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CSG Systems International Inc (NASDAQ:CSGS)
Q1 2021 Earnings Call
May 5, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day everyone and welcome to the CSG system international first quarter 2021 earnings announcement. all participants are in listen only mode. The question answer session will follow today's presentation and instructions will be provided at that time. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. JOHN Ray head of investor relations. Please go ahead.

John Rea -- Investor Relations

Operator, and thanks to everyone for joining us. For this quarters earnings call, we will be working from a slide deck which can be found on the investor relations section of our website. Please take a moment to locate those slides. 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 respective strategic operating and financial goals. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause 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 10k 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 gap.

We believe that these non gap financial measures when reviewed in conjunction with our gap 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 gap reconciliation tables on our website, which will also be furnished to the SEC on form 8k. With me today on the phone are Brian Sheppard, Chief Executive Officer and Raleigh Jon's Chief Financial Officer.

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

Brian Shepherd -- Chief Executive Officer

Thanks, john. For those accessing the slides for today's earnings call, please follow along starting on slide four. Since being named CEO at the end of 2020, I committed on behalf of the entire CSG leadership team that we would accelerate our revenue growth, diversify and grow our industry vertical revenues and build a consistent track record of outperforming while only one quarter into our more ambitious strategy. I'm pleased to report that even in the face of continued COVID related headwinds, the business momentum we regained in q4 2020 has accelerated with strong q1 results across our business. cc employees all around the world continue to rise to the occasion. And we are extremely refreshing ESG mission customers globally. And we help them all CSG makes ordinary customer and employee experiences extraordinary.

As we continue trying this mission into reality. CSG is more committed than ever to turbocharge our growth and amplify the social impact we make. By unleashing the full potential of our people and our culture. We will achieve this by relentlessly executing against three strategic growth pillars. First, CSP will obsess over the success and the value we create for our customers as we help them design and digitally enable exceptional customer and employee experiences. We believe in jointly innovating with customers to redesign and technologically enable personalized engagements for their consumer and enterprise customers.

As we continue trying this mission into reality. CSG is more committed than ever to turbocharge our growth and amplify the social impact we make. By unleashing the full potential of our people and our culture. We will achieve this by relentlessly executing against three strategic growth pillars. First, CSP will obsess over the success and the value we create for our customers as we help them design and digitally enable exceptional customer and employee experiences. We believe in jointly innovating with customers to redesign and technologically enable personalized engagements for their consumer and enterprise customers.

The market responsive innovation, combined with mission critical operational excellence will continue to set us apart. And third, CSU will be the technology provider of choice for communication service providers globally, while simultaneously accelerating diversified industry vertical revenues in digital engagement and cloud payments, we will grow our CSP market share by outpacing your organic market growth and by becoming a much more consistent strategic acquire. Equally important, we will diversify our revenues as we help leading brands and many industry verticals, improve and digitize their customer engagement and payment processes.

The business synergies and cross selling benefits that we get from our increasingly higher growth software portfolio, and more partner friendly approach, strengthen our market positioning, as we help great brands worldwide, acquire, monetize, engage and retain their customers. And the good news is that our efforts in all three strategic areas are translating into even better financial results. In q1 CSP generated $253 million of revenue, which represent 3.1% year over year organic revenue growth, our best organic quarterly revenue growth since q3 2019.

Even better, our q1 adjusted revenue, which excludes transaction fees was $237 million, which represents 4.1% year over year organic adjusted revenue growth. We are especially proud of the fact that our q1 revenue growth was 100%. Organic. This means that the health of our business, the strength of our balance sheet, and our low debt leverage has earned us the right to become a much more consistent and strategic acquire to elevate our business and grow faster. we fully expect to execute against our inorganic strategic growth plan with good discipline in the quarters ahead. In q1, we also made good on our commitment to return money to our shareholders with $8 million spent on dividends, and $7 million on share repurchases. Finally, with the business momentum generated by these good q1 results, we are pleased to reconfirm all our financial targets for 2021.

That's more color on our revenue acceleration. Please refer to the left side of slide by which provides some q1 highlights from across our business. A key driver of our optimism is the continued strong sales performance and win rate conversion of our sales pipeline. As we have highlighted in recent calls CSG sales pipeline is significantly larger than it has ever been contained deals that are both larger and in later stages of the sales cycle. And we continue to win meaningful deals all around the world, consistently stronger sales, winning bigger new customer deals, and delivering exceptionally well and our customer commitments are keys to us sustaining higher organic revenue growth in our North American cable and satellite business. CSP continues to extend our market share leadership position.

