CSG Systems International, Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Good day, ladies and gentlemen, thank you for standing by. Welcome to the CSG Systems Q2 2013 Conference Call. [Operator Instructions] This conference is also being recorded today, August 7, 2013. I would now like to turn the conference over to our host, Ms. Liz Bauer. Please go ahead.

[Liz Bauer:]

Thank you, Crescent, 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 the 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 earning release and our non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me on the phone are Peter Kalan, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer. With that, I'd like to now turn the call over to Peter.

[Peter E. Kalan:]

Thanks, Liz, and thanks to everyone, for joining us for today's call. We had a very solid first quarter in what continues to be a challenging business environment. During the second quarter, we were able to close several of the deals that we had anticipated closing in the first quarter, and also start to build momentum around several key areas of our business. This quarter, we signed our first significant managed services contract with a Tier 1 operator in the Asia-Pacific region. We'll help this operator move their legacy billing operations onto our Singl.eView platform for their enterprise service business. We will also operate this solution for them in their data center. It's a 5-year contract, and it represents a significant opportunity for CSG to demonstrate internationally what we've proven here in the United States. We know how to run large-scale solutions to meet operational performance standards, while also achieving cost-effectiveness. These types of implementations are complex, but we're thrilled to be able to demonstrate what many of North America's leading communication providers already know

[Randy R. Wiese:]

Thank you, Peter, and welcome to all of you on the call today to discuss our financial results for the second quarter and our outlook for the remainder of 2013. Overall, our results demonstrate that we were able to sign several of the contracts that had slipped from the first quarter into the second quarter, as well as the benefits that we are seeing in our Asia-Pacific region as a result of the significant changes we made 18 to 24 months ago to the sales leadership and sales team in that region, and the initial trends -- traction that we are seeing with our managed services offering. During the second quarter, we also reported an important milestone in our company's history with our decision to initiate a quarterly cash dividend to our shareholders. This move not only demonstrates our confidence in our business model and growth strategy, but also our commitment to create long-term value for our shareholders. We believe that the dividend is not only sustainable, but can be grown over time as we continue to successfully execute on our business plan. Our solid balance sheet and strong cash flow support this balanced approach to our capital allocation strategy. I'd now like to walk you through our financial results in more detail. So let us begin. Total revenues for the second quarter were $186 million, up 1% from the same quarter last year. Sequentially, revenues for the quarter increased $5 million or 3% from the first quarter. Looking at these comparisons, let me highlight a few things to provide some additional color. First, this quarter was the first full quarter of the renewal discounts associated with the Comcast and Time Warner extensions from earlier this year. Second, as we discussed last quarter, we had a slower-than-expected start to the year. Yet, as anticipated, we closed several deals in the second quarter that had been delayed in the first quarter. Breaking down revenues further. During the second quarter, we had 3 clients that each individually generated revenues of 10% or more of our total revenues

[Operator:]

[Operator Instructions] Our first question comes from the line of Mark Sue with RBC Capital Markets.

[Mark Sue:]

Just a clarification on the -- if I look at the midpoint of the guidance for this year, we subtracted $5 million, should we start thinking of adding the initial contributions from the contract win in Asia? Maybe you could give us some sense of timing of revenue rec in that particular new win.

[Peter E. Kalan:]

Well, I'll go first, Mark. The contract win, the managed services, was the type of business that we originally anticipated that we'd win this year when we gave our guidance. And so it's -- I wouldn't say it's additive to expectations for the year. Relative to the revenue recognition, Randy, I think if you were to talk about that, and how we'd look at this type of contract.

[Randy R. Wiese:]

Sure. This is a bit of a hybrid managed services contract for us, on which we actually license and install the software and then we operate the software and are paid for the operation of the software. So as the installation was taking place in the second quarter, we began recognizing some revenue on this, and we'll recognize revenue as we complete the installation and then we'll begin recognizing the revenue for the managed services operation. So it's somewhat -- it's somewhat over the implementation period, which is probably close to 6 to 9 months, we'll recognize it somewhat ratable under a percentage of completion and then ratable over the remaining balance as we do the managed services work.

[Mark Sue:]

Okay, understood. And then maybe at a high level, if we step back and think about where we are with the industry and a lot of the service providers around the world. I guess the focus has changed to more of customer acquisition and customer retention, leaving the opportunity of operational focus to companies such as you guys. Can you give us some qualitative sense of the pipeline, the inclination to do more external outsourcing? And just kind of your ability to kind of grow faster than the market. Are you competing less with the internal folks and more with other traditional companies? Just so that we could kind of get a sense of where the industry is headed.

