CSG Systems International Inc (CSGS) 2018 Q2 法說會逐字稿

Good day, and welcome to the CSG Systems International Second Quarter 2018 Earnings Announcement.

(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 Communication and Investor Relations Officer.

Please go ahead, ma'am.

Thank you, Michael, 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 in the Investor Relations section of our website.

Also, we will discuss certain 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 Rollie Johns, our Chief Financial Officer.

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

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

I'm pleased to report that we delivered record second quarter revenues and non-GAAP earnings per share.

For the second quarter, we grew our revenues by 11% to $213 million and grew our non-GAAP earnings per share by 18% to $0.73.

Overall, our results reflect the solid progress that we are making on our strategic initiatives aimed at driving revenue growth and profits to unlock shareholder value.

Now let's talk about our execution on these strategic initiatives.

First, revenues from our Ascendon SaaS-based cloud platform continue to grow double digits.

Our Ascendon platform continues to be recognized by our partners, like Amazon Web Services, and industry experts as a differentiated, next-generation platform that is enabling and monetizing the digital transformation of service providers' businesses.

With Ascendon, we are seeing our clients' end customer accounts grow, which is good for us as we get paid on a per-sub, per-month basis or a revenue share percentage.

We are seeing more international communication service providers seriously evaluate a phase transformation to the public cloud, which is good for us as it grows our managed services revenues in addition to our Ascendon revenues because operators value the domain expertise and risk mitigation and operational efficiencies that we deliver.

And we are seeing Ascendon open new doors to new verticals and industries, which is good for us as it helps us grow revenues and diversify our client base and revenue streams.

In addition, we continue to gain traction with our solutions aimed at helping our clients improve their customer experience.

This quarter, we expanded our Workforce Express footprint into the telecom space with a win at Telecom Argentina and their sister company, Personal Paraguay.

Telecom Argentina has 3,000 telecom technicians who will be using our industry-leading field force automation platform.

This is important as this is our first Workforce Express client outside of cable and increases the number of South American countries in which Workforce Express will be deployed.

Next, we expanded our footprint with JPMorgan Chase with our customer communications management solution.

Once implemented, JPMorgan Chase will be one of our largest noncable or telco customers.

With this expanded contract, we will be processing all the consumer fraud alert notifications for the debit division using our voice, text and e-mail solutions.

Wins like these are important as we seek to diversify our revenue streams into new verticals in a deliberate and thoughtful manner.

And finally, we continue to expand our footprint within our 2 largest managed services clients, MTN and Telstra.

Our continued execution on delivering the value that was promised, combined with the domain expertise of our people, opens new doors and new divisions at both companies.

I'm extremely proud of the hard work that our teams on the ground have done on both of these accounts.

Next, while we spend a large portion of our time talking about our investments in our digital monetization platform, Ascendon, we also continue to invest our R&D dollars in a balanced way across our solutions that have momentum.

This past quarter, we introduced an extension to our industry-leading Workforce Express solution with our Where's My Tech app.

This solution enables a service provider's end consumer to track the location of their technician to determine where they are and what time they will arrive at their appointment.

Think of it as the app for appointments.

Our continued investment in R&D is an important contributor as to why our clients are willing to sign multiyear contracts with us.

They know that we are investing not only in our success but theirs as well.

Over the past 10 years, we've invested approximately 13% to 15% of our revenues into R&D.

From our perspective, we believe these investments create a sustainable competitive advantage, provide us with opportunities to get broader and deeper in our clients' operations, gain new logos in the existing markets that we serve as well as win in new verticals.

And finally and most important, they help to drive our top line growth.

While we deliver a very solid quarter from a revenue and earnings perspective, there is one metric that is not indicative of the strength of our business model or what is going on in the business, and that metric is our negative cash flow from operations number this quarter.

We have been in this situation before where a client has held their payments until after quarter end, then they pay it within days.

We do not believe that this is a trend in which this client is changing their payment patterns or trying to manage their accounts payable in a certain way going forward and therefore believe that our guidance of cash flow from operations is still achievable in spite of this quarter's performance.

And while we're on the topic of cash, our strength in generating cash is a topic that comes up in many of our investor meetings.

So I thought I'd share our philosophy on cash and remind you of our capital allocation policy.

First, we like cash.

It gives our company lots of options.

It gives us opportunities to invest in business improvements to drive value like R&D or sales and marketing.

It gives us opportunities to create value by making smart, deliberate acquisitions.

And it gives us opportunities to return cash to our shareholders, be it share buybacks or a dividend, or pay down debt.

