Earnings Labs

CSG Systems International, Inc. (CSGS)

Q3 2017 Earnings Call· Wed, Nov 1, 2017

$80.37

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Transcript

Operator

Operator

Good day and welcome to the CSG Systems International Third Quarter 2017 Earnings Announcement Conference Call. [Operator Instructions] Today's conference is being recorded. At this time, I would like to turn the conference call over to Liz Bauer, Senior Vice President, Chief Communication and Investor Relations Officer. Please go ahead, ma'am.

Liz Bauer

Analyst

Thank you, Will, and thanks 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 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 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 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. However, we have a highly unusual situation today. Bret woke up with the cold and has no voice. So I will be sharing his prepared remarks with you before turning this over to Randy. Before we proceed, Bret, would you like to try to say a few words?

Bret Griess

Analyst

Thank you, Liz. My apologies for the voice but it was important for me to be on here to say thank you to our employees for making this happen and our customers for the great business and our shareholders for their continued confidence in us. It’s a quarter we’re very proud of and it does work in the setup for long-term success for CSG. Thanks and my apologies again.

Liz Bauer

Analyst

Again for those of you who couldn’t hear Bret, he has lost his voice. So I will be reviewing his prepared remarks, let’s begin. For the third quarter we grew revenues to $199 million, our strongest revenue quarter ever in our history. We generated non-GAAP earnings per share of $0.64 and we produced cash flow from operations of $38 million. For the first nine months of the year we have grown revenues organically approximately 3% and we generated cash flows from operations of $103 million and free cash flow of $79 million. We are certain to see traction on our topline revenues as a result of our investments. Our revenues are growing at high end of the industry rate at the same time we are transitioning our software business into more recurring and visible revenues with our managed services and SaaS based platform. We are pleased with our execution so far. Randy will review our financial performance in more details later in the call. Before we discuss some highlights from the third quarter, we want to remind you that the four key initiatives that we established at the beginning of the year all aimed at increasing shareholder value. These include first, continuing to drive revenue growth in particular through our cloud based and managed services offerings. Second, expanding our broadband and cable footprint globally and getting broader and deeper in our international client’s operation by transitioning from software license based relationship to recurring multiyear engagements which we believe is true and sustainable partnering. Third, investing in our platforms like our next-generation cloud-based solution and investing in our go-to-market strategies. And fourth, continuing our relentless focus on executing extremely well on behalf of our clients our proven reputation for doing what we say has served us and our clients extremely well…

Randy Wiese

Analyst

Thank you Liz and welcome to all of you on the call today to discuss our financial results for the third quarter, as well as our outlook for the remainder of 2017. We are pleased with our continued solid results for this year and the process we are making on our strategic initiatives. Now I’d like to walk you through the financial results in more detail. Total revenues for the third quarter were $199 million, an increase of 5% from the same period last year an increase of 3% from the second quarter. For the nine months ended our total revenues were up 3% over last year and our cloud and related solutions revenue increased 7%. This growth was driven largely by the conversion of new customer accounts onto our cloud solutions and increased revenues from our recurring managed services offerings, countering our anticipated decrease in software and services revenues as we continue to execute on our cloud first solution strategy transition this part of our business into a more predictable recurring revenue model. Moving on to the results of operations our third quarter non-GAAP operating income was $36 million with a margin of approximately 18% which is in line with our expectations. Our non-GAAP adjusted EBIT was $45 million for the quarter or 22% of our total revenues. Our non-GAAP EPS for the current quarter was $0.64 compared to last year's $0.75 in our non-GAAP effective income tax rate was in line with expectations at 34%. Our current quarter and year-to-date financial results reflect our continued execution of our business plan reflecting our commitment to invest in top line growth opportunities and in the long-term strength of our business. Moving on we ended the quarter with $259 million of cash and short-term investments compared to $245 million at the…

Operator

Operator

[Operator Instructions] We will take our first question from Tom Roderick from Stifel. Go ahead your line is open.

Matt VanVliet

Analyst

Matt VanVliet on for Tom this afternoon thanks for taking my questions. I guess to start off here I would say the win with Arrow is sort of a big kind of new market to enter in with Ascendon. Can you talk a little bit about sort of what the process was there and longer-term you know how much of a addressable market expansion is something like this that you can offer to something outside of just service providers?

