Q1 2021 CSG Systems International Inc Earnings Call
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Ladies and gentlemen, you're currently standing volume for the ESG system International first quarter 2021 earnings announcement at this time, we are still admitting additional participants and plan to be underway. Shortly we do appreciate your patience and please remain on the line.
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Good day, everyone and welcome to the C. S. G system International first quarter 2021 earnings announcement, all participants are in a listen only mode. A question and answer session will follow today's presentation and instructions will be provided at that time.
Today's call is being recorded at this time I would like to turn the conference over to Mr. John <unk> head of Investor Relations. Please go ahead.
Operator, and thanks for everyone for joining us for this quarter's earnings call, we will be working from our slide deck, which can be found on the investor Relations section of our website.
Please take a moment to locate the slides 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.
And in order to achieve their expected strategic operating and financial goals while.
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 for the information used by our management team and 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 SEC on form 8-K with me today on the phone are Brian Shepherd, Chief Executive Officer, and Rollie Johns Chief financial.
Officer with that I'd like to now turn the call over to Brian.
Thanks, John for those accessing the slides for today's earnings call. Please follow along starting on slide four since being named CEO at the end of 2020 I committed on behalf of the entire <unk> leadership team that we would accelerate our revenue growth diversify and grow our industry vertical revenues.
And build a consistent track record of outperforming while only one quarter and to a more ambitious strategy I'm pleased to report that even in the face of continued COVID-19 related headwinds the business momentum, we regained and Q4 2020 has accelerated with strong Q1 results across.
Our business Here's your employees all around the world continue to rise to the occasion and we are extremely grateful to each one of them together, we are <unk> on a refresh DSG mission is clearly resonating with customers globally as we help solve their toughest business problems.
<unk>, the Powerball CST makes ordinary customer and employee experiences extraordinary as we continue turning to submission into reality.
She is more committed than ever to turbocharge, our growth and amplify the social impact we made by unleashing the full potential of our people and our culture.
And we'll achieve this by relentlessly executing against three strategic growth pillars first CSC will obsess over the success and the value we create for our customers as we help them design and digitally enable exceptional customer and employee experiences.
We believe and jointly innovating with customers to redesign and technologically and enable personalized engagements for their consumer and enterprise customers.
While seemingly simple concepts being easier to do business with and adding more value than competitors are key differentiators.
CSC will develop partner and acquire category, leading technology that address the market's biggest and most pressing needs our SaaS platforms and pre integrated solutions and revenue management digital monetization customer engagement and cloud payments give our customers a cost and.
Marketplace advantage and an increasingly real time data driven digital world speed agility and market responsive innovation combined with mission critical operational excellence will continue to set us apart.
And third CST will be the technology provider of choice for communication service providers globally, while simultaneously accelerating diversified industry vertical revenues and digital engagement and cloud payments, we will grow our CSP market share by outpacing your organic market growth.
And by becoming a much more consistent strategic acquire.
<unk> really important and we will diversify our revenues as we help leading brands and many industry verticals improve and digitize their customer engagement and payment processes, the business synergies and cross selling benefits, we get from our increasingly higher growth software portfolio and more partner friendly approach.
Strength in our market positioning as we help great brands worldwide acquire monetize engage and retain their customers.
And the good news is that our efforts and all three strategic areas are translating and be even better financial results and <unk>.
Q1, and CSC generated $253 million of revenue, which represents three 1% year over year organic revenue growth, our best organic quarterly revenue growth since Q3 2019.
Even better our Q1 adjusted revenue, which excludes transaction fees was $237 million, which represents four 1% year over year organic adjusted revenue growth.
We are especially proud of the fact that our Q1 revenue growth was 100% organic this means that the health of our business the strength of our balance sheet and our low debt leverage has earned us the right to become a much more consistent and strategic acquirer to elevate our business and grow faster.
We fully expect to execute against our inorganic strategic growth plan with good discipline in the quarters ahead.
In Q1, we also made good on our commitment to return money to our shareholders with $8 million spent on dividend and $7 million on share repurchases.
Finally, with the business momentum generated by these good Q1 results. We are pleased to reconfirm all our financial targets for 2021.
That's more color on our revenue acceleration. Please refer to the left side on slide five which provides some Q1 highlights from across our business.
A key driver of our optimism is the continued strong sales performance and win rate conversion of our sales pipeline as we have highlighted in recent calls CFT sales pipeline is significantly larger than it has ever been contains deals that are both larger and and later stages of the sales cycle and we can.
