Q3 2019 Earnings Call

[noise] Good day and welcome to the C.S.G. system International's third quarter 2019 earnings announcement, all participants are in listen only mode. A question and answer session will follow today's presentation and instructions will be provided at that time 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 Communications and Investor Relations Officer. Please go ahead.

Thank you Shiloh and thanks, everyone for joining us as many of you know David Bank strained our IR team a few months ago and as much as I get a mystery in these highly informative earnings call introductions.

They're all David Snow, So David take it away thanks lists I'm glad to be here.

Today's discussion will contain a number of forward looking statements. These one 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 to strategic upper.

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 public 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 are 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 gap. 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.

For more information regarding our use of non-GAAP financial measures. We refer you to todays earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the FCC on form 8-K.

In addition to Liz also with US today on the phone or Bret Griess, our CEO and Raleigh, John's our CFO with that I'll turn the call over to Brett.

Thank you listen David Thank you all for joining US today, our results this quarter and through the first three quarters of 2019, our 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% 88 cents.

Organic growth was in the middle single digits or adjusted operating margin came in at 18.2%, which is above our long term target range of 16% to 18%. We still believes that our long term target range is appropriate for our business.

We're proud of our performance over the past several quarters, while the markets. We serve we're going through a tremendous amount of change and we ourselves have also been undertaking a business transformation, we've 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 at 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.

And our capabilities and footprint.

This quarter, we had several successes in the market to demonstrate how we're delivering.

First we displaced one of the largest field service management competitors at all tier one of the largest broadband communications and video service providers in the United States. All T. selected us to arm, there 3000 field technicians to service their approximately 5 million broadband cable customers, we're pleased to be work.

Even with all Tees 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.

Actively we process over $1 billion and payments through our kiosks for our entire kiosk client base and as our customers are expanding their retail presence with physical store locations. There also expanding the use of these digital kiosk 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 theaters on demand streaming service utilizing our ascendon platform.

This new service AMC is.

20, plus million loyalty members can rent or by movies produce for major studios like Disney and Universal as more and more entertainment lovers want access to high quality content. We're proud of count companies like AMC theatres formula one and expending the on campus as streaming customers.

Next we expanded our footprint within JP Morgan Chase with our holistic communication suite of solutions. This past quarter, we help 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 a as they look to provide relevant timely and personalized communications to their customers.

And finally, we have now owned for today for a full year. We have integrated teams continue to work on the consolidation of our solutions and it increased our investment in our go to market capabilities. This acquisition is meeting our expectations and the remaining accretive to our non-GAAP bps.

When you boil this all down our mission is quite clear, we're delivering innovative customer engagement solutions that help companies acquired monetize engage and retain their customers. We do this by continuing to invest in our solutions our people and our clients. We believe believed that by doing this and staying singularly.

Focused on helping our clients exceed we will benefit.

That 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 optimized each touch point in the customer lifecycle, 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. We are very important existing customers and earn more of their business.

Wrapping solve our customers' biggest business challenges to compete and succeed in this hyper competitive digital future.

We're diversifying our revenues from new verticals at the same time, we're growing our revenues from the cable market widening our business smoke.

We're continuously evolving our cost structure to ensure that we're competitive in the market.

You are consistently delivering organic revenue growth that is above the industry growth rates and last but not least we're committed to distributing capital to shareholders. While we invested in New addition initiatives to drive longer term topline growth.

In summary.

Executing on a strategy to working and we're seeing the benefits of that strategy and we're in a fortunate position as we look to the future. Thanks to several key characteristics of our business.

First we have an enviable business model with strong fundamentals that position us well to drive shareholder value second we have unrivaled domain expertise and the customer experience revenue management and the paint many industries.

Third we work with some of the largest and most innovative service providers in the world and we are 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 the strength of these solutions allow us to pursue new verticals, creating more diversified and sustainable growth engine.

If we generate strong cash flows and have a solid balance sheet, which gives us tremendous flexibility to grow and diversify the business and still returning capital to our shareholders and most importantly, we have talented and dedicated employees across the globe, we're committed to helping our clients and our company and cheap greatness.

