CSG Systems International Inc (CSGS) 2017 Q4 法說會逐字稿

Good day, and welcome to the CSG Systems International Fourth Quarter 2017 Earnings Announcement Call.

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

At this time, I would like to turn the conference over to Liz Bauer.

Please go ahead, ma'am.

Thank you, Vicki, 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

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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 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 Bret Griess, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer.

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

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

I know some of you may not be excited by it, but I am really excited to have my voice back after that untimely bout with a cold last quarter.

More importantly, I'm pleased to report that in 2017, we executed very well on both our financial and business objectives.

In the past 2 years, we have made investments and organizational changes that are positioning us even better to create a long-term value for our customers, employees and shareholders.

For the full year of 2017, we grew our revenues organically by approximately 4% to a record $790 million, exceeding our top line revenue guidance.

Our non-GAAP earnings per share of $2.51 were in line with our guidance.

We generated cash flows from operations of $128 million and free cash flows of $99 million.

And we grew our recurring revenue base by 7% year-over-year to over 90% of our total revenues.

This is important for 2 reasons.

First, it creates longer-term and more engaged relationships with our clients than a traditional software and services relationship.

And second, it decreases the volatility in our overall revenues and quite frankly, our customer relationships as we transition our software and services customers to multiyear engagements.

We had an extremely strong fourth quarter, which led to our outperformance in revenues.

Randy will review both our fourth quarter and full year financial results in more details later in the call.

At the beginning of the year, I laid out our 4 key initiatives aimed at increasing shareholder value.

I'd like to provide you with my perspective on how we executed against these initiatives.

First, we stated that we would continue to drive revenue growth in line or greater than the market organically.

As I shared earlier, revenues grew by 4% year-over-year.

This is 4x the rate of the industry.

We attribute this growth to several factors.

Our relentless focus in investment and helping our clients solve for the most challenging business problems.

Specifically, their transformation from a traditional communication service provider into a digital services provider.

The fact that we bring a differentiated and highly valuable approach to solving for the challenges that our customers are facing.

And finally, we do what we say we are going to do and are much easier to do business with than other solutions providers.

Next, we said that we would expand our broadband and cable footprint globally and get broader and deeper in our international clients' operations, and we did just that.

Let me share some of the highlights of 2017.

During the fourth quarter, we converted over 500,000 Comcast customers off of a competitor's legacy billing platform over to CSG, bringing the final Comcast conversion total for 2017 alone to nearly 4 million customers and over 10 million customers over the past 4 years resulting in Comcast's entire residential multiplay customer base now being serviced solely by CSG.

In addition, we converted over 200,000 customers off a competitor's legacy billing platforms for smaller cable operators like Buckeye Broadband.

Additionally, we extended our contract with Charter Communications for another 4 years and expanded our industry-leading field force automation solution across their national footprint, again replacing a competitor's solution.

We extended our contract with DISH another 4 more years and worked with them on introducing their new digital AirTV service to their customers.

And finally, we nearly doubled our managed services revenue year-over-year.

We did this by delivering sustainable business value for our existing managed service clients.

For example, with increased standardization and automation, lower operational costs or an enhanced customer experience and by winning engagements with companies like TalkTalk, Bharti Airtel, MasterCard, Cable ONE and TELUS.

I believe that our approach and our execution has established us as a true partner with companies as they continue to evolve their businesses to thrive in the new digital world.

Next, we said that we would continue to invest in our platforms and go-to-market strategies, like our next-generation cloud-based solutions.

We've seen solid momentum being created as a result of these investments.

In 2017, we expanded our reach and our footprint in the communications and entertainment space as well as into the IoT vertical with our Ascendon SaaS cloud-based platform.

This past quarter, we helped entertainment providers like Redbox and Marvel launch their direct-to-consumer offerings aimed at creating new revenue sources and a differentiated customer experience.

And we won an Indian Smart Cities IoT opportunity, beating out competitors who are much larger than us.

Smart cities are a subset of the overall IoT market, and their activities can range from sensors, monitoring utilities to transportation, to commerce, to trash collection and hundreds of other use cases.

This engagement involves enabling smart transformation of enterprises and cities throughout India.

We won because of Ascendon's ability to manage the complex end-customer and third-party business relationships that make up any smart city's efforts.

And finally, we said that we would relentlessly focus on executing extremely well for our clients.

Our proven reputation for doing what we say has served us and our clients extremely well in this highly competitive business environment.

We continue to invest in our people, our processes and our platforms to ensure that we deliver at the level our customers not only desire, but have come to expect from us.

We believe that our reputation for delivering on our commitments differentiates us from other companies in this space.

