CSG Systems International, Inc. (NASDAQ:CSGS) Q4 2016 Earnings Conference Call February 1, 2017 5:00 PM ET
Liz Bauer - IR
Bret Griess - President and CEO
Randy Wiese - EVP and CFO
Matt VanVliet - Stifel, Nicolaus & Company
Good day, and welcome to the CSG Systems International Fourth Quarter 2016 Earnings Announcement Conference Call. All participants are in a listen-only. A question-and-answer session will follow today's presentation and instructions will be provided at that time. At this time, I would like to turn the conference over to Liz Bauer, IR. Please go ahead Ma'am.
Thank you, Wendy and thanks to everyone for joining us. 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 convert the backlog of customer accounts onto our solutions in a timely manner.
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 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 available on 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 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 the non-GAAP reconciliation tables located on our website, which will also be furnished to the SEC on Form 8-K.
With me today on the phone are Bret Griess, Chief Executive Officer and Randy Wiese, our Chief Financial Officer. With that I'd now like to turn the call over to Bret.
Thank you, Liz and thank you all for joining us today. I'm pleased to report that we executed well in 2016 and are beginning to see the positive impact from many of the new initiatives that we have put in place. But first let's review our 2016 performance.
Full year revenues of $761 million exceeded the top of our revenue guidance and non-GAAP earnings of $2.79 per share were in line with guidance. While we had an extremely strong year in particular on the bottom line, I'm most pleased that we grew our revenues after years of flat revenues. Entering 2017, we have more momentum and visibility in our recurring revenues than ever before. This visibility fuels our confidence in investing ahead of the curve to drive future accelerated revenue growth.
Today I'd like to provide you with some highlights from our fourth quarter as well as provide you with my assessment as to how we have performed as a management team in creating long-term shareholder value. First Comcast converted another 1 million residential customers onto our ACP platform away from a competitor's legacy platform. In 2016 alone we've converted just under 3 million Comcast customer accounts ahead of our expectations going into the year. So far we've converted approximately 7 million customers in less than two and half years without any delays or disruptions in service. A fact that we continue to successfully convert their customers on to our platform without disruption of service or any hiccups is a testament to the unique skills that our employees and theirs bring to the table. No one does it better than us and it shows.
We’re pleased that when it comes to Comcast residential customers, CSG is their partner of choice. As we move into 2017, we are optimistic that we will continue to earn Comcast's trust and business as a partner who delivers true value and solutions that help them compete and win in a highly competitive marketplace.
Next, we signed a new cable and broadband client this past quarter, Buckeye Broadband, further extending our leadership position in this dynamic market. Buckeye will utilize our cloud based ACP platform to deliver a more differentiated experience to their customers while at the same time driving operational efficiencies. In addition, last month DISH introduced their AirTV services at CES. We're pleased to announce that their AirTV leverages our Ascendon platform to make it easy for consumers to explore and buy their service and easily pay for video content on the go.
CSG deployed Ascendon in less than a month enabling DISH to quickly begin earning revenues from its new innovative OTT service. DISH’s AirTV service solves the problem that most consumers have with OTT services not being able to watch your local network stations like CBS, NBC, and ABC along with Netflix and other internet streaming services. We are pleased to have earned the opportunity to help a creative and innovative service provider like DISH roll out this new and differentiated service to consumers across the nation.
Next we signed our first significant Ascendon contract in Europe with TalkTalk, the UK based communication service provider. TalkTalk will utilize Ascendon to roll out their internet TV services. This is exactly what our Ascendon platform was created to do and is reinventing video for the future in people's businesses. In addition TalkTalk has signed a managed services contract in which CSG will manage the implementation and day to day operations of the solution on their behalf. TalkTalk is a perfect example of how our overall strategy is playing out.
When we bought an international software business a few years ago, one of our goals was to take what we do really well in North America which is run a large complex revenue management solutions on behalf of our clients and leverage that expertise with carriers around the world. Another goal was to take our experience of running solutions in both a private and the public cloud to those same carriers. Well, today we're doing just that. We have many managed services clients and clients using our award winning cloud based Ascendon solution on multiple continents around the world.
