CSG Systems International Reports Record Results for Fourth Quarter and Full Year 2018

GREENWOOD VILLAGE, Colo.–(BUSINESS WIRE)–CSG (NASDAQ: CSGS), the trusted partner to simplify the complexity of business
transformation in the digital age
, today reported results for the
quarter and year ended December 31, 2018.

Key Highlights:

  • Fourth quarter 2018 financial results:

    • Total revenues were $247.3 million and total non-GAAP
      adjusted revenues were $231.7 million.
    • GAAP operating income was $29.4 million, or 11.9% of
      total revenues, and non-GAAP operating income was $41.4
      million
      , or 17.9% of non-GAAP adjusted revenues.
    • GAAP earnings per diluted share (EPS) was $0.64 and
      non-GAAP EPS was $0.95.
    • Cash flows from operations were $70.1 million.
  • Full year 2018 financial results:

    • Total revenues grew eleven percent year-over-year to a record high
      of $875.1 million and non-GAAP adjusted revenues were $859.5
      million
      , at the high end of expectations.
    • GAAP operating income was $104.9 million, or 12.0% of
      total revenues and non-GAAP operating income was $147.9
      million
      , or 17.2% of non-GAAP adjusted revenues,
      exceeding expectations.
    • GAAP EPS was $2.01 and non-GAAP EPS was $3.06, exceeding
      expectations.
    • Cash flows from operations were $143.3 million, exceeding
      expectations.
  • CSG declared its quarterly cash dividend of $0.21 per share of
    common stock, or a total of approximately $7 million, to
    shareholders, bringing the total 2018 dividends to approximately $28
    million
    .
  • In February 2019, CSG’s Board of Directors approved an approximately 6%
    increase in CSG’s cash dividend, effective with the first quarterly
    payment of $0.2225 per share of common stock.

“We executed very well this quarter, hitting on all cylinders from a
sales, delivery and expense management standpoint,” said Bret Griess,
president and chief executive officer of CSG. “And while, I’m proud of
the record revenues and earnings that we generated this year, I’m most
proud of the work that we have done over the past several years to
strongly position ourselves as a trusted, dependable and reliable
partner for our customers around the world.

“Over the past several years we have increased our investments to help
power our customers’ digital transformation journeys, put our cash flows
to work to help strengthen and diversify our business while at the same
time being shareholder friendly, and expanded our footprint outside of
the cable industry. We are seeing the impact of these investments and
focus in our results.”

Financial Overview (unaudited)

(in thousands, except per share amounts and percentages):

    Quarter Ended December 31,       Year Ended December 31,
      Percent       Percent
2018 2017 Changed 2018 2017 Changed
GAAP Results:    
Revenues $ 247,267 $ 205,204 20 % $ 875,059 $ 789,582 11 %
Operating Income 29,425 26,048 13 % 104,932 105,685 (1 %)
Operating Margin Percentage 11.9 % 12.7 % 12.0 % 13.4 %
EPS $ 0.64 $ 0.45 42 % $ 2.01 $ 1.87 7 %
Non-GAAP Results:
Adjusted Revenues $ 231,665 $ 205,204 13 % $ 859,457 $ 789,582 9 %
Operating Income 41,400 36,343 14 % 147,855 142,127 4 %
Adjusted Operating Margin

Percentage

17.9 % 17.7 % 17.2 % 18.0 %
EPS $ 0.95 $ 0.62 53 % $ 3.06 $ 2.51 22 %
 

For additional information and reconciliations regarding CSG’s use of
non-GAAP financial measures, please refer to the attached Exhibit 2 and
the Investor Relations section of CSG’s website at www.csgi.com.

Results of Operations

GAAP Results: Total revenues
for the fourth quarter of 2018 were $247.3 million, a 20% increase when
compared to revenues of $205.2 million for the fourth quarter of 2017,
and a 16% increase when compared to revenues of $213.1 million for the
third quarter of 2018. Total revenues for the full year 2018 were $875.1
million, an 11% increase when compared to revenues of $789.6 million for
the full year 2017. The increases in revenues can be mainly attributed
to the acquisitions of Business Ink on February 28, 2018 and Forte on
October 1, 2018. For the fourth quarter and full year of 2018, these
acquisitions generated approximately $39 million and $74 million,
respectively.

