Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the CST Systems Q1 2014 Earnings Announcement. [Operator Instructions] This conference is being recorded today, Tuesday, May 6, 2014. I would now like to turn the conference over to Liz Bauer. Please go ahead, ma'am. .

Thank you, Sherell, 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 Peter Kalan, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer. With that, I'd like to now turn the call over to Peter. .

Thank you, Liz, and thanks to everyone for joining us on today's call. We had another solid quarter, generating strong revenues and earnings and in particular, in our Processing business, which includes our North American cable and satellite and international managed services clients.

We continue to help our clients navigate a rapidly moving and changing landscape. Our focus on helping them drive down their operational cost, introduce new revenue-generating services and create loyal and committed customer relationships continues to position us as a trusted and valued partner.

The importance of these activities is playing out across the globe with every type of operator. .

Let me expand upon this. Last week, I attended the National Cable Television Association's Annual Conference. I've been attending this conference for over 15 years, and I have to tell you that I left this year's conference feeling extremely optimistic about where we, as a company, are headed.

The changes that have occurred in the industry over the past 5 years are astounding. When I first attended this conference 15 years ago, we discussed the possibility of offering new services like voice and high-speed data to cable customers.

Today, with the power of the network, the advent of new intuitive devices, the proliferation of innovation, whether that be in content, in apps or in learning, and the increased choices that consumers now have, CSG is participating and enabling one of the most powerful revolutions that we will witness in our lifetime, the digital revolution. .

Today, approximately 283 million Americans watch TV each month. Each week, the average American watches approximately 34 hours of content via their TVs and 50 minutes of content online. This data reinforces a few key points that are not driving -- that are driving not only our clients' investments but CSG's, as well. First, content is highly valued.

And consumers want it in their home and on the go. I can tell you from my personal experience, that how my 3 kids, who are millennials, consume content is vastly different from how I do. .

Second, that last mile into the home that cable operators have built is a very important asset. It provides the foundation for the majority of viewing experiences, including the traditional TV and the newer online experiences enabled through Wi-Fi. .

And finally, scale matters. While wireline providers continue to dominate the traditional consumer viewing experienced, large consumer brands like Google, Amazon and Apple are dominating the early stage online and on-the-go viewing experiences.

The scale of these new competitors is causing traditional wireline and wireless providers to pursue consolidation as a means to drive increased scale and new and economic business models in this digital revolution.

This was obviously a hot topic at the cable show last week, with the announced acquisitions, swaps and various divestitures between Comcast, Time Warner and Charter. .

As the customer care and billing provider to all of these companies, we're well positioned with the investments that we've been making to help accelerate and enable the change that is being demanded by the consumer in this digital age.

One way that operators are addressing these changing dynamics is by offering a differentiated experience, enabling consumers to view their favorite TV shows anyway they want, whether that be in front of a TV, on their smart phone or tablet, in their home or on-the-go, through apps and on-demand services.

Operators are embracing and encouraging the online experience by offering seamless viewing between any screen connected via their Wi-Fi hotspots or in the consumers' homes. This type of innovation, flexibility and open-mindedness is one of the key reasons why the video pie is actually growing.

And video consumption has not become just a zero-some game but of market share swaps. Over the years, we've been investing in solutions to enable this sort of digital revolution. Our content direct solution is squarely aimed at enabling a new type of content consumption.

We're pleased with the work that we've done with big brand names like Comcast XFINITY and Sony Pictures, to offer an expanded and differentiated customer experience. .

Let me give you some examples. With Comcast, we're helping them pursue millennials in a new more relevant way, with their XFINITY on Campus offering. For those of us with college students, they traditionally have not had to subscribe to a pay-TV service.

Scheduling an install and having equipment delivered and activated does not really work with this generation's lifestyle expectations. With XFINITY on Campus, students download the XFINITY app on their smart phone, tablet or PC to access all that great Comcast content. No appointment necessary. No technician involved.

No expensive equipment sitting in a college dorm or apartment room. And more important, the college student has their content and is happy. .

With Sony Pictures, in addition to enabling customers to purchase and view their content directly, we've also helped them to expand their digital distribution to 9 international countries, enabling them to have a lower distribution cost and a more user-friendly content redemption process.

We're also helping new entrants launch services, like a new virtual video provider whose blending on demand and time-shifted content, plus sports, across big brand devices.

And we're helping mature companies like Cineplex, Canada's largest movie theater and entertainment company, reinvent themselves and the customer experience by enabling customers to purchase and view content on their devices and use of their phone as a wallet for ticket purchases. .

The pace of change is accelerating. These types of advances would have taken 10-plus years to happen when I first started in this business and now, you're seeing innovations like these happening in years, not decades.

We're seeing similar advances with our international clients as advanced networks and services continues to take a life of their own, with the machine-to-machine applications, wearable devices, connected devices, houses and cars and apps everywhere.

The data growth that operators around the world are seeing from the rollout of advanced networks is enormous. Ecosystems are becoming more complex and the settlement of payments for services between carriers and partners continues to multiply.

