CSG Systems International, Inc.

quarter 2020 earnings announcement. All participants are in a listen-only mode. 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. John Ray, Head of Investor Relations. Please go ahead, sir.

Thank you, Operator, 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 risk 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 8K. With me today on the phone are Brian Shepherd, Chief Executive Officer, and Raleigh Johns, Chief Financial Officer. With that, I'd like to now turn the call over to Brian.

Thanks, John, and thank you all for joining us today. Glad to be here. To start, the entire CSG family hopes that all of you are staying healthy and safe. The pandemic reminds us every day to put our people and our priorities first. It has also changed the way we in the world do business, and we couldn't be more grateful for everything our 4,800 dedicated global employees do to put our customers first and propel our business forward. As challenging as 2020 was, Team CSG had a very strong Q4 2020 finish, which created momentum heading into 2021. We're fortunate to have a resilient SaaS-based business model that generates strong recurring cash flows with high revenue and earnings visibility. I couldn't be prouder to announce that COVID notwithstanding, our 2020 financial performance finished at the high end of our guidance ranges. These good results were underpinned by the strength of our customer relationships with leading global brands in many different industry verticals. Our clients know that they can trust CSG to help them better acquire, monetize, engage, and retain their customers. As CEO, I'm honored to lead CSG and our committed employees into the next phase of our growth and our evolution. Specifically, my team and I look forward to building a bigger, better, and more future-ready CSG. We will accomplish this by having every one of our CSG employees working towards our common goals. And we will accomplish this the CSG way, where our culture, our people, and doing business the right way are at the heart of everything we do. With that in mind, I wanted to take a moment to highlight three key strategic pillars that will underpin our shared vision for the future of CSG. First, we will continue to invest and relentlessly defend our position as an innovative and industry-leading technology provider. The world is now digital. Cloud and edge computing are here to stay. Data and real-time insights will pave the way for extraordinary advancements in customer experiences in every industry all around the world. And CSG innovation and technology advancements will lead the way for our customers, as we've done for over three decades. Our broad portfolio of cloud, on-premise, and pre-integrated solutions give our customers a competitive advantage by allowing them to more quickly deliver new digital services with an even more personalized experience. Second, we will continue to link and strengthen our relationships with our existing customers, but we also diversify our revenue base into new, higher growth industry verticals via our customer engagement and payment product offerings. Our relentless focus on enabling an exceptional customer experience, delivering on our customer commitments, and being easier to do business with than our competitors will continue to set CSG apart in the market. Every day, our employees, our market-leading product platforms, and our world-class operations help customers solve their toughest challenges. And with respect to diversifying our revenue streams, as we grow in new industry verticals like retail, healthcare, and government, we will also continue to win big in our existing cable, satellite, telecom, and media customer base. And third, we will focus on unleashing the power of our employees to drive growth, innovation, and customer centricity. We know that our corporate culture is one of our key competitive advantages, and we will protect, nurture, and evolve our culture and our values. With respect to diversity and inclusion, while we still have much work to do, we are committed to reflecting the global communities where we work and serve. embracing seeking and elevating our people that represent our global diversity will make us a stronger more agile and more competitive csg to help us accomplish our goals we recently hired our new chief diversity and social responsibility officer whose main goal is to partner with me and the csg leadership team to embed diversity equity and inclusion into the core of who csg is Before we turn to our 2020 financial highlights, I want to extend a huge thank you to every CSG employee who did so much to move the business forward and serve our customers so well in 2020. To thank our employees, we recently gave every single CSG employee a special one-time $500 cash COVID thank you bonus in addition to our standard incentive programs. And with that, I'll highlight a few financial achievements from 2020. First, for the full year, even with the COVID headwinds, CSG generated $923 million of adjusted revenue, up slightly year over year on a constant currency basis. CSG also generated $173 million in cash flow from operations and $144 million of free cash flow. And finally, we make good on our promise of returning money to you, our shareholders, with $57 million spent on dividends and share repurchases in 2020. Raleigh will go into more detail on the financial results momentarily. Changing