With that I'll turn it over to rally to review our financial performance for a second quarter.

Thanks, Brett 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're 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 2018.

This increase is reflective of two key items.

First we delivered organic growth in the mid single digits, driven mostly by continued growth in our cloud solutions and our managed service arrangements.

Higher third quarter revenues from the timing of some expected 2019 software and services and maintenance revenues that were pulled through into the third quarter.

Second was the contribution from four to.

Which we acquired in or what October last year.

For Teva will become part of our organic revenue calculation beginning in the fourth quarter.

Moving on.

Our third quarter non-GAAP operating income was $43 million or 18.2% of non-GAAP adjusted revenues.

Our operating results this quarter reflect the continued growth in our revenue quarter over quarter, while at the same time continuing to invest in our people products and clients.

Next our non-GAAP adjusted EBITDA was $54 million for the third quarter or 23% of non-GAAP adjusted revenues.

Our non-GAAP bps for the current quarter was 88 cents up 26% over last year.

We do to our strong current quarter operating performance.

Our non-GAAP tax rate was 26%.

So moving onto our balance sheet.

We ended the quarter with $172 million of cash and short term investments.

We generated $79 million of cash flow from operations and $69 million, a pretty cash flow for the quarter.

Cash flow for this quarter was positively impacted by the timing of the significant client payment that was delayed at the end of the second quarter and received at the beginning of the third quarter.

As I mentioned last quarter, we expected cash flow to improve in the second half.

As our working capital levels out over the year.

That said, we remain confident in our cash flow guidance for 2019.

Additionally year to date, we paid $22 million in dividends and repurchased $21 million common stock.

So moving onto our guidance.

After three strong sequential quarters, we're raising the lower end of our 2019 revenue guidance and narrowing to a range of $975 million to $995 million.

And to a range of 913 and $920 million on a non-GAAP adjusted basis.

With a path to the upper side of both of those ranges.

The 6% to 7% increase in adjusted revenue over 2018 reflects the growth in organic business as well as the expected incremental revenue contributions from our 2018 acquisitions.

We now expect a non-GAAP adjusted operating margin percentage of 17.5% to 18% at the high end of our long term target range of 16% to 18%.

We're also raising our adjusted EBITDA range to $212 million to $218 million.

7% to 9% increase over 2018.

In addition, we're raising our 2019 non-GAAP bps to a range of $3.28 to $3.41, a 7% to 11% increase over 2018.

This expectation is based on a 2019 non-GAAP tax rate of 26% and continued share repurchases under our buyback program.

With anticipated outstanding shares for the year of 32.5 million.

And finally, we continue to expect a range for our operating cash flows over $125 million to $150 million.

With an annual capital spend $30 million to $40 million.

In summary, this was another solid quarter.

As we continue to execute well with strong organic and inorganic revenue performance driving bottom line growth.

We're pleased with this quarters operating results, allowing us to continue executing on our long term business objectives, and returning cash to our shareholders to deliver additional long term shareholder value.

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

Thank you.

Ask a question we signaled by pressing star one on your telephone keypad.

Using a speaker phone.

Please make sure your mute function is turned off to life signal to reach our equipment again press star one to ask a question.

Our first question comes from Tom Roderick of Stifel. Please go ahead.

Yes, Hi, Matt Vanvliet on for Tom Thanks for taking my questions.

Great Great quarter here, just curious if we could dig in a little bit on on the JP Morgan announcement that you made in 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 look.

Going forward.

Yeah. Thanks, Matt we appreciate a the question you know what we're done with JP Morgan 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 a with then it was around some fraud activity is.

As far as how to automate fraud management for the in consumer and so what you really see happening is there is the overall customer communications management digitalization of the customer journey, where our tools are just fitting in a very optimal way and we do see this is just a springboard into start just like it was.

And 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.

And then turning to the the announcement from a couple of weeks ago launching these sending communications platform.