Our solutions are perfectly positioned to help manage the increasing complexity of these ecosystems and the tremendous scale required as transactions continue to grow at exponential rates.

These advances are forcing service providers to explore new business models, fresh approaches to innovation and different ways to drive costs out of their operations while reallocating their resources to new generating -- renewed revenue generating ideas. This bodes well for CSG.

We have a mindset aimed at identifying ways to manage and reduce the cost of system ownership while continuing to move a business forward. Our 30 year approach to managed services is based on delivering not only enhanced technological and service results, but also an improved bottom line for our clients.

We provide operators with a pragmatic transformation that enables them to simplify the complexity of their operations, while reinvesting in new areas to drive growth and improve the customer experience. By working with us, we free up their resources to focus on innovation, which ultimately drives their future growth.

And by working side-by-side with our clients, we have a tremendous opportunity to do what we do best, get broader and deeper in our clients' operations by helping them solve problems. .

We have a diverse set of clients trying to address a wide set of challenges. We work with companies in emerging markets whose main objective is to grab market share. We work with operators in mature markets who are trying to stem the decline of their traditional businesses and introduce new moneymaking services.

We work with providers who are looking to increase their size and scale through acquisitions and consolidation. And we work with companies who are reinventing the communication space and looking not just to be a service or device provider, but a household brand that people trust.

This requires us to stay focused and committed to what we do best, helping our clients maximize the effectiveness and efficiencies of their operations and to monetize all the new great products and services that will delight their customers. .

I've spent the majority of the first 4 months of this year meeting with our clients, prospects and employees around the world, and while the business environment continues to be challenging for everyone, I'm extremely optimistic about the position we're in. Our clients trust us. Our products and solutions work.

Our domain expertise in the way in which we conduct ourselves are valued and we're good operators. We understand the challenges of business today. We're in a fortunate position to be working with some of the best minds in business today.

We're also fortunate in that we can do something that a lot of companies today can't, and that's invest in our own internal R&D efforts in new opportunities in markets that are yet to be proven out, like we did with Content Direct 7 years ago, and we're doing today with our new cyber-security offering that we've just launched just 2 months ago. .

We're planting the seeds to drive future growth. And we're leveraging our products and our infrastructure to look at the massive amount of transactions that flow across networks to try and identify new ways to monetize and protect those transactions. And finally, new ways to touch and engage the consumer.

We think it's an exciting time, and I'd like to thank our employees for their dedication and hard work and our shareholders for our continued interest in our company. .

With that, I'd like to turn it over to Randy to review our financial performance for the quarter. .

Thank you, Peter, and welcome to all of you on the call today to discuss our financial results for the first quarter and our outlook for 2014. Overall, our first quarter performance was within our expectations and we are maintaining our full year guidance. Now, I'd like to walk you through the financial results.

Total revenues for the first quarter were $188 million, up 4% from the same quarter last year, primarily due to increased processing revenues from some special project work and continued organic growth of various ancillary products and services.

Sequentially, revenues in the quarter decreased $7 million, as CSG typically experiences seasonally stronger software services revenues in the fourth quarter. .

Comcast, DISH and Time Warner. Together, they were 47% of revenues for the quarter. Additionally, for the quarter, we generated 86% of our revenues from the Americas region; 10% of our revenues from the Europe, Middle East and Africa region; and 4% of our revenues from the Asia Pacific region.

Our non-GAAP operating income for the first quarter was $30 million, with a margin of 16%. Although, our total expenses were in line with our expectation, there were 2 expense items in the quarter that were unusual that I'd like to mention as you'll see them come through our financials for the quarter.

First, during the quarter, we recorded a provision within our cost of software services expense line item of $4 million, for estimated cost overruns related to a large software and services implementation project.

Because of the complexity of the overall project, the estimated costs and efforts required to complete of the project have increased significantly from our original expectations.

Second, during the quarter, we recorded an expense reduction within our SG&A expense line item of $3.9 million related to a favorable settlement of a patent infringement and misappropriation of trade secrets case we asserted against a third party for one of our ancillary products.

These items essentially offset each other within our total expenses but are classified in different line items within our income statement. .

GAAP operating income for the quarter was $21 million or a margin of 11%. For the first quarter, our non-GAAP adjusted EBITDA was $37 million or 20% of total revenues. Non-GAAP EPS for the first quarter was $0.52, which compares to $0.48 for the same period last year. Our non-GAAP effective income tax rate for the quarter was 36%, as expected.

GAAP EPS for the first quarter was $0.28. Foreign currency movements did not have a material impact on our results. .

Now onto the balance sheet and cash flows. We ended the quarter with $183 million of cash and short-term investments, a decrease of $28 million from our year-end balance. This decrease is primarily attributed to cash flows from operations for the first quarter, coming in at a negative $9 million.

This was primarily due to the timing around certain working capital items for the quarter. In addition to the normal impact we see in the first quarter each year, related to the payment of year-end accrued incentive compensation, we also experienced some monthly client payments coming in after quarter end.

