Good day, and welcome to the CSG Third Quarter 2018 Earnings Announcement. [Operator Instructions] Today's conference is being recorded. At this time, I'd like to turn the conference over to Liz Bauer, Investor Relations. Please go ahead.

Thank you, Melissa, 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 solutions; 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're 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 Rollie Johns, 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. For the third quarter, we grew our revenues by 7% to $213 million and grew our non-GAAP earnings per share by 9% to $0.70. Importantly, in the third quarter, we announced two actions aimed at optimizing our strong balance sheet. These include the increase in our share repurchase program and the acquisition of Forte Payment Systems. The strength of our business model, cash flow generation and balance sheet enable us to take a balanced approach to driving long-term shareholder value. First, we have said that we will continue to invest in our business both organically and with strategic acquisitions to increase the addressable markets that we serve and deliver solutions that help our clients compete and win in a very demanding business environment. Forte Payment Solutions is an innovative niche player in the payments space. The payments market globally is a $17 billion market that is growing 15%. Even though CSG and Forte combined are a small player in this space, we believe that we have a lot of runway in front of us to gain market share in this dynamic and growing space. This is a logical acquisition for CSG as payments is core to revenue management, and Forte's solutions will accelerate our ability to provide next-generation solutions to our existing customer base and serve other vertical markets. In addition, Forte has historically relied upon channel partners to sell their solutions. CSG's sales organization will be able to expand the reach of Forte to verticals that they have traditionally not serviced, including wireless and cable operators, financial institutions and healthcare organizations. This investment provides us with a great opportunity to advance our industry-leading solutions, expand into new verticals outside of cable and wireless, and leverage our existing infrastructure…

Thanks, Bret, and welcome, everyone, to the call today to discuss our financial results for the third quarter as well as our outlook for the remainder of 2018. We are pleased with our execution during the quarter and our actions to enhance shareholder return. With that, I'd like to walk you through the financial results in more detail. We reported third quarter revenues of $213 million, an increase of 7% from the same period last year, driven primarily by the contribution of Business Ink, which we acquired in February. Revenues for this quarter were consistent with those of the second quarter. Our third quarter non-GAAP operating income was $36 million with a margin of 16.7%, which is in line with our expectations. Our non-GAAP adjusted EBITDA was $49 million for the third quarter or 23% of total revenues. Our non-GAAP EPS for the current quarter was $0.70 compared to $0.64, an increase of 9%. This increase was primarily driven by the lower non-GAAP effective income tax rate from the recently enacted U.S. tax reform. Moving on to the balance sheet; we ended the quarter with $199 million of cash and short-term investments compared to $186 million at the end of the second quarter. The sequential increase was primarily due to higher cash flows from the third quarter. We reported cash flow from operations and free cash flow of $47 million and $30 million for the quarter, respectively. Year-to-date, we generated $73 million of cash flow from operations and $29 million of free cash flow. Additionally, year-to-date, we paid $21 million of dividends, and we repurchased $17 million of common stock at a weighted average price of $42.71 per share. Our solid business model and cash flow generation create a strong foundation for our balance sheet. This provides us with the…

[Operator Instructions] And our first question will come from Tom Roderick with Stifel.

This is Matt Van Vliet on for Tom. I guess, first off, there wasn't a lot of discussion about various Ascendon initiatives here, but I know you've limited time in terms of what you have on each quarter. But I wanted to dive in there a little bit and just hear about maybe what some of the progress is at some of the customers you've recently announced in terms of ramping up and what kind of revenue contribution maybe you're seeing here and then what the pipeline for maybe some alternative or maybe non-traditional to CSG initiatives or use cases that Ascendon's looking at now.