Should we think about that becoming sort of the platform over time that you move all of your cable customers too or is this just another option that gives you more flexibility to go into either newer carriers are those that have already gone through a broader digital transformation.

That's about as a key investment thesis for us as we move down the path, Matt It primarily fits within the revenue management digital monetization activity. So yeah. We do believe that it can support some of the functionality that the current core cable business does that also is very focused right now in the wireless space.

Some of the Aiotv space. So its yet another one of the assets within our revenue management digital monetization similar to HCP similar to a single view, where it just really positions us well the do it in the great thing about us and on is that it is a cloud native cloud first activity. So customers that are open to that which not all.

Denmar, but some of the more forward thinking ones in that space, where you get the flexibility are so it's a another quiver or another arrow in our quiver of revenue management digital monetization that we'll continue to look to build out.

And Matt if you think about it with that now we have a private cloud solution with HCP and on Prem solution with single view and a cloud native solution with us and so it really is whatever best suits the customer we're here to solve their toughest business problems.

Great and then lastly, just turning to some of the regional performance, obviously theres a lot of headlines around the macro, especially in Europe , and some slowing in China, but curious what what you're seeing from your customers as you really do span a lot of those the major geographies or people still looking at potential big.

Projects into the end of the year in and out in the next couple of years or have you have you heard some pause or at least some sales cycles cycles elongating as people are a little bit concerned about what what the overall economy could be doing.

Yeah in the.

Hyper competitive space that we're in and then you combine everything is going on in the broader economy. As you mentioned there Matt I think it if I made any broad statement it would be wrong. It will fall down into details. What we are seeing as a continued level of strength in Europe a in the.

Europe Middle East in Africa marketplace.

We see different things a in Asia that or maybe not quite as strong at the current moment, but we also see that it's almost a quarter to quarter as we move forward in that there are large transformational projects that are in flight vote next gen and on some of the current a private cloud products that we have.

So I would say, we've got a really sound pipeline, but we never count our tickets other hatch as we progress. We're all you have any different first thing no <unk> I'd Echo the same well a lot of strength with it in the EMEA region and continue to work for not only opportunities in a pack, but South America.

Great. Thank you.

Thanks, Matt.

If you find your question is going to answered you may remove yourself from the Q by pressing star to once again, if you'd like to ask a question. Please signal by pressing star one our next question comes from Greg Burns.

And company. Please go ahead.

Good morning, I, just wanted to dig in a little bit on the T. swings.

Talk about why you think.

Please see the incumbent vendor there whats.

Your platform versus theirs, and we look at the.

The field service management opportunity more broadly in the case.

Sure opportunities for you there thanks.

Thanks, Greg I. Appreciate the question you know, 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 group and 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.

It has been driving hard as being a cloud enabled applications that were rolling it out beyond even North America and within the cable space. There we have been in that field force management for cable for well over 20 years now we believe that that history and along with the feature flush out yet driving next generation in it.

<unk> based positions us really well, we havent talked about how we're utilizing it in different markets, including places like.

Healthcare 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 building grow the business.

Okay, and Ltvs or are you doing any sort of revenue management for them or is this kind of your first.

Entre into that customer.

This is one of our first entrees, we've got a few other small ones that are there, but as we said in a quote or as we do with all of our customers will uses to position ourselves to earn the right to do more business with them and look to continue to grow they're a great client a and so we want to continue to helping solve their problems.

Okay, Great and then rally the revenue you mentioned the timing of the software and services revenue hitting in the third quarter. If you just.

Scott what that is and.

The magnitude of that how much did it contribute to the third quarter as opposed to.

Before you Greg it wasn't entirely a significant weren't talking a couple of million dollars or so but.

It was a revenue that we did expect within 2019 or the timing was such that we expected it to fall within Q4 and it actually came in a came in early.

Okay, great. Thank you.

Great. Thanks, Greg.

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

Well, thank you Shiloh and thank you to everybody who took the time to participate were 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 didnt think are 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 again next year have a great day.

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