Q2 2021 CSG Systems International Inc Earnings Call
Good afternoon, My name is Christian and that'll be a conference operator today at this time I would like to welcome and maybe 1.2 the C. S. T systems International Inc. Q2, 2021earnings call all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question and during this time simply press Star then the number 1 when you touch tone telephone if you would like to withdraw your question Christa Punky. Thank you presenters you may begin your conference.
Thank you operator, and thanks to everyone for joining us like last quarter, 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 these slides.
Today's discussion will contain a number of forward looking statements. These include but are not limited to statements regarding our projected financial results our ability to meet our clients' needs through our products services and performance and our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic.
<unk> operating and financial goals.
While these risks 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 and.
In addition to factors noted during this call and 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 and the Investor Relations section of our website.
Also we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures when reviewed in conjunction with our GAAP financial measures provide investors with greater transparency to the information used by our management team 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 4.
Over the last 3 quarters I have highlighted how <unk> with big and the market and consistently outperformed by investing and our culture investing and our talent and investing and our future ready software platforms. These investments combined with our customer obsessed values are the foundation upon which our accelerated biz.
And this momentum is being built as I meet with talented CSU teams globally, the energy and competitive intensity are evident and <unk> all around the world are turbocharging, our growth and diversifying our revenue into higher growth industry verticals, including financial service.
Says health care retail government and more as we walk through our results today I Hope you will see why we absolutely believe that our best quarters and years are ahead of us with this as the backdrop. We are very pleased to report that Q2.2021was another strong quarter we delivered.
6.2% year over year top line revenue growth, which was substantially all driven by organic sales growth as a result of this strong performance and the execution of our inorganic growth strategy as we closed both the tango telecom and Kai will strategic acquisitions we.
We're raising all guidance metrics for 2021 put simply CST has never been healthier our future outlook has never been more encouraging and our accelerated growth and revenue diversification has never been more real and with that summary, please turn to slide 5 to see how we are performing against 6 strategic priorities.
<unk> first we told you that <unk> would more than double our long term organic revenue growth rate and our results prove we are delivering on this commitment in Q2, <unk> delivered 255 million and total revenue, which represents 6.2% year over year.
Growth substantially all coming from organic revenue growth. Our Q2 adjusted revenue was $238 million also growing 6.2% year over year, a robust Q2 results combined with our good Q1 performance led to a very strong first half of the year.
Second we told you that we would boldly elevate our market aspirations and this is exactly what <unk> is doing based on both our strong organic revenue performance and the size strength and overall health of our sales pipeline CST is raising our full year 2021 guidance targets across the <unk>.
Ward.
Our revised fiscal year of 2021 revenue guidance is now 1.0, or 1.5 billion to 1.045 billion, which represents a $20 million increase on the low end of our range and a 10 million increase on the top and we also are raising adjusted operating margin.
By 25 basis points on both the low and high end of our guidance range to 16, 5% to 17% and a few minutes Raleigh will share more details on our revised guidance, which also includes raises to cash flow EBITDA and EPS our business.
<unk> is attributable to our dedicated <unk> employees and leaders all around the world. While Covid continues to have lingering impacts and our business I'm extremely grateful to our all of our global employees for propelling C. S. G upward regardless of the obstacles standing and our way.
Third we told you that <unk> would be the technology provider of choice for communication service providers globally, and our continued sales success with global Csp's proves that we are executing well against our strategic priority and the cable marketplace. We continue to grow our relationship.
With charter communications, 1 of the largest and most successful U S cable providers, we successfully converted almost 300000 subscribers and the Kansas City market to <unk> from our competitors billing platform. In Q2. This is the latest example of how we continue to grow with charter and look for.
And to earning more business from this world Class Communications company.
And the global Telecom market, we continued to find success with new wins and contract extensions with leading telecom operators and May we announced a multiyear extension and expansion with MTN South Africa, the largest mobile network, operator, and Africa with over 30 million subscribers.
As part of this agreement, we are advancing and enhancing mtm's digital ecosystem, which includes migrating mtm's enterprise and consumer customers to our new technology platform that will drive future growth and enable rapid delivery of innovative products and services, we look forward to continuing our journey with <unk>.
<unk> 10, as we help them digitally transform their business. Another great highlight in Q2 was our multi year contract extension with Vietnam Mobile 1 of Asia, Pacific's, leading mobile operators with $5.5 million subscribers as Vietnam mobile and technology provider of choice CST will drive their customer bill.