gears, let me share with you some highlights from the various parts of our business. As we've highlighted in our last two earnings calls, our CSG sales pipeline is significantly larger than it has ever been, and you're seeing our previous optimism turning into won and closed deals as our global sales team continues to compete and win in the market. When we talk about growth being our number one priority, consistently strong sales, customer wins, and delivering exceptionally well in our customer commitments are keys to sustained growth and business momentum. First, in our North American cable and satellite business, CSG is seeing ongoing strength. We continue to deepen and strengthen our relationship with Charter as evidenced by our 10th consecutive quarter of sequential revenue growth with this great customer. We have deployed solutions that help deliver a differentiated customer experience, including enhanced kiosk solutions, expanded university on-campus offerings to college students, and a variety of customer marketing and communication programs. As the world continues to go digital, we look forward to expanding our relationship with this industry-leading broadband and entertainment provider. CSG also won two deals in the cable market, increasing our market share in this vertical. The first is with Zeto Media Group, a provider of television, high-speed Internet, and digital phone services to customers across 19 states to deploy industry-leading customer engagement solutions. The second is with Hargrave Communications, a regional leader providing advanced communications and entertainment services to customers in the southeastern United States to deploy our revenue management and field management solutions. And in our global telecom wireless and wireline business, we made significant sales progress that clearly positioned CSG as the number one challenger brand in the wireless and telecom revenue management market space, as illustrated by our Q4 wins. CSG signed an exciting new deal with Mobily, the second largest wireless provider in Saudi Arabia, with nearly 14 million subscribers. Mobiley was looking for a partner to future-proof their business, accelerate their innovation, all while improving their customer experience. Demonstrating our strength as a technology leader in wireless, CSG was selected as the prime systems integrator to deploy our full revenue management platform for this digital leading wireless service provider. We expect big growth to continue in our MIA telecom business. In South America, we completed Telecom Argentina's Paraguay implementation of our field management service solution. This was a nice win as it showcased how our relationship with Telecom Argentina has grown beyond our initial deployment and into their surrounding operating units across Latin America. The last Telecom win I want to highlight is with Airtel Africa, where CSG will provide managed services, including customer relationship management and convergent charging and revenue management solutions to support Airtel Africa's growth across its 14-country footprint. These solutions will help bring consistency and scalability across business operations, enabling Airtel Africa to bring new services to market quickly, boost operational efficiency, and reduce cost. Next, consistent with our goals to diversify and grow our new industry vertical revenue, I wanted to highlight some key wins in other industry verticals as companies around the world look for new ways to communicate and engage with their customers. In Q4, we signed a contract with one of the nation's largest drugstore chains to provide customer engagement messaging for the retail and clinic operations in order to enhance their customers' experience. This solution is increasingly important with unprecedented inbound requests to healthcare providers, retail pharmacies, and government agencies related to COVID vaccinations and appointments. And finally, an update on our payments business. While we saw a moderate downturn in transaction volumes on our payment solutions during the middle of 2020, as small to mid-sized businesses experienced impacts from COVID, our payments business is weathering the storm extremely well. As we've mentioned on previous calls, we are not experiencing the severe declines that other global we serve, which includes government agencies, early education services, retail, and small to medium businesses. Overall, I'm pleased with the success we've had and the progress that we're making in the payment space. In closing, we are extremely proud that CSG is doing what it takes to navigate and deliver in these difficult times. Thank you to our customers for your ongoing trust in us. Thank you to our talented and dedicated employees across the globe who are committed to helping our customers and CSG achieve our fullest potential. And last but not least, thank you to our shareholders for believing that we will deliver for you. We are as committed as ever to distribute capital to our shareholders while we invest in new initiatives and acquisitions to drive long-term top and bottom line growth. Put simply, 2020 results prove that CSG's business is as healthy, resilient, and strong as it has ever been, and this management team is laser focused on accelerating our growth and diversifying our revenue. With that, I'll turn it over to Raleigh to review the details of our financial performance and our 2021 guidance.