We continue to lengthen and strengthen our relationship with our top two customers charter and Comcast, as evidenced by our 5.3% and 1.5% year over year increases in q1 revenue. For me to these important customers. We continue to deploy new solution to help these two industry leading broadband and entertainment providers without saying that his copy of fees, SAS revenue, also continues to grow nicely. Turning to our global communication business, we continue to accelerate our growth and our sales win rate, with leading telecom operators all around the world. Cincinnati Bell technology solutions selected CSP ascendance to help them deploy a digital monetization solution to provide resilient and secure voice data and network services for their enterprise customers.

With our ascending Cloud Platform cbts will be able to scale and change feature sets on demand and roll out new applications without additional investment needed for equipment or people. cbts will also leverage our output solutions to improve the overall customer experience with a fully redesigned customer invoice and greater flexibility for targeted marketing messages.

In the Malaysian market, we are proud of our new wind with Max's a leading CSP with over 11 million subscribers. Max's selected CSP Ascendant to help with our go live market launch of Max's TV, a new consumer marketplace, to digitally stream movies and TV programs from regional partners to send in is fully implemented it matches TV, and is powering the consumer experience and enabling the flexible offerings consumers demand, including day passes for special content and bundle offers across multiple content partners. Plans are already under way to add additional partners, and more new digital services.

We are excited to help Max's realize their full digital potential. And finally, we were proud to announce earlier this week, the signing of a close partnership with axiata Digital labs, the Technology Center for one of Asia's largest telecom groups. As I mentioned earlier, co creating and jointly innovating with leading customers are keys to our future success. this exciting new partnership combines our CSC charging and digital monetization capabilities, with axiata Digital telco enabler technology, to create a new digital marketplace in Asia, that adheres to tm forums open API standards.

This marketplace enables partner companies to rapidly launch and monetize an infinite number of new digital services and offers to their own consumer and enterprise customers. NET NET more and more large global CSP are selecting us to solve their toughest business problems. Now moving to the right side of slide five, I'll share some recent wins related to our strategic priority to diversify our industry vertical revenues outside of our core CSP market. Since 2017, not only have we significantly reduced CSCs customer concentration, we've also increased the percentage of revenue coming from higher growth, non CSP industry verticals by 16 percentage points.

We are committed to continuing this positive trend that benefits both our business and our shareholders. Our largest CSP customers are extremely important to us and continue to grow nicely. We're also consistently winning good new customers in diversified industry verticals, because these new customers value what we have always delivered future ready technology back with reliable operations in great customer service. As a result, large industry leading brands in high growth verticals are increasingly turning to CSP and our innovative software solutions to digitally engage and communicate with their customers.

In q1 we extended our business was for very large and very important CSC customers, two of the largest drugstore chains in the US, and one of the largest retailers in the world, selected CSC software to power their customer engagement communications for their retail and clinic operations. Our solution is increasingly important to all three of these large customers. Given the unprecedented number of inbound requests and healthcare providers, retail pharmacies, and government agencies are getting related to COVID, vaccinations, and employments.

We're also proud to announce that we signed an exciting new conversational AI deal with one of the largest software companies in the world to digitize part of their customer service and call center operations. And finally, a quick update on our cloud payments business. While we continue to see high single digit reduction in our payments transaction volume, as we continue to feel the impacts from COVID. Our payments business is weathering the storm well. We saw improved results in the last month of q1 and continue to have a good sales win rate, which gives us cautious optimism that we can return sometime in 2021 to the healthy organic revenue growth rate that we had in our payments business prior to the COVID pandemic. And the fact that we delivered our highest year over year organic quarterly revenue growth as a company since q3 2019.

Even as our payments unit continues to face COVID headwinds in q1 is another testament to the strength and the resiliency of our cloud based business. In closing, we are extremely grateful to CSG employees worldwide, continue to put our customers first and deliver greater value than our competitors consistently doing This quarter and quarter round is foundational to accelerating our revenue growth and diversifying our industry vertical revenues. Put simply, our q1 results prove CSP business is healthier and more resilient than ever. And it tells us that we are on the right to dream bigger and more boldly and grow faster. On behalf of the global CSP leadership team, we will continue to envision, invent and shape a better, more future ready world. We thank our customers for their continued trust that we will create value for them every single day. And we thank you, our shareholders for believing that we will deliver for you.