As we begin 2018, I believe that the disruption that we are seeing in our customers' business will create solid opportunities for CSG.

Service providers need to do more with less whether that is resources or funding, they need to protect their traditional business models that generate strong cash flows while exploring ways to generate new, sustainable revenue streams.

And they need to serve an always-connected customer who has more choices than ever for consuming information, communications and content.

For over 35 years, we've helped our clients evolve their businesses.

We've helped make their hardest decisions simpler and smarter, and we've enabled them to thrive no matter the challenge in front of them.

Going forward into 2018, we will continue to execute on the initiatives that we laid out in 2017 aimed at creating long-term shareholder value.

You should expect us to continue to drive revenue growth at or above the industry rate, get broader and deeper in our customers' operations with our proven cloud and SaaS-based solutions, invest in our platforms and go-to-market strategies to power our revenue growth and enable us to enter new markets like IoT and smart cities.

And finally, relentlessly focus on delivering an exceptional experience for our customers.

When we do those things, good things happen for our employees, our customers and our shareholders.

Speaking of good things happening, we believe that the most recent tax reform legislation is a positive for all U.S.-based businesses.

For CSG, we believe that we will be able to provide a tangible benefit to our employees, customers and shareholders.

We will invest approximately 25% of the benefit we gained from our lower corporate tax rate and invest it directly in compensation and programs aimed at helping our employees continue to grow and deliver value for our customers.

We continue to believe that our employees are a true differentiator for CSG, and this is a worthwhile investment that will pay long-term dividends for us, our clients and our shareholders.

The remaining 75% will provide an immediate benefit to our shareholders as is evidenced by our guidance.

In summary, I like our position.

I just came from our sales kickoff event, in which we brought in our teams from all around the world, and the tone, the energy and the excitement for what lies ahead of us was contagious.

Sales professionals love to be on winning teams and is -- and as is evident by growing 4x faster than the market in 2017, they know a lot of the actions we have taken have put us in this position.

From a shareholder perspective, I believe we've a winning formula for creating long-term value.

This formula includes some compelling elements, including that 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're establishing ourselves as a trusted digital transformation partner for companies undertaking this journey.

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

We have a financially sound company.

We generate strong cash flows and have a solid balance sheet which gives us tremendous flexibility for investing in our people, our solutions, our clients and still return capital to our shareholders through our dividend and share repurchases.

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 to review our results for the fourth quarter and the full year of 2017.

Thank you, Bret, and welcome to all of you on the call today to discuss our financial results for the fourth quarter and full year of 2017 as well as our outlook for 2018.

We are pleased with our solid results for this year, our success in extending our global market share and the progress we are making on our strategic initiatives.

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

Total revenues for the fourth quarter were $205 million, a record high for CSG.

This represents an increase of 5% from the same period last year, an increase of 3% from the third quarter.

Total revenues for the full year 2017 were a record $790 million, an increase of 4% over last year and above our full year expectations.

Our strong revenues for this year were driven by our cloud and related solutions revenue, which increased 7% over last year.

This growth was driven largely by the conversion of new customer accounts onto our cloud solutions and increased revenues from our recurring managed services offerings, countering our anticipated decrease in software and services revenues as we continue to execute on our transition to more long-term recurring relationships.

Moving on to results of operations.

We finished the year with solid operating results in line with our expectations.

Our fourth quarter non-GAAP operating income was $36 million and was $142 million for the full year, both representing a margin performance of approximately 18%.

Our non-GAAP adjusted EBITDA was $45 million for the fourth quarter and $176 million for the full year, both representing 22% of our total revenues.

Our non-GAAP EPS for the current quarter was $0.62, and we ended 2017 with non-GAAP EPS at $2.51 in line with our full year expectations.

Our 2017 non-GAAP effective income tax rate came in slightly higher than our expectations at 35% for the year.

It is worth noting that our non-GAAP results for 2017 were not impacted by the recently enacted U.S. tax reform.

Moving on, we ended the year with $261 million of cash and short-term investments.

We generated $24 million of cash flow from operations and $19 million of free cash flow for the quarter.

For the full year, we generated $127 million of cash flow from operations exceeding our expectations and $98 million of free cash flow.

For the full year, we repurchased $21 million of common stock under our buyback program and paid $27 million of dividends, which together represents close to 50% of our free cash flow being returned to shareholders.

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

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

With that in mind, we are pleased to announce that we will be increasing our first quarter dividend by approximately 6%, maintaining our annual mid- to upper single-digit growth profile since we initiated our dividend in 2013.

Let's move our -- on to our forward view for 2018.

