CSG Systems International, Inc.
Q3 2019 Earnings Call Transcript

Published: 3 Nov 2019

[Operator:]

Good day, and welcome to the CSG Systems International Third Quarter 2019 Earnings Announcement. [Operator Instructions] Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Liz Bauer, Senior Vice President, Chief Communication and Investor Relations Officer. Please go ahead.

[Liz Bauer:]

Thank you, Shiloh, and thanks to everyone for joining us. As many of you know, David Banks joined our IR team a few months ago. And as much as I'm going to miss doing these highly informative earnings call introductions, they're all David's now. So, David, take it away.

[David Banks:]

Thanks, Liz. I'm glad to be here. 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 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.In addition to Liz, also with us today on the phone are Bret Griess, our CEO; and Rollie Johns, our CFO.With that, I'll turn the call over to Bret.

[Bret Griess:]

Thank you, Liz and David, and thank you all for joining us today. Our results this quarter and through the first three quarters of 2019 are strong. For the third quarter, adjusted revenues grew 10% year-over-year to $235 million, an all-time high for CSG. Non-GAAP earnings per share grew over 20% to $0.88. Organic growth was in the middle single digits. Our adjusted operating margin came in at 18.2%, which is above our long-term target range of 16% to 18%. We still believe that our long-term target range is appropriate for our business.We are proud of our performance over the past several quarters. While the markets we serve are going through a tremendous amount of change and we, ourselves, have also been undertaking a business transformation, we have been executing well against our core goal of driving long-term sustainable growth and diversification in our business. We're doing this by continuing to focus on helping our clients solve their toughest business problems and take advantage of the opportunities that this changing market presents.We've utilized a number of tools to do this, including increasing our investments in R&D and go-to-market, acquiring companies that increase our scale or expand our solutions, and working with partners to expand our capabilities and footprint. This quarter, we had several successes in the market that demonstrate how we are delivering.First, we displaced one of the largest field service management competitors at Altice, one of the largest broadband communications and video service providers in United States. Altice selected us to arm their 3,000 field technicians to service their approximately 5 million broadband cable customers. We're pleased to be working with Altice and hope to earn the right to do more business with them, as we help them deliver an enhanced customer experience.Next, we continue to expand our footprint with Charter Communications, a leading broadband communications company and second largest cable operator in the United States. This quarter, we expanded our kiosk footprint within the entire Charter Communications operations.Collectively, we process over $1 billion in payments through our kiosks for our entire kiosk client base. And as our customers are expanding their retail presence with physical store locations, they are also expanding the use of these digital kiosks to up-sell services, authenticate mobile devices and more. What was once a payment tool is now becoming a revenue-generating tool as well.Next, we recently helped the world's largest movie theater chain, AMC Theatres; launched their AMC Theatres on-demand streaming service utilizing our Ascendon platform. With this new service, AMC's 20-plus million loyalty members can rent or buy movies produced for major studios like Disney and Universal. As more and more entertainment lovers want access to high-quality content, we're proud to account companies like AMC Theatres, Formula 1 and Xfinity On Campus as streaming customers.Next, we expanded our footprint within JPMorgan Chase with our holistic communication suite of solutions. This past quarter, we helped Chase automate the communications and notifications required when a homeowner pays off their mortgage. Not only is our turnkey approach helping Chase Home Lending save money through automation and moving away from paper to digital communications, it is helping improve the overall customer experience. We continue to work closely with Chase as they look to provide relevant, timely and personalized communications to their customers.And finally, we have now owned Forte for a full-year. We have integrated teams, continue to work on the consolidation of our solutions and have increased our investment in our go-to-market capabilities. This acquisition is meeting our expectations and remaining accretive to our non-GAAP EPS. When you boil this all down, our mission is quite clear. We are delivering innovative customer engagement solutions that help companies acquire, monetize, engage and retain their customers.We do this by continuing to invest in our solutions, our people and our clients. We believe that by doing this and staying singularly focused on helping our clients succeed, we will benefit. And being a trusted partner to some of the world's leading brands means that you must continually invest, innovate and deliver solutions that help companies optimize each touch point in the customer life cycle. We've been doing that for over 35 years.As I look forward, I like where we are. We're continuing to lengthen and strengthen our relationships with our very important existing customers and earn more of their business. We're helping solve our customers' biggest business challenges to compete and succeed in this hypercompetitive digital future.We are diversifying our revenues from new verticals; at the same time, we are growing our revenues from the cable market, widening our business mode. We are continuously evolving our cost structure to ensure that we are competitive in the market. We are consistently delivering organic revenue growth that is above the industry growth rates. And last, but not least, we are committed to distributing capital to shareholders while we invest in new initiatives to drive longer-term top line growth.In summary, we're executing on a strategy that is working, and we are seeing the benefits of that strategy. And we are in a fortunate position, as we look to the future, thanks to several key characteristics of our business

