Q4 2019 Earnings Call

Good day and welcome to the CSG system International fourth quarter 2019 earnings announcement.

Today's conference is being recorded at this time I would like to turn the conference over to David Bank.

[laughter]. Thank you Corey and thanks, everyone for joining us today's discussion will contain a number of forward looking statements easily 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 integrated manage acquired businesses in order to.

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 data for this call and we undertake no obligation to revise our 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 slows. Our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our web site.

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 FCC on form 8-K.

With me today on the phone our Bret Griess, our Chief Executive Officer, Raleigh, Johnson, our Chief Financial Officer, and list, our Chief Communications and Investor Relations Officer with that I'll turn the call over to Brad. Thank you David and thank you all for joining US today. This was a good quarter end year for CSG with record revenue.

New and earnings highlighting the quality of our execution in these dynamic times. This past year has further position CSG as a trusted provider of solutions that help our clients better acquire monetize engage and retain their customers Raleigh rule will review the financial results in more detail.

I'd like to call out a few key highlights.

First for the full year adjusted revenues grew 8% year over year to $928 million, an all time high for CSG with almost half of that coming from organic revenue growth.

Non-GAAP earnings per share grew 15% to $3.53 per share another all time high.

Our adjusted operating margin came in at 17.9%, which is at the high end of our long term target range of 16% to 18% and.

And finally free cash flow was $114 million for the year.

We believe that these results demonstrate that the investments, we're making enable us to execute well against our core goal of driving long term sustainable growth and diversification in our business.

This quarter, we had several successes in the market the validate how we're delivering on this goal.

First the long term contract extension that we signed in December with our largest customer Comcast is a great affirmation of the value that we are delivering to the broad communications in entertainment marketplace, but was just one of many key sales wins, we added many new logos to our mix of customers worldwide.

Further diversifying our base and strengthening our competitive position.

I'd like to review a few of these wins in more detail.

This past quarter, we also extended our managed services contract and achieved global partner status with Telstra, one of Asia, Pacific's, leading telecommunications and technology companies.

Telstra was one of our first software customers, who entered into a long term managed services relationship with CSG.

This renewal reinforces the value that having a long term relationship brings to both parties.

Next we helped one of the leaning diversified global entertainment and media brands rollout capabilities for its new streaming service to take advantage of the holiday gift giving season.

This customer turned to us to help rapidly at gifting capabilities through our digital monetization platform. Our cloud based offer management capabilities were implemented in less than two weeks and help this service provider captured new revenues just from individuals buying a subscription to their service and gifting into a friend or family member.

For the holidays, we founded this company as a customer for many years and they knew our capabilities and more important new that we would do everything in our power to help them capture a new revenue stream.

Moving on we were selected by a longstanding client of CSG operating across Europe, and Asia to provide the world's first cloud native online charging solution for its wholesale aiotv and digital business unit.

As part of this engagement, we will provide a centralized group billing and settlement platform to support internal revenue and cost distribution for their NVNO Eni OTI clients.

Next we entered into a multi year VSS contract as Unitel Mongolia is transformation partner to support their strategic imperatives and business growth Unitel was looking to future proof its operations and move away from solutions that Didnt provide the omnichannel experience or next generation Fiveg mobile.

Technology necessary, we identified opportunities to improve its time to market through our comprehensive on premise solution as well as demonstrated our ability to scale and support unit sales future growth.

With our vast experience with operators around the world, we were able to share best practices from other companies that are evolving their own business models and operations. We're pleased to add unitel to our roster of clients.

In addition, we were selected as the rating and monetization provider to help Oneweb, a global communications network provider to deliver low latency high speed Internet service to everyone in the world by deploying and operating at constellation of hundreds of low Earth orbiting satellites.

Working closely with the channel partner, we're pleased to forge and new strong relationship with both the service provider and the entire ecosystem of technology providers required to launch this game changing service.

And finally, our payments team is helping one of the world's leaders in real estate services provide the payments capabilities for an exciting new business launched their planning later in the year. While this service will not launch until later this year early next year, the number of payment transactions that it could generate our significant.