Thanks, Brian. As Brian highlighted, we have a resilient business that continues to generate strong cash flows and provides us with high visibility into both revenue and earnings. We believe our business model gives us the stability necessary to continue to deliver on our strategic growth initiatives and create shareholder value both now and into the future. We are pleased with our solid 2020 performance, finishing at the high end of our guidance metrics, and we feel well-positioned to deliver strong business results in 2021 and beyond. So let's walk through our financial results for the fourth quarter and as well as our outlook for 2021. We reported revenue of $260 million for the fourth quarter, up 2% year-over-year, and $991 million for the full year, down 1% year-over-year. The increase in our fourth quarter revenue can be mainly attributed to a strong quarter of managed services, software, and professional services revenue. The decrease in our annual revenue is primarily due to the pricing adjustments associated with five-year Comcast contract extension that was effective January 1 of 2020, as well as foreign currency headwinds partially offset by our strong fourth quarter revenue performance. In addition, non-GAAP adjusted revenue, which excludes transaction fees, was $243 million for the quarter and $923 million for the full year. representing a year-over-year increase of 3% and a decline of 1%, respectively. Our revenue saw a second-half acceleration as customer sales and implementation activities that had slowed during the pandemic picked up. This trend was even more apparent when looking at our sequential performance from the third quarter to the fourth quarter of 2020, as revenue and non-GAAP-adjusted revenue each increased 7% quarter-over-quarter. Moving on, Our fourth quarter non-GAAP operating income was $43 million, or 17.7% of non-GAAP adjusted revenue. Our full year, 2020, non-GAAP operating income was $155 million, or 16.8% of adjusted revenue, exceeding the high end of our guidance range and benefited by significantly less employee-related costs in areas such as travel and entertainment. Next, our non-GAAP adjusted EBITDA was $57 million for the fourth quarter, or 23% of non-GAAP adjusted revenue, with full-year adjusted EBITDA of $208 million, or 23% of adjusted revenue, finishing right at the high end of our guidance range. With respect to earnings per share, our non-GAAP EPS for the current quarter was $0.90, and our full-year non-GAAP EPS was $3.12. exceeding the high end of our 2020 guidance range. Year over year, non-GAAP EPS for both the quarter and the year were down 9% and 12% respectively, primarily due to a lower 2019 non-GAAP effective income tax rate, with the full year 2020 non-GAAP EPS also impacted by lower non-GAAP operating income. So turning to the balance sheet and cash flow. We ended the year with $240 million of cash and short-term investments. We generated $57 million of cash flow from operations and $52 million of free cash flow for the quarter. For the full year, we generated cash flow from operations of $173 million and $144 million of free cash flow, with both of these metrics exceeding our guidance expectations, driven mostly by favorable working capital movements. For the full year 2020, we paid $31 million in dividends and repurchased $26 million of common stock under our stock repurchase program. If you look over the past five years, we've returned $251 million to shareholders in the form of dividends and share repurchases, representing approximately 50% of our free cash flow over that time. We remain committed to balancing our use of cash and return on invested capital, focusing on inorganic growth opportunities providing a return to our shareholders. I'd like to highlight that we will be increasing our quarterly dividend by approximately 6%, which will pay out at a rate of 25 cents per share per quarter, or $1 per share on an annual basis. Since we initiated our dividend in 2013, we have increased our annual payout every year. So moving on to our financial outlook for 2021. After a year that brought us some initial uncertainty and unquestionably impacted our results and the way we do business, even in the face of this ongoing pandemic, we were optimistic about 2021. Therefore, we were expecting revenue to come in in the range of $995 million to $1.035 billion, and non-GAAP adjusted revenue, excluding transaction fees, in the range of $922 million to $954 million. We also expect our non-GAAP adjusted operating margin percentage to range between 16.25% and 16.75%, well within our long-term target range of 16 to 18%. This range takes into consideration a number of items, including organic growth percentage in the low single digits consistent with pre-pandemic periods, higher levels of employee-related costs such as travel and entertainment expenses that were avoided in 2012, and repricing pressure associated with the potential for early execution of both the charter and dish contracts that are up for renewal in December 2021. We also anticipate our non-GAAP EPS to range between $3.02 and $3.24, based on a non-GAAP tax rate of approximately 27% and a share count of about 32 million shares for the year. Additionally, we expect the range of our non-GAAP-adjusted EBITDA to be between $212 and $222 million. And finally, we expect the range of free cash flow to be between $110 and $120 million, based on expected operating cash flows of $135 to $155 million, with CapEx expected to come in between $25 and $35 million. While these cash flow ranges are below our reported 2020 results, they take into consideration certain significant working capital movements impacting our 2021 expectations, including our strong accounts receivable collections in 2020 that were well in excess of historical trends and not expected to repeat in 2021, and costs incurred in 2020 that will be paid in 2021. such as our special employee bonus that Brian mentioned earlier, and separation costs related to the departure of our former CEO. In summary, we are pleased with our 2020 operating results in this challenging environment. Our continued strong cash flows demonstrate the resiliency of our business, and that, coupled with our strong balance sheet, allow us to continue to execute on our long-term business objectives, including strategic growth in 2021 and beyond, and most importantly, returning value to our shareholders. With that, I'll turn it over to the operator to facilitate the questions and answers session.

