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CSG Systems International (NASDAQ:CSGS)
Q4 2019 Earnings Call
Feb 05, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to the CSG Systems International fourth-quarter 2019 earnings announcement. Today's conference is being recorded. At this time, I would like to turn the conference over to David Banks.

David Banks -- Executive Director, Investor Relations

Thank you, Cory, 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' need 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; Rollie Johns, our chief financial officer; and Liz Bauer, chief communications and investor relations officer. With that, I'll turn the call over to Bret.

Bret Griess -- Chief Executive Officer

Thank you, David, and thank you all for joining us today. This was a good quarter and year for CSG, with record revenue and earnings highlighting the quality of our execution in these dynamic times. This past year has further positioned CSG as a trusted provider of solutions that help our clients better acquire, monetize, engage and retain their customers. Rollie will review the financial results in more detail, but I'd like to call out a few key highlights.

First, for the full year, adjusted revenues grew 8% year over year to $928 million, an all-time high for CSG, with almost half of that coming from organic revenue growth. Non-GAAP earnings per share grew 15% to $3.53 per share, another all-time high. Our adjusted operating margin came in at 17.9%, which is at the high end of our long-term target range of 16% to 18%. And finally, free cash flow was $114 million for the year.

We believe that these results demonstrate that the investments we are making enable us to execute well against our core goal of driving long-term sustainable growth and diversification in our business. This quarter, we had several successes in the market to validate how we are delivering on this goal. First, the long-term contract extension that we signed in December with our largest customer, Comcast, is a great affirmation of the value that we are delivering to the broad communications and entertainment marketplace but was just one of many key sales wins. We added many new logos to our mix of customers worldwide further diversifying our base and strengthening our competitive position.

I'd like to review a few of these wins in more detail. This past quarter, we also extended our managed services contract and achieved global partner status with Telstra, one of Asia-Pacific's leading telecommunications and technology companies. Telstra was one of our first software customers who entered into a long-term managed services relationship with CSG. This renewal reinforces the value that having a long-term relationship brings to both parties.

Next, we helped one of the leading diversified global entertainment and media brands roll out capabilities for its new streaming service to take advantage of the holiday gift-giving season. This customer turned to us to help rapidly add gifting capabilities through our digital monetization platform. Our cloud-based offer management capabilities were implemented in less than two weeks and help this service provider capture new revenues just from individuals buying a subscription to their service and gifting it to a friend or family member for the holidays. We've counted this company as a customer for many years, and they knew our capabilities and, more important, knew that we would do everything in our power to help them capture a new revenue stream.

Moving on, we were selected by a long-standing client of CSG operating across Europe and Asia to provide the world's first cloud-native online charging solution for its wholesale, IoT, and digital business unit. As part of this engagement, we will provide a centralized group billing and settlement platform to support internal revenue and cost distribution for their MVNO and IoT clients. Next, we entered into a multiyear BSS contract as Unitel Mongolia's transformation partner to support their strategic imperatives and business growth. Unitel was looking to future-proof its operations and move away from solutions that didn't provide the omnichannel experience or next-generation 5G mobile technology necessary.

We identified opportunities to improve its time to market through our comprehensive on-premise solution, as well as demonstrate our ability to scale and support Unitel's future growth. With our vast experience with operators around the world, we were able to share best practices from other companies that are evolving their own business models and operations. We are pleased to add Unitel to our roster of clients. In addition, we were selected as the rating and monetization provider to help OneWeb, a global communications network provider to deliver low-latency high-speed Internet service to everyone in the world by deploying and operating a constellation of hundreds of low-earth orbiting satellites.

Working closely with the channel partner, we are pleased to forge a new strong relationship with both the service provider and the entire ecosystem of technology providers required to launch this game-changing service. And finally, our payments team is helping one of the world's leaders in real estate services to provide the payments capabilities for an exciting new business launch they're planning later in the year. While this service will not launch until later this year, early next year, the number of payment transactions that it could generate are significant. And speaking of payments, after one year of ownership of Forte, a significant number of our clients are using one of Forte's payment products, reinforcing that in addition to the potential that acquisitions bring for revenue diversification, they also bring the opportunity for us to cross-sell those solutions into our existing customer base.