Liz Bauer

Analyst

Matt I am going to start off on that. Yes, Arrow win was a significant win because if Bret could talk he would sit there and say pretty impressive that we were able to get a significant company basically $24 billion company that’s reinventing themselves, transitioning from really being a distributor to someone who hits all the things that Ascendon plays to. They are going through digital transformation becoming a IoT solutions provider, they’re reinventing their business model moving from transaction based selling components to moving to a subscription recurring revenue model. And really that whole ecosystem management which Ascendon quite frankly was beautifully built for and we’ve been investing in. So a big win for us pretty lengthy process as you can imagine if someone going through a digital transformation and reinventing themselves, they are going to be pretty particular about the process they go through and getting the buy in from all the affected party and quite frankly making sure that the ecosystem management and more importantly that monetization component is there. Bret you look like you’re leaning forward and you talk to.

Bret Griess

Analyst

It was an exciting win for us it helps to starts put us in tangential markets but our focus is and we’ll continue to be the CSPs but as we can go that way we definitely want to open up that IoT market share and continue to try the value that Ascendon can bring.

Liz Bauer

Analyst

Could you hear that at all Matt.

Matt VanVliet

Analyst

I guess then sort of building on top of that to, I know you've talked about in the past of having some maybe nontraditional revenue streams but still sort of I think that the U.K. media company have talked about in the past and sort of enabling their streaming service. Could you give an update in terms of what maybe the sales pipeline looks like in terms of some nontraditional but still sort of within the broader media industry that you had some our early success on Ascendon to?

Liz Bauer

Analyst

I think if you look at it we started pretty small in this right and we’re looking at what’s really important to growing big is ensuring that you’re working with winners that understand the way you grow, the way that you make money in IoT is to manage the ecosystem and have a monetization platform. So while outside of the media, entertainment and telecom vertical we're starting small the potential from picking the right winners has great opportunity for us. Relative to the entertainment sector for doing some really cool things with content providers that are going directly to the consumer and what you're seeing is - whether its iFlix which is basically the Middle East version of Netflix or other content providers that we are at liberty to talk about. They’re seeing the opportunity for them to try our new packages in ways that allow them to reach the customers through different means or at the same time being complementary to those cable and telco operators. So we’re pleased with what we’re seeing there.

Matt VanVliet

Analyst

And then looking at the managed services business obviously you talked about that being a key pillar of growth here especially in the international markets. How is that been progressing year to date whether that's a bookings metric or the actual revenue that you been recognizing. How should we think about that sort of through this year and then as we look out towards next year in terms of growth and overall revenue mix?

Randy Wiese

Analyst

Matt couple different things on the revenue itself we’re having a very good year I think we mentioned in our comments about we've been able to double the size of the managed services revenue this year alone and I think Bret likes to talk about this as well is that a little less than five years ago we had zero managed services revenue so we done a fantastic job of making that meaningful part of our business in a short period of time and it continues to grow. There are different metrics that our teams track very closely the bookings for the year are pretty solid, the pipeline is really strong across all regions. We started out with probably the strongest pipeline in Europe and it's continued to be very strong, we got a lot of prospects who are pursuing there but it's actually across the globe and across multiple products. There is a lot of demand for our managed services.

Bret Griess

Analyst

And each of the ones we got have been expanded since we got them and it's key to keep in mind that they’re recurring revenue over long terms to help stabilize and grow that international business.

Randy Wiese

Analyst

One of the things that I’ll just kind of touch on that point for Bret since he has had some trouble on that one is the beauty of the managed services businesses once you get into the client and demonstrate your skills in which you can perform as your success they give you more and more so you're able to really kind of expand across not only old application but different applications and it just creates a nice long recurring business relationship, makes us very sticky and very valuable to the clients. And we’re seeing a lot of that mainly on MTN and Telstra we've been able to grow those relationships quite sizably since we initially lost our services a couple of years ago.

Operator

Operator

[Operator Instructions] We'll take our next question from Chris Moore with CJS Securities. Go ahead, your line is open.

Chris Moore

Analyst · CJS Securities. Go ahead, your line is open.