GAAP operating income for the fourth quarter of 2018 was $29.4 million,
or 11.9% of total revenues, compared to $26.0 million, or 12.7% of total
revenues, for the fourth quarter of 2017, and $25.7 million, or 12.0% of
total revenues, for the third quarter of 2018. GAAP operating income for
the full year 2018 was $104.9 million, or 12.0% of total revenues,
compared to $105.7 million, or 13.4% of total revenues, for the full
year 2017.

GAAP EPS for the fourth quarter of 2018 was $0.64, as compared to $0.45
for the fourth quarter of 2017, and $0.49 for the third quarter of 2018.
GAAP EPS for the full year 2018 was $2.01, compared to $1.87 for the
full year 2017. These increases in GAAP EPS are due to a combination of
increased operating income and a lower effective tax rate, resulting
primarily from the U.S. Tax Reform enacted in December 2017.

Non-GAAP Results: Non-GAAP adjusted
revenues for the fourth quarter of 2018 were $231.7 million, a 13%
increase when compared to $205.2 million for the fourth quarter of 2017,
and a 9% increase when compared to $213.1 million for the third quarter
of 2018. Total non-GAAP adjusted revenues for the full year 2018 were
$859.5 million, a 9% increase when compared to $789.6 million for the
full year 2017. These increases in non-GAAP adjusted revenues are
primarily due to the acquisition activities, discussed above.

Non-GAAP operating income for the fourth quarter of 2018 was $41.4
million, or 17.9% of total non-GAAP adjusted revenues, compared to $36.3
million, or 17.7% of total non-GAAP adjusted revenues for the fourth
quarter of 2017, and $35.6 million, or 16.7% of total non-GAAP adjusted
revenues for the third quarter of 2018. Non-GAAP operating income for
the full year 2018 was $147.9 million, or 17.2% of total non-GAAP
adjusted revenues, compared to $142.1 million, or 18.0% of total
non-GAAP adjusted revenues for the full year 2017.

Non-GAAP EPS for the fourth quarter of 2018 was $0.95 compared to $0.62
for the fourth quarter of 2017, and $0.70 for the third quarter of 2018.
Non-GAAP EPS for the full year 2018 was $3.06 compared to $2.51 for the
full year 2017. The year-over-year increases in non-GAAP EPS are
primarily due to a combination of a lower effective tax rate, resulting
primarily from the U.S. Tax Reform enacted in December 2017, and higher
operating income.

Balance Sheet and Cash Flows

Cash, cash equivalents and short-term investments at December 31, 2018
were $162.9 million, compared to $199.3 million as of September 30, 2018
and $261.4 million as of December 31, 2017. These decreases can be
mainly attributed to the cash acquisitions of Business Ink and Forte for
approximately $155 million during the year.

CSG had net cash flows from operations for the fourth quarters ended
December 31, 2018 and 2017 of $70.1 million and $24.4 million,
respectively, and had non-GAAP free cash flow of $57.0 million and $18.8
million, respectively. For the year ended December 31, 2018 and 2017,
CSG generated net cash flows from operations of $143.3 million and
$127.2 million, respectively, and had non-GAAP free cash flow of $86.2
million and $98.3 million, respectively. These increases in cash flows
from operations can be primarily attributed to positive working capital
changes during the fourth quarter of 2018.

Summary of 2019 Financial Guidance

CSG’s financial guidance for the full year 2019 is as follows:

GAAP Measures:    
Revenues $965 – $995 million
Operating Margin Percentage 11.7%
EPS $2.17 – $2.27
Cash Flows from Operating Activities $125 – $145 million
Non-GAAP Measures:
Adjusted Revenues $903 – $920 million
Adjusted Operating Margin Percentage 17.0%
EPS $3.15 – $3.27
 

For additional information and reconciliations regarding CSG’s use of
non-GAAP financial measures, please refer to the attached Exhibit 2 and
the Investor Relations section of CSG’s website at www.csgi.com.

