CSG Systems International's (CSGS) CEO Bret Griess on Q1 2018 Results - Earnings Call Transcript

CSG Systems International, Inc. (NASDAQ:CSGS) Q1 2018 Earnings Conference Call May 2, 2018 5:00 PM ET

Executives

Liz Bauer - Senior VP, Chief Communications & IR Officer

Bret Griess - President, CEO & Director

Randy Wiese - Executive VP & CFO

Analysts

Chris Moore - CJS Securities

Parker Lane - Stifel

Operator

Good day, and welcome to the CSG Systems International First Quarter 2018 Earnings Announcement. All participants are in listen only, a question and answer session will follow today's presentation and instructions will be provided at that time. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Liz Bauer. Please go ahead.

Liz Bauer

Thank you, Stephanie, 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 integrate and manage acquired businesses in order to achieve their expected strategic, operating and financial goals. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the 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 to the information used by our management team in our financial and operational decision-making.

For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K.

With me today on the phone are Bret Griess, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer.

With that, I'd now like to turn this call over to Bret.

Bret Griess

Thank you, Liz, and thank you all for joining us. I'm pleased to report that we delivered record first quarter revenues and non-GAAP earnings. For the first quarter, we grew our revenues by 5% to $202 million, and grew our non-GAAP earnings per share by 11% to $0.69.

And finally, we generated cash flows from operations of $30 million and free cash flow of $18 million. Overall, we had a solid start to our year. Randy will review our financial performance in more detail later in the call.

As we started this year, I outlined our four key initiatives aimed at creating long-term shareholder value. They include, first, driving revenue growth at or above the industry rate, second, getting broader and deeper in our customers' operations with our proven cloud and SaaS-based solutions, third, investing in our platforms and go-to-market strategies to power our revenue growth and enable us to enter new markets, like IoT and smart cities; and finally, relentlessly focusing on delivering an exceptional experience for our customers. When we execute on those things, good things happen for our employees, our customers and our shareholders.

Let me share with you how we are doing on those initiatives. First, I'm very pleased to announce that at the end of February, we strengthened our customer communications management solution with the acquisition of Business Ink, a leading provider of multichannel business communications.

This business combination allows us to leverage our operational talent, scale our technology and platforms and diversify the vertical markets we serve to now include the home security, transportation, health care, utilities and government segments.

Also we bring together complementary business models, each built upon strong recurring customer relationships and a history of delivering services with well-run, state-of-the-art operations driving healthy, profitable business. And most important, we have a common culture. Our teams are obsessed with making customers successful in delivering value.

Simply put, this combination provides CSG with attractive financials as well as strengthening our competitive advantage in the marketplace. We're happy to welcome our Business Ink colleagues to the CSG family, and are excited about the long-term value that we will create for our customers, employees and shareholders. Randy will walk you through the economics of this deal and the impact to our quarter and financial outlook for the year.

Going forward, we will continue our disciplined approach for our capital allocation, including driving profitable growth with smart and delivered acquisitions. We have a solid business model that generates strong cash flows, providing us with sufficient resources to strategically invest in our business, while also being well positioned to return cash to shareholders. It is a good place to be.

Next we continue to create solid momentum, as a result of our investments in our Ascendon, next-generation cloud-based digital platform. This quarter, we added Formula One, the signature provider of premier motor racing competitions around the world to our client roster.

Ascendon will enable Formula One's digital transformation with their introduction of F1 TV, their over-the-top subscription video platform. This allows Formula One to expand viewership and revenue opportunities by creating a unique, customer Formula One fan experience for their over 1 million subscribers. F1 TV will feature live races, driver camera viewing, interviews, archived video content and more. Ascendon's digital commerce engine will enable Formula One to enhance its exclusive digital offerings and targeted promotions.

Also we're proud to be a valued partner for Eastlink for another 10 years as they expand their offerings and digitally transform their business. This past quarter, we extended and expanded our long standing partnership with Eastlink, one of Canada's most-successful and customer-focused video entertainment and communications service providers through 2028. In addition, Eastlink will use our Ascendon solution to support their wireless subscribers, as they deploy this important quad-play service throughout Canada.

Overall, we're seeing a very active pipeline as providers contemplate what digital transformation means to their operating models and customer relationships. I believe that our approach and our executions have established us as a true partner with companies as they look to optimize their legacy business, while also evolving their businesses to thrive in the new digital world.

Finally, we continued to be successful in getting broader and deeper within our international clients operations by helping them solve their business challenges through our managed services engagements. We're pleased to announce a new managed service agreement with Rain, a next-generation mobile network operator in South Africa.