[Peter E. Kalan:]

Well, Mark. Several points on that. One is, we are enthusiastic on the pipeline we're seeing build on managed services, and that we think that our announcement of this contract is indicative of the type of things that we'll see carriers wanting to do around the world. And our pipeline is building in most regions around the world for this. And it is driven by clients who want to focus on the areas of their business where they need the most internal focus, and that's retaining customers and not focusing on internal management of systems. And so they believe in what -- I think in what they're seeing. And we're seeing is, through our assumption of those operations and making sure that the system evolve and are responsive to their business, that it will be more advantageous for them in a way that their systems operate across their enterprises. So it's a -- it's for us, we think it's positive. And that, we think, for the clients, we're seeing the shift in their mindset of how they invest in their businesses to give these types of opportunities to us as the experts. As it relates to growth, we're very excited because we think we'll be taking on more of our clients' IT spend through international managed services. And then when we see things around the way that content is being -- how it's evolving in the way that it's offered and being consumed -- and this is probably a long cycle, but the success we're seeing in the different parties who are involved in this evolution and our support of that through Contact Direct, we think that's going to position us well to drive some growth as well and be in a position to help put us at or above the market growth rates for revenues. And if we do that, then we should be in a very strong point on bottom line results as well.

[Mark Sue:]

That's helpful. And then just on the balance sheet and the cash flow. Any thoughts of -- are there more consolidation opportunities? Any opportunity to take on more debt to do another acquisition? Then on the dividend, it's good to see that while you are proactively reducing the share count, dividend payers typically go on to become dividend growers, any thoughts on just kind of how we should think about the free cash flow over the longer term on an annual basis?

[Peter E. Kalan:]

I'll take parts of it, and I'm sure Randy will weigh in on some of the thoughts of how we look at the dividend and share repurchases going forward. First of all, we strive to have a very strong balance sheet so that we have flexibility of how we think about the business. We're always looking for opportunities to add to our capabilities, whether it be a new technology, a new feature functionality of products through acquisitions, and making sure that we have applications that have high-volume capabilities. But we are always also looking at what can we do to accelerate the scale of our business beyond the organic sales that we have? And so those are areas that we'd look to invest. But we try to be pretty prudent on that to make sure that these are things that are going to give us real market positioning and can leverage the infrastructure that we have in place. So that's why we keep ourselves available from a balance sheet and cash on our books. And the strong cash flow that we have as a company gives us the ability to continue to be very shareholder-friendly in what we do with our shares. And Randy maybe you can talk about the outlook on how you think about that?

[Randy R. Wiese:]

Yes, a couple of different things. I think on the operating cash flows. Our working capital in our cash flow statement, you can see, is pretty insignificant over time. So as we grow the bottom line, we think we can grow cash flows at least at the same pace. So I think that's the way you should look at the cash flow growth. I think from the dividend perspective, a couple of points on that is that, we initiated the dividend we thought was at a very compelling level. And also, we took into consideration the ability to sustain at that level, but also to grow at that level. So I think as we grow our cash flows, we would look to maybe expand our dividend at the same pace. So I think that's -- I think that answers your first question. I think the other thing, Peter kind of touched on this, but to kind of round that out is that, we took a very balanced approach to our capital allocation strategy looking for the opportunity to not only deliver cash flow back to our shareholders in the form of dividends or share repurchases, but also retaining enough flexibility to invest in the business for growth. So I think the strong cash flows with the balanced approach gives us plenty of capital to grow the company. Plus, we have a very strong balance sheet that we could leverage up if we needed more capital than we're generating from the business.

[Peter E. Kalan:]

And we would still anticipate doing share repurchases as years go by to manage both the dilution that comes from incentive programs, as well as opportunistically about the stock price.

[Randy R. Wiese:]

Yes, I think on the balanced approach, it's almost 50-50 as our kind of our framework we would look for the dividends and the share repurchases over time to be in the 25% to 50% range with the balance to be invested back into the business. I mean, at some quarters, it may deviate within that 25% to 50%. But over a longer period of time, we think that's a good balanced approach for us.

[Operator:]

And our next question comes from the line of Tom Roderick with Stifel, Nicolaus.

[Unknown Analyst:]

Matt [indiscernible] on for Tom. First question is just on overall industry trends that you're seeing, especially on your client base, with some of the potential consolidation talked about and just kind of how you guys are approaching that and kind of looking at the trends there longer term?