Yes, Matt, I appreciate the question. And you're right, we're always looking at getting as much information and in the timeframe that's possible. Ascendon continues to be a core part of our research and development investment, and we see it as one of the leading digital transformation platforms for revenue management and digital monetization in the future. And we continue to roll it out at customer sites. We've had good luck at Formula One with the races and the activity that we're doing there. When we look at Arrow and what's happening with Arrow Electronics around the IoT space, we continue to have progress there. With next-generation products, the rollouts and the products, the revenue is always further out than we would like but we're continuing on the double-digit growth area and that revenue management area that we're driving. And the teams continue to work it. And so there, Redbox is another area where -- non-traditional customer for us, but we're getting great rollout and we're going to stay the course with it as we move forward. As our legacy products -- are wonderful from cash flow generation and servicing the industry. We know that the modularity of Ascendon and the platform is the future. And as it continuous roll out, we're very confident. We don't have the specific date but we know it's an incredible solution and tool itself for our customers in the space and also opens up in those IoT and other areas for opportunities to continue to expand and grow it over time.

And then when you look at some of the functionality that's on the Forte platform that you acquired, is -- were the gaps in the Ascendon platform or at least opportunities that may be pushed further that those can be combined or integrated to a certain extent? Or did you have a lot of the payment types necessary within the current use cases of Ascendon?

The greatest thing that I would say that came out of Forte is less on the gaps as much as it was the ability to accelerate that future. So we had some components that were in technologies from years as we went through it that they allowed us to move very rapidly into the AWS fully compliant area, from the governance and compliance around the transaction area and brought in a very healthy customer base. So what it did was it allowed us between their platform for payments and our platforms for payments to get a single R&D push and to get years and years of experience and to get some of these security tokenization and other things there that make it an even better and healthier payment solution that we can take to the new market. So we just view it as a great way of accelerating our current Ascendon platform roadmap and putting us in other markets and getting some great people on the team of CSG.

And then just lastly on some of the geographic performance; looked like Europe was up again particularly strong. North America was sort of in line with the overall company. Is there anything in particular that you would highlight in terms of success in Europe that you're really sort of seeing there? And maybe conversely in APAC, have you hit some macro weakness there? Was there anything specific to any customers that you might highlight?

You know how it is, Matt, as a financial analyst. Nobody knows better than you how the world changes on a day-in and day-out basis. So there are evolutions that happen on a macro level. We'll never use those as excuses. What we see happen is in certain parts of the world, it's more challenged today that in others. We see great strength coming out of our business in Europe in our management services area, and as we mentioned, TalkTalk with Ascendon, where we're starting to roll platforms in that direction. So it maybe hasn't been as strong in APAC but the teams are busting their tails as it goes forward. We're sure it's just a timing issue. It's nothing bad on that front, and the strength in managed services there is helping us. That's our model, it's long-term recurring revenue so that we don't have to chase the ups and downs. And so even with the macroeconomic things that happen, they'll influence us and cause bumps. And like we see in the stock market and everywhere else, there's volatility that comes, but the model is sound, the team is sound, the platforms are sound, and so that managed services in Europe and the things that are going on with Ascendon and managed services and APAC are serving us well now. And we see great opportunities in the future as we continue to drive that and grow our business outside of North America.

Our next question will come from Greg Burns with Sidoti & Company.

Could you just go into that last question you were answering about Europe and the managed services? Can you just talk about maybe how far you are penetrated into your legacy customer base in terms of converting those customers to managed services? And I know in the past you had kind of targeted like $50 million to maybe $100 million of managed service revenues. Where are you standing in terms of that goal?

Yes. We don't disclose it from an actual segmentation perspective on that front, Greg. But I would tell you that we are nearing that portion of our goal and still having great progress in rolling it out. So we have multiple customers in Europe and in the Asia Pacific region that we've gotten it to. But because of the fact that those are large transactions usually dealing with people, systems and they're usually front-end loaded where we make it up in the back end, we're not going to convert all of those customers in a short period of time. So we feel very confident in the customers that we have converted, but as we're just out of baseball season and my beloved Red Sox, I would tell you, we were talking in Red Sox -- in baseball terms, we're probably in the second or third inning of what the possibilities are here. And we're going to continue to stay the course because it is so core to our domain knowledge and the value that we can bring to the marketplace and the opportunities that it opens up for us.

And then in terms of the free cash flow or cash conversion, it's been a little bit lower this year. I think you mentioned maybe some working capital issues. But can you just talk about operating free cash flow, why it's trending kind of a little bit below where you were last year? And then in terms of the free cash flow to CapEx that you're spending this year, does that normalize next year? Or is this kind of a new run rate?