When you boil this all down, our mission is quite clear. We are delivering innovative customer engagement solutions that help companies acquire, monetize, engage and retain their customers. We do this by continuing to invest in our solutions, our people, and our clients. We believe that by doing this and staying singularly focused on helping our clients succeed, we will benefit as will our stakeholders and being a trusted partner to some of the world's leading brands mean that you must continually invest, innovate and deliver solutions that help companies optimize each touchpoint in the customer life cycle.

We've been doing that for over 35 years. As I look forward, I like where we are. We're executing well across a broad set of metrics. We are adding new logos from a diverse set of clients, ranging from wireless to healthcare to retail to technology.

Importantly, we are diversifying our revenues from our new verticals. At the same time, we are growing our revenues from the cable market and, therefore, lightening our competitive business mode. We are continuing to lengthen and strengthen our relationships with our very important existing customers and earn more of their business. We are helping solve our customers' biggest business challenges to compete and succeed in this hypercompetitive digital future.

We are continuously evolving our cost structure to ensure that we are competitive in the market. We are consistently delivering organic revenue growth that is above the industry growth rates. And last but not least, thanks to our strong balance sheet and consistent ability to generate cash, we are distributing capital to shareholders while we invest in new initiatives and acquisitions to drive longer-term top-line growth. In summary, we are executing on a strategy that is working, and we are seeing the benefits of that strategy.

Before I close, I'd like to share that as part of our ongoing emphasis on good board governance, we are continuing to refresh the talent, skills and experience that are represented on our board. This past month, we added Haiyan Song to our board. Haiyan is a recognized industry leader with extensive experience across software development, security and product engineering. She currently serves as a senior vice president and general manager of security markets for Splunk Inc.

Haiyan is the third new board member to join our board in the past five years. And finally, I'd like to thank our clients for their trust in us and thank our 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 Rollie to review our financial performance for our fourth quarter and full year.

Rollie Johns -- Chief Financial Officer

Thanks, Bret, and welcome, everyone, to the call today to discuss our financial results for the fourth quarter and the full year for 2019, as well as our outlook for 2020. We are pleased with the strong 2019 performance, finishing near or above the high end of our guidance, and we feel well-positioned to continue delivering upon our strategic initiatives in 2020 and beyond. So, let's walk through our financial results. We reported revenue of $255 million for the fourth quarter, up 3%, all coming from organic growth.

We also reported a record $997 million of revenue for the full year, up 14% and exceeding the top end of our revenue guidance. This full-year revenue growth reflects the combination of organic growth of about 3.5% and the additional full-year contribution of our 2018 acquisitions of Business Ink acquired in February 2018 and Forte acquired in October 2018. In addition, non-GAAP adjusted revenue, which excludes transaction fees, was $237 million for the quarter and $928 million for the full year, up 2% and 8%, respectively. In summary, our teams delivered strong revenue growth for 2019, with each quarter building on the strength of the previous performance level.

Moving on, our fourth-quarter non-GAAP operating income was $42 million or 17.5% of non-GAAP adjusted revenue. Our full 2019 non-GAAP operating income was $166 million or 17.9% of adjusted revenue at the high end of our guidance range. This reflects the continued ability to grow our revenue and manage our cost structure while continuing to invest in our people, solutions, and clients. Next, our non-GAAP adjusted EBITDA was $55 million for the fourth quarter or 23% of non-GAAP adjusted revenue, with full-year adjusted EBITDA of $219 million or 24% of adjusted revenue, up approximately 10% year over year.

Our non-GAAP EPS for the quarter was $0.98, up 3% over last year, and our full-year non-GAAP EPS was $3.53, up 15% over the prior year. Our non-GAAP effective income tax rate was 12% for the quarter and 23% for the year. Our effective income tax rate was positively impacted more so in the quarter by an income tax benefit related to the Comcast exercise of the remaining vested warrants in December 2019. We elected to settle this exercise with cash and a little of granting additional shares resulting in a $13 million payment to Comcast at the end of 2019.

So, moving on to the balance sheet, we ended the year with $183 million of cash and short-term investments. We generated $44 million of cash flow from operations and $34 million of free cash flow for the quarter. For the full year, we generated cash flow from operations of $151 million and $114 million of free cash flow, with both metrics exceeding our guidance expectations and further demonstrating our ability to convert earnings to free cash flow. As was the case in 2018, we generated a vast majority of our free cash flow in the second half of this year.