With that, I'll turn it over to Raleigh to review the financial details of our q1 performance.

Rollie Johns -- Chief Financial Officer

Thanks, Brian. as Brian highlighted, we have a strong resilient business that generated healthy year over year revenue growth in the first quarter, even in the face of the ongoing COVID pandemic. With a strong first quarter start, we're pleased to reconfirm our 2021 full year financial guidance targets. So let's walk through our financial results for the first quarter and revisit our 2021 out what generated 253 million representing 3.1 organic growth since the third quarter of 2019. In addition, our first quarter line gap adjusted revenue, which excludes transaction fees related to our payments business was $237 million,

Representing a 4.1% year over year increase.

These increases are mainly attributed to the continued growth of our revenue management solutions, along with a strong quarter a professional services revenue related to the implementation of new customer contracts that we continue to win.

Additionally, we've started to see some real momentum this quarter with our digital communication solutions, building on some key ones the prime highlighted outside of our cable and telco industry verticals.

As Brian mentioned earlier, our first quarter growth is all organic growth. That said acquisitions are an important component of our growth strategy aimed at advancing our diversification into new industry verticals, and increasing our leadership position in our core markets. As we accelerate our inorganic growth in the quarters ahead, we will remain disciplined by focusing on strategic financial and cultural fit with an appropriate risk return profile for each acquisition we close.

Moving on to the bottom of the slide, our first quarter nine damp operating income is $40 million, or 17% of non GAAP adjusted revenue as compared to $42 million, or 18 and a half percent in the same prior year period. As I highlighted this time last year, our first quarter 2020 operating margin benefited from lower deferred compensation expenses, resulting from the steep decline in the stock market following the onset of the COVID pandemic. We believe that our first quarter 2021 non Deaf operating margin of 17%, which is at the midpoint of our long term target range of 16 to 18%. is representative of our ongoing operations, absent any factors outside of our control, like the benefit I just mentioned,

Moving on mnandi Mbps for the current quarter was 82 cents, down five cents year over year due mostly to the impact on operating margin that I just discussed. And finally, our non damp adjusted EBIT, I was $54 million for the first quarter, or 23% of non gap adjusted revenue down 1% compared to our performance in the first quarter of 2020 and impacted by the prior year margin benefit I already mentioned. Turning to the balance sheet, our cash flow generation and shareholder renumeration for the quarter are included on slide eight.

First Quarter 2021 cash flow results represent a modest increase over the same period last year. However, I will point out that both periods were negatively impacted by the timing of key customer payments that were delayed and subsequently received after those quarter ends. For the first quarter of 2021. That delayed payment was approximately $2.6 million, resulting in net cash flow used in operations of $3 million and a non debt free cash flow deficit of $11 million for the quarter. I should also note that while this quarter represents an increase over the same period last year, our first quarter of each fiscal year is generally lower than other quarters, due mainly to the payment of our year end accrued employee incentive compensation.

Moving on the end of the first quarter was $205 million of cash and short term investments. That, along with our outstanding debt at quarter end, results in $149 million of net debt and a net leverage ratio of 0.7 times. As a reminder, our convertible debt can be settled in the first quarter of 2022. As a result is now classified as a current liability on our balance sheet. We are currently reviewing several options to further optimize our balance sheet, including the possibility of increasing the amount of leverage we carry.

During the first quarter of 2021, we increased our dividend by approximately 6% year over year and declared $8 million in dividends. In addition, we repurchase $7 million of common stock under our stock repurchase program. We remain committed to balancing our use of cash and return on invested capital focusing on in order to return to shareholders.

I'll conclude with this. We are pleased with our first quarter 2021 operating results. Taken together, a strong start to the first quarter and our outlook for the remainder of the year. Give us the confidence to reconfirm our 2021 financial guidance that we laid out earlier this year, as outlined in the table on the right of the slide. And working beyond 2021. Our high recurring revenue business model, combined with the strength of our sales pipeline, gives us the confidence that we will execute well against the strategic priorities that Brian discussed earlier. CSP is committed to accelerating our revenue growth and diversifying our industry vertical revenues. And we believe this investment in our future strategic growth, while also consistently distributing capital in the form of both dividends, and share buybacks will serve our shareholders. Well.

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

Questions and Answers:

Operator

And first we'll go to Tom Robert from Stiefel, your line is open.