Before I get into the details, I want to provide some background how the recently enacted U.S. tax reform will impact our business.

We currently expect both our GAAP and non-GAAP effective income tax rates going forward to be in the range of 26% to 28%.

This represents an improvement of 10 to 11 percentage points for 2018 had the new legislation not been enacted.

As Bret mentioned earlier, we plan to take a thoughtful approach in how we use this benefit.

First, we plan to take about 1/4 of the benefit and invest it back into our business.

This investment is being directed almost entirely towards our employees.

Our employees represent one of our most valuable assets, and we believe our actions here will further strengthen our workforce and continue to set us apart from our competitors.

And second, the remaining 3/4 of the benefit will fall to the bottom line in 2018, thereby increasing our EPS for the year.

Now let's move on to the numbers.

We expect our 2018 revenues to come in between $795 million to $815 million, which represents a 1% to 3% growth over last year, consistent with our strategy to grow revenues at or above the market rate.

This is driven mainly by expected continued growth in our cloud-based solutions and managed services offerings.

We now generate over 90% of our annual revenues from recurring sources.

We anticipate our non-GAAP operating margin to be approximately 17.5%.

We anticipate our non-GAAP tax rate to be approximately 27% for 2018.

We expect our outstanding shares to remain consistent with our 2017 level at approximately 33 million shares.

Putting our expectations for our non-GAAP EPS to be in the range of $2.76 to $2.89.

This represents a 10% to 15% increase over last year, reflecting the strength of our business and the retained benefit of the lower tax rate, I mentioned earlier.

In addition, we expect a range for non-GAAP adjusted EBITDA to be $182 million to $180 million.

And finally, we expect a range of operating cash flows of $120 million to $140 million with CapEx of approximately $30 million for the year.

In summary, as I look back on the year, I am pleased with the strong performance we had for 2017.

During the year, we grew revenues by expanding our pay-TV market share, winning new client logos, growing long-term managed services arrangements and extending long-term contracts with key clients.

We did all this while also positioning ourselves for continued success going forward by investing in our people, our solutions and our clients in order to drive long-term value for our shareholders.

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

(Operator Instructions) We will take our first question from Tom Roderick with Stifel.

So congratulations for starters here on -- in this successful complete conversion of all the Comcast stuff.

That was a multiyear process.

I know you guys put a lot of work into it.

I'd love to hear, if you don't mind talking about it, some of the learnings you can take away from the successful conversion itself?

And from that perspective, now that you have some extra capacity back, is there an opportunity still on the table, do you think, to look at some other share shift opportunities, notably the Charter, Time Warner opportunity to do some sort of -- something sort of similar?

And do you think you have the added expertise following Comcast to pull that off even more efficiently next time?

Thanks, Tom, for the question.

This is Bret.

You can rest assured based upon everything you're seeing from us driving growth, we're looking everywhere we can in the market to drive share shift.

And we believe we're incredibly well positioned to do so.

To my knowledge, we're the only company in the space that's had a conversions team focused for over 30 years and pulled off that -- it's all over industry, you see failed conversions projects.

We did a multiyear 10-million subscriber conversion onto a live active production system without a single misdeed there.

So there are some learnings there.

There is day-in and day-out learnings for CSG period.

We're constantly looking for ways to up our game.

We do have some capacity in the conversions.

We do see some market opportunities there.

If you listened to Comcast's call, you'll hear good things.

We believe that we've added great value to them through numerous factors there.

And so yes, we see that, and we are going to be pursuing growth in a very hard fashion as we go -- healthy growth, of course.

And we think our conversions team is a very key piece of that as we move forward.

Fantastic.

One quick follow-up for you just on Ascendon.

You've got another year under your belt.

And I'm curious what sort of feedback you're getting from your bigger clients out there, particularly on the proper business model to use Ascendon on.

Looking at Comcast, they've utilized it in a couple of emerging growth offerings, and maybe some of the on-demand features that you could support them on.

Talk a little bit more about how you see the demand for Ascendon evolving and the business model for that evolving as we look out to 2018 and '19?

Tom, we have seen growth in that area, and we're extremely committed to it.

Our customers were seeing some of the traditional CSPs, who are more open to moving that direction.

It's hard to move an entire infrastructure that way.

But as you mentioned, we're getting some pieces where we're adding great business value on that front.

And in addition, it's opening up some of those tangential markets like IoT, like smart cities as we go down that path.

So 5 years ago, everybody was reading about cloud.

Now what's happening is everyone on the planet are close to it has heard of cloud, and they're starting to realize the phenomenal benefits of it.

And we're a leader by having the only digital BSS and BSS platform that is in the public cloud, which brings great efficiencies around time to market and cost of delivery as we go there.