<unk> to win meaningful deal all around the world consistently stronger sales, winning bigger new customer deals and delivering exceptionally well on our customer commitments are keys to us sustaining higher organic revenue growth.
Our North American cable and satellite business CSC continues to extend our market share leadership position, we continue to lengthen and strengthen our relationship with our top two customers charter and Comcast as evidenced by our five 3% and one 5% year over year and.
Creases and Q1 revenue from each of these important customers. We continue to deploy new solutions to help these two industry, leading broadband and entertainment providers enhance their digital customer experience and it goes without saying that as Comcast charter and our other north American cable.
Tumors continue to add high speed internet subscribers each quarter.
SaaS revenue also continues to grow nicely.
Turning to our global communication business, we continue to accelerate our growth and our sales win rate with leading telecom operators all around the world.
Cincinnati Bell technology solutions selected CST ascended to help them deploy a digital monetization solutions to provide resilient and secure voice data and network services for their enterprise customers with our ascend and cloud platform see bts will be able to scale.
And change feature sets on demand and rollout new applications without additional investment needed for equipment or people see Bts will also leverage our output solutions to improve the overall customer experience with a fully redesigned customer invoice and greater flexibility for targeted marketing messages.
And the Malaysian market, we're proud of our new win with Max's a leading CSP with over 11 million subscribers Max's selected <unk> to help with their go live market launch of Baxter TV, a new consumer marketplace to digitally stream movies and television programs for.
Regional partners ascend and is fully implemented it matched with TV and is powering the consumer experience and enabling to flexible offerings consumers demand, including day passes for special content and bundled offers across multiple content partners plans are already underway to add additional partners and more.
New digital services, we are excited to help maxus realized their full digital potential and finally, we were proud to announce earlier. This week the signing of a close partnership with Oxy out of digital labs. The technology Center for one of Asia's largest telecom groups as I mentioned earlier co.
Creating and jointly innovating with leading customers are keys to our future success. This exciting new partnership combines our CST charging and digital monetization capabilities with <unk> digital telco enabler technology to create a new digital marketplace and Asia.
And here's to TM forums open API standards.
This marketplace enables partner companies to rapidly launch and monetize and infinite number of new digital services and offers to their own consumer and enterprise customers.
Net net more and more large global CSP are selecting us to solve their toughest business problems.
Now moving to the right side of slide five I'll share some recent wins related to our strategic priority to diversify our industry vertical revenues outside of our core CSP market.
Since 2017, not only have we significantly reduce csc's customer concentration. We have also increased the percentage of revenue coming from higher growth non CSP industry verticals by 16 percentage points. We are committed to continuing this positive trend that.
Both our business and our shareholders, while our largest CSP customers are extremely important to us and continue to grow nicely. We're also consistently winning good new customers and diversified industry verticals, because these new customers value, what we have always delivered future ready technology back.
And with reliable operations and great customer service.
As a result large industry, leading brands and high growth verticals are increasingly turning to <unk> and our innovative software solutions to digitally engage and communicate with their customers.
And Q1, we expanded our business with for very large and very important and CSC customers.
Two of the largest drugstore chains and the U S and one of the largest retailers and the world selected CSC software to power their customer engagement communications for the retail and clinic operations. Our solution is increasingly important to all three of these large customers given the unprecedented.
And number of inbound requests that health care providers retail pharmacies and government agencies are getting related to COVID-19 vaccination and appointments.
We are also proud to announce that we signed and exciting new conversational AI deal with one of the largest software companies and the world to digitize part of their customer service and call Center operations.
And finally, a quick update on our cloud payments business, while we continue to see high single digit reduction and our <unk>.
<unk> transaction volume as we continue to feel the impacts from COVID-19, our payments business is weathering. The storm well, we saw improved results and the last month of Q1 and continue to have a good sales win rate, which gives us cautious optimism that we can return sometime in 2021 to the healthier.
Organic revenue growth rate that we had and our payments business prior to the COVID-19 pandemic and.
And the fact that we delivered our highest year over year organic quarterly revenue growth as a company since Q3 2019, even as our payments unit continued to face COVID-19 headwinds in Q1 is another testament to the strength and the resiliency of our cloud based business.
In closing we are extremely grateful to <unk> employees worldwide continue to put our customers first and deliver greater value than our competitors consistently doing this quarter and quarter out is foundational to accelerating our revenue growth and diversifying our industry vertical revenues for.
Put simply our Q1 results proved CFC business is healthier and more resilient and ever and it tells us that we underwrite to dream bigger and more boldly and grow faster.
On behalf of the global CSC leadership team, we will continue to envision invent and shape, a better more future ready world.