Thank you. If you would like to signal with questions, please press star 1. one on your touch tone telephone. If you're joining us today using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one. If you would like to ask questions, star one. And we'll take our first question from Tom Roderick with Stiefel.

Hey, everybody. Happy New Year. Thanks for taking my questions. So, Brian, I want to start with you. And this is going to be a very high-level question, but you guys kind of really handled a very difficult year quite well and finishing on really solid footing. If you kind of go back to where things were back in the spring and how your customers evolved their decisions over the year, just tell me a little bit more about this concept of CX, you know, consumer experience and how – the changing nature of the world might be forcing their hand to evolve a little faster than perhaps they wanted to. You mentioned Mobili. I think you mentioned Charter. You mentioned Telecom Argentina. Any common threads as far as accelerated decision-making and what the pandemic might have done to force some customers' hands on that front?

Thanks for the question, Tom. Happy New Year and congrats to you on your new role that you'll be taking. So first, a couple of key points around what we saw. In the middle part of this year, I think every business was trying to figure out what COVID was all about. We saw a little bit of slowdown. But as we talked about in Q3 and Q4, we saw the sales returning with the strength of our sales pipeline and where we were going. And we saw that turn into wins. And I think a couple of things really drove that. One is the transition to all digital is accelerating all around the world. And so we see customers in every industry vertical coming to us with ideas and business problems to say, how do they improve their customer experience? How do they operate without going into consumers' homes? How do they basically make it easier for them to do business with? and be all digital. And so what that's done is that's accelerated our pipeline and some of the win rate we've had both for our revenue management solutions, but also things like how do we help enable technicians to solve customers' problems in a home without having to physically go in the home? How do you do customer care and support in an environment where you can do that online and make it easier and an improved experience and enable them to continue with the business. We also saw that in payments where merchants still need to complete transactions. They're just going to do it more online. So we've seen this acceleration of the digital adoption that's actually helping our business and driving some of the momentum we talked about in the earnings script.

Yeah, I'm glad you mentioned payments. That was the second thing I wanted to ask you about, just in terms of how we should think about the payments business in a cyclical recovery. Raleigh, it might be worthwhile tying you in as part of this question, but can you guys kind of bring it all home and give us a sense as to, you know, how much of a headwind to growth payments might have been to the overall growth level this year? And, you know, as you issue your guidance for next year, should we be thinking about a little bit of a recovery in that business, just directionally relative to what you saw this year?

Brian, do you want to touch on it, or do you want me to?

Yeah, maybe I'll give the high level, and you can give the specifics. Specifically in payments, we didn't see nearly the downturn in reduction in volume. We did see kind of single-digit reduction in transaction volume. So as a result, we actually fared pretty well year over year from 19 to 20, Tom, but it wasn't a growth year for us. We still are in the middle of COVID, as we all know, and so I think we're cautiously optimistic as we watch the first couple of months come in in 2021 that we have good expectations and high hopes that our payments business We'll get back to year-over-year growth. And as we talked about before the pandemic hit, we expect our payments business to be a strong double-digit revenue growth business for us, and that's our focus on getting back to that level, notwithstanding any headwinds we feel in the first part of this year. Raleigh, any other color you want to add to that?

Yeah, I'd just say, you know, we didn't lose significant ground this year in the payments We're thankful for all considering. And to your point, you know, we look forward to getting that business back to double-digit growth in line with our expectations. Fantastic.

One last quick one from me, if you guys don't mind. Raleigh, you did a nice job. I appreciate it on the guidance sort of outlining, you know, the margin potential, the margin outlook in the context of the potential for repricing. on an early renewal basis for, say, Charter and Dish. I know it's impossible to go into exactly what component of the guidance that is, but just historically, if we were to think about an early renewal on a Tier 1 customer, what would that mean if that happened a year in advance of expectation? What might that mean for the impact and margins, just so that we can help frame up

you know how your guidance might might uh encapsulate some of uh you know some of the wiggle room on on that you know potentially uh get involved early yeah when you look at us historically um from a repricing standpoint on our on our large contracts you know i i put it in the range of uh you know five to to 15 obviously we uh we OF THAT RANGE. BUT IF YOU THINK ABOUT IT IN TERMS OF THAT, OBVIOUSLY WE DISCLOSE OUR REVENUE BASE ASSOCIATED DISH now no longer significant, but with Comcast and Charter, but specific to Charter and DISH. That's kind of the range I'd look to. You know, it's hard to ballpark timing. Obviously, we would like to get a deal done sooner rather than later and anticipate – So a nice renewal that's fair for both sides. Brian, I don't know if you want to provide any additional color on that.