And speaking of payments after one year of ownership of Forte, a significant number of our clients are using one of fortes payment products reinforcing that in addition to the potential that acquisitions, bringing for revenue diversification. They also bring the opportunity to the cross for us to cross sell those solutions indoor.

Summer base.

When you boil this all down our mission is quite clear, we're 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 as well our stakeholders and being a trusted partner to some of the world's leading brands being that you must continually invest innovate and deliver so.

Elutions at 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 executing well across a broad set of metrics. We are adding new logos from a diverse set of clients ranging from wireless to healthcare to retail to technology Importantly, we're diversifying our revenues from our new verticals at the same time, we're growing our revenues from the.

The cable market and therefore widening our competitive business mode.

We're continuing to Lincoln and strengthen our relationships with our very important existing customers and earn more of their business.

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

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

We're consistently delivering organic revenue growth that is above the industry growth rates and last but not least thanks to our strong balance sheet and consistent ability to generate cash we're distributing capital to shareholders, while we invest in new initiatives and acquisitions to drive longer term topline growth.

In summary, we are executing on a strategy that is working and we are seeing the benefits of that strategy.

Before I close I'd like to share that as part of our ongoing emphasis on good board governance, we're continuing to refresh the talent skills and experience that are represented on our board. This past month, we added high and song Norbord Hyun as a recognized industry leader with extensive experience across software development security and product.

To engineering. He currently serves as a senior Vice President and General manager of security markets for Splunk incorporated.

And as the third New board member to join our board in the past five years.

Finally, I'd like to thank our clients for their trust in us and thank our talented and dedicated employees across the globe, who are committed to helping our clients and our company achieved greatness.

With that I'll turn it over to rally to review, our financial performance for our fourth quarter and full year.

Thanks, Brent and welcome everyone to the call today to discuss our financial results for the fourth quarter and a full year for 2019 as well as our outlook for 2020.

We're pleased with a strong 2019 performance, finishing near or above the high end of our guidance and we feel well positioned to continue delivering upon our strategic initiatives.

In 2020 and beyond so lets walk through our financial results.

We reported revenue of $255 million for the fourth quarter up 3% all coming from organic growth.

We also reported a record $997 million of revenue for the full year up 14% and exceeding the top end of our revenue guidance.

This full year revenue growth reflects the combination of organic growth of about 3.5% and the additional full year contribution of our 2018 acquisitions or business Inc. acquired in February 2018, and Forte acquired in October 2018.

In addition, non-GAAP adjusted revenue, which excludes transaction fees was $237 million for the quarter and $928 million for the full year up 2% and 8% respectively.

In summary, our teams delivered strong revenue growth for 2019 with each quarter building on the strength of the previous performance level.

Moving on our fourth quarter non-GAAP operating income was $42 million or 17.5% of non-GAAP adjusted revenue.

Our full 2019, non-GAAP operating income was $166 million or 17.9% of adjusted revenue at the high end of our guidance range.

This reflects the continued ability to grow our revenue and manage our cost structure, while continuing to invest in our people solutions and clients.

Next our non-GAAP adjusted EBITDA was $55 million for the fourth quarter or 23% of non-GAAP adjusted revenue.

Full year, adjusted EBITDA of $219 million or 24% of adjusted revenue.

Up approximately 10% year over year.

Our non-GAAP EPS for the quarter was 98 cents up 3% over last year.

And our full year non-GAAP EPS was $3.53 up 15% over the prior year.

Our non-GAAP effective income tax rate was 12% for the quarter and 23% for the year.

Our effective income tax rate was positively impacted more so in the quarter by an income tax benefit related to Comcast exercise of the remaining vested warrants in December 2019.

We elected to settle this exercise with cash in lieu of granting additional shares resulting in a $13 million payment to Comcast at the end of 2019.

So moving on to the balance sheet.

We ended the year with a $183 million of cash and short term investments.

We generated $44 million of cash flow from operations and $34 million of free cash flow for the quarter.