Additionally, for the year, we paid $29 million in dividends and repurchased $26 million of common stock under our stock repurchase program. I'd also like to highlight that, once again, we'll be increasing our quarterly dividend by 6%. This will payout at a rate of $0.235 per share per quarter or $0.94 per share for the year. So, before I provide our financial outlook for 2020, I'd like to call out our January 2 acquisition of the majority of the assets of TekZenit, which we paid approximately $10 million upfront with the potential for future earn-out payments based on defined performance levels.

TekZenit is a Dallas-based firm with global operations and a world-class client list. Their teams help clients who are undertaking a digital transformation for their customer, employee and user experiences across all communications channels. They employ a host of services, including strategic, advisory, design, engineering, and technology enablement to drive success. Like our Forte business that we acquired in 2018, TekZenit is not entirely new to CSG as they have been an existing partner contributing to several client wins.

We believe this acquisition fits nicely into our M&A and capital allocation strategy. In addition to reinvesting in the business and returning cash flow to our shareholders, we will continue to deploy a portion of our cash to acquisitions of TekZenit to provide a strong strategic fit, meet our financial criteria and reflect a solid cultural alignment. TekZenit has a great team, and we look forward to the expansion on our existing relationship. We expect the acquisition will lift our 2020 revenue by approximately $10 million with a return profile that we expect to be neutral to slightly accretive to earnings on a non-GAAP basis.

So, moving on to our financial outlook for 2020. Recall in December, we provided an initial view into our 2020 guidance, simultaneous with the announcement of our new Comcast contract. We are now updating and raising our revenue expectation with the addition of TekZenit, which, as I previously stated, we believe will add approximately $10 million of revenue for the year. As such, we now expect our 2020 revenue to be in the range of $990 million to $1.03 billion.

And a range of $917 million to $950 million on a non-GAAP adjusted basis. Also, as previously conveyed in December, we expect our non-GAAP adjusted operating margin to range from 16% to 17%. And down from our strong performance in 2019 but well within our long-term target range of 16% to 18%. In addition, we expect adjusted EBITDA of $202 million to $217 million.

We also expect to deliver 2020 non-GAAP EPS in the range of $2.96 to $3.29. This expectation is based in part on a non-GAAP income tax rate of approximately 27%. Our guidance also assumes continued share repurchases under our buyback program with anticipated outstanding shares for the year of approximately 32 million shares. And finally, we expect the range of our operating cash flows to be $130 million to $150 million, with an annual capital spend range of $25 million to $35 million.

In summary, this was another strong quarter and a terrific year for the CSG team as we continue to execute well with strong organic and inorganic revenue performance, driving bottom-line growth, and significant free cash flow. We believe we are well-positioned to continue to help our clients compete and thrive in this evolving marketplace. And as a result, we expect to drive revenue, earnings, and cash flow growth over the longer term. With that, I'll turn it over to the operator for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from Zack Silver with B. Riley.

Zack Silver -- B. Riley FBR -- Analyst

OK, great. Thanks for taking the question. I just wanted to drill into the TekZenit acquisition a bit more. When you think about that, obviously, I think the revenues there are a bit smaller than Forte's.

But when you think about the opportunity with TekZenit, what, I guess, types of things were you doing with them from a partnership perspective before and can you help us size the opportunity for new business wins for the core business?

Bret Griess -- Chief Executive Officer

Yeah. Thanks, Zach. We appreciate the questions. TekZenit, as we said in the note, the former ones there, has been a great partner for us for some period of time and as we work together and continue down this process of capital allocation, which we continue to say we take incredibly seriously.

But what we saw is the opportunity to work together to leverage their knowledge and skills that they bring to the table, along with the solutions that we bring to the table to truly help with the digital transformation that so many clients are going through today. And so, though it's only $10 million of revenue, getting at one times revenue, we think, was a very great strategic deal for us. And as we said, we're already seeing some of the pull-through activities right now. And the fact that -- similar to what I mentioned with Forte in the payment space as we went through that.

So, we just see it as falling right in the line with our capital allocation and our overall M&A strategy of looking for ways that we can bring greater solutions to the marketplace and so that we can actually ensure that we're continuing to drive value for our customers. And I believe that there's one clarification Rollie had from his notes, is there?

