed services.

You've been able to double that business over the last 12 months.

Just curious where you see sort of the continued growth there?

How much more investment in the business do you feel like you need to continue to scale that and maybe where the targets are 3, 5 years down the road here?

Matt, we don't see any big investments on that international managed service business at this point in time, because it's usually a joint effort with our clients to help them solve problems, and we work collectively to get a win-win deal for them.

So I wouldn't see it as a major capital investment or anything along those lines as we go.

As far as opportunity, we've got some incredible high-end customers in MTN South Africa and Telstra who continued to work with us, or allow us to work with them is a better way to say it, to extend and increase the relationships with them.

Those have been really good markets for us.

With the pipeline is as full now as it's ever been in that space, I'd hate to commit to a doubling year-over-year, because these deals, they're usually pretty good-sized deals and they're material in complexity and amounts.

So timing them and getting that right isn't as simple as flipping a coin.

There is a lot of work that goes into them.

If you go back 5 years, we had no revenue in that front.

Now we've got what's moving in on a material amount on that front and a pipeline that's larger, richer and healthier than it's ever been.

So we just see great opportunity in that.

And whenever we see an engine growing, we're going to feed that engine.

And then looking at the growth of the Ascendon platform and the investments you've made there and product development and now moving it to AWS, where do you feel like you are in sort of the -- maybe looking back a couple of years, the product's road map of where you wanted to get that to be an effective go-to-market, for not just your sort of existing cable pay-TV providers as an over-the-top and additional revenue source, but being able to utilize some of the newer go-to-market, maybe less traditional customers for CSG's perspective in terms of the product development?

So where you are now?

And maybe how much more you need to invest to continue to grow that business?

That's a long question, Matt.

No.

But the reality is, people like to use the metaphor of a ballgame.

And if there's anything, I'd say we're in the second to third inning of this ballgame.

We've just started -- over the previous couple of years, we had incrementally been bringing down our R&D.

Here of late, we've been bringing it up a couple of percentage points a year.

You'll see there from a growth perspective, we're starting to see some results from that, some traction from that growth.

And even more telling than the specific economics for me is the sheer number of customers and the times that I'm hearing, wow, this is not the CSG we thought it was.

And so where we may have been viewed as a very steady eddie deliver on your behalf, we still have that.

But now what's happening is they're seeing the innovative approach and how we're driving the next-generation digital services platform, that's causing them to look at their other strategies and initiatives and say, hey, wait a minute, maybe I better take a look at this and go a little bit deeper.

Well, that being said, we have brought it up incrementally a couple of percentage points, but we're early in the game here.

So we're going to keep evaluating that.

We may end up investing more in that.

We may end up managing it in different ways.

But the reality right now is we see great traction.

We see places that are not just in the communications support providers, but we're seeing it from other digital services activities that are gaining interest in it.

And as I said earlier and I'll repeat again, when an engine is growing, we're going to feed it.

And then looking at -- you obviously, you announced the extension with Charter Time Warner.

So the next big contract renewal on the books is going to be DISH Network.

Can you talk about maybe where you guys feel like you're in that process?

If memory serves me correct, the deal ends at the end of 2017.

So where maybe you are in that renewal negotiation?

Well, like a baseball game, it's not over till it's over.

But we have a great relationship with DISH.

They are a great customer.

I'd be remiss if I didn't say thank you to the team at Charter and our employees that did that one.

We feel like we've got an incredibly fair, agreement -- extension win for our shareholders, for our employees, and most importantly, for them as our customers, an incredibly fair extension and renewal there.

We believe we're in very good standing with DISH.

You should take that as a great proof point in the future if we get that to a conclusion and a commitment to continue our relationships together.

But they're an incredible customer, and our teams are doing yeoman's work to make it make business sense for them and make it make business sense for us.

And we got confidence by bringing the right "A" game everyday.

We will continue our relationship with DISH as we move forward.

And then last one from me.

There has been a lot of talk, I guess, recently with Comcast, Charter or Sprint kind of bouncing around different ideas of how we kind of get to the next level, or I guess, the next generation of providers and what converging broadband and wireless might look like.

Where do you guys, I guess, sort of you view that strategic aspect of your market?

What are you doing to sort of further improve and differentiate the product to hopefully serve a potential combination service provider that might be a little more end-to-end at least in the U.S. market?

Yes.

It' an incredibly exciting time in our market, in our space right now.

But I also remember, when there were a couple of hundred cable companies across the country.

And we're talking about the next-generation would have dual-play or triple-play, now it's quad-play and they're competing with the large companies out there in the Amazons and the Apples and pick your poison here.

So, there is great transformation going on.

And it's also one of the things that CSG has been really good about from a strategic investment perspective getting out in front of.

So Ascendon, as much as you're hearing us talk about it in the last 12 to 24 months, the investment basis and the strategic input started 8 to 10 years ago, which has positioned us really well with a cloud-based, fast time-to-market, very cost effective solution that solves these exact digital challenges that they're going to be facing and are facing day-to-day, which is what is helping -- to get us deeper and deeper into the conversations as they go through that.

And then when you combine with that 30 years of do what you say and say what you do, that combination becomes incredibly powerful, because we understand the challenges of going through the transformation.

We've made the investments.

We're prepared for it.

And the interactions as they go through consolidation is a thing that we're a part of.