Tom Roderick -- Stifel -- Analyst

Hi, everybody, great to great to hear from you. Thanks for the update. And, I'm very nice quarter. Really nice to see some sustainable growth there. So you, Brian, I guess was my first question you in some of these wins. And by the way, great slide. I love I love having some of the visual to go with it. They some of the winds there you highlighted to send on as being sort of, you know, a key critical component of landing the customer. And, you know, we've talked about ascending for so long, but yet it hasn't, you know, kind of risen to the point of being a material revenue driver, but it seems like it's becoming, you know, finding its way into more and more conversation. Can you talk a little bit more about customers, you know, maybe even new customers embracing it turned on and and what you're doing from the go to market perspective to drive that into the hands of customers?

Brian Shepherd -- Chief Executive Officer

Now, it's a great question, Tom, thanks for joining us and hope you're doing well these days. Maybe low collar is first born from the marketplace, we see the market, adopting and becoming more comfortable with a cloudburst approach, which hadn't historically been the case in revenue management. And so that's a great trend to see in the market more holistically. Secondly, as we've always talked CSG technology has to be future ready. And that means that investing in ahead of the curve, which is exactly what we did in our cloud native ascending platform. And last year's reminder was our fastest growth and our highest revenue in 2024 Ascendant and we continue to like what we're seeing in the marketplace.

And with the three winds, we announced, we see more and more interest and more and more adoption is descended to your points as a percentage of our overall revenue. It's still small, but we like the growth rate. We like what we're seeing in the market, and we just have to continue to sell and when and deliver more value with it. But we also have great other revenue management solution. So it's still smaller on the overall materiality, but we like what we're seeing in the business.

Yeah, it's a great trend. Turning the attention here to the payment side. business so fully understand, you know what, what sort of transpired in in 2020, relative to COVID being dependent on that business? Remind us if you don't mind, Brian, just in terms of the some of the challenges that that the revenue or the transactional have been faced, how much of that was sort of customer churn versus just transactions themselves dropping? In other words, if the churn wasn't that bad from a customer perspective, are you seeing those transactions come back?

Tom Roderick -- Stifel -- Analyst

And then, you know, as we sort of think about this on a sequential basis, as opposed to year on year, has that revenue base stabilized? That seems like a probably as the extent you might start seeing some, you know, some year on year growth in the back half of the year, but just, you know, just on a sequential trend line that would be helpful to understand as well.

Rollie Johns -- Chief Financial Officer

Now, again, good question, what we saw was, it was great to see a stronger March month close in the q1. But on your question around what drove the decline last year, or the erosion of our growth, this is a business that pre COVID was growing nicely a double digit organic growth rate. And what we saw is we saw transaction volumes dropped by about eight to 12%, depending on the bond. And that was about half of the drop we saw in the industry. So overall, we fared well, when you talk about was actually driven by one or two customers that struggled in the COVID environment. But that would have been a small impact on the overall headwinds that we've been facing. So as we progress into 2021, and continue to regain the momentum. Last year, we saw a business that eroded the growth, but still performed quite nicely. We're cautiously optimistic that we can get back to growth in the second half of the year. But I would just say we need to see another quarter and some more strong months, like we saw at the end of q1.

Tom Roderick -- Stifel -- Analyst

When you talk about was actually driven by one or two customers that struggled in the COVID environment. But that would have been a small impact on the overall headwinds that we've been facing. So as we progress into 2021, and continue to regain the momentum. Last year, we saw a business that eroded the growth, but still performed quite nicely. We're cautiously optimistic that we can get back to growth in the second half of the year. But I would just say we need to see another quarter and some more strong months, like we saw at the end of q1. Was there fair points?

Brian Shepherd -- Chief Executive Officer

You know, I think from a debt perspective, we were in a really good position where we're at, I would say, historically, you raised it, we have been under levered, I think we have the potential to increase our leverage. Certainly, we could afford two to three times for future investments and the ability to provide returns to our shareholders. You know, we're currently in the marketplace. We were we're looking at m&a targets every day, as we've discussed previously, and Brian's point out, as well, as you know, right now from a valuation perspective valuations are are pretty frothy. Brian, I don't know if you have anything you want to add to that as well. No, I would say as it is the right direction. And we do believe the strength of our business allows us to increase the debt leverage. And that's something that we're actively looking at. So I'd say stay tuned. On the acquisitions, we see very attractive strategic assets that could actually fit our culture, give us the offering to solve more future ready problems of our customers. I think it's really thing discipline disciplined on the price, and making sure that we can get good deals that also bring the financial attractiveness with the strategy that accelerates growth. We see assets that are actionable, Tom, and it's just making sure that we look at a lot to do the ones to close the ones that we believe will bring us the most value.