[Peter E. Kalan:]

Well, Matt, I would start off by saying that the trends that we're seeing in the industry is reflective of an increased competitive environment between carriers and the need to continue to drive operational efficiencies and consolidation of service providers, whether it be cable companies or cable or telcos is reflective of trying to generate scale in their operations. And so, we think that plays well to us because our success has been about delivering solutions that are cost-effective for our clients. We've got an incredible history of what we've done in the cable industry, such that our -- cable and satellite industry -- such that our cost of billing is probably somewhere in the range of about 1% of revenues. While we've seen some of our efforts and sales engagements that we've been involved in that worldwide telcos, who have businesses across geographies, in some cases are running 5% to 6% of revenues. And so when companies start thinking about consolidation and driving efficiencies, we think that plays well for us and our managed services is a means that we can help deliver that. So that's an exciting part for us. We think the evolving industry is going to be focused on those type of things.

[Unknown Analyst:]

Okay. And then just one more follow-up on the new managed services deal that you talked about in the Asia-Pacific region, what kind of timeframe are you guys expecting, or maybe looking at to sort of prove out your capability that you talked about internationally and really helping to drive maybe some incremental contracts or additional services provided to existing clients?

[Peter E. Kalan:]

Well, I think the first part is that we think we'd go in with a pretty strong resume of what we can do. And, one, knowing the product, knowing the industry that it serves and then getting to know the client. Those facets allow us to be very excited about having confidence that we can succeed for this Asia-Pacific client. And the client, I think, has very strong confidence in us as well. What happens is that as you get into the business operations, it takes a little bit to have that foundational relationship before you start incrementally adding new products or new services. But as I talked about in my comments, my opening comments about what we are doing with Comcast and what we were doing with another North American communications provider. They turned back to us and asked us to do more or get -- we get the opportunity to offer more to them, anticipating what their future needs are. So I'm not ready to say we're going to see something incrementally out of this Asia-Pacific client this year. But our history has been, when we perform for clients and work alongside their operational folks, the business comes our way.

[Operator:]

And our next question comes from the line of Lauren Choi with JPMorgan.

[Lauren Choi:]

This is Lauren Choi for Sterling Auty. I was just curious if you could give us some background on this Tier 1 carrier, actually. When did this relationship originally start? Did it come through Intec, one of your acquisitions? In terms of -- did you have to go through a formal RFP process? And where there any kind of competitors out there that you went against? And I guess lastly, also just curious if this was a wireless or a cable and satellite customer as well?

[Liz Bauer:]

Thanks for not asking the name.

[Peter E. Kalan:]

And you'd like it, I'm sure, but I'm not at liberty to disclose yet. So a few things. One, this was an existing client that came through the Intec acquisition, and they -- it was a client that was using -- that wasn't using Singl.eView, but was using other applications. It's a client that has a enterprise business services business that needed to get off of a legacy platform, and it was a competitive environment for us. So this is not just a upgrade of an existing Singl.eView application and then turning it into managed services. This is a new install and the client is trusting us after we went through the RFP process and showed what our solutions could do for their business versus the competition. It is a -- it is a traditional telco. It's not a cable and satellite provider. So you would think of it as someone in kind of the traditional marketplace of where Intec has played. All that being said is, I can just -- we are so excited about what this shows as a benchmark of where we think we can go with our international managed services of new installs, but we think we can also go back to existing clients who have our systems deployed and show what we can do to elevate their performance through our relationship, which is incremental revenue for us as well. So very excited for it. I think I hit all of your points.

[Lauren Choi:]

Yes, that's very helpful. And another follow-up. Some of these, I guess Asian carriers, when they're emerging markets, and I don't know if this one is. But their economics on deals are a little different than the developed world. I guess, Randy, I was curious about that. And also if, given that this is managed services, how this can maybe impact your operating model?

[Peter E. Kalan:]

I guess first of all, we're not going to disclose whether it's emerging or non-emerging because that starts -- I think you start getting this narrowed down like you're Colombo in a murder mystery, but economically, Randy, you want to talk about how you think about it?

[Randy R. Wiese:]

I would think about the managed services offering as kind of more generally, Lauren, is that I think it's a great opportunity for us to -- as we get broader and deeper with our clients, what that allows us to do is it allows us to really leverage our current infrastructure in servicing that client and also allows us to leverage some of the assets that we've invested in. In this case, the one we're talking about is Singl.eView. As we do more and more managed services contracts, I think that, that will give us a great opportunity to leverage some of our R&D investments in the products, utilizing those products without additional R&D. And also if it's an existing client, the sales cost would not be normally what they would be if you were chasing a new client. So I think this provides us a great opportunity to leverage R&D and our SG&A line item such that I think this could be accretive to the bottom line operating results as we get greater scale in this offering.

[Lauren Choi:]

All right, that's helpful. And then just last question. So your software, maintenance and services line was up a bit in June. And I know you mentioned the 3 clients that kind of got pushed into June that closed. Was that jump that? Or is it also this, I guess, implementation of the Tier 1 carrier?