Our monetization and activation solutions will support the launch of Rain's fixed and mobile data service over its LTE advanced network, aimed at providing consumers Internet connectivity with a simple, fast and cost-effective offering, Rain will rely on CSG's agile and reliable solutions for its first time to market - fast time to market, scalability and reliability requirements needed to offer digital alternatives to their subscribers.

We're pleased with our progress in growing our managed services approach, where we leverage our domain expertise in running large-scale operations to create longer-term, recurring relationships that result in a trusted and valued partnership with our clients.

So as I look back on the first quarter, quite simply, we're doing what we said we would do. We really like our position. We have an enviable business model with strong fundamentals that position us well to drive shareholder value. We've unrivaled domain expertise in the broadband and video markets. We work with some of the largest and most innovative communications service providers in the world.

And we're establishing ourselves as a trusted digital transformation partner with companies undertaking this journey. We have proven technology and a solid reputation for operating our solutions really well. We have a financially sound company.

We generate strong cash flows and have a solid balance sheet, which gives us tremendous flexibility for investing in our people, our solutions, our clients and still return capital to our shareholders through our dividend and share repurchases.

And most important, we have talented and dedicated employees across the globe, who are committed to helping our clients and our company achieve greatness.

With that, I'll turn it over to Randy to review our results for the first quarter and our outlook for the full year 2018.

Randy Wiese

Thank you, Bret. Welcome to all of you on the call today to discuss our financial results for the first quarter as well as our outlook for the remainder of 2018. We're pleased with our solid start to the year and the progress we're making on our strategic initiatives.

Now I'd like to walk you through our financial results in more detail. We reported record first quarter revenues of $202 million, an increase of 5% from the same period last year.

This performance is consistent with our goal to grow at or above the industries we serve. This 5% growth is driven by a combination of solid organic growth of 2%, with the balance of the growth coming from the acquisition of Business Ink, as Bret mentioned earlier in his comments.

Let me provide some additional color on our first quarter revenues. The 2% organic revenue growth can be attributed primarily to two areas. First, we continued to experience success in transitioning our software and services clients into long-term relationships via our managed services offerings.

Second, this is the first full quarter in which we have realized the full year revenue benefit from the $4 million Comcast customer conversions that we completed last year.

In addition, our one month of ownership of Business Ink added $5 million of revenues for the current quarter, which accounted for the remaining 3 percentage points of growth this quarter. I will provide more details around this acquisition later in my comments.

You should expect us to continue to drive our future business growth through a combination of both organic and inorganic sources.

Moving on to results of operations. Our first quarter non-GAAP operating income was $35 million with a margin of 17.5%, which is in line with our expectations. Our non-GAAP adjusted EBITDA was $47 million for the first quarter or 23% of our total revenues.

Our non-GAAP EPS for the current quarter was $0.69 compared to last year's $0.62, an increase of 11%. This increase is driven mainly by our lower non-GAAP effective income tax rate of 27% for the current quarter as compared to 34% last year, resulting from the recently enacted U.S. tax reform.

Moving on to the balance sheet. We ended the quarter with $222 million of cash and short-term investments compared to $261 million at the end of the fourth quarter. The sequential decrease is mainly attributed to our Business Ink acquisition. We generated $30 million of cash flow from operations and $18 million from - of free cash flow for the quarter.

Also during the quarter, we refinanced our existing credit agreement. We saw this as an excellent opportunity to improve our economics while also extending the term of the agreement by 3 years into 2023. We paid over $7 million in dividend this quarter which reflects an increase of 6% in our per share dividend rate over last year. In addition, share buybacks totaled approximately $6 million in the quarter.

Moving on, before I get into details on our guidance, I want to first provide you with some background on our acquisition of Business Ink.

Business Ink is a provider of multichannel business communications. We completed this acquisition at the end of February with a purchase price of a little over a 1x historical revenues or $70 million in cash.

As Bret mentioned, CSG and Business Ink have very common business models with strong recurring revenues and profitable operations, built upon long-term client relationships. Additionally, combining our businesses allows us to further leverage our operational talent and scale of our technology and platforms.

We believe our combined assets will increase long-term shareholder value as we continue to drive healthy, profitable business through our well-run operations and continued focus on the customer.

As a result, we are updating our full year guidance to include the 10 months of acquired operations.

Now on to the numbers. Our 2018 revenue guidance is increased by $50 million to a new range of $845 million to $865 million, which represents 7% to 10% growth over the last year. Next we expect Business Ink to be about $0.05 accretive to our 2018 non-GAAP EPS. As a result, our 2018 non-GAAP EPS range is now $2.81 to $2.93, which now brings our growth up to 12% to 17% when compared to last year.