Conference Call

CSG will host a conference call on Wednesday, February 6, 2019 at 5:00
p.m. EST, to discuss CSG’s fourth quarter and full year results for
2018. The call will be carried live and archived on the Internet. A link
to the conference call is available at http://ir.csgi.com.
In addition, to reach the conference by phone, dial 1-888-254-3590 and
ask the operator for the CSG conference call and Liz Bauer, chairperson.

Additional Information

For information about CSG, please visit CSG’s web site at www.csgi.com.
Additional information can be found in the Investor Relations section of
the website.

About CSG

CSG simplifies the complexity of business transformation in the digital
age for the most respected communications, media and entertainment
service providers worldwide. With over 35 years of experience, CSG
delivers revenue
management
, customer
experience
and digital
monetization
solutions for every stage of the customer lifecycle.
The company is the trusted partner driving digital transformation for
leading global brands, including Arrow Electronics, AT&T, Bharti Airtel,
Charter Communications, Comcast, DISH, Eastlink, iflix, MTN, TalkTalk,
Telefonica, Telstra and Verizon.

At CSG, we have one vision: flexible, seamless, limitless
communications, information and content services for everyone. For more
information, visit our website at csgi.com
and follow us on LinkedIn,
Twitter
and Facebook.

Forward-Looking Statements

This news release contains forward-looking statements as defined under
the Securities Act of 1933, as amended, that are based on assumptions
about a number of important factors and involve risks and uncertainties
that could cause actual results to differ materially from what appears
in this news release. Some of these key factors include, but are not
limited to the following items:

  • CSG derives approximately fifty-five percent of its revenues from its
    three largest clients;
  • Continued market acceptance of CSG’s products and services;
  • CSG’s ability to continuously develop and enhance products in a
    timely, cost-effective, technically-advanced and competitive manner;
  • CSG’s ability to deliver its solutions in a timely fashion within
    budget, particularly large and complex software implementations;
  • CSG’s dependency on the global telecommunications industry, and in
    particular, the North American telecommunications industry;
  • CSG’s ability to meet its financial expectations as a result of its
    dependency on software solution sales, which are subject to greater
    volatility;
  • Increasing competition in CSG’s market from companies of greater size
    and with broader presence;
  • CSG’s ability to successfully integrate and manage acquired businesses
    or assets to achieve expected strategic, operating and financial goals;
  • CSG’s ability to protect its intellectual property rights;
  • CSG’s ability to maintain a reliable, secure computing environment;
  • CSG’s ability to conduct business in the international marketplace;
  • CSG’s ability to comply with applicable U.S. and International laws
    and regulations; and
  • Fluctuations in credit market conditions, general global economic and
    political conditions, and foreign currency exchange rates.

This list is not exhaustive, and readers are encouraged to review the
additional risks and important factors described in CSG’s reports on
Forms 10-K and 10-Q and other filings made with the SEC.

       

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS-UNAUDITED

(in thousands, except per share amounts)

 
December 31, December 31,
2018 2017

ASSETS

Current assets:
Cash and cash equivalents $ 139,277 $ 122,243
Short-term investments   23,603   139,117
Total cash, cash equivalents and short-term investments 162,880 261,360
Settlement assets 124,627
Trade accounts receivable:
Billed, net of allowance of $3,115 and $4,149 235,827 219,531
Unbilled 37,227 31,187
Income taxes receivable 6,720 13,839
Other current assets   32,286   28,349
Total current assets   599,567   554,266
Non-current assets:
Property and equipment, net of depreciation of $93,278 and $123,126 81,813 44,651
Software, net of amortization of $119,381 and $108,986 36,400 26,906
Goodwill 255,816 210,080
Client contracts, net of amortization of zero and $97,109 43,626
Acquired client contracts, net of amortization of $82,692 and zero 65,456
Client contract costs, net of amortization of $43,051 and zero 37,289
Deferred income taxes 11,087 14,057
Other assets   26,934   10,948
Total non-current assets   514,795   350,268
Total assets $ 1,114,362 $ 904,534