We do not see that as the new run rate, and I'm sorry for -- we take it very seriously. We had some opportunistic things on some technology purchase where we can get some pricing and also some upgrades to our technology to position us well for the long term, but that will not be our long-term capital position. You'll see, if you look historically, we have up year, down year, up year, down year, ebbs and flows. I would say this is a flow year, and it's going to ebb next year. I don't know, Rollie...

Yes. And when you look -- I kind of look at cash flow from operations in two pieces, one, the cash from the operations and then changes in working capital. And if you focus in on the cash from the operations, it remains steady and strong just like it has in the past years. And we expect it to continue as well so...

And then in terms of Forte, their growth rate. Can you just give us a sense of maybe -- you talked about the -- note about $80-or-so-million of revenue, what type of growth that they've been doing? And then when we look out to next year, how dilutive to the operating margin will the full year contribution of Forte be?

As I mentioned in my comments, the space, the payment space is growing about 15%, and we see Forte being in line with that. And we do not see it taking away from our EPS as we move forward. We will hold ourselves to growing top line revenue and EPS over time. It will be rare when we make a strategic decision that will negatively impact those things, but we don't see it impacting it in a negative fashion, and with that growth being in line with the payments space. And in that space, we've seen historically that we can get good margins. We see this as being very healthy, smart way to deploy capital and to serve our customers better.

[Operator Instructions] Our next question will come from Chris Moore with CJS Securities.

Maybe we could stay with Forte for a minute. Big picture, can you maybe just walk through the next 6 to 12 months? Are there key milestones that you're looking at? It sounds like there are some synergy that you -- already between Forte and CSG, but are there -- is there potential for some really kind of interesting things down the line? And maybe just a little bit more specifics in terms of how you see this evolving.

Yes, Chris. There are some synergies from a technology perspective from things that we have been doing, the legacy that we won't be doing. They're not material where it will show up here, but there are some synergies in there. And there's also, from a people perspective, as I mentioned in the comments, where, when we do, do an acquisition, we've seen historically where companies ask, "What can I take from that thing I just acquired?" We also look at that from a counter-perspective of what can we give and how can we help. And when you look at the activities that are going on at Forte and our go-to-market activities, our sales folks are already highly engaged with our current customer base and looking to continue to drive that. So we're going to take every core part of our business. If it's Forte in the future for how we get -- drive revenue growth at a healthier growth clip and manage those earnings, if it's our customer communications management component I talked about with CenturyLink and the activities that we're doing there. And heck, AT&T has moved to be a Top 5 client for us. So we're just excited about anywhere we can do digital disruption and continue to evolve. And Forte is another area in that market space that really helps us, and the teams are working. We're already seeing some great traction happening there.

So the 15% growth, it sounds like if you start selling into some of your client base kind of the effective growth rate could actually be a little bit better than that. Like I don't see that number, but it's certainly -- on the go-to-market side, it sounds like there's a lot of opportunities. From just kind of a margin standpoint, if we're looking at the Forte revenue on a -- not on an adjusted basis, on kind of that $85 million run rate, gross margins there, obviously, got to strip out the transaction fees or in the 20% to 25% range or -- just trying to get a better handle on that.

So go through that math again, Chris. You were saying total revenue, stripping out the interchange fees or any fees?

I guess just starting with -- I assume the $85 million run rate is the -- kind of a GAAP revenue that has the interchange fees in there?

Yes, that's gross.

So if you're -- we're looking at it from a gross perspective, what's a reasonable proxy for gross margins?

Yes, we're going to continue to drive that to match the industry gross margins that are in that space. And so they've run the business for breakeven to grow and develop it over time, but we'll drive everything towards that baseline of the industry averages in that area and then try to improve upon it from there, Chris.

So maybe if you can help me out, I'm not sure what the industry gross margin average is in there.

As Rollie said, with the -- we're releasing the new way is we're looking at it and because of that -- the interchange fees, taking the interchange fees out. Our traditional broader business at CSG, including our payment space, from a gross margin usually runs around 50%. What we see in the payment space is they're slightly below there. We'll continue to manage that to get to that spot with it. And it's what we see in the space with Forte also and the business that we acquired.