We continue to anticipate our 2018 non-GAAP tax rate to be approximately 27%, and our outstanding shares to be approximately 33 million shares for the year. In addition, we are increasing the expected range for non-GAAP adjusted EBITDA by $8 million to $190 million to $196 million. Finally, we are increasing our range of operating cash flows to $130 million to $150 million, with higher CapEx of approximately $40 million for the year.

In summary, we are executing according to our plan. We are pleased to welcome our Business Ink colleagues to our team and are excited about the long-term value this acquisition will create for our customers, employees and shareholders.

We continue to execute upon our long-term business objectives. And invest in our people, our products and our clients to drive long-term business value. And we are continuing to return cash to our shareholders.

With that, I'll turn it over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll take our first question from Chris Moore with CJS Securities.

Chris Moore

Hey, guys. Thanks for taking my questions. Yes, maybe we could start with Business Ink and may be just talk a little bit further in terms of kind of how the business models are complementary? Are there - is there kind of crossover from a selling perspective? Just kind of how the two fit together.

Bret Griess

Chris, thank you. Appreciate you being on the call and for the question. Business Ink, as we set out of Texas, has a very similar business model as far as multichannel communications, along the lines of the digital services, the print and mail, areas that we're seeing great opportunities around our things, along the lines of workforce management where we can leverage it.

We really view it as a combined CCM, or customer communications management. Any time you're touching the customers. So it's a family built and operated private company. We saw it and its culture along with the business model as a direct match for what we are doing.

We got great economics around it. The teams have been working together since the close of the acquisition to do a couple of things. One is to get the synergies that we know make sense in our businesses combined that everybody is on board with and carrying out.

And also on building the go-to-market strategy and executing on it, on where we can do pull-through into larger customers for things that they were doing. They can put us into other areas. And what I mean by that is a smaller percentage of their customers are in our traditional segments.

So it puts us into things with greater diversity around the worlds of health care and some of the other things that we can leverage some of those customer relationship management. So beyond great economics and great culture tying it together, we just see ways that we can drive the market seriously together with each other.

Chris Moore

Got you. Roughly, what kind of gross margins does Business Ink have?

Randy Wiese

Chris, it's a business pretty similar to CSG, so you would expect it to have very comparable margins.

Chris Moore

Got you. And is there - so revenue was on a trailing 12 months, roughly $60 million, is that right?

Liz Bauer

On an annual basis, yes.

Randy Wiese

On an annual basis, that will be correct. Yes.

Chris Moore

Okay. Got you. Got you. Can we just skip on that a bit? The Formula One conversation you have and the F1 TV is really interesting. Can you - kind of maybe just walk through when you talk about Ascendon as a digital commerce engine for Formula One.

Can you just outline exactly kind of specifically how long that took to get positioned here? And exactly what you're doing for Formula One?

Bret Griess

Yes. I'd have to go back to look at specific dates and times. The majority of these things take - they're not as large as the DBS's deals that take a couple of years to go through. They are usually shorter time frame than that. But our sales team around our Ascendon over the top activities has been on average, I would guess 6 months to 12 months with any given customer, understanding their business needs and then ensuring that we're the right fit and right solutions for them.

How much we like recurring revenues. We really want to ensure that we're solving problems on their behalf. But this is one where Formula One what may be used to be contemplated or considered as just car racing. Like the rest of the world, they're having to deal with the concept of digital transformation, and how they get further into that digital transformation world.

And so with that, they're doing a lot of different activities, as I mentioned, around driver camera viewing, interviews with drivers, interviews with crews, archived video. And then what we're doing is we're helping them without how you do the monetization, the management, all the activity around that in a fast time to market, low-cost solution, cloud-based SaaS operation that fits right into our long-term strategy.

Chris Moore

Got it. I appreciate that. Back to kind of the Business Ink non-organic growth. You talked about potentially additional acquisitions. Is this a pretty good kind of model for what you're looking at $50 million to $100 million in revenue, recurring - recurring revenues, good gross margins that kind of fit with what you're doing? Is that a pretty good model for the types of things you're looking at?

Randy Wiese

If we can find those, we'll take those all day long every day because it's such a solid acquisition for us. However, as we said before, we truly do believe that we pride ourselves first and foremost on being good business people. And we don't take using your capital or anybody else's capital lightly.

