CSG Systems International, Inc.
Q3 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the CSG Systems Q3 2013 Conference Call. [Operator Instructions] I would now like to turn the conference over to Liz Bauer. Please go ahead, ma'am.

[Liz Bauer:]

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

[Peter E. Kalan:]

Thanks, Liz, and thanks to everyone for joining us on today's call. We had another solid quarter in both revenues and earnings, demonstrating the strength of our business model and our focus on execution. We continue to see strong activity and momentum building in 2 areas that we believe are important to the company's long-term growth

[Randy R. Wiese:]

Thank you, Peter, and welcome to all of you on the call today to discuss our financial results for the third quarter and the outlook for the remainder of 2013. We had another solid quarter of financial results. We continue to execute on our business plan and we return value to our shareholders through the initial payments of our recently declared quarterly dividend. Overall, we are pleased with the progress we achieved this quarter and are maintaining our guidance for the full year 2013. I'd now like to walk you through our financial results in more detail, so let us begin. Total revenues for the third quarter were $186 million, down 2% from the same quarter last year, primarily due to the renewal discounts on the Comcast and Time Warner extensions from earlier this year. Sequentially, revenues were consistent with the second quarter, in spite of the reduction of approximately $2 million in quarterly revenues associated with our divesting of a small, non-core print center on July 1. Overall, we are pleased with the level of revenues reported for the third quarter. Breaking down revenues further, during the third quarter, we had 3 clients that each individually generated revenues of 10% or more of our total revenues

[Operator:]

[Operator Instructions] Our first question is from Mark Sue with RBC Capital Markets.

[Mark Sue:]

If I could get a sense of regional -- some of the regional dynamics, I think things were a little bit stronger in EMEA and a little bit weaker perhaps in Asia. Maybe if you could help us understand the dynamics there as it really just to revenue recognition? And then if -- I can understand the success behind the new wins that you announced, the one in the EMEA and one in the Americas. Were the competitive displacement or if you could just help us understand why you were not able to secure these 2 new wins?

[Peter E. Kalan:]

Sure. Mark, I'll first give a comment about what we see, not on the specific revenues but the dynamics in the regional markets you talked about, and Randy can add if there's anything from a financial perspective that influence the percentages that came. We can continue to see strengthening for us in the Asia Pacific region. The rebuilding of our client and market-facing teams continues to build pipeline. We are in the process of deploying the managed services contract that we talked about last quarter and we continue to see the managed services opportunities grow in that region. And so the investments that we've made to rebuild are positive, and we think that the opportunities are improving. In EMEA, we've been through a long cycle where it's been tough because of -- especially in Western Europe, the broader economic and financial conditions. We are refocusing in EMEA. We've put a new leader in place for which has now been about 2.5 months. And he is getting very focused because we believe at some point, the EMEA market is going to turnaround for us, and that we've got a strong client base there that we'll be able to expand our relationships with and do more with. So EMEA, the general market is not rebounding for us from what we see near term in opportunities, but we do see that longer term, we're in a good spot to pick up, and the investments that we're making around the leadership there will pay off. Randy, from a perspective of anything specific in the financials.

[Randy R. Wiese:]

I'd say, EMEA kind of fluctuates anything from the $17 million to $20 million range on a given quarter, if you look to last several quarters. It's really kind of a timing of the -- on what's going on in the level of efforts that are put forth on some of the larger projects. So I'd say, there's nothing unusual there. Probably on APAC, the one thing that you see is you see it coming down a little bit from the second quarter. That's really a result of the success we had in the second quarter when we announced our first managed services win. There were some software and professional services revenues that were booked in the second quarter as we worked on some of the installations. So it's just really kind of the sequence and I think of the projects, the way I look at it.

[Peter E. Kalan:]

And then, Mark, on your second question about the 2 wins that I referenced around our managed services, these are with existing clients who are currently using our products. So I would not view them as competitive wins except competitive against the internal resources of our clients. And what we're doing is just we're taking on a broader responsibility for the, what I'll call, the support and the application operations on behalf of our clients.

[Mark Sue:]

I see. And then as we look into 2014, just trying to get a sense of some of your planning assumptions. Should we think of steady transit for some of the North American cable and satellite customers, some expectation on improvements in Europe and then just opportunistically, just continue to invest and broadening the pipeline in Asia. Is this the kind of the dynamics you should see for next year?

[Peter E. Kalan:]

From a market dynamic, we continue to think that the North American cable and satellite clients will continue to evolve their businesses, which we think is good for us. We are past all the major renewals, which should give us a base from which to build from a reported revenue. And so, we think those are good markets for us. Asia Pacific, we expect to continue to broaden for us. We expect to see EMEA to start having better results for us. It may not happen on the nearer term, but longer term, we expect that we're going to see the benefits of our offerings. And so those are the major pieces. We expect that overall, that we're going to be able to keep up with what's happening in those markets, from kind of the spend with our clients and the telco providers in those spaces for IT services.

[Operator:]

And our next question is from Matt Van Vliet with Stifel.