[Randy R. Wiese:]

I think it's multiple things. Some of those that we had slipped from the first quarter went into the second quarter, but some of this was also expected growth in other areas. So I wouldn't say there's anything terribly unusual. Multiple things going on in the second quarter.

[Operator:]

And our next question comes from the line of Howard Smith with First Analysis.

[Howard Smith:]

In the news, very publicly, CBS and Time Warner are having a dispute. And without getting into specifics on Time Warner or a specific client, this is just representative of something that's been happening with a number of the cable companies and satellite companies over time. How does that -- does that cause any inserts or attention or things that spurs marketing efforts or things that translates into business to you or affects you in some way?

[Peter E. Kalan:]

Boy, that's an interesting question, Howard. One is, I don't think that those types of events, when we have those types of differences and kind of activities go on, it's not going to be material to anything we're doing from communications on behalf of our clients. But from a bigger picture perspective, it's really interesting to us to see play out what we started focusing on and investing in roughly 5 years ago. We really see a changing market that's going to take several years to continue to evolve, and it may get faster. But whether it's changing to the economics and the higher cost of content or the consumer habit, we really think the intimacy of personalization to the end consumer is what we're going to see continue to evolve. And us investing in Content Direct and us investing through M&A to make sure that we have billing and charging platforms that can be more responsive to the data demand that clients are going to have make this a very interesting opportunity for us to be a part of as it goes forward. And that's why we're very optimistic that any time that there is a change in the marketplace of how people think about doing business, it bodes well for us. Because we've typically done a good job of helping our clients not only manage their existing businesses, but utilize new systems to deploy for their new businesses. And I think we're -- that's what we're seeing. I don't know how fast it's going to happen. But just that piece. I think there was an article on the Wall Street about Jim Dolan and Cablevision of what -- some of the things he sees in the future. It's a changing world and one that we think we're well positioned. So in a long-winded answer, I don't think we see immediately impact to some of our marketing services, but strategically, we think we're well positioned.

[Howard Smith:]

That's very useful color. Just a quick housekeeping item. Other income seemed to jump a little bit. And it may be in this detail, I didn't read. But was there anything specific there?

[Randy R. Wiese:]

Probably the biggest thing Howard is, we had a little bit of a currency gain. Really kind of when you revalue some of your receivables and payables that are denominated in something other than dollars, you get a little bit of gain this quarter because the dollar strengthened against several currencies. So that's probably the -- that's the biggest piece in there. And if you look at it, it's probably up $1 million over the first quarter, and that's primarily what the increase is.

[Operator:]

And our next question comes from the line of Paul Thomas with Goldman Sachs.

[Paul B. Thomas:]

you've highlighted several growth opportunities and what do you think the growth can grow -- go over the next 2 or 3 years? I think in the past, you talked about getting back to mid- to upper-single-digit type of growth. With the opportunities you're seeing, how long is the horizon to get back in that range given the contract resets you've just gone through?

[Peter E. Kalan:]

Well, I think the contract resets give us a -- what we have as a certainty of a base business that's going to -- it's going to be important to us. I'm very cautious of trying to predict an absolute number. But what we focus on is, if the market's growing at a certain point, whether if the market was growing at 4% to 5%, we would look to see if we could exceed that based on some of the areas where we have strength. Taking more of the IT spend from clients who view us as a better operator to do certain things, taking advantage of the evolution of content and the way that -- whether it's traditional cable and satellite operators who want to start new ways of doing business or even if it's telcos that want to leverage or big-box retailers or content owners. We think that dynamic is going to help us grow at a higher rate than the general market for IT spend among communication providers. But not knowing how that -- fast that market's going to evolve makes me hesitant to try to put an absolute percentage on it.

[Paul B. Thomas:]

Okay, that's helpful. And then I think you talked about some of the deals that slipped from 1Q and then closed in 2Q. Did you capture all of those, or are there still some of those out there in 3Q?

[Randy R. Wiese:]

There's still a couple. We had some good success in 2Q, but there's still some that are out there that we're chasing.

[Peter E. Kalan:]

I think he hung up the call, so operator?

[Operator:]

There are no further questions at this time, please continue.

[Peter E. Kalan:]

Well, I just want to close this earnings with a thanks to our clients and to the shareholders and analysts who are participating. But most importantly, I want to thank our employees, our long-term employees who have been here and watched us and supported us as we go through the evolution. But also the new employees that we brought on that are excited about what we're doing. And I think we look forward to continued success as we really provide compelling answers to the marketplace. So with that, goodbye.

[Operator:]

Ladies and gentlemen, this does conclude the CSG Systems Q2 2013 conference call. We'd like to thank you for your participation. You may now disconnect.