We thank our customers for their continued trust that we will create value for them every single day and we thank you our shareholders for believing that we will deliver for you.
With that I will turn it over to Raleigh to review the financial details of our Q1 performance.
Thanks, Brian as Brian highlighted we have a strong resilient business, but generated healthy year over year revenue growth and the first quarter, even on the face of the ongoing COVID-19 pandemic.
With a strong first quarter start we are pleased to reconfirm, our 2021 full year financial guidance targets.
So let's walk through our financial results for the first quarter and revisit our 2021 outlook.
Turning to slide seven.
We generated $253 million of revenue and the first quarter, representing a three 1% a year over year organic growth.
Our best quarterly organic growth since the third quarter of 2019.
In addition, our first quarter non-GAAP adjusted revenue, which excludes transaction fees related to our payments business was $237 million.
Representing a four 1% year over year increase.
These increases are mainly attributed to the continued growth of our revenue management solutions, along with a strong quarter of professional services revenue related to the implementation of the new customer contracts that we continue to win.
Additionally, we started to see some real momentum this quarter with our digital communication solutions building on some key wins for Brian highlighted outside of our cable and telco industry verticals.
As Brian mentioned earlier, our first quarter growth is all organic growth.
That said acquisitions are an important component of our growth strategy.
And advancing our diversification and to new industry verticals, and increasing our leadership position and our core markets.
As we accelerate our inorganic growth and the quarters ahead.
We will remain disciplined.
Kissing on strategic financial and cultural fit with an appropriate risk return profile for each acquisition we close.
Moving on to the bottom of this line.
On our first quarter non-GAAP operating income was $40 million or 17% of non-GAAP adjusted revenue.
As compared to $42 million or 18, 5% and the same prior year period.
As I highlighted this time last year, our first quarter 2020 operating margin benefited from lower deferred compensation expenses, resulting from the steep decline and the stock market. Following the onset of the COVID-19 pandemic.
We believe that our first quarter 2021, non-GAAP operating margin of 17%, which is at the midpoint of our long term target range of 16% to 18%.
Is representative of our ongoing operations absent any factors outside of our control like the benefit I just mentioned.
Moving on non-GAAP EPS for the current quarter was <unk> 82.
Down and <unk> year over year, due mostly to the impact on operating margin and I just discussed.
And finally, our non-GAAP adjusted EBITDA was $54 million for the first quarter or 23% of non-GAAP adjusted revenue.
Down 1% compared to our performance from the first quarter of 2020 and impacted by the prior year margin benefit I already mentioned.
Turning to the balance sheet, our cash flow generation and shareholder remuneration for the quarter are included on slide eight.
Our first quarter 2021 cash flow results represent a modest increase over the same period last year.
However, I will point out that both periods were negatively impacted by the timing of key customer payments that were delayed and subsequently received after those quarter ends.
For the first quarter of 2021 that delayed payment was approximately $26 million and resulted in net cash flow used and operations of $3 million and a non-GAAP free cash flow deficit of $11 million for the quarter.
I should also note that while this quarter represents an increase over the same period last year, our first quarter of each fiscal year is generally lower than other quarters due mainly to the payment of our year and accrued employee incentive compensation.
Moving on and we ended the first quarter was $205 million of cash and short term investments.
That along with our outstanding debt at quarter end results and a $149 million of net debt.
And our net leverage ratio of 0.7 times.
As a reminder, our convertible debt can be settled and the first quarter of 2022 and as a result is now classified as a current liability on our balance sheet.
We are currently reviewing several options to further optimize our balance sheet income.
And the possibility of increasing the amount of leverage we carry.
During the first quarter of 2021, we increased our dividend by approximately 6% year over year and declared $8 million and dividends.
In addition, we repurchased $7 million of common stock under our stock repurchase program.
We remain committed to balancing our use of cash and return on invested capital focusing on inorganic growth opportunities internal investment and providing a return to shareholders.
Moving on to slide nine ill.
I'll conclude with some key takeaways and revisit our 2021 financial objectives.
We are pleased with our first quarter 2021 operating results taken together with strong start for the first quarter and our outlook for the remainder of the year gives us the confidence to reconfirm, our 2021 and financial guidance that we laid out earlier this year as outlined on the table on the right on the slide.
And looking beyond 2021 on a high recurring revenue business model combined with the strength of our sales pipeline gives us the confidence that we will execute well against the strategic priorities that Brian discussed earlier.
<unk> is committed to accelerating our revenue growth.
And diversifying our industry vertical revenues.