[Matthew Van Vliet:]

On for Tom this evening. First question on Time Warner and Comcast, are there any early signs that they're seeing much of a growth in their consumer -- or their customer base as they started to roll out some of their new products and some of their new features?

[Peter E. Kalan:]

Well, it's not appropriate for me to talk about how their business is performing based on their initiatives because that's for them to really report on, and we have a fiduciary responsibility not to report what we see happening in their business. What is important for us is, as I referenced in my prepared comments, that with folks like Comcast, they are -- they are clearly evolving their business and we're -- it's creating opportunities for us to bring new solutions such as our Content Direct, as they think about new ways to approach the market. We believe from our investment that we've made in Content Direct and what we've done in other applications, that the -- that we're expecting to benefit and that the market will evolve and we'll be beneficiaries for that over time.

[Randy R. Wiese:]

I think one good evidence to look at there, Matt, is that both the revenues for Comcast and Time Warner grew from the second quarter, so that's a good indication of some successes we're having with them.

[Matthew Van Vliet:]

Okay. And then segue to that, on the Content Direct product line, are you seeing an inflection point in terms of the demand for a product, both at the cable [indiscernible] and other service providers that are looking towards the IP-based content, to either add on or to complete with the cable?

[Peter E. Kalan:]

I think we're clearly seeing see a strengthening of pipeline opportunities. We still believe we're in the early innings of a -- the evolution of how consumers truly shift their buying behavior and consumption of content and information. But that being said, we are seeing the pipelines build up. What we need to see is as well as having the platform used by clients, we need to see volumes driven by the consumers through these client support. And we think we're still early on that. But with -- I think we all watch the market and we believe that over time, whether it's the evolution of the cable and satellite operators, whether it's the content owners or whether it's independent aggregators, or call it, electronics superstores, they are all going to have some influence. And we think we're in a good position to really participate with all those guys.

[Matthew Van Vliet:]

Right. And then finally on the managed services demand, it seems to be ahead of expectations. Is there anything internally that you guys are looking at that might need additional CapEx versus maybe initial plans to help support the demand and being able to meet those -- go to the pipeline and kind of close the sale through that process?

[Peter E. Kalan:]

You know from a CapEx perspective, Matt, I don't think that's been anything that we're seeing stress point on the business, because primarily for a lot of these wins, we're actually helping our clients run the applications on their hardware. Though we are open to doing it on our own proprietary hardware or proprietary data centers if we need to. So we haven't seen that. We have been investing to make sure that we have the skills and capability in our people as we go out in both market and prospect and then deliver the results to make sure we have it. But that's part of our core operations and not a CapEx piece.

[Operator:]

And next is Paul Thomas with Goldman Sachs.

[Paul B. Thomas:]

Just looking at the decline in revenue, so outside the top 5 customers, I guess that's somewhat of a mixed question earlier, with the driver there pretty much a divestiture from the small print operation, or was there any other changes that customers were pointing out?

[Randy R. Wiese:]

If you're talking about sequentially, it was primarily the divestiture of the revenues. If it's year-over-year, it's primary, yes. If it's sequentially, it's the divestiture. If it's year-over-year, then it's more of the renewal of both the Time Warner and Comcast.

[Liz Bauer:]

Wait. Can I ask a clarifying question? Did you say the top 5...

[Paul B. Thomas:]

Outside the top 5, so looking at revenue from other customers.

[Liz Bauer:]

Oh, okay. I'm sorry. I misinterpreted.

[Randy R. Wiese:]

The first question, to make the clarification of periods there, are you looking sequentially?

[Paul B. Thomas:]

Yes, sequentially.

[Randy R. Wiese:]

Yes. It's primarily the print divestiture.

[Paul B. Thomas:]

Okay. And then on uses of cash, you may choose the dividend this year, but I was wondering what the appetite would be for a larger buyback program, similar to what you did in 2006 as your cash balance had passed $200 million, or should we think about uses beyond the dividend as just being for acquisitions?

[Peter E. Kalan:]

Well, we came out as we instituted the dividend, Paul, and said that we are targeting between 25% and 50% of our cash flow, or free cash flow, to be returned to the shareholders, using different vehicles whether it's dividend or share buybacks. And so we continually evaluate that. It will fluctuate from quarter-to-quarter how much we do. And so we're constantly evaluating that, but we do believe this is a dynamic market and we want to make sure that we still have capital available, both from a balance sheet perspective and readily available cash if we see opportunities to add to our capabilities or do something from an M&A perspective.

[Operator:]

And next is Sterling Auty with JPMorgan.

[Sterling P. Auty:]

So I'm bouncing between calls so my apologies if some of this is repetitive. But in some of the commentary about, I think it was Asia in particular, kind of doing piecemeal or smaller add-ons in terms of services, et cetera. Does that mean that you expect a smaller recovery, or I should say, a longer recover where just kind of inches along until we get back to what you would consider normalized growth rate for the region?

[Peter E. Kalan:]

I don't think that my comment was specific to Asia Pacific. It was just what some clients that I met with in the last quarter were commenting, that they -- instead of doing big projects, they're breaking them up into smaller projects to both change the rate of their CapEx investment, as well as derisking projects. This is something that we've seen for some time. Not unique to this quarter. But in APAC, we continue to see a strong pipeline there. And this has been a good year for growth for us in Asia Pacific and we're still expecting that to build as we move forward.