[Rollie Johns:]

Thanks, Bret, and welcome, everyone, to the call today to discuss our financial results for the third quarter, as well as our outlook for the remainder of 2019. We are pleased with our continued progress this year as we deliver on our strategic initiatives. So, let's walk through our financial results.We reported revenues of $251 million for the third quarter. Non-GAAP adjusted revenues, which exclude transaction fees, were $235 million, up 10%, compared to the third quarter of 2018. This increase is reflective of two key items

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Tom Roderick of Stifel. Please go ahead.

[Matt Van Vliet:]

Hi. Matt Van Vliet on for Tom. Thanks for taking my questions. Big quarter here. Just curious if we could dig in a little bit on the JPMorgan announcement that you made and maybe just using that as a framework for discussing some of the options and opportunities that you have outside of the core cable market. And what kind of traction you're seeing both this year and looking forward?

[Bret Griess:]

Yes. Thanks, Matt. We appreciate the question. What we're doing at JPMorgan, as we talked in this quarter, was automating the communications and notifications required around their homeowners pay – when they pay off the mortgage activity. And if you look at some of the stuff that happened before with them, it was around some fraud activity as far as how to automate fraud management for the end consumer. And so, what you really see happening is, there is the overall customer communications management and digitalization of the customer journey, where our tools are just fitting in a very optimal way.And we do see this as just a springboard and a start, just like it was from the fraud management activities to this mortgage activity that goes there. And we're very proud of the fact that our core cable and satellite is now down to 60% of our overall revenue. So, we plan to continue to do that, diversify the business and as we mentioned in the script is to continue to build the moat of strength around this business as we move forward.

[Matt Van Vliet:]

And then turning to the announcement from a couple of weeks ago, launching the Ascendon Communications platform, should we think about that becoming sort of the platform over time that you move all of your cable customers to? Or is this just another option that gives you more flexibility to go into either newer carriers or those that have already gone through a broader digital transformation?

[Bret Griess:]

Ascendon is a key investment thesis for us as we move down the path, Matt. It primarily fits within the revenue management and digital monetization activity. So, yes, we do believe that it can support some of the functionality that the current core cable business does. But also, it's very focused right now in the wireless space and some of the IoT space.So, it's yet another one of the assets within our revenue management and digital monetization, similar to ACP, similar to Singleview, where it just really positions it well to do it. And a great thing about Ascendon is that it is a cloud-native, cloud-first activity.So, customers that are open to that, which not all of them are, but some of the more forward-thinking ones in that space where you'll get the flexibility, are. So, it's another quiver – another arrow in our quiver of revenue management and digital monetization that we'll continue to look to build out.

[Liz Bauer:]

And Matt, if you think about it, with that now we have a private cloud solution with ACP, an on-prem solution with Singleview and a cloud-native solution with Ascendon.

[Bret Griess:]

Yes. So, it really is whatever best suits the customer, we're here to solve their toughest business problems.