For the full year, we generated cash flow from operations of $151 million and $114 million of free cash flow.

With both metrics exceeding our guidance expectations and further demonstrating our ability to convert earnings to free cash flow.

As was the case in 2018, we generated a vast majority of our free cash flow in the second half of this year.

Additionally for the year, we paid $29 million in dividends and repurchased $26 million of common stock under our stock repurchase program.

I'd also like to highlight the once again will be increasing our quarterly dividend by 6%.

This will pay off at a rate of 23, and a half cents per share per quarter or 94 cents per share for the year.

So before I provide the outlook for our financial outlook for 2020.

I'd like to call out our January 2nd acquisition of the majority of the assets of taxes on it.

We paid approximately $10 million upfront with the potential for future earn out payments based on defined performance levels.

Sentences of Dallas based firm with global operations and a world class client list. Their teams hope clients, who are undertaking a digital transformation for their customer employees and user experience experiences across all communications channels. They employ a host of services, including strategic.

Advisory design engineering, and technology enabled and to drive success.

Like our 14 business that we acquired in 2018 touched on it is not entirely new the CSG as they've done an existing partner contributing to several client wins.

We believe this acquisition fits nicely into our M&A and capital allocation strategy.

In addition to reinvesting in the business and returning cash flow to our shareholders. We will continue to deploy a portion of our cash to acquisitions like Tech Senate to provide us strong strategic fit meet our financial criteria and reflect a solid cultural alignment.

10% It has a great team and we look forward to the expansion on our existing relationship.

We expect the acquisition will lift our 2020 revenue by approximately $10 million with a return profile that we'd expect to be neutral to slightly accretive to earnings on a non-GAAP basis.

So moving on to our financial outlook for 2020.

Recall in December we provided an initial view into our 2020 guidance simultaneous with the announcement of our new Comcast contract. We are now updating and raising our revenue expectation with the addition of tech sentiment, which has improved as stated we believe will add approximately $10 million of revenue for the year.

As such we now expect our 2020 revenue to be in the range of $990 million to $1.03 billion.

And the range of $917 million to $950 million on a non-GAAP adjusted basis.

Also as previously conveyed in December we expect our non-GAAP adjusted operating margin to range from 16% to 17%.

Down from our strong performance in 2019, but well within our long term target range of 16% to 18%.

In addition, we expect adjusted EBITDA of $202 million to $217 million.

We also expect to delivered 2020 non-GAAP EPS in the range of $2, a 96 cents to $3.29. This.

This expectation is based in part on a non-GAAP income tax rate of approximately 27%.

Our guidance also assumes continued share repurchases under our buyback program with anticipated outstanding shares for the year of approximately 32 million shares.

And finally, we expect the range of our operating cash flows to be a $130 million to $150 million with an annual capital spend range of $25 million to $35 million.

In summary, this was another strong quarter and a terrific year for the CSG team as we continue to execute well the strong organic and inorganic revenue performance driving bottom line growth and significant free cash flow.

We believe we are well positioned to continue to help our clients compete and thrive in this evolving marketplace and as a result expect to drive revenue earnings and cash flow growth over the longer term.

I'll turn it over the operator for questions.

Thank you if you'd like to answer your question. Please take note by pressing star one on your telephone keypad.

Again to ask a question. Please press star one now.

Pause momentarily to allow everyone an opportunity if the signal for questions.

Our first question comes from stack silver with B. Riley.

Okay, great. Thanks, Jane and question I, just wanted to drill and ex acquisition a bit more on and when you think about that obviously I think the revenue or a bit smaller than more change. The when you think about the opportunity with tax that at what I guess tempted things are you doing with them.

From a partnership perspective, before and can you help us side the opportunity for new business wins for the core business.

Yes. Thanks, Zack we appreciate the question techs in it as he said in the.

The notes the formal ones there is been a great partner for us for some period of time and as we work together and continue down this process of capital allocation on should continue to say, we take incredibly seriously, but what we saw is the opportunity to work together to leverage their knowledge and skills that they bring to the.

