Q2 2020 CSG Systems International Inc Earnings Call

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Please standby.

Good day and welcome to the CSG system International second quarter 2020 earnings announcement.

All participants Arnie listen only mode. A question answer session will follow today's presentation.

And instructions will be provided at that time today's conference is being recorded.

And now at this time like to turn the conference over to Mr., David Banks Global head of Investor Relations. Please go ahead Sir.

Thank you operator, and thanks, everyone for joining us.

Today's discussion will contain a number of forward looking statements.

He's will include but it's 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.

Well these statements reflect our best current judgment they are subject to risks and uncertainties the could cause our actual results to differ materially.

Please note that these forward looking statements reflect our opinions only as of the beta this call.

We undertake no obligation to revise or publicly release any revisions to these forward looking statements.

Right 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 web site.

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 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.

We'll also be furnished to the FCC on form 8-K.

With me today on the call our Bret Griess Rally John's Chief Financial Officer, and Liz Bauer, Chief Communications, and Investor Relations officer with that I'd like to now turn the call over to Brett.

Thank you David Thank you all for joining us today.

First we hope that you your family friends and loved ones are safe and well. This year has proven to be a test for all of us on a variety of fronts and I'm confident that collectively we can do better as a company. We're focused on re imagining what the future workplace looks like for C.S.G. The next normal.

And again, just like I shared last quarter, well see if she is not immune from the impact of this pandemic. We are so fortunate compared to many the predictable resilient business. The provides a lot of visibility.

Ali will review the financial results in more detail I'd like to call out a few key highlights.

Our first quarter adjusted revenue was $225 million.

Non-GAAP earnings per share were 59 cents, our adjusted operating margin for the first half of the year, 16.1% inline with our long term target the lower in the current quarter due to factors that Raleigh will discuss in more detail.

First quarter levels.

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Sure we feel very good about our performance thus far in 2020.

And our ability to hold our non-GAAP guidance unchanged.

For the year, notwithstanding the continuing impact of the global pandemic.

Our employees continue to deal effectively with the uncertainty of co. The 19 first and most important we continue to be blessed with a handful of team members who have tested positive at fully recovered our employees and customers health and safety continues to be our number one priority as we work through the effects of the pen.

Then Nick.

For those who have been deemed essential such as in our current email operations, where we produce over 1 billion printed documents and statements each year for our clients. Our teams have done a masterful job with sanitizing disinfecting to ensure safety and continuity of operation.

For our other employees, we continue to provide the option to work from home through the end of this year.

Early in a very carefully planned phase manner, we round the world that had been team safe by a variety of local governmental agencies only a small percentage of our employees are choosing to go into our offices.

And we did future our global cross.

Functional task force that is working on our reentry plan. It can use them on her in me on a regular basis.

Finally, we track so our business ranging from.

The ladies and implementations as both CSG and our clients worked through their delays in decision maker.

Taking on new projects and some increased costs due to planning for potential shut downs all well. These factors are part of our next normal and are reflected in our results and contemplated in our guidance.

So now let me share with you what we're experiencing in various parts of the business.

First.

We continue to see strength in our North American cable and satellite business.

We've continued to Lincoln and strengthen our real including securing a seven year.

Your extension with Bell, Canada for their five in all TV services. We're pleased to earn the right to continue to be a valued partner to Bell, Canada, a customer of ours since 1997.

We've also seen some positive activity with our screaming and over the top customers 'cause live sports and events are coming back in different places around the globe.

Formula One for example through its F. One TV recently started racing again and streaming those races life. They are seeing significance for concurrent streaming and subscriptions are up.

Okay.

And business continues to be mixed with our global wireline and wireless service providers on the positive side, we're seeing an acceleration in conversations about our digital customer engagement solutions with many customers and prospects. In fact, we have the strongest most qualified sales pipeline.

That we've seen in the past five years. Many companies are embracing new technologies like Fiveg to drive new revenue streams for competitive edge or others are looking to simplifying and standardizing their offline and others are looking for new.

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However for those companies who are early implementation stage of complex solutions and initiatives. We continue to see a slight slowdown in activity as they continue to reprioritize projects based on the pandemic at this stage. It is too soon to tell us the pandemic will impact the pace of decision, making for new more coming.

Flex projects.

Third we continue to see a moderate downturn in the use of our payment solutions, a small to midsize businesses continue to experience impacts from cobot 19.

Well, we're not experiencing the declines that other global payments providers are we're seeing some impact from different sectors, including childcare after school and lunch programs and other retail establishments that has not fully opened yet.

In addition over the past several months, we've been asked by our customers to help them respond to market challenges as well as opportunities.

Recently, we helped a major Canadian telecommunications provider implement a donation hotline for the use of local cherry.

They used to help support those impacted by Cobot 19, our teams activated these lines within 24 hours at the request, we helped the leading South African video and entertainment provider improve with agility by deploying our cloud based billings more quickly to the changing needs of the moping digital disruptors like seat.