[Matt Van Vliet:]

Great. And then, lastly, just turning to some of the regional performance. Obviously, there's a lot of headlines around the macro, especially in Europe and some slowing in China. But curious what you're seeing from your customers as you really do span a lot of those – the major geographies? Are people still looking at potential big projects into the end of the year and out in the next couple of years? Or have you heard some pause or at least some sales cycles elongating as people are a little bit concerned about what the overall economy could be doing?

[Bret Griess:]

Yes. In the hypercompetitive space that we're in and then you combine everything that's going on in the broader economy, as you mentioned there, Matt, I think that if I made any broad statement, it would be wrong. It would fall down in the details. What we are seeing is a continued level of strength in Europe and in the Europe, Middle East and Africa marketplace. We see different things in Asia that are maybe not quite as strong at the current moment, but we also see that it's almost quarter-to-quarter as we move forward.In that, there are large transformational projects that are in-flight, both next-gen and on some of the current private cloud products that we have. So, I would say we've got a really sound pipeline, but we never count our chickens till they're hatched as we progress. Rollie, do you have any different perspective?

[Rollie Johns:]

No, I'd echo the same. A lot of strength within the EMEA region and continue to look for not only opportunities in APAC, but South America.

[Matt Van Vliet:]

Great. Thank you.

[Liz Bauer:]

Thanks, Matt.

[Operator:]

[Operator Instructions] Our next question comes from Greg Burns of Sidoti & Company. Please go ahead.

[Greg Burns:]

Good morning. I just wanted to dig in a little bit on the Altice win. Can you just talk about why you think you were able to displace the incumbent vendor there? What separated your platform versus theirs? And when we look at the field service management opportunity, more broadly in the cable market, is there additional market share opportunities for you?

[Bret Griess:]

Thanks, Greg. We appreciate the question. We do think that there are things that differentiate our field management – field services management platform that we have out there, and we think that the proof in that is that we were selected above an incumbent to replace them in that process, which is a proof point there. It is something that we have not only the capability, but we're driving hard as being a cloud-enabled application, so we're rolling it out beyond even North America and within the cable space there.We have been in the field force management for cable for well over 20 years now. We believe that, that history along with the feature functionality, driving next generation into the cloud base positions us really well. We have talked about how we're utilizing it in different markets, including places like health care and government, is where we're utilizing it currently already. So, we do see great opportunity for us as an asset to continue to drive and build and grow the business.

[Greg Burns:]

Okay. And at Altice, are you doing any sort of revenue management for them? Or is this kind of your first entree into that customer?

[Bret Griess:]

This is one of our first entrees. We've got a few other small ones that are there, but as we said and I quote, as we do with all of our customers, we'll use this to position ourselves to earn the right to do more business with them and look to continue to grow. They're a great client, and so we want to continue to help them solve their problems.

[Greg Burns:]

Great. And then, Rollie, the revenue, you mentioned the timing of the software and services revenue hitting in the third quarter, can you just discuss what that is and the magnitude of that? How much do they contribute to the third quarter as opposed to the fourth quarter?

[Rollie Johns:]

Yes, Greg, it wasn't entirely significant. We're talking a couple of million dollars or so. But it was revenue that we did expect within 2019. The timing was such that we expected it to fall within Q4, and it actually came in early.

[Greg Burns:]

Great. Thank you.

[Liz Bauer:]

Thanks, Greg.

[Bret Griess:]

Thanks, Greg.

[Operator:]

It appears there are no further questions at this time. I'd like to turn the conference back to you for additional remarks.

[Bret Griess:]

Well, thank you, Shiloh, and thank you to everybody who took the time to participate. We're really grateful for those that are supportive of CSG and continue to dig into the story as we go through our transformation and build it and grow. And as always, I would be remiss if I didn't thank our incredible customers and employees for all they do to help make us who we are. So, thanks for a solid quarter, and we look forward to talking to you again next year. Have a great day.

[Operator:]

That concludes our conference for today. Thank you for your participation. You may now disconnect.