Table, along with the solutions that we bring to the table to truly help with the digital transformation that so many clients are going through today and so though it's only $10 million of revenue getting at one times revenue. We think was a very great strategic deal for us and as we said we're already seeing some.

Some of the pull through activities right now.

And in the fact that similar to what I mentioned with Forte in the payment space as we went through that so we just see it is falling right into line with our capital allocation and our overall M&A strategy of looking for ways that we can bring greater solutions to the marketplace and so that we can actually ensure that we're continuing to drive value for our customers.

And I believe that Theres, one clarification Raleigh had from his notes is Oh, yes, yes. Thank you. So before we go on one thing I did want to clarify I slumped, our operating cash flow guidance. So the actual range is $130 million to $155 million I believe I said 150, so just to.

Clarify that's $130 million to $155 million.

Thanks for the questions equity appreciate yet of course, and then I guess, one more quick one if I guide.

Let me ask Greg, but when you think about.

Thats a pretty intriguing service you provided to this large.

Yes media company over the holidays.

Begin I guess that may be.

Yes, when you think about I guess was that something that's going to sort of fall off after the holidays or is there an opportunity to de then.

Relationship with the service and with these giftgiving capabilities and maybe other thank you can bring to the table.

You know theres no customer that we take for granted or solution in the marketplace that we take for granted so we're going to continue to work or tails off to solve but what we saw there is just yet another time, where our solutions were viewed as being highly innovative and with that we are very fast and cost compare.

Good to bring it to the marketplace and actually executed by tried to accentuate a bit that from.

The time, we started going to it was in place to gather that revenue stream for them was two weeks and so the fact that we showed value that fast and actually delivered in the timelines, we see it not going away, but we also believe we have to compete for that business every single day.

Got it thank you Brad.

Thank you.

Our next question comes from Tom Roderick, which cycle.

Hi, there thanks for taking my questions and congrats on unmet on many things on the quarter notice, notably I think getting the Comcast contract resigned his is fantastic better clarity for all of US on the street. So maybe I can kind of tackle Comcast as a customer but also.

With respect to the broader product set I think it gives an opportunity is sort of look at where you're at now versus the last time, you did resign Comcast and go through that process. So when we think about kind of a onetime hit to the revenue stream.

You know that happens every every five years or so so then you kind of climb out of that whole with additional offerings additional products additional things that you can offer them. How should we think about how that pace of revenue recoveries, particularly given that you have payments now you've got a more complete ascend on product. There is more things you can offer them than the last time you went through this.

Can you kind of take us through what that what that cycle of life might look like with Comcast in terms of.

What other offerings, they can use and how long we ought to think about.

This head to revenue holding holding that down versus where we started prior to the renegotiation. Thanks.

Nothing like a simple question Tom. Thanks, [laughter] there is no as in all seriousness you've been around often enough to see how that process works and traditionally after a major renewal.

Because they do view us not just Comcast its many of our customers as an extension of their value added IP organization to deliver services to solve their problems. So like you would with some of your services you expect the benefits of that the cost benefits as it happens, but traditionally there have been a level of discounting.

What happens in that and as it grows out over time. It we may get back in that cycle. One of the very positive thing that I see from at this time, you'll notice that our guidance for revenue is not going down. This is one of the first time to after a major renewal where the revenue is flat to slightly up at.

And with the earnings aspects going on there what you can see is the fact that what we're putting out for guidance is a slight reduction in the earnings but not to the level that it's been traditionally in historically as we go through that path. That's a combination of numerous factors as the things that you referenced where the we have more solutions that we can bring to the table and now.

Only more solutions as far as net new ones. The continual improvement of the historic solutions that are getting better and better as we move forward, which is where you hear as often reference how we have to keep investing in innovating to have that value added proposition, but in addition to that what helps to offset that revenue and keep our earnings.

Things in the range that we said is our long term earnings range of 16% to 18% even with it we land in that range of 16% to 18% forecasted earnings is through some of these other diversifications solutions in customers and new logos that we're adding so you've seen it traditionally take us out to that fourth or fifth year to start truly get.