Rollie Johns -- Chief Financial Officer

Oh, yes, yes. Thank you. So, before we go on, one thing I did want to clarify, I flubbed our operating cash flow guidance. So, the actual range is $130 million to $155 million.

I believe I said $150 million. So just to clarify, that's $130 million to $155 million.

Bret Griess -- Chief Executive Officer

Thanks for the question, Zach. We appreciate it.

Zack Silver -- B. Riley FBR -- Analyst

Yeah, of course. And then I guess one more quick one if I could. Maybe not so quick. But when you think about this, a pretty intriguing service that you provided to this large media company over the holidays.

I guess we can guess who that may be. But when you think about it, I guess was that something that's going to sort of fall off after the holidays? Or is there an opportunity to deepen your relationship with service and with these gift-giving capabilities and maybe other things you can bring to the table?

Bret Griess -- Chief Executive Officer

There's no customer that we take for granted or solution in the marketplace that we take for granted. So, we're going to continue to work our tails off to solve but what we saw there is just yet another time where our solutions were viewed as being highly innovative and that we are very fast and cost-competitive to bring it to the marketplace and actually execute it. That's why I tried to accentuate a bit that from the time we started going until it was in place together, that revenue stream for them was two weeks. And so, the fact that we showed value that fast and actually delivered in the timelines.

We see it not going away, but we also believe we have to compete for that business every single day.

Zack Silver -- B. Riley FBR -- Analyst

OK. Thank you, Bret.

Operator

Thank you. Our next question comes from Tom Roderick with Stifel.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Hi there. Thanks for taking my questions, and congrats on many things in the quarter, most notably, I think, in the Comcast contract resigned. It's fantastic. A bit of clarity for all of us on the street.

So, maybe I could kind of tackle Comcast as a customer but also with respect to the broader product set. I think it gives us an opportunity to sort of look at where you're at now versus the last time you did resign Comcast and go through that process. So, when think about kind of a onetime hit to the revenue stream that happened every five years or so. Then you kind of climb out of that hole with additional offerings, additional products, additional things that you can offer them.

How should we think about how that pace of revenue recovers, particularly given that you have payments now, you've got a more complete Ascendon product? There's more things you can offer them than the last time you went through this. Can you kind of take us through what that cycle of life with Comcast in terms of what other offerings they can use and how long we ought to think about this hit to revenue holding that down versus where we started prior to the renegotiation?

Bret Griess -- Chief Executive Officer

Nothing like a simple question, Tom. Thank you. No, in all seriousness, you've been around often enough to see how the process works. And traditionally, after a major renewal because they do view us -- it's not just Comcast, it's many of our customers as an extension of their value-added IT organization to deliver services to solve their problems.

So, like you would with some of your services, you expect the benefits of that, cost benefits as it happens. But traditionally, there have been a level of discounting that happens in that, and as it grows out over time, we may get back in that cycle. One of the very positive things that I see from this time, you'll notice that our guidance for revenue is not going down. This is one of the first times that after a major renewal where the revenue is flat to slightly up.

And with the earnings aspects going on there, what you can see is the fact that what we're putting out for guidance is a slight reduction in the earnings but not to the level that it's been traditionally and historically as we go through that path. That's a combination of numerous factors. It's the things that you referenced, where we have more solutions that we can bring to the table and, not only more solutions as far as net new ones, the continual improvement of the historic solutions that are getting better and better as we move forward, which is where you hear us often reference how we have to keep investing and innovating to have that value-added proposition. But in addition to that, what helps to offset that revenue and keep our earnings in the range that we said is our long-term earnings range of 16% to 18%.

Even with it, we land in that range of 16% to 18% forecasted earnings is through some of these other diversification solutions in customers and new logos that we're adding. So, you've seen it traditionally take out to that fourth or fifth year to start truly getting out of that hole. We want out of the hole quicker. And we believe that that's what allows us to go there.

So, we're not going to give you specifics on this as the day it will happen, but you can see with the revenues not being projected down and the earnings being within our long-term range plus our investments in solutions, we think we're really well-positioned to get out of that hole quicker.

Rollie Johns -- Chief Financial Officer

Yes. And just a little additional color, Tom. I think if history is an indicator, generally after we provided a discount, it's usually about four to six quarters, where we're back to earning that revenue base back.

Operator

Thank you. Our next question comes from Greg Burns with Sidoti.