Maybe we just start on R&D little bit, 30 million for this quarter is that obviously higher than Q1 and Q2. Is that a reasonable level to assume moving forward to the next few quarters or was that a little bit high for Q3?

Randy Wiese

Analyst · CJS Securities. Go ahead, your line is open.

No, I think it's very consistent Chris, look we've been talking about how we're looking to invest more and more in our products and our focus in R&D. It's up about probably 18% to 19% from last year, so you can see that we’re making the investment. I'd say probably the $30 million run rate this quarter is probably pretty good but maybe it wouldn't surprise me if it started to tick up a little bit more beyond that the next couple of quarters because there is a huge opportunity as we talk about all the successes we're having on Ascendon always like to use a phrase that Bret uses again, since he can't talk I’ll use it which is when it's growing feed the engine right. So we’re having a lot of success with Ascendon so you should expect us to continue to pump R&D dollars into that.

Liz Bauer

Analyst · CJS Securities. Go ahead, your line is open.

And Chris I’ll just add that this is the first year really the first year of our investment mode so you mentioned a couple of quarters but you should expect that you’ll see us investing especially when you're getting names like Arrow, Xfinity folks like that signing up for multiyear engagements, you should expect to see that going forward.

Chris Moore

Analyst · CJS Securities. Go ahead, your line is open.

So if I'm looking at say R&D for Q3 of 2017 $30.3 million versus $23.6 million a year ago, most of that delta is coming from Ascendon and Ascendon related activities?

Randy Wiese

Analyst · CJS Securities. Go ahead, your line is open.

Yes there's a few other products in that by far that is the lion share of the increase.

Chris Moore

Analyst · CJS Securities. Go ahead, your line is open.

Staying with Ascendon for a minute, in terms of - I know that historically from a revenue standpoint the only thing you talked about is less than 5% of revenue. The Arrow agreement looks like potentially it could be really significant. Just trying to get a sense as to you know would it take 10 Arrow agreements to get - to move the needle by to 10% of revenue or could the Arrow be a few million dollars on its own in a few years or maybe a few hundred thousand I just have no idea for the scope?

Randy Wiese

Analyst · CJS Securities. Go ahead, your line is open.

Yes, I think one thing you have to keep in mind Chris is that this is a cloud solution so that this is a subscription model this is not a software model. So the growth and the size of the revenue streams and the growth of the revenue streams really kind of depends on how successful our clients are in their business model. So it's kind of hard to gauge that. It’s not your traditional software license we’ll get a big chunk of revenue regardless of how well the client's business model progresses. So obviously IoT is a great market opportunity for us, very early on Arrow was starting out in this area. So Liz I don't know…

Liz Bauer

Analyst · CJS Securities. Go ahead, your line is open.

Yes I think especially like with someone like Arrow you look at IoT what they’re projected, the world is projected to have 50 billion devices by 2022, so I mean how successful people are connecting gathering data and monetizing what’s coming off of that. Arrow has some really unique opportunities because of all the components that they manufacture and the businesses that they serve but they need to get on the platform and then signing customers up. So we still sit there and say important customer but in the first inning of this ball game.

Randy Wiese

Analyst · CJS Securities. Go ahead, your line is open.

Yes, it’s similar to our traditional cloud business Ascendon is. It’s all the getting new logos, you want to get many new logos as you can and then you bet on the business model of your clients and as they grow. We’re revenue enablement an ecosystem monetization platform so as your business grows that's how we grow as well.

Chris Moore

Analyst · CJS Securities. Go ahead, your line is open.

So if Arrow was widely successful with this, it’s not a flat fee that you’re getting - you're going to share on some of that upside?

Randy Wiese

Analyst · CJS Securities. Go ahead, your line is open.

Absolutely.

Operator

Operator

[Operator Instructions] Looks like there are no other questions at this time.

Bret Griess

Analyst

Well again thank you to everyone for being here. We appreciate in the ongoing support to our employees, customers and our shareholders we appreciate it. I apologize for the voice and look forward to talking next quarter.

Liz Bauer

Analyst

Thank you. Bye, bye.

Randy Wiese

Analyst

Bye, bye.

Operator

Operator

This does conclude today's program. Thank you for your participation. You may disconnect at any time.