And we believe this investment and our future strategic growth, while also consistently distributing capital and the form of both dividends and share buybacks will serve our shareholders well.
With that I will turn it over to the operator to facilitate the question and answer session.
Thank you at this time, if you'd like to ask a question. Please press star followed by the number one on your telephone keypad, if youre, calling from a speaker phone. Please make sure. Your mute function is often share youre sticking up for HR equipment again, Starwood and to ask a question and first we'll go to Tom Roderick from Stifel. Your line is open.
Hi, everybody great too great to hear from you. Thanks for the updates and congratulations very nice quarter.
Really nice to see some sustainable growth there so.
And Brian I guess I'll ask my first question, you and some of these wins and by the way a great slide.
I love, having some of the visual to go with it.
Some other wins there.
You highlighted a sand on as being sort of a key critical component of.
Landing the customer and.
And we've talked about semi and for so long, but yet and it had been.
Kind of risen to the point of being a material revenue driver, but it seems like it's becoming finding plan and more and more conversation can you talk a little bit more about customers and maybe even new customers embracing offend on.
And what Youre doing from a go to market perspective to drive that into the hands and customers.
No. It's a great question, Tom Thanks for joining us and hope you're doing well these days.
Maybe a little color as first for from a marketplace, we see the market.
Adopting and becoming more comfortable with a cloud first approach, which had historically been the case and revenue management and so that's a great trend to stay and the market more holistically and secondly, as we've always talked CST technology has to be future ready and that means the vast investing ahead of the curve, which is exactly what.
We did and our cloud native ascendant platform and last year as a reminder, was our fastest growth and our highest revenue.
In 2020 for ascend then and we continue to like what we're seeing and the marketplace and.
With the three wins, we announced we see more and more interest and more and more adoption and ascended to your point as a percentage of our overall revenue, it's still small, but we like the growth rate, we like what we're seeing and the market and we just have to continue to sell and win and deliver more value with it but we also have great other rare.
The new management solution. So it's still smaller on the overall materiality, but we like what we're seeing and the business.
It's a great trend.
Turning the attention here to the payments all of the business. So.
And we fully understand what what sort of transpired and 2020 relative to COVID-19 being some headwinds on that business remind us if you don't mind, Brian just in terms of that.
On the challenges that the revenue or the transactional headwind space, how much of that was sort of customer churn versus just transactions themselves dropping and other words, if the churn wasn't that bad from a customer perspective are you seeing those transactions come back and then as we sort of think about this on a sequential basis.
And as opposed to year on year has that revenue base stabilized and it seems like it probably has to the extent you might start seeing some some year on year growth and the back half for the year, but.
Just on a sequential trend line that would be helpful to understand as well.
No no.
And again good question, what we saw there was it was great to see a stronger March month close and the Q1, but on your question around what drove the decline last year.
Erosion of our growth. This is a business that pre COVID-19 was growing nicely at double digit organic growth rate and what we saw is we saw transaction volumes dropped by about 8% to 12% depending on the bank and that was about half of the drop we saw and the industry. So overall, we fared well.
And because of the recurring nature of our customer base and the merchants we saw.
And when you talk about the majority of that.
It was actually driven by just a reduction and transaction volumes from our merchant we lost one or two customers that struggled in the COVID-19 environment, but that would have been a small impact on the overall headwinds that we've been facing so as we progress into 2021 and continue to regain the momentum.
<unk> <unk>.
Last year, we saw a business that.
Eroded the growth, but scope performed quite nicely and we're cautiously optimistic that we can get back to growth and the second half of the year, but I would just say we need to see another quarter and some more strong months like we saw at the end of Q1.
Great Hey, Raleigh last quick one for you I noticed and this kind of philosophical but would love to hear how you all sort of think about it.
Super low interest rate environment, the rates are starting to tick back up a little bit, but you've done well with acquisitions and diversifying the business and Brian you mentioned, it's a core tenet of how you think about the future.
What would keep CSD and sort of philosophically from levering up the business, taking on some debt and and accelerating that M&A roadmap are there and not enough targets and your immediate line of sight or would you just prefer not to have that extra leverage on our balance sheet and think about the <unk>.
<unk> pull of that of that topic.
And now they're fairpoint.
And I think from a debt perspective, we.
We were and are really good position, where we're at.
Wouldn't say historically.
You raised that we have been under Levered.
I think we have the potential to increase our leverage certainly we could afford.
Two to three times.
For future investment and the ability to provide returns for our shareholders. We're currently on the marketplace.
We're looking at M&A targets every day.
I think as we've discussed.
Obviously, and Brian pointed out as well as.