Mediation and settlement operations to support the company's accelerated growth and introduction of new products and services and finally, we are proud to have won more business with a leading telecom operator in Africa, where we were selected to help digitize their revenue management solution as we replace our competitors.
Legacy technology stack.
Turning to slide 6 fourth we told you that <unk> would continue to diversify our industry vertical revenue significantly above the 23% of total <unk> revenue that we delivered last year and and the first half of 2020..1 we grew revenue coming from higher growth industry verticals outside of our.
Core CSP base to approximately 24% as a reminder, since year end 2017, we have grown and cfd revenue from exciting new industry verticals like retail government financial services and health care from 55 million or 7% of total <unk>.
Revenue to more than 225 million or <unk> 23 per cent of total revenue last year and now through the first half of 2021, we've continued our industry vertical diversification even further being.
Being a partner of choice for some of the biggest customers and higher growth industry verticals, where <unk> is helping them digitize and modernize their customer engagement and cloud payments capabilities is an important driver of <unk> accelerated growth.
During the quarter, we signed a deal with a leading insurance provider to digitize their customer engagement services. This is an important win because it underpins our diversification and ambitions and adds another great brand to our enterprise grade customer engagement software platform, which also serves the property and casualty insurance.
<unk>.
And last quarter, we also announced that we signed and exciting new conversational AI short for artificial intelligence deal with 1 of the largest software companies and the world to digitize part of their customer service and call Center operations.
We are proud to announce that <unk> now processes and supports 100% of the production traffic for this clients online customer engagement.
And our payments business, we continue to see positive signs and our sales and revenue performance, which is underpinned by the industry, leading nature of our cloud payment gateway and payment processing technology, which was highlighted by CSC, winning 3 separate industry payment awards in Q2 <unk>.
<unk> was recognized by card not present, a leading voice and the growing segment of the payment industry as the customer's choice winner for Best E. Commerce Gateway platform. Forte was also recognized by Fintech breakthrough a leading market intelligence organization as best point of sales company final.
<unk> was ranked number 2 by the straw hacker groups also known as T. S. Gee's best of breed API set which ranked the top payment companies and overall API experience with CSC Forte ranking well ahead of many of the biggest payment competitors and the market.
Moving to the middle of the slide fifth we told you that <unk> would become a more consistent and acquire while still maintaining good financial discipline on the strategic software assets, we buy and this is exactly what we accomplished in Q2 and a few weeks ago. We closed our acquisition of <unk>, a cloud based technology platform <unk>.
And that supports real time interaction management through omni channel journey orchestration and analytics software. We're extremely excited to have the <unk> team become part of the <unk> family from a strategic perspective, the acquisition unlocks a $10 billion high growth market opportunity and further position <unk>.
As a leader and a large multi industry vertical customer experience management category. Additionally, this acquisition gives us new footholds and expansion opportunities and retail financial services and health care.
Simply this acquisition creates a powerhouse cloud based engagement platform that orchestrates real time, contextually relevant customer experiences for leading brands.
We also announced the acquisition of Tango Telecom, a leading supplier of convergent policy control and messaging solutions. The acquisition was a combination of a long standing relationship that delivers into and digital monetization and 5 <unk> solutions to some of the world's largest and most successful csp's where.
<unk> on successfully integrating these 2 acquisitions and ensuring we leverage the talented people and symbiotic cultures from both companies.
Lastly, we told you that we would obsess over the success and value we create for customers as large brands all around the world count on <unk> to be easier to do business with and our competitors.
Our customers count on our innovative recurring revenue technology platforms to solve their toughest business problems and our most recent customer satisfaction survey, our customers rated us higher than industry benchmarks on overall satisfaction responsiveness and delivering on our promises and understanding their.
Specifically <unk> customer satisfaction ratings of 82% exceeded the 76% software industry benchmark further highlighting this competitive advantage that we have.
Across all 6 of these important strategic priorities. The results speak for themselves CST is building momentum that we fully expect will fuel our continued long term transformation before.
Before I wrap up my opening remarks, and turn it over to Raleigh, Let me leave you with a few more forward looking insights into how we think about delivering long term sustained value and C. S. G, which can be found on slide 7.
At <unk>, we care about the results, we see in the rearview mirror and we care even more about the results we aspire to deliver as we look through our front windshield. Given this you might be asking yourself what is the <unk> management team see on the horizon and the quarters and years ahead.
We see S. ESG that will win big and outpaced market growth because we have the best talent and the best culture and the industry and we know that the best most energized talent wins further were driven by a broader purpose to envision invent and shape, a better more future ready world as such and <unk> will hold off.