No, we just continue to serve both customers extremely well, and we've had a good track record. We're focused on moving the business forward.

Fantastic. Well, nicely done on a great finish to an otherwise tricky year. I'll jump back in the queue, but thank you, guys.

Thanks, Tom.

Thanks, Tom.

Once again, if you would like to signal with questions, please press star 1 for your touchtone telephone. Again, that is star 1. And our next question will come from Greg Burns with Sedoti Company.

Edwin, when we're looking at the renewal with Charter, is the remaining subscribers, they're not on your platform? Is that part of the conversation you're having with them? as part of that renewal deal?

Yeah, hey, Greg, thanks for the question and joining the call today. We can't talk specifically about that. What we can highlight is there's about 14 million subs that we do not serve today. What we try to do every day with charters we've done over the past many years is just serve them well, bring more future-ready ideas to solve their business problems. And obviously, we'd love to give them an incentive and a reason to come our direction on that, like Comcast did by moving subs off of Amdocs to us, almost 11 million subs a couple years ago. So that's obviously in our interest. We won't speak on behalf of Charter, but we just try to serve them well every day and give them things to think about on moving in that direction. Stay tuned.

Okay, great. And then I highlighted some of the areas. You've been a nice grocery trucker, and I guess it's not entirely from incremental subscriber, but it's more coming from incremental services. So could you maybe type some of those areas where you're picking up more business with these large customers, and then maybe we could tie that back into Comcast, because I know you took the price adjustment. But what do you see maybe in the pipeline with that customer to refill that revenue gap?

Yes, I think with all of our customers, not just Charter, the thing we focus on is bringing more and more solutions across revenue management, across customer engagement, across payments to solve more and more of their big problems in an all-digital world. And that can come from helping them grow their subscriber base. So we are getting some benefit from our cable customers. They're adding a lot of of broadband subscribers. When they do that, that also is on our platform and that brings us revenue. And as you said, we also then work on trying to sell new technology platforms into them. A couple that we've highlighted, kiosk solutions where individuals will walk into a retail store and want to change service or make a payment and do that without having to talk to a human being. Those are done through our kiosk solutions at Charter and at other customary We're also doing more around helping them with engagement and care to both lower their costs and make it easier to do business in a digital world. And that's part of what CSG focuses on, on continuing both through our internal R&D, but also with our partnerships and the acquisitions we do to bring more value. So it's those kind of things that we do with all of our customers to try to expand our existing relationships and the revenue that we earn from them.

Okay, thanks. And then the The contract with the drugstore, what does the pipeline look like for your customer experience solutions outside of the cable market? And how big of a part of your business is that currently, non-cable?

Yeah, we don't break it out today. What we can say is, It is a material part of our revenue. And we actually see when we look at the customer engagement space that that falls into, we typically see that market growing kind of mid single digit organically. And one of the things we try to do in all the markets that we compete in is grow at the upper end of the market growth from an organic standpoint. So it is material. We do have a strong, healthy, broad pipeline with lots of customers and brands in different industry verticals, and that's what we'll continue to focus on winning big deals with big, large customers like that in a digital world.

What's the competitive landscape like there once you move outside of the cable market? Yeah.

I would say like every one of the markets, Greg, that we compete in, the competitive intensity is intense and there's good customers, which means we've got to bring our A game every day around the quality of the innovation and the technology, the robustness of the operations, the ease of doing business. I wouldn't say it's more or less than competitive. Each one of the markets has its healthy competitors going after it. But as we've proven, when we commit to a market, we want to be a leader in the space and we want to invest accordingly and bring those kind of quality of solutions and win more than our fair share. And that's what we're seeing in that space.

Okay, great. Thank you.

Thanks for your time, Greg.

Thank you. And at this time, there are no further questions. I'll now turn the conference back over to Mr. Brian Shepard for any additional or closing remarks.

Yeah, I would just say in closing, thank you for joining the call today. We're proud of the results. We're proud of our global employee base, what they do to keep themselves safe, move our business forward, serve our customers. And we're extremely grateful for the business that our customers do give us. And we try to earn more and more every day. And And as shareholders, thank you for investing in us. We're committed to returning the capital to the business and deliver a strong return. We're laser focused on having 2021 be a higher growth, more diversified year, and it's all about the results we deliver. So thank you for joining the call. All the best.