Second, we have great visibility into our cash generation as the majority of our solutions are offered via private or public cloud.

Under long-term contracts with -- resulting in recurring revenues, our solutions are business critical and basically rate and bill for all of the interactions and services that our provider is monetizing.

This provides us with 90-plus percent revenue visibility going into each year, enabling us to manage our expenses and investments, resulting in strong cash flow.

But beyond the cash flow generation niceties, there is more to the role that we play in our clients' operations.

It is very serious business and one we do not take lightly.

While there is always risk in managing any type of data, the rating, billing and management of a company's cash sources, well, let's just say, a very important role.

Our teams wake up every day treating that role with the proper respect and attention it warrants.

With that as a backdrop, we take a balanced approach to how we use and deploy our capital.

We will pay out over $25 million in dividends this year.

We have already repurchased $11 million of stock back this year and plan to buy back enough to offset any dilution associated with employee equity compensation.

And to date, we have utilized $70 million of our cash for an acquisition that we expect to be accretive in the first year.

Finally, we're investing in our people, our solutions and our go-to-market strategies at what we believe is an appropriate level.

We evaluate our uses of cash on a regular basis to determine the optimum method for creating a sustainable competitive advantage in the marketplace while creating long-term shareholder value.

Finally, we are doing what we set out to do this year.

So as I've said in the past, I like our position for several reasons: First, we have an enviable business model with strong fundamentals that position us well to drive shareholder value.

Second, we have unrivaled domain expertise in the communications, information and entertainment industries.

Third, we work with some of the largest and most innovative communication service providers in the world, and we are establishing ourselves as a trusted digital transformation partner for companies undertaking this journey.

Fourth, we have proven technology and a solid reputation for operating our solutions really well.

Fifth, 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 and our clients to grow and diversify the business 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 Rollie who, as most of you know, was named CFO in June after 5 years as our Chief Accounting Officer.

Thanks, Bret, and welcome, everyone, to the call today to discuss our financial results for the second quarter as well as the outlook for the remainder of 2018.

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

With that, I'd like to walk you through the financial results.

We reported record second quarter revenues of $213 million, an increase of 11% from the same period last year.

This increase represents a combination of solid organic growth of 2%, driven by the continued success of our cloud solutions and managed service offerings and the contribution of our first full quarter of revenue from Business Ink, which we acquired in February.

As Bret indicated earlier, we are fortunate to have the balance sheet strength to pursue future business growth both organically and inorganically.

Moving on to results of operations.

Our second quarter non-GAAP operating income was $36 million with a margin of 16.7%, which is in line with our expectations.

Our non-GAAP adjusted EBITDA was $48 million for the second quarter or 23% of total revenues.

Our non-GAAP EPS current quarter was $0.73 compared to $0.62 or an increase of 18%.

This increase was primarily driven from the lower non-GAAP effective income tax rate when compared to last year resulting from the recently enacted U.S. tax reform.

Moving on to the balance sheet.

We ended the quarter with $186 million of cash and short-term investments.

This was compared to $222 million at the end of the first quarter.

The sequential decrease was primarily due to lower cash flows from the second quarter.

For us, from time to time, our cash flows from operations are impacted by the timing of client payments, as was the case for the second quarter when a significant recurring client payment was delayed and received shortly after quarter end.

This primarily -- this delay primarily contributed to the negative cash flow from operations and negative free cash flow of $4 million and $18 million for the quarter, respectively.

Year-to-date, we generated $26 million of cash flow from operations and had slightly negative free cash flow.

While we occasionally have short-term timing fluctuations in our working capital, we find these occurrences tend to level out over time.

And as such, we expect to deliver 2018 cash flow from operations in line with our guidance.

Our ability to generate strong, consistent cash flows, coupled with our solid balance sheet, allows us to return cash to shareholders while also being well positioned to invest in future growth opportunities.

During the first half of the year, we've repurchased $11 million common stock under our stock buyback program and paid $14 million in dividends.

So let's move on to the outlook for 2018.

As a result of our solid year-to-date, we are maintaining our guidance for full year as follows: We are keeping our 2018 revenue guidance at $845 million to $865 million, which represents a 7% to 10% growth over last year.

Our expectation for our non-GAAP operating margin for this year is unchanged at approximately 17%, which is consistent with our results for the first half of the year.

We are maintaining our 2018 non-GAAP EPS at $2.81 to $2.93, which reflects a growth of 12% to 17% compared to the last year.

We continue to anticipate our 2018 non-GAAP tax rate to be approximately 27% and our outstanding shares to be 33 million shares for the year.