Shelves accountable to make a bigger social impact as we expand our commitment to ESG with more transparent data driven disclosures and by continuing to be a more diverse equitable and inclusive of CST.
We see a strong healthy growing sales pipeline and new logo win rate because customers' trusts ESG to deliver every single day for them. Our customers also know that our product based business model, our category defining software and our dedicated employees will not let them down and.
We see lots of optimism regarding our big customer renewals on the horizon, including with 2 of our largest cable and pay TV customers and even more importantly, we believe that these big customer renewals will be a springboard to our continued growth and 2022 and beyond not an excuse for why we.
Can maintain and grow top line revenue and the year following key customer renewals.
We see the innovative investments, we make and category defining technology, enabling <unk> to be more and more relevant and higher growth diversified industry vertical segments, which we believe is a cornerstone of how we will hold ourselves accountable to expand our valuation multiples for shareholders. We.
We see and enhanced capital structure, and a thoughtful refinance plan being executed and the second half of 2021 that centers on a target net debt leverage of 2 X. This refinancing and capital structure will enable us to fund our future organic and inorganic growth while also consistently returning capital.
And to shareholders via our dividend and share repurchase programs.
Finally, we see CST and continuing to consistently close integrate and grow more strategic value, adding and disciplined acquisitions with a relentless focus to grow multiple category defining new businesses that serve high growth industry verticals, all around the world and revenue management digital monitor.
Physician customer engagement and mobile money payment solutions in short we're excited by the opportunities in front of US. It's an honor to lead this energized and passionate and <unk> team the works harder and smarter every day, so that our quarterly business and financial results speak much louder than our words with.
That I will turn it over to Raleigh for more detail on Q2 financials and updated 2021 financial guidance targets.
Thanks, Brian as Brian highlighted we're off to a strong start in 2021.
Given our first half financial performance, we are pleased to raise our 2021 financial guidance targets across the board.
So, let's first start by walking through our second quarter financial results and I'll share a little more detail about our enhanced 2021 outlook.
Turning to slide 9 we generated.
And $255 million of revenue and $238 million of non-GAAP adjusted revenue during the second quarter.
This result represents 6.2% year over year growth substantially all of which was organic.
On a year to date basis.
Both our revenue and adjusted revenue were up approximately 5% year over year.
The year over year increase and revenue and adjusted revenue was driven primarily by the continued growth and <unk> revenue management solutions, where we serve many of the largest CSP and the world.
We also had some favorable foreign currency movements of approximately $4 million that contributed to our revenue growth from the second quarter.
While our revenue growth was primarily organic inorganic growth through acquisitions as an important component of our overall growth strategy aimed at advancing our diversification into faster growth new industry verticals, and increasing our leadership position and in our core markets.
Over the past few months, you've seen us execute on that strategy as we closed multiple new acquisitions, including Tango and telecom and titanfall.
As we accelerate our inorganic growth and the quarters ahead.
We will remain disciplined and by focusing 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 our second quarter non-GAAP operating income was $40 million or 16, 7% of non-GAAP adjusted revenue as compared to $31 million or 13, 6% and the same prior year period.
This year over year increase was primarily related to current year revenue growth.
On a year to date basis, our non-GAAP adjusted operating margin as a percentage of non-GAAP adjusted revenue was 16, 8%.
Non-GAAP EPS for the current quarter was <unk> 82 cents up 23 cents year over year due mostly to our operating performance.
On a year to date basis, our non-GAAP EPS was $1.65, a 13% increase from the same prior year period.
We are extremely proud to deliver not only top line growth.
But EPS growth for our shareholders our performance trends that the entire CST and management team is focused on perpetuating going forward.
And finally, our non-GAAP adjusted EBITDA was $54 million for the second quarter or 22, 8% of non-GAAP adjusted revenue as compared to $44 million or 19, 6% and the same prior year period.
On a year to date basis, our non-GAAP adjusted EBITDA was $109 million or 22, 9% of non-GAAP adjusted revenue.
The growth and expansion that we're seeing and our EBITDA and EPS and demonstrate that as we increase our revenue growth rate CSD continues to stay focused on growing our bottom line as fast or faster than our topline revenue growth.
Turning to the balance sheet.
Our cash flow generation and shareholder returns for the quarter are included on slide 10.
Our second quarter 2021 cash flow from operations was $45 million compared.
Compared to $58 million and the same prior year period.
Further we generated non-GAAP free cash flows and $38 million and Q2 of 2021 as compared to $48 million in Q2 of 2020.