Greg Burns -- Sidoti and Company LLC -- Analyst

Yeah. In terms of the other -- can you just remind us the timing of your next major renewals now that you have Comcast out of the way? What are the next large ones that are...

Rollie Johns -- Chief Financial Officer

Yes. So, the two next largest are both Charter and DISH. Those renew in December of 2021. And this Comcast contract takes us through -- at least for core platform services, that will take us through 2024, and for print and other services, that takes us through an additional year, 2025.

Greg Burns -- Sidoti and Company LLC -- Analyst

OK. Specifically in terms of Charter, might be the renewal in impetus to do something more broader with them in terms of maybe some of the drivers that aren't on your platforms? How do you view the opportunity that the contract renewal might present to you expanded with that customer?

Bret Griess -- Chief Executive Officer

Yes, Greg, that's always been a great question, and it's a part of the market where we do believe we can bring great value to customers in solving their most challenging problems. But it's also one of the -- I constantly say is that we have to earn that business day in and day out. We see large customers like Comcast, like DISH and like many others. The more we do with them, the more we seem to consolidate and drive value.

Our model is one of scale, and it is one of bringing quality to the marketplace. And so, we believe that we're very well-positioned with Charter to bring that when it's the right logical priority for them. We believe that their selection of us to consolidate their Hawaii subs recently is another proof point or a sign of positivity that we're bringing value at a good price point in the marketplace. So, we'll never count our chickens until they've hatched, but we'll continue to strive to solve for Charter, who is a great customer and great operators, as we go forward.

And we hope that it is an impetus for more business.

Greg Burns -- Sidoti and Company LLC -- Analyst

OK. And then when we look at the guide for '20 in terms of the operating margin, you're guiding up on revenue, but the margins are taking a step back. Is that because the mix of where you're growing is lower margin than what you're losing from Comcast? Could you just help us out with that dynamic?

Rollie Johns -- Chief Financial Officer

Sure. Yes. As you think about the nature of our Comcast contract, there aren't a lot of variable costs associated with a platform type product, right? So, the discount that we provide from a revenue basis is essentially a pass-through to the bottom line and impacts margin and profitability. So, what you actually see there is we are gaining some other efficiencies in other areas of the business because if you took that 10% reduction all the way down, you're probably sub-16%.

So, we're looking for growth, cost efficiencies in other areas of our business to offset that.

Greg Burns -- Sidoti and Company LLC -- Analyst

OK. Great. And just lastly, I just wanted to touch on that incremental gifting service you provided. Was that globally, internationally or just domestic? And do you have these types of like add-on services when we think about over the top or streaming platforms? I think historically, the billing, it was kind of more simple applications, so you weren't really involved with some of them.

But is there an opportunity now? Are you seeing a broader opportunity outside of this when you want to layer on incremental services that are maybe a little bit more complicated from a billing perspective?

Bret Griess -- Chief Executive Officer

Yes, that's a great question. It is an area as our solutions continue to evolve and we go more cloud-based and continue to modernize the solutions we have. There's a lot more modularity that helps us to solve. That's part of the activity helping us not to solve, only to solve for the traditional customers, but for some of these new customers we're talking about.

That one explicitly around the gifting was only in the U.S. And, of course, we would always like to look to expand that with this client internationally and with other clients as we go forward, but adding new feature functionality and increasing our ability to add value to the customer will continuously be a goal of ours.

Operator

Thank you. [Operator instructions] And at this time, there are no questions in the queue.

Bret Griess -- Chief Executive Officer

Thank you, Cory. We really appreciate the call, and we appreciate everybody taking the time to listen. We're very proud and we're very excited about where CSG is going. And as always, I'd be remiss if I don't think the wonderful customers, investors, and, most importantly, our employees that are answering the bell every day to work hard to solve questions and turn CSG into the greatness that we know it can become.

So, thanks for your time, and have a great day.

Operator

[Operator signoff]

Duration: 33 minutes

Call participants:

David Banks -- Executive Director, Investor Relations

Bret Griess -- Chief Executive Officer

Rollie Johns -- Chief Financial Officer

Zack Silver -- B. Riley FBR -- Analyst

Tom Roderick -- Stifel Financial Corp. -- Analyst

Greg Burns -- Sidoti and Company LLC -- Analyst

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