We also continue to expect our operating cash flows to be within the range of $130 million to $150 million, which assumes more normal working capital levels through the end of the year.

We are maintaining our outlook for CapEx of approximately $40 million for the year as well.

In summary, we're executing according to plan.

We are achieving revenue growth above the industry rate as a result of our investments in our business.

We are continuing to operate at a profitable margin and drive bottom line returns.

We are executing upon our long-term business objectives and investing in our people, our products, our clients to drive long-term business value, and we are returning cash to our shareholders to provide additional share -- long-term shareholder value.

We are pleased with our achievements this year to deliver solid results and build strong business for the future.

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

(Operator Instructions) And our first question comes from Matt Van Vliet from Stifel, Nicolaus.

Yes, yes, on for Tom Roderick today.

I guess, first off, looking at some of the expansion that you talked about at your 2 largest managed services clients.

Could you maybe give us a little indication in terms of what types of expansions are you moving into other areas of the business?

Is it just growth within sort of what you've been operating in?

And what brought about some of those expansions?

Absolutely, Matt.

Thanks for being here.

We really appreciate it.

It's -- at MTN and Telstra, even though they're growing to be our largest international managed services clients, they're still small compared to some of the North American clients we have.

And what we're seeing transpire there is what we see happen with most customers, if not all, is the more that they're around our people and the domain expertise and the operational expertise, the more they want to deal with us.

And the good thing about it is by having people on the floor working with them, what happens is when they're dealing with business challenges day in and day out at customers like MTN and Telstra, we're all in, and so our teams are there with them.

And if it's operationally, if it's cost effectiveness of the solutions, if it's automation or sometimes it can even be things like Ascendon feature functionality as a potential solution for the business challenges they're working on, so what we're really seeing is just the early stages now being 1.5 years to 2.5 years into them and us working together to solve those problems.

And a couple of those agreements have actually been extended 4 and 5 times.

And each time that happens, it's exactly what you've seen us do traditionally in North America, we want to strengthen and lengthen the relationships with our clients.

So it's around each of those areas operationally, economically and hopefully, long term more feature functionality with a cloud-native solution that solves problems for them.

Great.

And then looking at the deal you announced with JPMorgan Chase, can you talk a little bit more about what aspects of, I guess, your platform are they looking to use and how many other contracts or clients do you have that are sort of similar to that in the nontelco cable space?

Well, it falls within our customer communications management component, Matt, which is really -- it's a change in what used to be viewed as either direct IVR or direct print and mail or those types of things.

We view it as the total customer communications strategy and solution to get a 360-degree view and solve for those types of things.

So I'm sure that you as a person probably have credit cards or airlines that you deal with.

And so as you experienced, it's not just one or the other.

And as mentioned in the prepared comments, it's everything around specifically going to the end user with those updates and communications via IVR and also through the print and mail and also through other aspects of it.

So it's a continued growing of that.

We do that at some of our other cable customers to provide that input to them, and we also see it as an opportunity to go broader.

So you've heard us talk about customers in the past like Walgreens and some of the others like that where we have been able to do that.

And so we'll continue to look to build that 360-degree view of the customer, lengthen and strengthen those agreements even in that transactional business and drive the long-term value by bringing more diversity in our revenue streams.

And then looking at the performance of Business Ink during the quarter.

You called it out that it looked like it generated about $16 million in revenue.

But can you just talk about maybe how the integration is going, bringing that into the fold and then also what are the growth rates or at least maybe some new bookings trends that you're seeing with that business now that it's part of CSG?

Yes.

I hate to sound like a broken record, Matt, but the reality is we're executing the plan.

That's what we're doing.

And what we're seeing from an integration is almost spot on for what was in our internal investment memorandum to drive that accretion and drive the internal rate of return of what we're doing.

Like anything, this isn't easy.

If it was easy, they'd call it a chocolate sundae, but it isn't; it's work, so we have to get after it.

And the reality of it is there's ups and downs as we go through there.

We've had a couple of client -- small client issues, employee issues, all of which was expected and planned for, and it's coming in right where we thought it would.

And so we're getting some good revenue traction.

It's not a fast-growing business, as we said beforehand.

So as far as -- there have been new bookings since the acquisition, not to the point where I think it's material or relevant that we want to start tooting a pipeline horn as we go.

And just remind everybody that the intent is it's a scale play with great economics that are very compelling and we are executing to plan.

(Operator Instructions) Our next question comes from Chris Moore from CJS Securities.

We can start maybe on Ascendon.

It's -- can you kind of talk about our Arrow Electronics in terms of kind of the current status of the relationship?