So as I indicated, we're looking at -- sorry, go ahead, Chris.

So on the adjusted revenue basis, then the target is trying to get to that 50% gross margin, correct?

Did you follow up -- that took...

Yes, I have. You know what, Chris, let me follow-up with further detail on that.

Yes, we better update that to make sure we're right on it.

At the end of the day, when we're looking at it, operating margin, like I had indicated, we believe it to be slightly dilutive to operating margin percentage, but as -- the business as a whole will be accretive to us.

And just one other thing, the Charter footprint expansion, could you just walk that again real quickly in terms of the opportunity there? It sounds like that won't be unique to Charter. I just want to make sure I understand that.

It's unique to the way Charter is dealing with their customer base now, and that solution is not unique from an industry perspective because that -- the portal activity that is serviced by the kiosk when you go to your local grocery store or you go to the other areas, there's a certain consumer base that still likes to do their transactions that way. And so rolling those out, it creates just another touch point with the customer to continue to build it out. And so with Charter buying into that solution and rolling it out to improve their overall customer digital interaction activity within that CCM space was a new one for us this quarter. It all comes down to managing the end consumer experience.

And actually, to your point, Chris, those portals and kiosks are servicing both CSG and non-CSG customers.

That's a great point. So it's servicing beyond our own platforms.

Yes, beyond our own normal footprint, yes.

Our next question will come from Tim Curro with Value Holdings.

Comcast recently announced that it is planning to introduce a streaming set-top box. How would you see that affecting your business with them?

The -- Comcast and their Xfinity platform is an incredible platform. We see them as a phenomenal, innovative customer in our space. As far as that specific streaming one, I'm not sure which one you're referencing. They've got different solutions, ones where they use directly off their Xfinity platform, and we -- if it's residential, we're servicing them from a back office revenue management perspective. They've got some other streaming platforms such as their Xfinity University that uses our Ascendon platform in that front. So like I said, we continue to see them as incredibly innovative and doing new things, and we'll continue to do everything we can to serve and support them on them.

So if they introduce a streaming set-up box that just gets provided to their residential broadband customers, is that something where you guys would just be affected because it would be another thing to deal with in billing? Or is it something where you could sell Ascendon to them to address their end-consumer experience?

Well, right now, we've got all the residential subscribers on our platform, but the set-top box, like I said, I don't know which one you're referencing specifically. But we have found both our ACP platform and our Ascendon platform as incredibly powerful revenue management and digital monetization tools to assist them in that process. So Comcast and their residential is a great customer of ours. We've got our contract through June of 2019 with them. We continue to work with them to solve there. And in other areas, they're a user of our kiosk. They're a user of our Workforce Express product. They're users of our Ascendon around Xfinity University and we'll -- which is a streaming platform, and that's on a set-top box that we're working in partnership with them. So as I said, I'm not trying to be elusive. I don't know the specific one you're talking about, but we're serving them in streaming ones like Xfinity University and all of their residential platforms. So we believe we've got a great platform to service them.

One Forte question; was that competitively bid?

We've worked with Forte for years, and I would tell you that what we found over time, they were one of our partners. We've worked with numerous partners, and over time, the partnership just kept advancing and advancing to where it made the most sense for them and the most sense for us to go through an acquisition. And it really positions us well outside of our core customer base in the spaces that they serve, if it's government, if it's healthcare and in some of the areas where we're at. So it's really was a long-term partnership that became an acquisition. Whenever -- as we've mentioned on some previous calls, we look at strategic high grounds to drive the future growth of our revenue and our earnings. We look at a cultural fit, and we also look at, does it make good economic sense? And they checked all three boxes, and we're really excited to have them on board.

[Operator Instructions] That does conclude our question-and-answer session today, and I'd like to turn the conference back over to Bret Griess for additional or closing remarks.

Thank you, Melissa. We really appreciate it. And for everyone that took the time to be on the call, we continue to be extremely confident in our business and extremely grateful for the customers that we serve in the market. And as always, I can't say thank you enough to our employees and our investors who continue to support us as we continue to build this business and grow it. And thanks again for your time, and we'll talk to you next quarter.

That does conclude our conference for today. Thank you for your participation.