The final highlight I'd like to discuss is the work we're doing with a major media and entertainment company. Last year you may recall that we helped this company launch their first OTT offering of books, music, videos, and more in the United Kingdom with our Ascendon SaaS based platform. Last December, just in time for the holidays they added live streaming of their TV channels. With the integration of live TV and other promotional activities this past month, they have doubled the number of customer sign ups to this service. Again exactly what our Ascendon platform was developed to do and helping our clients drive new revenues and subscriber growth.
Ascendon's agility and flexibility allows them to tryout different approaches, packages, and promotions on a daily, weekly, or monthly basis while at the same time evolving quickly to drive health and growth in their business. Next, I'd like to share with you my perspective on how we have done in delivering on the strategies that we outlined at beginning of 2016 beyond the financial metrics. Last February I outlined five key priorities that this management team would focus on to continue to drive long-term shareholder value. If I were grading our performance I would give us a B and here's my rationale behind that grade.
First, we said that we would align our organization to intensify our focus on growing our client relationships. We executed very well on this initiative. We reduced the number of layers in our organization. We move the decision making process closer to our clients and we added proven professionals both on site at our client's operations and in our company to help nurture and grow these relationships. This alignment and focus enabled us to grow existing and new client relationships as is evidenced by the fact that we converted 3 million new customers onto our ACP platform and we signed new multi-year managed service agreements with our carrier clients and new cable logos.
Second, we said that we would increase our investments in our cloud based solutions and go to market strategies. While we've made progress here, it was not at the pace that we would have liked. We increased the investments in our go to market strategies, in particular in sales and marketing. These investments include solutions training for our entire sales organization around the globe, the development of new sales tools and materials for our various solutions including Ascendon and an increased sales and services focus on key accounts. However, our increased R&D investments in our Ascendon platform lagged our original expectations as we took the appropriate time to ensure that we had the right people in place to execute on our plans.
Third, we said we would take a more focused and targeted approach to growing our cable and satellite position globally. We're making solid progress here. We implemented our industry leading workforce automation and management solution at Cablevisión in Argentina. Having this solution being used by 4000 cable technicians outside the United States opens the doors and reference ability for other opportunities with communications service providers around the world. In addition we have added sales professionals and partners with strong domain expertise and relationships to expand our capabilities globally.
And finally, our Ascendon solution is opening doors for us with operators who are looking for a highly flexible and agile solution that can help them launch new digital services in less than 90 days. Like we've done with DISH, Bell Canada, and Eastlink portions of Comcast and others who can drive their businesses into next generation solutions yet not have to undertake high risk complete back office transformation. Another testament to the power of our Ascendon platform to solve real business challenges. Our insights, experience, and disruptive thinking in this evolving digital landscape is gaining traction both with new and existing customers.
And fourth, we said that we would improve the performance of our international business. We've made very solid progress here. We improved our overall cost structure and operating performance by also focusing our investments in those areas where we see the greatest future returns. We signed significant managed services engagements with key tier one providers on two different continents this year, MTN in South Africa and Telstra in Australia. In addition we signed several managed services engagements with tier two and tier three operators. Importantly this adds stability and diversification in addition to our very strong North American business.
As a result of these efforts we have significantly improved the performance of our international operations. We had a great foundation to drive growth in the carrier market both on the top and bottom line. And finally we said we would continue to pursue over the top providers in a highly targeted manner with our Ascendon cloud based solution. Our experience in this space has created a key differentiator for us in the market and is gaining momentum with our current clients as is evidenced by the work we do with expending on campus, Bell Canada's CraveTV, Eastlink, and DISH AirTV.
Going into 2017 you should expect us to focus on the following. First, continuing to drive top line revenue growth, in particular through our cloud based and managed service offerings. Second, expanding our broadband and cable footprint globally and getting broader and deeper in our carrier clients operations. Third, investing in our platforms and go to market strategies in particular around our Ascendon SaaS based solution. And fourth, continue our relentless focus on executing extremely well on behalf of our clients. Our proven reputation for doing what we say we're going to do has served us and our customers very well in a highly competitive business environment.
So as we enter this New Year I really like the position we've put ourselves into continue to drive long-term shareholder value. We have an enviable business model and strong fundamentals that are true value creators. We have unrivaled domain expertise in the broadband and video markets and it is getting stronger. We work with some of the largest and most innovative communications service providers in the world. We've added new logos to this list and we have greatly improved our leadership position here. We have proven technology and a solid reputation for operating our solutions really well and are feathering in next generation solutions that help advance our customers into future business models by helping to manage the risks associated with complete transformations.