The unit of CK Hutchison's Telecom Division provided caught online charging solution for a tool.

And finally, we continue.

You do expand into new verticals with our robust cloud solutions.

Recently, new leave service contracts and extended homework to service provider selected our field.

Service management solution with our solution, they automate processes and integrate customer data and analytics to fully orchestrate end to end management that its contracts, resulting in improved customer technician and employee experience.

These examples demonstrate the breadth and depth of activities at our teams are engaged in as our customers also responded the next normal.

In addition to the great work happening across the business. We've also received accolades from industry analysts and partners in recognition of our innovative solutions that delivery.

Recently, Microsoft name CSG, It's 2020 partner of the year immediate and communication for our innovative client deployment revenue management solutions is you are cloud.

In addition, roston Sullivan recognized us with the 2020 global New product Innovation award for Fiveg monetization.

These honors and others helped prospects and customers differentiate between vendors in the market and continue to reinforce that our R&D investments are delivering value to the industry.

Going forward, we are executing well across a broad set of metrics.

We are adding new logos from a diverse set of clients ranging from wireless the health care to retail to technology.

We are diversifying our revenue from new verticals, while growing our revenue from the cable market, that's widening our business mode.

We are continuing to lengthen and strengthen our relationships with existing customers earn more of their business, we're helping solve our customers' biggest business challenges to compete and succeed the hyper competitive digital future. We're also continuously evolving our cost structure to stay competitive in the market.

And last but not least distributing capital to shareholders, while investing in new initiatives and acquisitions to drive longer term topline growth.

In summary, we are delivering even in these very challenging times.

Before I close out I'd like to share that as part of our ongoing emphasis on good board governance, we continue to refresh our talent skills and experience.

In May Silvio tourists joined our board.

Sylvio's, an experienced CEO senior payments executive in industry innovator with extensive experience in the payments and digital Commerce industries. He currently serves as CEO of the card links Association.

Leading global Trade Association for the payment in digital advertising industries Silvio is our fourth new board number 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 the quarter and our full year outlook.

Thanks, Brett and welcome everyone to the call today to discuss our financial results for the second quarter and our outlook for 2020.

As Bret mentioned, while we're not immune to the impacts to cover the 19.

We do feel fortunate to have a strong business model that we believe provides us with the resiliency and stability to successfully navigate the remainder of 2020 and into the future.

So let's walk through our financial results.

We reported GAAP revenue of $240 million excludes transaction for use of $225 million for the quarter.

Well its decreases of approximately 2% from the prior year.

These year over year fluctuations were not unexpected when considering the continued unfavorable movements in foreign currency and our first full quarter exposure to the impacts ago extended sales and implementation cycle.

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Pricing adjustments associated with the Comcast extension also contributed to the year over year decline.

But were offset by growth in our revenue management solutions.

Moving on.

Second quarter, non-GAAP operating income was $31 million or 13.6% of non-GAAP adjusted revenue.

Non-GAAP adjusted EBITDA was $44 million for the quarter, representing 20% of non-GAAP adjusted revenue.

Non-GAAP EPS for the current quarter was 59 cents based in part on a non-GAAP effective income tax rate of approximately 27% for the quarter.

Each of these profitability metrics were negatively impacted by a noncash write off of approximately $10 million or 23 cents per share of a deferred contract cost, resulting in the discontinuance of a project implementation during the quarter.

Moving on the balance sheet cash flow.

We ended the quarter with $171 million and cash and short term investments.

Operating cash flow for the quarter was $58 million.

After including capital expenditures of approximately $10 million for this quarter free cash flow came in in a strong $48 million missing our use of cash.

And return on invested capital inorganic growth opportunities.

And providing a return to shareholders.

Year to date, we page $16 million and dividends and repurchased $7 million of common stock.

Under our stock repurchase program. Despite suspending the program in early April this year.

We will continue to evaluate our repurchases program as the year progresses.

So moving onto our financial outlook for 2020.

[noise] acknowledging the uncertainty surrounding the wondering affect some coven 19, and the continued impact on our business. We remain confident in the financial outlook for 2020.

Therefore, our 2020 non-GAAP guidance remains unchanged.

With GAAP revenue in the range of $960 million to $1 billion and non-GAAP adjusted revenue excluding transaction fees in the range of $891 million to $924 million.

Non-GAAP adjusted margin in the range of 16% to 16.5% still within our long term range of 60 non-GAAP bps in the range of $2.87 to $3.10 based on a non-GAAP tax rate of approximately 27% and a share count of about 32 million shares for.

The year.

Adjusted EBITDA in the range of $198 million to $208 million and finally operating cash in $35 million with a capex range of 25.

In summary.

We're pleased to deliver a solid quarter of results.

We look because of this next normal Empire.

And then.

Well, we have adjusted well.

With that I'll turn it back.

Once again, we'd like to thank you for your time today.

First half of this year and believe that we are well positioned to deliver upon our guidance.