Tom Roderick -- Stifel -- Analyst

Yeah, that's great call. I really appreciate it.

Brian Shepherd -- Chief Executive Officer

Thank you guys. That's great.

Operator

Next we'll go to Greg burns from Sedona and accompany your line is open.

Greg Burns -- Sidoti & Company -- Analyst

There is a bit more about the the acquisition strategy in the past. You've done some skill positions, you've done your forte getting you into some new verticals. And then you also mentioned, you know, adding technology in his prepared remarks. So what what are your priorities in terms of when you're looking at deals and in terms of acquisitions?

Brian Shepherd -- Chief Executive Officer

Greg, hope you're doing well, thanks for joining, I think the best way you kind of framed it out, it isn't an either or there's attractive assets in all those categories. And the key for us, is adding technology talent that matches our culture, and the ability to integrate, that enables us to be more future ready for what customers need in all the industry verticals, we serve all around the world. And so with the current market conditions and prices being higher and elevated, we are looking at scale deals that add capability and strength that can expand our global reach, we're looking at high growth, strategic assets that in new verticals that can drive.And we're also looking for nice capability or product tuck in, both in North America as well as globally, so really does fall in those several categories. And we believe there's value across the board, and we're focused on extracting that, and you'll see us close acquisitions in all of those categories to consider continue to elevate and accelerate the business. Okay, and then we look at the full year guidance relative to the strong start of the year, can you just walk us through Your maintaining the guidance, you know, relative to strong start the year, I guess revenue is kind of arranged. So that might not be an issue. But what will drive the margins back down into that full year range versus where you were in the first quarter I'll give you the high level electronics. First, we're one quarter into the year. So we're extremely pleased with how we started. Obviously, building a culture and a track record of outperforming is something that we need to deliver quarter in, quarter out. So we really want to see that continued execution in the second quarter in the third. And we expect to continue the momentum. But we know we have work to do. But Rolla, you want to provide a little more color on that, including on the margin question that Greg had.

Rollie Johns -- Chief Financial Officer

Yeah, so you know, still still, you know, after after a strong first quarter, you know, still believe the current ranges are a good indicator for our performance. Like I said, you know, first quarter margin percentage of 17 is right, smack dab in the middle of our, our long term target range. And I think, you know, 17% is a really good indicator of how CSG can perform in the midst of an ongoing pandemic, you know, absence any any events or factors that are that are outside of our control. So, as Brian said, you know, it's it's early in the year, but we like what we see.

Greg Burns -- Sidoti & Company -- Analyst

Okay, just just the midpoint of the full year guidance on the margin front, being a little bit low in the first quarter. I mean, is there incremental investments you're planning on making in the bounce year? Like, kind of getting sensitive?

Brian Shepherd -- Chief Executive Officer

No, fair, fair. fair question, Greg. You know, when when we had initially provided the guidance, raises a couple of things that we had highlighted as, as potential headwinds to our our performance trending out of 2020 into 21. One was the potential for higher levels of employment related costs, especially in the form of travel and entertainment expenses. The other was the potential for repricing pressure associated with the potential for the early execution on both the the charter and the dish contracts that are coming up for renewal in December of this year.

Okay. So I guess, since you brought that up, is there any update on the progress of the talks there and you expect to get that done? before the end of the year or, you know, is there a possible extension to the current dealer community?

Rollie Johns -- Chief Financial Officer

Yeah, at this stage, there's no update, Greg around that. What we've always done is just folk So on bringing all of our customers including our large in a renewal window, Greg bring greater value. Obviously, we love to see the ongoing revenue growth that we've announced the last several quarters with charter. And we're continuing to work those and don't have any other updates, other than if you look at the history of CSG. It's intended to work out well for us. And that's what we're working darn hard to make sure happens this time as well.

Greg Burns -- Sidoti & Company -- Analyst

Okay, thank you.

Operator

Thanks for and with no further questions, I'll turn it back to Brian Shepard for closing remarks.

Brian Shepherd -- Chief Executive Officer

I just say hope you're all doing well. We're going to continue to build on the strong start to q1 look forward to talking in the quarters ahead. Thank you.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

John Rea -- Investor Relations

Brian Shepherd -- Chief Executive Officer

Rollie Johns -- Chief Financial Officer

Tom Roderick -- Stifel -- Analyst

Greg Burns -- Sidoti & Company -- Analyst

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