[Sterling P. Auty:]

I got you. And on the Time Warner and the Comcast, I think in previous large contracts from those, you take price at the certain amount of time to get you back to kind of the revenue run rate, at least the last couple it's been about 4 quarters. How would you characterize the trajectory of the growth off the bottom post the price cut?

[Randy R. Wiese:]

I would say it's -- I would expect similar -- it's kind of early to tell. But I think, if history repeats itself, we've done a very good job of getting back within 4 to 6, 7 quarters. I think you saw a little bit of evidence this quarter. You see a nice little uptick in Q2 going to Q3, and they both have the full amount of the discount in the second quarter. So I think it's early, but we like the direction it's going.

[Sterling P. Auty:]

So when we hear some of the projects like the one on college campuses, how would you characterize the economic model around those and the size of those projects, meaning are those kind of singles where we need a bunch of them to pile on top? Or some of them doubles and triples in terms of size?

[Randy R. Wiese:]

I think you think of those as singles that we had to string quite a few singles to get it to score the homerun -- or to score the run. These are not the amount of complexity and the amount of the services that we provide or not as complex as your traditional legacy cable subscriber is. So I think you look at these as dimes, nickels, quarters, as opposed to the full amount that we get from our cable operators.

[Peter E. Kalan:]

And I would also say that similar to the on-campus piece that I mentioned in my prepared remarks that, that's a much smaller market set than the 20-plus million subs that something like Comcast has. And they take that larger potentially. But early on, it's indicative of how they're thinking about their business. And so it may be above single versus a full single to use Randy's parallel. And he doesn't have a big beard like the Red Sox though.

[Sterling P. Auty:]

I got you. One last one and I'll jump back into the queue or turn it over, I should say. As we look at the margins in the quarter, we're a little bit better than I would have thought. People ask about, I think the revenue mix dynamic between the large customers and the small. Let me ask it this way, how did the rev mix look in terms of some of the lower -- or away from some of the lower margin like the print mail services versus some of the other higher margin. Was that a contributor to the margin that we saw this quarter?

[Randy R. Wiese:]

I think, what I'd say is the margins are pretty close to my expectations. I'm not sure if there's anything that I'd read into that. If you look at the expenses quarter-over-quarter, they're almost flat, except for SG&A is up a little bit, and that's as a result of us doing some investments and market research that we're doing. So I'd say there's really nothing all that -- that worth noting between the quarters, Sterling.

[Peter E. Kalan:]

Yes, and it's not as -- Randy, maybe this is much of question to confirm, but when we see growth on our major clients after going to the repricing, if it has nice margin dynamics, because we've got a lot of fixed support infrastructure already in place for those clients, so growth on Time Warner and Comcast and others have a nice contribution too.

[Randy R. Wiese:]

Yes, exactly. And you can see it also just in the general mix of the gross margin on the processing, it's probably in the low 50s, 50, 51, 52, and your professional services and software is usually in the low 40s. So I think you probably saw a little bit of bump in the processing revenues this quarter, and a little bit of downtick on the software and services. So a little bit of mix going on there.

[Operator:]

[Operator Instructions] Our next question is from Johnny Grubstein [ph] who is a student.

[Unknown Attendee:]

I'm calling -- you actually just cut some of the [indiscernible] about the SG&A expense, picking up a little bit from the investments in market research. However, I've noticed that it's gone up since 2010 from 15% to 20% based on revenues. Is there a plan in place for that to move it in the other direction?

[Liz Bauer:]

So, Johnnie, I think if you look at the end of 2010, we acquired Intec, which had a higher SG&A as a result of being a software company, so I think what you're asking is directionally do we continue to expect that to grow, and I'll turn that over to Randy to give you some perspective.

[Randy R. Wiese:]

I think you saw it go from probably from 12%, 15% to probably 18% or so shortly after the Intec acquisition which is...

[Unknown Attendee:]

17.47%, yes.

[Randy R. Wiese:]

Really kind of -- which is kind of the change in the business model. Probably the last couple of quarters, maybe the last 4 quarters, you saw it going up a little bit and that's really kind of a couple of different things that are going on, investments within the business, some marketing investments, some market research in a couple of different areas. And the buildout of some of our IMS sales staff, right, or managed services staff. So there's a lot of investment going on within that line item which is what you're seeing. I think longer term, you should probably see it settle more back down in that 18% range, through the growth of revenues. As you get additional leverage off of the SG&A platform, you should be able to get that back into the 18% range. I think it may stay elevated for a few quarters as we go through some of these investments.

[Operator:]

All right. And I'm showing no further questions. I will turn the call back to Peter Kalan for closing comments.

[Peter E. Kalan:]

Thank you, George. And I just want to thank for all who participated for giving us your time to hear our story today. And we look forward to finishing up the year strongly and reporting in the first part of 2014 our results of this year. And I also like to give thanks to our employees who continue to work diligently to make sure that we can deliver on our promises to our clients. Thank you.

[Operator:]

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.