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:
Current portion of long-term debt $ 7,500 $ 22,500
Client deposits 36,889 31,053
Trade accounts payable 45,386 38,420
Accrued employee compensation 61,107 62,984
Settlement liabilities 123,613
Deferred revenue 40,236 41,885
Income taxes payable 218 1,216
Other current liabilities   35,442   24,535
Total current liabilities   350,391   222,593
Non-current liabilities:
Long-term debt, net of unamortized discounts of $14,549 and $18,264 352,326 309,236
Deferred revenue 17,527 12,346
Income taxes payable 2,284 2,415
Deferred income taxes 8,205 4,584
Other non-current liabilities   22,605   10,614
Total non-current liabilities   402,947   339,195
Total liabilities   753,338   561,788
Stockholders’ equity:
Preferred stock, par value $.01 per share; 10,000 shares authorized;
zero shares issued and outstanding
Common stock, par value $.01 per share; 100,000 shares authorized;
33,158 and 33,516 shares outstanding
693 689
Common stock warrants; 439 warrants vested; 1,425 issued 9,082 9,082
Additional paid-in capital 441,417 427,091
Treasury stock, at cost; 34,779 and 34,075 shares (842,360 ) (814,732 )
Accumulated other comprehensive income (loss):
Unrealized loss on short-term investments, net of tax 2 (88 )
Cumulative foreign currency translation adjustments (42,937 ) (28,734 )
Accumulated earnings   795,127   749,438
Total stockholders’ equity   361,024   342,746
Total liabilities and stockholders’ equity $ 1,114,362 $ 904,534
 
       

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME-UNAUDITED

(in thousands, except per share amounts)

 
Quarter Ended Year Ended

December 31,
2018

   

December 31,
2017

December 31,
2018

   

December 31,
2017

Revenues:
Cloud and related solutions $ 214,987 $ 169,565 $ 766,377 $ 651,010
Software and services 18,528 16,212 58,101 62,892
Maintenance   13,752   19,427   50,581   75,680
Total revenues   247,267   205,204   875,059   789,582
Cost of revenues (exclusive of depreciation, shown separately below):
Cloud and related solutions 115,589 81,812 392,801 315,006
Software and services 9,054 7,614 34,870 39,018
Maintenance   5,537   10,300   22,149   40,787
Total cost of revenues 130,180 99,726 449,820 394,811
Other operating expenses:
Research and development 32,225 28,112 124,034 113,215
Selling, general and administrative 48,793 43,714 169,308 153,695
Depreciation 5,011 3,405 18,304 13,380
Restructuring and reorganization charges   1,633   4,199   8,661   8,796
Total operating expenses   217,842   179,156   770,127   683,897
Operating income   29,425   26,048   104,932   105,685
Other income (expense):
Interest expense (4,465 ) (4,156 ) (17,667 ) (16,794 )
Amortization of original issue discount (680 ) (643 ) (2,664 ) (2,790 )
Interest and investment income, net 390 936 2,646 3,246
Loss on extinguishment of debt (810 )
Other, net   897   (514 )   550   (1,637 )
Total other   (3,858 )   (4,377 )   (17,945 )   (17,975 )
Income before income taxes 25,567 21,671 86,987 87,710
Income tax provision   (4,669 )   (6,705 )   (20,857 )   (26,346 )
Net income $ 20,898 $ 14,966 $ 66,130 $ 61,364
 
Weighted-average shares outstanding:
Basic 32,329 32,512 32,488 32,415
Diluted 32,602 32,983 32,855 32,865
 