We have a financially sound company, we generate strong cash flow and have a strong balance sheet which gives us tremendous flexibility for investing in our people, our solutions, and our clients and still return capital to our shareholders, as is evidenced by the 7% increase in our dividend announced today each of which we are very committed to. And most important, we have talented and dedicated employees all over the world who are committed to helping our clients and our company achieve greatness, and we're committed to investing to continue to grow that talent base to solve challenges to help our customers meet their goals.
Before I hand it over to Randy to review our financial results and 2017 guidance I want to thank our employees for their hard work, passion, and commitment to helping our clients succeed. And to our clients for putting their trust in our company to help them deliver. With that I'll turn it over to Randy.
Thank you Bret and welcome to all of you on the call today to discuss our financial results for the fourth quarter and our full year 2016 results as well as our outlook for 2017. We are pleased with our solid results for this year, the success in extending our global market share, and the progress we're making to accelerate our top line growth. Now onto the details, total revenues for the fourth quarter were $195 million, a decrease of 1% from the same period last year. Sequentially revenues were up 3% from the third quarter. Total revenues for the full year of 2016 were $761 million, an increase of 1% over last year and slightly above our full year expectations.
Our cloud and related solutions revenue grew 5% over last year. This was driven largely by the migration of new customer accounts on to our cloud solutions and the increased revenues from our recurring managed services offerings which grew itself by over 60% from last year. This strength helped to offset our expected decrease in software and services revenues as we continue to transition this part of our business into a more predictable recurring revenue model.
Moving on, we finished the year with strong operating results. Our fourth quarter non-GAAP operating income was $34 million with a margin of 17%. We finished the year with $164 million in non-GAAP operating income with the full year margin of 22%. Our lower margin percentage for the quarter was in line with our expectations and was driven by our planned increased investments aimed at our long-term business growth and was coupled with higher levels of employee incentive compensation earned in the quarter. GAAP operating income for the fourth quarter was $25 million our margin of 13%. GAAP operating income for the year was $133 million our margin of 17%.
Moving on, our non-GAAP adjusted EBITDA was $42 million for the fourth quarter and for the full year it came in at $195 million or 26% of our total revenues. Non-GAAP EPS for the fourth quarter was $0.57 allowing us to finish the year in line with our full year expectations at $2.79 which represents a 6% increase over last year's $2.62. Our non-GAAP effective income tax rate was 37% for the year. Our GAAP EPS for the fourth quarter was $0.38 and GAAP EPS for the full year was $1.90 which compares to $1.87 for the same period last year. Overall we had a very strong financial operating performance for the year.
We ended the year with $276 million of cash and short-term investments. We generated $25 million of cash flow from operations and $22 million of free cash flow for the quarter. For the full year we generated $84 million of cash flow from operations and $70 million of free cash flow. Our overall cash flow from operations came in lighter than we expected mainly due to unanticipated year-end working capital, timing fluctuations, and a payment made at the end of the year as part of our closure of several years of outstanding tax audits with the IRS.
Our ability to generate strong and consistent cash flows from operating activities continues as one of our fundamental business strengths. This plus our solid balance sheet positions us well for future growth opportunities. Moving on, for the year we paid over $24 million in dividends which represents an increase of 6% in our per share dividend rate over last year. In addition our full year share buybacks totaled approximately $12 million.
Let's move on to our forward view for 2017. We remain focused on driving revenue growth and delivering solid operating results. We are very confident in the strength of our company, allowing us to make investments in our business while still returning capital to our shareholders. Along that line we are pleased to announce that we will be increasing our first quarter dividend by approximately 7%.
With that let's move on to the numbers. We expect our 2017 revenues to come in between $760 million to $785 million. This is driven mainly by expected continued growth in our cloud based solutions and managed services offerings. Our business model remains strong. We now generate close to 90% of our annual revenues from recurring sources. We anticipate our non-GAAP operating margin to be at the low-end of our target range of 18% to 20%. We believe our target range provides a good balance between delivering healthy returns to the bottom line while still having the resources available for meaningful investments to ensure the long-term strength of our business. We have shown our willingness and good judgment to operate both above and below this target range by balancing current business conditions and our long-term opportunities.
