CSG Systems International Inc (CSGS) Q4 2020 Earnings Call Transcript

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CSG Systems International Inc (CSGS 0.83%)
Q4 2020 Earnings Call
Feb 3, 2021, 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 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 Rea, Head of Investor Relations. Please go ahead, sir.

John Rea -- Head of Investor Relations

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 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 Brian Shepherd, Chief Executive Officer; and Rollie Johns, Chief Financial Officer.

With that, I'd like to now turn the call over to Brian.

Brian Shepherd -- President and Chief Executive Officer

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 and 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 toward 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 and 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 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 within our competitors will continue to set CSG apart in the market. Everyday, 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 [Phonetic] 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 a 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 cord 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 made good on our promise of returning money to you, our shareholders with $57 million spent on dividends and share repurchases in 2020. Rollie 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 one and close 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 sustain 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 in 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 Zito Media Group, a provider of television, high speed Internet and digital phone services to customers across 19 states, deploy industry-leading customer engagement solutions. The second is with Hargray 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 position 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. Mobily 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 EMEA 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 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 the business operations, enabling Airtel Africa to bring new services to market quickly, boost operational efficiency and reduce costs.

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 request 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 payment providers are due to the markets that 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 proved 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 Rollie to review the details of our financial performance and our 2021 guidance.

Rollie Johns -- Chief Financial Officer

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 even in the face of this COVID pandemic. 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 the very strong business results in 2021 and beyond.

So let's walk through our financial results for the fourth quarter and full year of 2020 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 the 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 $943 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 is 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, internal investment and 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 a rate of $0.25 per share per quarter or $1 per share on an annual basis. Since we initiated our dividend in 2013, we have increased our annual pay-out 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 are optimistic about 2021. Therefore, we are 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 awarded in 2020 due to the pandemic 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 million and $222 million. And finally, we expect the range of free cash flow to be between $110 million and $120 million. Based on expected operating cash flows of $135 million to $155 million with capex expected to come in between $25 million. 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 must importantly, returning value to our shareholders.

With that, I'll turn it over to the operator to facilitate the questions and answer session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] And we will take our first question from Tom Roderick with Stifel.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Hey everybody, Happy New Year. Thanks for taking my questions. So Brian, I want to start with you. I know 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, consumer experience and how the changing nature of the world may be forcing their hand to evolve a little faster than perhaps they wanted to. You mentioned Mobily. I think you mentioned Charter. You mentioned Telecom Argentina. Any common thread as far as accelerated decision making and what the pandemic might have done to force some customers' hands on that front.

Brian Shepherd -- President and Chief Executive Officer

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're 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 the 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 enabled 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 transaction, but just going to do it more online. So we've seen this acceleration of the digital adoption is actually helping our business and driving some of the momentum we talked about in the earnings script.

Tom Roderick -- Stifel Financial Corp. -- Analyst

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

Rollie Johns -- Chief Financial Officer

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

Brian Shepherd -- President and Chief Executive Officer

Yeah, let me -- I'll give the high level, you can give the specific. Specifically in payments, we saw -- 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 2019 to 2020, 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 2021, but we have good expectations and high hopes that our payments business will 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 levels, notwithstanding any headwinds we feel in the first part of this year.

Rollie, any other color you want to add to that?

Rollie Johns -- Chief Financial Officer

Yeah. I would just you say we didn't lose significant ground this year in the payments business, essentially flat year-over-year, which we're thankful we are all considering. And to your point, we look forward to getting that business back to double-digit growth, in line with our expectations.

Tom Roderick -- Stifel Financial Corp. -- Analyst

Fantastic. One last quick one from me if you guys don't mind. Rollie, you did a nice job. I appreciate it on the guidance sort of outlining 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 to margins, just so that we can help frame up how your guidance might encapsulate some of the wiggle room on that potentially getting solved early.

Rollie Johns -- Chief Financial Officer

Yeah. When you look at it historically, from a repricing standpoint on our large contracts, I put it in the range of 5% to 15%. Obviously, we like to shoot to the low end of that range, but if you think about it in terms of that obviously we disclose our revenue base associated with those -- well, DISH is now no longer significant, but with Comcast and in Charter but specific to Charter and DISH, that's kind of the range I would look to. It's hard to ballpark timing. Obviously, we would like to do the deal done sooner rather than later and anticipate a nice renewal that is fair for both sides.

Brian, I don't know if you want to provide any additional color on that.

Brian Shepherd -- President and Chief Executive Officer

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.

Tom Roderick -- Stifel Financial Corp. -- Analyst

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

Brian Shepherd -- President and Chief Executive Officer

Thanks, Tom.

Rollie Johns -- Chief Financial Officer

Thanks, Tom.

Operator

[Operator Instructions] And our next question comes from Greg Burns with Sidoti & Company.

Gregory Burns -- Sidoti & Company -- Analyst

Hi. And when we're looking at the renewal with Charter, is the remaining subscribers that are not on your platform, is that part of conversation you are having with them as part of that renewable.

Brian Shepherd -- President and Chief Executive Officer

Yeah. Hi Greg, thanks for the question and joining the call today. We can't talk specifically about that. What we can highlight is there is about 14 million subs that we did not serve today. What we try to do every day with Charter as 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 of 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.

Gregory Burns -- Sidoti & Company -- Analyst

Okay, great. And then I highlighted some of the areas you've done [Technical Issues] I guess it's not until from incremental subscriber, it is more coming from incremental services too. Could you [Technical Issues] some of those areas we're picking up for business with these large customers. And then maybe you could tie that back into Comcast, because I know you took the price adjustment. So what are you seeing maybe in the pipeline with that customer to refill that revenue gap.

Brian Shepherd -- President and Chief Executive Officer

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 business problem 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 that are adding a lot 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. 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 and Charter and at other customers.

We're also doing more around helping them with engagement and care to both lower their cost to make it easier to do business in the digital world and that's part of what CSG focuses on and continuing both through our own 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 our -- the revenue that we earn from them.

Gregory Burns -- Sidoti & Company -- Analyst

Okay, thanks. And then the -- yeah. Contract with the drugstore, the pipeline looks like for your customer experience solutions outside of the cable market and how big a part of your business is that currently, non-cable.

Brian Shepherd -- President and Chief Executive Officer

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 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 the digital world.

Gregory Burns -- Sidoti & Company -- Analyst

Also competitive landscape like there once you move outside of the cable market [Technical Issues].

Brian Shepherd -- President and Chief Executive Officer

I would say like every one of the markets currently we compete in, the competitive intensity is intense, and there is 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 healthy competitors going after it. But as we've proven, when we commit to a market, we want to be a leader in this 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.

Gregory Burns -- Sidoti & Company -- Analyst

Hey, great. Thank you.

Brian Shepherd -- President and Chief Executive Officer

Thanks for the time, Greg.

Operator

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

Brian Shepherd -- President and Chief Executive Officer

Yeah. I would just say in closing, thank you for joining the call today. We're proud of the results. We're proud of the -- 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 as shareholders, thank you for investing in us. We're committed to returning the capital to the business to deliver a strong return. We're laser focused on having 2021 be a higher growth, more diversified year. It's all about the results we deliver. So thank you for joining the call. All the best.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

John Rea -- Head of Investor Relations

Brian Shepherd -- President and Chief Executive Officer

Rollie Johns -- Chief Financial Officer

Tom Roderick -- Stifel Financial Corp. -- Analyst

Gregory Burns -- Sidoti & Company -- Analyst

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