The year over year decrease was primarily related to movements and our working capital mostly connected with the timing of certain tax payments.
Moving on and we ended the second quarter with $212 million of cash and short term investments.
And that along with our outstanding debt at quarter end results and a $138 million of net debt and net debt leverage ratio of <unk> 6 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.
And as Brian mentioned, we are currently reviewing ways to enhance our capital structure and look to execute a thoughtful plan and the second half of 2021.
From a leverage standpoint, we could operate comfortably with a target of 2 times net debt, which would enable us to fund our future growth, while consistently returning capital to our shareholders through our dividend and share repurchase programs.
During the second quarter of 2021, we declared a <unk> $8 million and dividends. In addition, we repurchased $7 million of common stock under our stock repurchase program, which is a substantial increase over the prior year period.
We fully expect to consistently execute our strategy in order to accelerate shareholder returns through a combination of higher organic growth faster inorganic growth strong bottom line growth and continued EPS expansion.
Moving on to slide 11.
And include with some key takeaways and revisit our 2021 financial objectives.
Given the overall health and momentum across our global <unk> business and to include recent acquisition activity. We are pleased to be and are positioned to increase all of our 2021 financial guidance targets as outlined in the table on the right of the slide.
On the top line, we're now expecting 2021 revenue to come in between $1 billion and $15 million and $1 billion $45 million.
This represents a $20 million increase on the low end of our original guidance and a $10 million increase on the top and <unk>.
Similarly, we are increasing our adjusted revenue guidance and now expect to deliver between 946 and $964 million and 2021.
Further we are increasing our 2021 adjusted operating margin guidance by 25 basis points to a range of 16, 5% to 17% raising.
Raising our non-GAAP EPS range to between $3 and 16.
And $3.34 and upping, our non-GAAP free cash flow by $5 million to a range between 115 and $125 million.
Put simply we are raising our 2000 and 'twenty 1 guidance targets across the board.
Looking beyond 2021, our high recurring revenue business model combined with the strength of our sales pipeline gives us the confidence that we will continue to execute well against our strategic priorities and Brian discussed earlier.
Net net we plan to be more relevant and deliver greater value than we ever have to our shareholders our customers and our global employees.
With that I'll turn it over to the operator to facilitate the question and answer session.
Thank you Sir and at this time I would like to remind everyone in order to ask a question Press Star then the number 1 key on your Touchtone telephone.
And that has started 1.
We'll pause for just a moment to compile the Q&A roster.
Your first question is from Tom Roderick from Stifel. Your line is open.
Excellent thanks for taking my questions.
And let me start with you I mean, 6% growth is a number we're not necessarily used to seeing around these parts. So that's that's great to see the acceleration and I guess I couldnt help but notice some of your commentary regarding ended the year renewals not necessarily signaling sort of a typical downturn or.
Or or appeal back on sort of the revenue profile. So I think that's true.
A combination of optimism that is that's really encouraging.
Would love to hear a little bit more behind that as you think into the midterm and long term. What gives you some of that confidence maybe you could even start with the 300000 adits and subs coming from charter.
And as evidence of share gains but.
Getting away from just the quarter itself talk about some of that midterm confidence and.
And maybe you could leave and that charter data point for us that'd be great. Thanks.
No Hey, Tom Hope, you're doing well great question. So first it's really across the board we've been talking for several quarters about the health the size the shape the strength of our sales pipeline and or huge gratitude to all of our global sales and P&L leaders around the world. We just continue to execute well on our organic.
<unk> sales both in our core cable and telecom CSP space, but also in these new higher growth industry verticals. So that if that really is what's fueling and driving this but we also like the strategic acquisitions that were closing that we think also become additive so.
And the core we continue to grow and cable we can continue to grow and win more and global telecom all around the world with our platforms and that's really what's fueling this ongoing growth and it just builds on itself. So we understand that we want a double more than double our growth rate and it comes with greater.
<unk> sales.
In the cable business you asked specifically about charter I'll, maybe just digress for a minute if it's fantastic to see the health and the strength of our customers. We've seen great results coming from the cable space, we've seen dish announced big wins, we've seen our global customer base continue to do big things and the market. So we've got a strong.
And healthy customer base, and we just work darn hard every day to bring them more value to be easier to do business with and to be.
Be their provider of choice. So we were very proud to continue to grow with charter. We're always excited when we can pick up subscribers convert them onto our platform and displace competitors and we think if we serve them better than any of their other vendors and partners that net net we're going to pick up more business and so as we think.