Right now from a valuation perspective valuations are pretty frothy.
Brian I don't know if you have anything you want to add to that as well.
No all I would say is it is the right direction and we do believe the strength of our business allows us to increase the debt leverage and that's something that we're actively looking at so I'd say stay tuned on the acquisitions, we see very attractive strategic assets that could actually fit our culture.
And give us the offering to solve more future ready problems of our customers I think it's really.
Staying disciplined on the price and making sure that we can get good deals and also bring the financial attractiveness with the strategy that accelerates growth, we see assets that are actionable, Tom and it's just making sure that we look at a lot to do the ones to close the ones that we believe will bring us the most value.
Yeah, that's great color I really appreciate it thank you guys.
Thanks, Tom.
You bet.
And again, if you'd like to ask a question. Please press star one at this time next we will go to Greg Burns from Sidoti <unk> Company. Your line is open.
Good afternoon.
And just talk a little bit more about the.
The acquisition strategy.
And the past and you've done some scale acquisitions you've done.
For today and getting you into.
And new verticals.
And then you also mentioned, adding technology and his prepared remarks. So what are your priorities in terms of what and when Youre looking at deals and.
In terms of acquisitions.
Hey, Greg Hope, you're doing well thanks for joining.
The best way, you kind of framed it out.
It isn't and either or.
There is attractive assets and all of those categories and the key for US is adding technology talent that matches, our culture and the ability to integrate that enables us to be more future ready for what customers need and all of the industry verticals, we serve all around the world and so with the current market.
Conditions and prices being higher and elevated we are looking at scale deals that add capability and strength that can expand our global reach we're looking at high growth strategic assets in new verticals that can drive and we're also looking for nice capability or a product tuck in bolt and <unk>.
North America as well as globally. So it really does fall and those several categories and we believe theres value across the board and were focus on extracting that and Youll see us close acquisitions and all of those categories to continue to elevate and accelerate the business.
Okay, and then when we look at the.
The full year guidance relative to the strong start of the year can you just walk us through.
Maintaining the guidance relative to a strong start for the year I guess revenue is kind of a range so that might not be an issue, but what will drive the margins back down into that full year range versus where you were and the first quarter.
I'll give you the high level I'll, let Charlie.
And a lot.
First we're one quarter ended the year. So we're extremely pleased with how we started obviously building a culture and a track record of outperforming is something that we need to deliver quarter and quarter out. So we really want to see that continued execution in the second quarter and the third and.
And we expect to continue their momentum, but we know we have work to do but rolla you want to provide a little more color on that including on the margin question that Greg had.
Yes, so still still.
After after a strong first quarter.
Still believe.
And the current ranges are good indicators for our performance like I said first quarter margin percentage.
17 is right smack Dab in the middle of our.
And our long term target range.
And I think the.
For 17% is a really good indicator of how CSD can perform in the midst of and ongoing pandemic.
Absence, any any events or factors that are that are outside of our control. So as Brian said.
It's early and the year, but.
We like what we see.
Okay, just just with the midpoint of the full year guidance on the margin front.
Little bit lower on the first quarter I mean is there incremental investments you're planning on making and the balance here.
Just trying to get a sense of it.
No.
Fair question, Greg when we had initially provided.
The guidance ranges a couple of things that we had highlighted as potential.
Headwinds too.
Our our performance trending out of 2020 into 'twenty, one one was the potential for higher.
On.
Levels of employee related costs.
Especially in the form of travel and entertainment expenses. The other was the potential for re pricing pressure associated with the.
For the potential for the early execution on both the the charter and dish contracts that are coming up for renewal and.
In December of this year.
Okay.
And so I guess.
And since you brought that up and is there any.
Update on the progress of the talks there do you expect to get that done.
Before the end of the year or is there a possible extension to the current deal that can be made.
Yes.
Yes at this stage there is no update Greg around that what we've always done is just focus on bringing all of our customers and quoting are large and the renewal window, Greg bring greater value. Obviously, we love to see the ongoing revenue growth that we've announced the last several quarters where charter and.
We're continuing to work those and don't have any other updates other than if you look at the history of <unk>.
And if they tended to work out well for us and Thats, what will work and darn hard to make sure happens this time as well.
Okay. Thank you.
Yeah.
Thanks, Greg.
And with no further questions I will turn it back to Brian Chen for closing remarks.
Now I would just say I hope you're all staying healthy.
<unk> well.
Going to continue to build on the strong start to Q1 look forward to talking and the quarters ahead. Thank you.
And that does conclude our call for today. Thank you for your participation you may now disconnect.
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