Earnings per common share:
Basic $ 0.65 $ 0.46 $ 2.04 $ 1.89
Diluted 0.64 0.45 2.01 1.87
 
   

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS-UNAUDITED

(in thousands)

 
Year Ended

December 31,
2018

   

December 31,
2017

Cash flows from operating activities:
Net income $ 66,130 $ 61,364
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation 18,304 13,380
Amortization 44,328 29,501
Amortization of original issue discount 2,664 2,790
Asset impairment 1,851 3,135
Gain on short-term investments and other (101 ) (184 )
Loss on extinguishment of debt 810
Deferred income taxes 4,913 7,112
Stock-based compensation   19,358   21,049
Subtotal   158,257   138,147
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net (138 ) (6,421 )
Other current and non-current assets and liabilities (23,179 ) 2,875
Income taxes payable/receivable 5,055 (2,729 )
Trade accounts payable and accrued liabilities (7,146 ) (4,377 )
Deferred revenue   10,492   (300 )
Net cash provided by operating activities   143,341   127,195
 
Cash flows from investing activities:
Purchases of software, property and equipment (57,104 ) (28,942 )
Purchases of short-term investments (75,022 ) (182,247 )
Proceeds from sale/maturity of short-term investments 190,778 193,465
Acquisition of and investments in business, net of cash acquired (144,791 )
Acquisition of and investments in client contracts     (12,180 )
Net cash used in investing activities   (86,139 )   (29,904 )
 
Cash flows from financing activities:
Proceeds from issuance of common stock 2,311 1,776
Payment of cash dividends (27,979 ) (26,850 )
Repurchase of common stock (34,726 ) (30,649 )
Proceeds from long-term debt 150,000
Payments on long-term debt (125,625 ) (15,000 )
Settlement of convertible notes (34,771 )
Payments of deferred financing costs   (1,490 )  
Net cash used in financing activities   (37,509 )   (105,494 )
Effect of exchange rate fluctuations on cash   (2,659 )   4,095
 
Net increase (decrease) in cash and cash equivalents 17,034 (4,108 )
 
Cash and cash equivalents, beginning of period   122,243   126,351
Cash and cash equivalents, end of period $ 139,277 $ 122,243
 
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest $ 15,857 $ 14,729
Income taxes 10,426 22,144
 
           

EXHIBIT 1

CSG SYSTEMS INTERNATIONAL, INC.

SUPPLEMENTAL REVENUE ANALYSIS

 

Total Revenues by Geography

 
Quarter Ended Quarter Ended Quarter Ended
December 31, September 30, December 31,
2018 2018 2017
Americas   85 %   85 %   84 %
Europe, Middle East and Africa 10 % 10 % 10 %
Asia Pacific   5 %   5 %   6 %
Total Revenues   100 %   100 %   100 %
 
   

 Year Ended  

   

 Year Ended  

December 31, December 31,
2018 2017
Americas   85 %   85 %
Europe, Middle East and Africa 10 % 9 %
Asia Pacific   5 %   6 %
Total Revenues   100 %   100 %
 

Revenues by Significant Customers: 10% or more
of Total Revenues

    Quarter Ended     Quarter Ended     Quarter Ended
December 31, September 30, December 31,
2018   2018 2017
Comcast   22 %   26 %   29 %
Charter 18 % 21 % 21 %
DISH 8 % 9 % 10 %
 
Year Ended   Year Ended
December 31, December 31,
2018 2017
Comcast 25 %   28 %
Charter 20 % 22 %
DISH 9 % 11 %
 

EXHIBIT 2
CSG SYSTEMS INTERNATIONAL, INC.
DISCLOSURES
FOR NON-GAAP FINANCIAL MEASURES

Use of Non-GAAP Financial Measures and
Limitations

To supplement its condensed consolidated financial statements presented
in accordance with generally accepted accounting principles (GAAP), CSG
uses non-GAAP adjusted revenues, non-GAAP operating income and margin,
non-GAAP adjusted operating margin percentage, non-GAAP EPS, non-GAAP
adjusted EBITDA, and non-GAAP free cash flow. CSG believes that these
non-GAAP financial measures, when reviewed in conjunction with its GAAP
financial measures, provide investors with greater transparency to the
information used by CSG’s management in its financial and operational
decision making. CSG uses these non-GAAP financial measures for the
following purposes:

  • Certain internal financial planning, reporting, and analysis;
  • Forecasting and budgeting;
  • Certain management compensation incentives; and
  • Communications with CSG’s Board of Directors, stockholders, financial
    analysts, and investors.