And about these renewals with our big too, but also would just customers all around the world and multiple verticals, we focus on bringing them value, bringing them more agility, helping them become more digital and and the process. We think we can actually expand the business, we do with them as we also bring them good value and so that is.
Our focus and our focus is to sign good renewals and absolutely. We expect Q3 Q4 to grow we also expect and hold ourselves accountable to grow in 2022 and beyond even with these renewals.
Outstanding that's great I wanted to ask you a question about <unk>.
The notion of omni channel orchestration is that is a bit of a mouthful.
But would love to hear a little bit more in terms of how that plays out on the customer journey side is it strictly meant to be on the marketing front is this something that can be woven and for inbound customer care.
And Raleigh question for you and I apologize if you addressed it but what is the inorganic contribution relative to the rest of the year's guidance from flywheel and tango.
Well once you hit the second part of Tom's question on the guidance and maybe what's included in that and what you want to share and then I'll I'll address the strategic question with Tom raised.
Perfect, Yes, low Tom if you look at our guidance range. If you look at the midpoint.
And we're raising the midpoint.
About $15 million I'd say half of that is about half of that's coming from organic growth. The other half is inorganic for the remainder of the year.
Great that's perfect.
And then on the strategic question Tom I mean, we are very excited about this acquisition, we think it opens up and expands our offering and our integrated full stack suite and a $10 billion market Thats got huge upside in terms of the addressable market that we can go after so.
You asked what part it really is think about more transactional engagement. So from the time that it's less around marketing and sales and it's more when a consumer is looking at packages and offers when they sign up for service when they activate the service when they get educated on the service offering on the billing and the.
Other things when they have a customer inquiry, what we do from an enduring standpoint, as we've always had great engagement channels, but with this journey orchestration and analytics, we can actually help these large customers and brands look at the individual consumer experience that they're providing through.
We're out that whole engagement of that lifecycle and we can provide insights in real time to help them provide the channel of choice and provide the information that the consumers looking for provide proactive or predictive offers or education to either give the consumer or the enterprise customer.
Better experience or to make it easier for them to find the information or the activity. They are looking for and to do it and a much more cost effective way. So it really is around transactional gauge meant and across the channel choice. Some some consumers may prefer a tax notification others may want a phone call others may 1.
And email some people still might like printed statement and so we make it easy for them to get what they want when they want in a cost effective and efficient way and that's that's what really excites us and the ability to sell this to our large cable and wireless customers all around the world, but also to expand into all of those other industry.
Verticals, and it's that combination of growing and staying healthy and our core CSP and moving into all of these other high growth verticals that is also fueling the revenue growth and transformation of CSC.
Yes, that's fantastic thanks for the detail I'll jump back in the queue, but really really helpful. Congratulations and thanks, so much Tom.
Again, if you would like to ask a question press star and the number 1 on your telephone keypad.
Alright, there are no further questions at this time, Mr. Brian Shepherd I'll turn the call over back to.
And I apologize.
Please go and my apology, Sir we have a follow up question from Tom Roderick from Stifel. Your line is open.
Hey, we can do our call back right now this is great.
Yeah.
So I did have 1 more question for you Raleigh, just in terms of.
The cash flows that there.
And there is a change there and he made relative to I guess it related settlement charges are not charges, but the settlement.
Fees that were sort of reclassified can you just go into what that was.
And did that have any impact on moving the guidance for your free cash flows for the year or is that is that irrelevant relative to that that was reclassified.
Yeah, I'll start with the last part of the question.
Not relevant and no impact.
Essentially what we did was we took a.
Re look at the.
Settlement assets and merchant reserves and the fact that that is actually cash.
Helped by us, although which in our mind, it's restricted and it's aligned with up settlement obligations.
Because of.
The fact that it is actually cash held by us.
The guidance would say it was probably more appropriate to include in our cash cash equivalents and restricted cash so really its a reclassification.
And the the statement of cash flows at the end of the day and no impact on or very minimal impact on our historical presentation of cash flow from from operations.
It was 1 of the things, where we saw there was a lot of diversity and practice and.
I think just based on the nature of the cash flows it was prudent for us to to include those understatement and cash flows.
Got it.
Got Louise there for a second but thats. It from me I'm. Good. Thank you guys. So much.
And there are no further questions at this time, Mr. Brian Shepherd I will turn the call over it back to you.
No I'd just say thanks for joining our call. We're proud of the first half results that team <unk> delivered but we're laser focused on delivering fantastic Q3, and Q4 and building momentum for the growth we expect to deliver in 2022. So thank you for joining today.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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