So we work really hard to be thoughtful and deliberate, not just out buying for the sake of buying, but actually making sure it's going to be a sound business. We reviewed in the last 1.5 years to 2 years over 70 companies. And we truly are working hard to find things that differentiate from a financial perspective and from a strategy perspective, and they are one of them.

We have multiple different things in the pipeline that we continue to look at, so that we can deploy capital in a smart way to deliver a good return on investment for our shareholders. And also solve for our customers as we go forward.

Chris Moore

Got you. Last question, just from a kind of EBITDA multiple standpoint. What was the purchase price on Business Ink?

Liz Bauer

From EBITDA.

Randy Wiese

Probably 4 to 5 times. Little over one times revenue, about 4 to 5 times on the EBITDA side.

Chris Moore

All right, guys. I'll jump back in line. Thank you.

Randy Wiese

Thanks, Chris.

Operator

[Operator Instructions] We'll take our next question from Tom Roderick with Stifel. Please go ahead.

Parker Lane

Hi. It's actually Parker Lane in for Tom. Thanks for taking my question. I was hoping if you can provide an assessment of the impact you'd expect Sprint and T-Mobile's upcoming merger will have on the conversions of pay-TV broadband and wireless? And how CSG is more broadly aligning itself from a go-to-market standpoint? It's capitalized on the emerging - the evolving market landscape.

Bret Griess

Thanks for the question, Parker. Thanks for being on the call. It's big news in our industry whenever something like this happens. If it's the first time it's attempted or the third time it's attempted, it's always big news as we work our way through these things. It does seem like they're very well positioned to pull it off.

We'll see what the government says along the lines of competition in the area, but I think the area that no one can deny is the stuff that you're talking about which is that there is consolidation happening in this space. And the lines are both smearing together in the lines where who used to be mobile, is now in the video, is now into telco.

They're all starting to crossover. Companies that used to be called cable are no longer cable. They're in the telco world and in the mobile world as we get into these multiple services, as we go forward. So folks are continuing to be pressured through that consolidation, and they're continuing to have the activities where they have to find business models that work.

So some companies out there are utilizing their video as nothing more - they view it as nothing more than a marketing expense that they have to put on their networks, and they make good money off of the backbone network that's out there. Both of those companies that you referenced, T-Mobile and Sprint are great wireless providers as they compete with Verizon and they compete with AT&T along those lines. Each of whom we do different levels of business with also.

As Sprint and T-Mobile come together, of course, we would always be looking to satisfy somebody in this space if we can help them with that. As far as it impacting us, we see it day in and day out.

As we mentioned on the call, Eastlink choosing our Ascendon platform for their mobile go-to-market activities that we go. We'll continue to compete day in and day out, listen to our customers and try to find the best way to solve for their complex business challenges in monetizing, personalizing and all the other fundizing [ph] words that we do to try to help our customers.

Parker Lane

Got it. And I guess just a step back to Business Ink. Understanding that you've been working on the alignment of your go-to-market strategy since the acquisition was completed.

Can you talk more broadly about the integration of their solutions into the broader CSG platform? Magnify that the customer crossover there? And what opportunities you see to sell their solution into your existing customer base? Thanks.

Bret Griess

As we mentioned there, that we see great opportunities to leverage our scale, leverage our technology and get efficiencies as we go forward with it. And you combine that with the cultures that are just so in sync. The meetings really quickly went to working together.

And you could see the excitement in it around sell-through activities and pull-through activities that are happening. So it's just - the cultural fit is hugely important because how quickly people get on to the idea of meritocracy of trying to solve problems for our customers.

And it's too early in the game to say we think revenues going to do X, Y or Z. But we have a very healthy model of recurring revenue, long-term contracts with our customers. They have the identical model. We see the synergies that are in play.

And we also have the teams working diligently together to grow the business that we all know is important. So we're very excited about the acquisition. And as we said, we take that allocation of capital incredibly seriously to do the right thing.

Parker Lane

Got it, Congrats on the quarter.

Bret Griess

Thanks.

Liz Bauer

Thanks.

Operator

And there are no further questions on the line. [Operator Instructions] And there are no further questions on the phone lines.

Bret Griess

Well, with no further questions on the call, we'll bring it to an end. We don't ever waste anybody's time. But again, I would be remiss if didn't thank our incredible team and our incredible customers for everything they do to make it happen. And Randy, we see for the incredible things that he has brought as a CFO of CSG to make us who we are today after 48 consecutive quarters of doing this and helping us. We feel very blessed and excited about what the future brings both for Randy and for us as a company. Thank you all for the time and helping to support CSG. Have a great quarter.