Moving on, our 2017 non-GAAP EPS guidance range is $2.33 to $2.49 which represents a year-over-year decline due to the heightened level of our planned investments for 2017. Our non-GAAP effective income tax rate remains unchanged at 37%. We anticipate our outstanding shares to be approximately 33.1 million shares consistent with our 2016 level. In addition we expect non-GAAP adjusted EBITDA to be within the range of $170 million to $179 million.
Finally, we expect the range for cash flows of $100 million to $120 million for the year which assumes more normal working capital levels between years. After relatively light year of capital expenditures we expect to return to more normal investment level of $20 million to $25 million in 2017.
In summary we are pleased with our continued transformation of our already strong business model. Today we generate around 90% of our revenues from highly visible, multi-year relationship with communication service providers around the globe. Just a few years ago only 84% of revenues were recurring in nature. We have accomplished this by investing in our people, products, and solutions all aimed at moving market share and strengthening and lengthening our relationships with our clients. We believe that our highly visible, recurring, and profitable business model that is growing creates long-term value for our shareholders, our clients, and our employees. With that I'll turn it over to the operator for questions.
[Operator Instructions]. And we will take our first question from Tom Roderick with Stifel. Please go ahead.
Hi Matt VanVliet on for Tom today. Thanks for taking my question. I guess first off on the cash flows, we talked about some impact from unexpected working capital timing, could you just maybe elaborate a little bit more on that and whether or not you think that that will sort of reverse in the next year and if so it would seem like the cash flow guidance might be a little light given the fact that you can make that up in the first quarter or so?
Yeah, good observation. The working capital items I was referring to were really around accounts receivable by far the largest piece. We had one client that would have typically paid by the end the year that paid us just a couple of days after and a couple other clients who have been paying on a very consistent basis also slipped that across at the end of the year. So your observations about our ability to outperform at a higher level in 2017 are well as a good observation. But we stayed relatively conservative so, if we have a good performance on those receivables we have a good chance to outperform our cash flow but we stayed conservative on our view.
And then in terms of the middle of P&L investments, Bret I think you talked about R&D investments were at least behind play in most of the year, is there a lot of catch up that you now have that's causing pretty substantial guide down in operating margins, I know we've talked about for a while here that you are going to invest in the business but I think the level to which you guys are guiding has taken us a little bit by surprise here. How much -- I guess how much of the R&D is catch up and how much additional maybe the sales and marketing side even relative to the 2016 levels are you expecting?
Yes, Matt there is a bit that is catch up from an outlay of it. We continue to believe that 18% to 20% is a healthy range to run this business. We plan to continue to do exactly what we say. R&D won't solve for the future on its own. So we're balancing some of those investments in R&D, our brand management, our solutioning, in our people so that our people going to market have a very good understanding on the ground with the customers solving their business problems with our solutions and it's incredibly exciting to see some of the very initial investments start to pay off and the traction start to come. So we will continue to talk to the 18% to 20% and then deliver in that 18% to 20% as we said.
And then looking at some of the international markets year-over-year both Europe and APAC had a pretty decent decline at least in the quarter, what can we maybe attribute that to and how should we think about those two markets moving into 2017?
You know, there's a great deal of uncertainty all over the planet as we move forward. Some of that decline has come from as Randy mentioned some of the software activity that's happening but what's exciting to see is our ability to transform many of those agreements into the managed services agreements to get the longer term revenue and the longer term relationships in place with our clients. So, there are those declines but it's exciting to see the business becoming healthier and more solid as we move forward through that process and the incredibly strong underlying business model allows us to still go through increasing our dividend at 7% and make those investments as we push forward.
Great, thank you.
Wendy I think we're good.
Yes, it does not look like we have any further questions at this time. So I’ll hand it back to you Liz.
Well I would step in and just take a moment here to say thank you to everybody for being on the call, to our employees, our shareholders, and of course our customers through that process who continued to support CSG in these incredibly dynamic times in our industry. It allowed us to have a hugely strong business model where we can invest in growth for the future and can continue to deliver back to our shareholders a great return and a solid 7% dividend increase for this year. So it is an exciting time at CSG to see the strategy start to play out in a positive traction. So thank you to everybody involved with that success and thank you for your time today.
This does conclude today's program. Thank you for your participation. You may disconnect at any time.
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