So we continue to keep hitching our horses to that wagon, because we see that's the future and we intend to be relevant for our customers moving forward.

(Operator Instructions) And we'll go next to Chris Moore with CJS Securities.

If you just -- I know it's kind of a difficult one, but is there any way to measure or even approximate the return on investment or the effectiveness of the R&D spend?

I mean, what types of things do you look at to kind of gauge how that is going?

Chris, that's a -- it's a good question.

That's one that we wrestle with day in and day out because we know at the end of the day, we are fiduciaries and we have to do the right thing by our shareholders and everyone involved with it.

The key measure that we have on that is revenue growth, and then we look to continually drive that.

As long as we can drive that -- the growth -- if the machine is growing, we're going to feed it.

And then we look to how do we manage that so that we're not overspending, underspending along those lines.

And we've been investing in that Ascendon platform for some time now, and you see the revenue growth start to happen.

And we see that we're at -- right at market trends for R&D as a percentage of revenue and those types of things.

But we monitor that very closely, and we'll continue to as we look to drive the top line revenue.

Got it.

And just as a follow-up there.

I mean, R&D in '16 was a little under 99, but I think 113 something like that this year.

You expect that as a percentage of revenue in '18 to kind of match what '17 was?

Yes, Chris, this is Randy.

I think we kind of get to the -- our elevated investment level here throughout the year.

So I think we're at a pretty good spot right now.

And I think the fourth quarter and/or the full year run rate for '17 is a good indication of what you should expect in '18 as well.

And we'll go next to Tom Roderick with Stifel.

I wanted to sneak one last one in, just sort of thinking philosophically about the trade-off here with a lot of earnings power, given the tax reform, the lower tax rate itself.

Can you just sort of help us understand philosophically?

So guiding 17.5% margin is a little lower than where they were at the end of this year.

Are you looking at that as you've got some EPS upside because of tax reform, you want to invest some of that back, hence the lower operating margins?

Or should I think about other costs in the business that have sort of nothing to do with investing the upside of that earnings power back in the business?

Just philosophically, where are you coming at from that one?

Yes, from a philosophical perspective, Tom, I'd tell you, we spent a great deal of time working to ensure that we were thoughtful about what we did with that, as far as that tax reform what the intent of it was, where we're positioned as a business.

We brought down the margins a year ago to invest more in the R&D and in the business, and we're seeing great traction from that.

And it's also why we feel it was very important to make sure a good portion of it went back to EPS long term.

We're in a very healthy, very sound position.

We've got access to capital.

We continue to look at M&A activity along those lines, but we also understand the intent of it and wanted to make sure that we're investing in that incredible resource and domain knowledge that we have for our folks, which is where it's not just going to compensation, it's going to learning activities, to upscale what we're doing in the markets that we serve so that we can continue.

You know the things that are going on with Ken Kennedy leading our product organization; Brian Shepherd, in the overall go-to-market effort; Liz, with our brand.

You can go right around the table of our leadership team and investing in them and their people to make this stronger and healthier so we can continue to fight the fight to solve the problems for our customers and drive the growth and improve what we deliver to our shareholders is the philosophical intent.

Excellent.

Let me ask you one on the international then I'll jump off.

But thinking about some of the emerging markets, particularly the managed services opportunities and emerging markets, Tier 2, Tier 3 markets.

Competitively, any dynamics -- change in shape of the dynamics taking place in that -- in those environments?

I know for a long time, you had some Chinese competition that was very, very price-sensitive and it seems like perhaps some of the Network Equipment Providers may be dying down on some of that activity.

But what are you seeing out of the NEPs and their desire to sort of stay in the billing game on the international and managed services, in particular?

Yes.

We see them in the marketplace, and I would never diminish our competition because we're very excited about the endeavors that we do have.

But we think that the things that are going on in our industry and in markets altogether is causing volatility and is causing change.

When you see things like 5G coming, and how it's going to fuel the online activity and digital performance of things, we're seeing the competition consistently.

It goes through its ebbs and flows depending upon the market, depending upon the NEP, but we believe we're winning our fair share of that growth, and we're going to continue to drive that.

(Operator Instructions) No one else is queuing for a question at this time, so I'll turn the call back over to our speakers for any additional or closing remarks.

Well, our closing remarks would primarily be, first, thank you to everybody who got on the call and took the time to understand what we're doing in our business to drive growth and to continue to serve the ones that we're here to serve, which are our customers, our shareholders and our employees.

And we appreciate all your time and efforts in listening.

Have a great day.

That does conclude today's conference.

We thank you for your participation.