Is there still a lot of development going on?

Kind of how far are you guys away from any kind of meaningful recurring revenue there?

Yes.

Chris, we mentioned in the prepared remarks about how -- what we're seeing from a revenue perspective is double-digit growth sequentially year-over-year.

We don't disclose the specifics of those numbers, nor do we get something that's earth shattering at this point.

However, there are good data points for how those investments are paying off and how it's actually starting to drive that in the direction we want it to go.

As far as Arrow Electronics specifically, they're a great customer and a great partner as we move through that.

So there continues to be activities around the areas of proof-of-concepts all the way through to activities with their ecosystem of building out a subscription-based model for their components as we go forward.

So they're a great customer there.

Smart Cities, the one in India, is a great customer as you go through.

And we have actually got -- we're nearing in on 20 paying customers on the Ascendon platform, so we don't break out to the level of revenue there.

But getting to almost 20 customers, getting to double-digit growth on the revenue front and also getting the perspective with a native cloud-based application that very few people in our space have, what it really does is it opens us into the discussions that are driving other parts of our business to help deliver those results.

So great question.

That helps, for sure.

The 20 paying, a year ago, would that have been significantly less than that?

Or -- just trying to get a sense as to kind of the expansion.

From an expansion perspective, Chris, I would say it's minimal.

But what is really positive is the fact that it is an area within our industry and space where there's a lot of business model innovation happening.

So we've had some smaller customers drop out.

We've have some new ones add in, but the ones who are in there and the business models that are being innovated on are expanding.

That's the most exciting part of about it is we're finding business models in these partnerships that work.

And so the revenue is growing.

Their businesses are growing.

And as we said, that's good for us.

If we find a business model that works and it works for them and it works for us, that's how we build this company.

And that's how we're going to continue to drive the future of it to be relevant for a sustainable, competitive advantage in a sustainable investment thesis.

Got it.

And let me just stay with Arrow for 1 more second.

Suppose there was no Ascendon, I mean, how would Arrow have filled the void?

I mean, is this something that most companies would try to do the development internally?

Or are there other perhaps less attractive substitutes that they would look at?

I'm just trying to kind of understand how they're looking -- a company like Arrow looks at CSG?

Yes.

Well, we've seen it happen in numerous different fashions, not only in this wave of business innovation but years ago when there were a couple of hundred cable companies that consolidated.

When they came together, some of them were more mature than others.

Some of them were more foresightful.

Some did it on spreadsheets.

Some did it on internally developed systems.

Some did it with third-party competitors that we are there with.

I would tell you that Arrow has been very proactive in their IoT activity and partnering with somebody who's an absolute expert in this space.

And so they could have done it in-house.

They could have done it on spreadsheets.

They could have done it with a different application, but they realized and understood the complexities of everything from enterprise catalog, down to offer management, to order management and what could happen, and they're very well positioned now.

And we believe that we're a key partner in helping them to do that.

So there's a lot of different options that you can do.

We believe the best option is the one that Arrow proactively chose, and that's where we're seeing expansion in those business models.

Because when you're an expert at what you do and you let others be experts at what they do, you can really bring great business solutions to the market, which is what we see happening.

Got it.

Switching gears real quick.

So you talked about Telecom Argentina being the first Workforce Express client outside of cable.

Was there significant amount of development necessary in order to make that happen?

Or how difficult is it to kind of take this and move it outside of the cable realm?

That's a very exciting part of it, Chris, as there was very little, almost no, development with it.

So when I talk about Workforce Express getting further into the South American marketplace, what we've done in the cable marketplace, those lines are blurring heavily between telcos, cable and others as they do it.

But some of the things that are consistent are the solutions that we bring because they are designed for that broader market and have been around for quite some time.

So Telecom Argentina and the partner company, Personal Paraguay, we are able to -- we're going to be able to roll that out in a very straightforward fashion.

So that's a really exciting part and where we see scale in the products and the business model.

(Operator Instructions) There are currently no questions in the queue.

Well, thank you, and thank you to everybody for being here today.

We really appreciate the support across our shareholders, across our customers and across our employee base.

I hate to be the broken record, like I said, but CSG, we are executing the plan according to the plan that we've put in place, and we take great pride in that plan to continue to execute according to plan.

We're going to continue to feed our growth engines when they're there in an intelligent, balanced way.

We're going to continue to look at deliberate M&A and keeping that balanced approach across our business to execute according to plan.

So thank you for the time and for our employees for all you're doing to make it a reality.

You're the ones that are executing day to day on this, so thank you, and have a great rest of your day.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.