Thing out of that whole, we went out a little quicker and we believe that Thats what allows us to go there. So we're not going to give you specifics on this is the day it'll happen, but you can see with the revenues not being projected down and the earnings being within our long term range plus our investments in solutions. We think we're really well positioned to get out of that'll quicker and just.

A little additional color Tom I think if history is an indicator.

Generally after we provide a discount it's usually about four to six quarters, where we're back to earning.

That revenue base back.

Thank you. Our next question comes from Greg Burns with Sidoti.

Good afternoon.

Terms of <unk>.

The other.

Minus the timing of your next major renewals now the Comcast getaway.

What are the next large ones that are.

Yes, so the two to the next largest are both the charter and dish.

Those renew in December of Twentytwenty one.

And as Comcast contract takes us through at least for core platform services that will take us through Twentytwenty four and a four.

Brent and.

Other services that takes us through an additional year 2020 125.

Okay.

Okay.

Currently in terms of charter might might be the renewal, but just to do something more broader with them.

Some of the.

Overs and aren't on your platforms, how do you view.

The opportunity that.

The contract renewal might present to you.

Expand with that customer yeah, Greg that's always a great question and as a part of the market, where we do believe we can bring great value to.

Customers in solving their most challenging problems, but it's also one of this it constantly say is that we have to earn that business day in day out we see large customers like Comcast. Like addition, like many others. The more we do have them the more we seem to consolidate and drive value. Our model is one of.

Scale and it is one of bringing quality to the marketplace and so we believe that we're very well positioned with charter to bring that when it's the right logical priority for them, we believe that their selection of us to consolidate their Hawaii subs.

Recently is another proof point or sign of positivity that we're bringing value at a good price point in the marketplace. So we will never account our chickens until they've hatched, but we will continue to strive to solve for charter who is a great customer and great operators as we go forward and we hope that is an impetus for more business.

Okay. Thanks, and then when we look at the guide for 20.

The operating margin that.

On revenue, but the margins are taking a step back is that because the.

The mix.

Where you're growing is lower margin than what you're losing from Congress can you just.

Help us out that dynamic.

Sure Yeah, Greg as you think about.

The nature of our Comcast contract.

There aren't a lot of variable costs associated.

With a platform type product right. So.

The discount that we provide from a revenue basis is essentially a pass through to to the bottom line and impacts margin.

And profitability. So would you actually see there is we are gaining some other efficiencies in other areas of the business because if you took that 10% reduction all the way down you're probably sub 60%. So we're looking for growth cost efficiencies and.

Others of our business offset.

Okay, Great and just lastly, I just wanted to touch on that that.

Mental gifting service you provided.

It was that.

Globally internationally or just domestic.

And.

You have.

These types of like add on.

Services, we think about over the top or.

Forms I think historically.

The billing it was kind of more simple applications, you are really involved with some of them but.

Is there an opportunity now are you seeing a broader opportunity outside of this.

When you want.

Two.

Later on incremental services that are maybe a little bit more.

More complicated from a billing.

Yes, that's a great question. It is an area as our solutions continued to evolve and we go more cloud base and continue to modernize the solutions, we have theres a lot more modularity that helps us to solve that's part of the activity is helping us not to saw only to solve for the traditional customers that for some of these new customer.

We're talking about that one explicitly around the gifting was only in the U.S. and of course, we would always like to look to expand that with this client internationally and with other clients as we go forward, but adding new feature functionality and increasing our ability to add value to the customer will continuously be a goal of ours.

Thank you.

Q.

Thank you and as a reminder, please press star one on your telephone keypad now to ask a question.

And at this time there are no questions in the Q.

Thank you Corey we really appreciate the color and we appreciate everybody taking the time to listen we're very proud and we're very excited about where CSG is going and as always I'd be remiss. If I don't think the wonderful customers investors and most importantly, our employees that are answering the bell everyday to wear.

Our car Desal questions in turn CSG and Disney greatness that we know it can become so thanks for your time and have a great day.

Thank you ladies and gentlemen. This concludes today's call you may now disconnect.

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