These non-GAAP financial measures are provided with the intent of
providing investors with the following information:

  • A more complete understanding of CSG’s underlying operational results,
    trends, and cash generating capabilities;
  • Consistency and comparability with CSG’s historical financial results;
    and
  • Comparability to similar companies, many of which present similar
    non-GAAP financial measures to investors.

Non-GAAP financial measures are not measures of performance under GAAP,
and therefore should not be considered in isolation or as a substitute
for GAAP financial information. Limitations with the use of non-GAAP
financial measures include the following items:

  • Non-GAAP financial measures are not based on any comprehensive set of
    accounting rules or principles;
  • The way in which CSG calculates non-GAAP financial measures may differ
    from the way in which other companies calculate similar non-GAAP
    financial measures;
  • Non-GAAP financial measures do not include all items of income and
    expense that affect CSG’s operations and that are required by GAAP to
    be included in financial statements;
  • Certain adjustments to CSG’s non-GAAP financial measures result in the
    exclusion of items that are recurring and will be reflected in CSG’s
    financial statements in future periods; and
  • Certain charges excluded from CSG’s non-GAAP financial measures are
    cash expenses, and therefore do impact CSG’s cash position.

CSG compensates for these limitations by relying primarily on its GAAP
results and using non-GAAP financial measures as a supplement only.
Additionally, CSG provides specific information regarding the treatment
of GAAP amounts considered in preparing the non-GAAP financial measures
and reconciles each n on-GAAP financial measure to the most directly
comparable GAAP measure.

Non-GAAP Financial Measures: Basis of
Presentation

The table below outlines the exclusions from CSG’s non-GAAP financial
measures:

Non-GAAP Exclusions      

Adjusted
Revenue

     

Operating
Income

     

Adjusted
Operating
Margin
Percentage

      EPS
Transaction fees X X
Restructuring and reorganization charges X X X
Acquisition-related expenses:
Amortization of acquired intangible assets X X X
Earn-out compensation X X X
Transaction-related costs X X X
Stock-based compensation X X X
Amortization of original issue discount (“OID”) X
Gain (loss) on extinguishment of debt X
Unusual income tax matters X
 

CSG believes that excluding certain items in calculating its non-GAAP
financial measures provides meaningful supplemental information
regarding CSG’s performance and these items are excluded for the
following reasons:

  • Transaction fees are primarily comprised of interchange and other
    payment-related fees paid in conjunction with the delivery of service
    to clients under CSG’s payment services contracts, to third-party
    payment processors and financial institutions by Forte, a CSG company
    acquired in October 2018. Because Forte controls the integrated
    service provided under its payment services client contracts, these
    transaction fees are presented gross, and not netted against revenues;
    however, other payments companies who do not provide and/or control an
    integrated service present their revenues net of transaction fees. The
    exclusion of these fees in calculating CSG’s non-GAAP adjusted
    revenues provides management and investors an additional means to use
    to compare CSG’s current revenues with historical and future periods,
    as well as with other payments companies.
  • Restructuring and reorganization charges are expenses that result from
    cost reduction initiatives and/or significant changes to CSG’s
    business, to include such things as involuntary employee terminations,
    changes in management structure, divestitures of businesses, facility
    consolidations and abandonments, and fundamental reorganizations
    impacting operational focus and direction.

Contacts

CSG Systems International
Liz Bauer, Chief Communications
and Investor Relations Officer
303-804-4065
liz.bauer@csgi.com

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