And we look forward to continuing to serve them.

And moving on, we'll take our next question from Chris Moore with CJS Securities.

The field force automation with Time Warner, I'm just trying to understand how the pricing works there?

Is that something that's kind -- there's volume discounts that are given when you re-sign a Charter?

And then some of that is offset with additional services, such as the field force automation to the Time Warner customers?

Well, first of all, I think Bret mentioned it well.

This is a great contract that was best for both us and Charter.

Our contracts, typically when we renew with clients, there's an exchange of commitment from their part for term and for new products, and in return, we will give discounts.

And that's the case here.

In the case here, the new products that we expect them to roll out very quickly is the Workforce Express, because they already have it across their -- across part of their footprint.

And we expect that to give us an opportunity to more than offset some of those discounts that we provided in the near term.

And it also gives them the great ability to get more efficient by having a single platform delivering it across that broader market space.

So we try to keep our focus completely on solving their business challenges and improving their operations.

In terms of -- obviously, the increased investments you talk a lot about, long term, it's clearly to continue to drive revenue growth.

Just internally, how do you measure or how will you measure kind of the success of the expanded investment initiative over the next, say, 4 to 6 quarters?

And just -- obviously, I understand the idea behind it.

Sometimes, it's going to take a while for it to translate.

Just trying to understand kind of how you see it incrementally moving forward internally?

Yes.

Chris.

As I mentioned earlier, it is something that we see to be very important and especially with the very transformational activities happening across our space that Matt had asked the questions about and we talked about.

However, at the same time, we also know we're fiduciary.

So we've got to keep a good eye on making sure we're seeing the traction and we're getting returns on them.

I wish it could be solved in the quarter or 2. That's not reality.

The reality is to remain relevant and to make it a sound business.

It most likely is a longer-term investment.

And we're monitoring closely the size of that investment, and we maintain the flexibility to both pull back or go forward faster as we go through that.

And that will be based upon economics, good business, our customer buy-in to that.

A lot of factors come to bear on that.

How we can compete in that market space, the relevant size of that market space, whether we have a differentiated solution where we think we can gain better returns long term.

So there is a lot of factors that go into that.

We've got a great board who is helping us with it.

We've got a great executive team.

And most importantly, we've got great customers that are influencing whether there will be a return on that investment or not a return on that investment as we move forward.

So I know that's a long answer.

The reality is we're monitoring it closely.

We're going to continue the investment for now and we'll continue to monitor for getting the return on that investment.

And one thing I'd say, Bret, also the thing to keep in mind, Chris, is that the sales cycle on these type of deals is quite long.

So you've got probably anywhere from 12 to 24 months.

These are pretty significant systems that clients put in as they roll out new digital services.

We can get them up and running very quickly and as quick as 90 days, but the sales cycle just still takes long.

Just something to keep in mind.

Got you.

Okay.

I have some housekeeping stuff I'll follow up with.

(Operator Instructions) We'll hear next from Larry Berlin with First Analysis.

Just a couple of quick ones.

First if I just went apples-to-apples on subscribers, someone who is not migrating like Charter, how is sub growth or shrinkage looking compared to the way it's been over the last year or 2?

Does that make sense?

I'd say, one way to look at it, Larry, I think you've seen a lot of our customers are having pressure on the video side, but they're doing a great job of rolling out other services.

In particular, high-speed data has been a very good product for them.

So we've actually seen our subs continuing to grow on our platform over the last couple of years from an organic standpoint.

And obviously, we've got 10 million subs that we've converted over from Amdocs from Amdocs on to -- from Comcast -- Amdocs on to our platform.

But organically, we're still seeing some good growth going on.

Yes, there's just some puts and takes on a line item -- line of business, but the whole has been staying strong and growing.

So...

Okay then.

Besides the obvious one who you just mentioned, but what are you guys seeing in the competitive space, especially in the new products that you're building?

Are using small guys, big guys, the Oracles of the world coming in or some other form of competition?

I would say yes, yes, and yes being in the space.

We've got a very wise and very well-capitalized customers and who wouldn't want to work with that.

And so what we see is the big players would love to get further in and do more.

We see things international, where other folks want to do things as there's pressure on their telco business or other things.

They see it as ground we're trying to take.

And we also see a lot of small startups, especially in the IoT and OTT space, where they come up with a great idea in their proverbial garage or basement or whatever and they want to compete.

And so we believe that we're in a highly competitive space, but we also have an incredible track record and have been bringing in --I just today -- I'm blessed.

I got to sit through our interns' final end of summer projects and see the value they brought to our company.

And we're able to bring in great innovative skill sets to help to compete there along with that traditional.

So we'll continue to honor our past and inspire our future to fend off those competitors and keep the long-term relevance and growth of this company.

(Operator Instructions) And it appears we have no questions at this time.

With no outstanding questions, we look to bring it to a wrap.

And as always, I'd be remiss if I didn't say thank you to our customers for being our partners, our shareholders for being a part of this great journey, and equally, if not more importantly, employees that are putting their nose to the grindstone day in and day out to solve our customers' problems.

So with that, we'll bring it to wrap, and hopefully, get a chance to talk to you all over the next quarter.

Have a great day.

Once again, that does conclude today's conference.

Thank you for your participation.

You may now disconnect.