For the remainder of beer.

And while we don't believe the World will go back to how it operated pre cobot 19 to rebound in the next normal but.

Calls for innovation and customer engagement in interaction.

With that we'll turn it over to the operator for your question.

Thank you if you'd like to us.

Wondering your telephone keypad, if you're raising a speakerphone. Please make sure that you mean.

Function is to adopt to layer signal to reach our equipment. Once again that is star pause for just a moment time doing an opportunity to signal.

[noise] pickup.

First question from Zacks over with.

I think please go ahead.

Okay, great. Thanks, taking the question the first walk discontinued project implementation.

With that I mean, if you could provide a little bit more detail on what that wise and whether that has any impact on the financials going forward a man.

You know how do we get comfortable with with the fact that you don't have anymore of those over the balance of the year.

Yeah exactly I appreciate the questions. One it of course were never happy with in a the teams have taken full ownership for it.

But the reality there is rally shared a bit we had a project implementation with a long term a client and what was going on as we're going through a consolidation of their quad play services.

All things considered that they took the risk to.

Worked with us to consolidate all of their quad services onto our platform all things considered a as we went through it they made a decision to cease and desist on that project.

It's a north American mid tier communication service provider and they're continuing to you see as GE for a number there are other business activities and critical services that are happening, including cable in high speed data and still happening in the like but just chose to stick with those two vendors that were out there and as we continue to drive towards a.

You know growth mentality as CSG, even in these challenging times you can expect will take those occasional risks the things that out a share though is nothing here is systemic to the underlying business.

We still believe.

We believe strongly and our ability to weather the storm incredibly well with this resilient business, there's not a lot of projects like that you can guarantee after seeing this one in dealing with it we've gone through that list with a fine tooth comb.

We don't expect to have anything material like this for the remainder of the year, we have had them traditionally in the past an occasion when they occur and again, we Oh, we're proud that the customer took the risk with us they look to consolidate that quad play the impact amounted to about $10 million running primarily through the cost of goods.

Since line and it makes for a really rough quarter, but you also heard Raleigh communicate a were stick into our guidance for the year just the mechanics. The way it plays out a it'll impact management before it impacts the shareholders.

And so over the course the year, we're sticking to our guidance.

And we're going to continue to dig in and deliver.

That's helpful. Thanks, and then one sort of more broadly how are you focusing R&D spending in light of what that is at least a temporary new normal due to the pandemic and where do you see the biggest opportunity is to expand.

Yeah, so like everyone in the February March timeframe and as it progress forward.

We all took a a pause and caught our breath for what's really going on around us and I I think we're gonna have to suspend complete understanding for the time being as we all continue to have next normals that are coming everyday with the new cycle, but from the R&D front as we communicated a we believe this some of the awards. It we just shared.

Our proof points of the selections of where we're placing that R&D and the quality in that decision, making that happens of course nothing is ever perfect. As you go through that and you heard me say numerous times, we take capital allocation extremely serious.

And we're very committed to continuing to deliver 50% of our free cash flow back to our shareholders is very healthy business, but the other portions of that.

That comes in we get it leaves strongly in our next generation platforms that are there what we're doing around revenue management.

And on a what we're doing in our.

Customer Communications management Arena, and some of the things that you heard within the remarks that we're continuing to look at a making smart.

Decisions for return on invested capital that R&D and we're seeing results that are helping to put us back into growth my friend.

Got it and did you say, Brad and their prepared remarks that I mean, you characterize the.

There's obviously been some delays with implementations and you have that Comcast rate step down, but did you say that generally the pipeline sort of activity or a this year that it has been eight you're paying attention Zack.

Yeah, absolutely it's the highest.

One in the last five years that we've seen from a pipeline perspective. So we are seeing the nuances.

Because of learning to work in this fashion and everybody questioning are we doing the right thing with cash as far as our customers in projects as a reassess and go through that process. The overall evolution of their businesses, but our pipeline will business models are winning a right now.

And so those R&D dollars, where we've placed our beds to help people to go through the digital transformation a we're getting those phone calls and also just some of the investments that we've made in our marketing and our sales operations components that are holding the process. A you know we're just getting this team.

And it has led to the largest pipeline in the best.

As far as qualified within the last five years.

So we look for very positive things as we progress down that path.

Great. Thank you right.

Thank you that could appreciate it.

Thank you once again that start I wonder if you'd like to ask a question.

It appears there are no additional questions in queue I'd like to turn the conference back over to Mr. agrees for any additional closing remarks.

Well. Thank you very much and thank you CODI for coordinating the call today, we appreciate a the folks that were on the call.

And the folks that are paying attention and as always I'll never a walk away from one of these calls about thinking are incredible customers that put their trust in us and our employees for all that you're doing through these challenging times Ccs definitely going to come out on the positive as we work our way through this thanks again and have a great day.

Thank you that does conclude todays conference. Thank you all for your participation you may now disconnect.

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