Going forward, we expect these clients to return to their historical payment patterns. While we occasionally see large fluctuations between quarters in our working capital items, we find that they generally even out over longer periods of time. .

During the quarter, we spent approximately $4 million on capital expenditures and reduced our debt by $4 million to end the quarter with $281 million in par value debt on our balance sheet. Additionally, we paid a total of $0.15 per share or $5 million in cash dividends to our shareholders during the quarter.

We remain committed to our goal to return 25% to 50% of our annual free cash flow to our shareholders. Our strong cash flow generation and solid balance sheet allow us to return capital to our shareholders, while still having sufficient means available to invest in and strategically grow our business. .

Now let's move on to our guidance for 2014. Overall, we are maintaining our guidance ranges for 2014. Our 2014 revenue guidance is unchanged from our previous range of $745 million to $770 million.

In spite of a record first quarter, we still expect our revenues to be more back end weighted in the year and highly dependent upon our teams closing and delivering on key opportunities in a timely manner.

We continue to expect non-GAAP operating margins for 2014 to be approximately 16.5% and our non-GAAP adjusted EBITDA to be within the range of $152 million to $158 million or 21% of expected total revenues. We're also maintaining our guidance for 2014 non-GAAP effective income tax rate of 36%.

This rate assumes Congress approves the 2014 R&D income tax credit legislation prior to the end of 2014, as it is done for any past years. We continue to expect 2014 non-GAAP EPS guidance range of $2.05 and $2.17. Consistent with past practices, our guidance does not assume any share buybacks under our repurchase program for the remainder of the year.

We are maintaining the guidance range for our 2014 operating cash flows at $110 million to $120 million, as we anticipate the timing of client payments we experienced in the first quarter to return to historical patterns. We also continue to expect our capital expenditures to be around $30 million for the year. .

To summarize, we are pleased with the start of the year. We reported a solid quarter and made progress in extending the global reach of our solutions and services. We also continue to return a meaningful dividend to our shareholders, supported by our cash flow generation and solid balance sheet.

We look forward to sharing our continued successes with you over the coming quarters. With that, I'll open it up to the operator so that we can take any questions you may have. .

[Operator Instructions] And our first question comes from the line of Tom Roderick with Stifel Nicolaus. .

So let me start with the first high-level question, which I understand there's a lot of puts and takes going on in this space right now, particularly with the Comcast and Time Warner situation. So I understand there's a lot you can't answer about that.

But given the range of outcomes and some of the things that have already been discussed with a few million subs potentially being farmed out to a third-party at this point, how are you encouraging investors to think about what these range of outcomes could mean to you, positive, negative, what are the risk factors and what are the opportunities?.

Sure, Tom. This is Peter. I'll give you some color. We're not sizing specifically what we think is the potential for the number of subs that will be consolidated under one provider versus others because we think it's still early, waiting for regulatory approval and finalization of how we our clients want to run their operations.

But importantly, we believe that when we look at the market, holistically, that the consolidation really provides communication providers the opportunity to drive benefits to their standardization, their scale operations and their consistent delivery of new products and services to their end customers.

And over the years, we've clearly seen benefits from providers consolidating, whether that goes from TCI to MediaOne, the Adelphia. We've seen that benefit us, and since our systems are being used to support the major providers that are all in discussions with Time Warner, Charter and Comcast.

And importantly, the work that we're doing to help them drive the evolution of how their consumers can get products and services in new days -- in new ways, we think we're very well-positioned to benefit as the market consolidates and that we think that we have the potential to pick up market share.

But we need some passage of time to take place as our clients start to digest and plan around what they have now announced. .

Got it. Okay. That's helpful. Let me switch gears here. You mentioned, Peter, the cyber-security offering that was rolled out this -- kind of late this winter.

Can you talk a little bit more about the cyber threat response program that you've got built out, where some of that technology came from? And in particular, as you get into the security and data orchestrator components of the solution, how differentiated is that from other pieces in the marketplace.

I mean, it seems like it's been a crowded market over time, but certainly, you've got some technology that's very capable of handling high volumes of transaction and looking at those holistically.

So kind of curious how you think the projects shakes out as you headed out there in the marketplace a few months ago?.

Yes, thanks, Tom. It's clear, you've done a research because you know some of the products' sub-names, and so I appreciate that. I think just to add some color and some context to that before talking about the specifics, there's no doubt that the reports of cyber threats and the attacks are constantly in the news.

It's having impacts to the way businesses run. It's having impacts to how executives think about running their businesses. And I don't think there's any debate that the volume and types of threats that businesses and consumers alike face is growing in number.

And I think what we're finding from the clients that we talked to and the prospects, it's becoming harder for them to appropriately identify and respond in a timely fashion to remediate the threats. What we found was that there's a lot of detection systems that are out there, able to ascertain that there's been a threat that's come into the network.

But when you have many of these coming through, sifting through and then determining how to respond in a timely fashion was a place that technology had not been deployed.

And it was really -- we carved out a new spot for how you think about remediating the issues and protecting the network after a threat was identified and making sense of which ones you should respond to.

So our innovative solution, the security orchestrator, it was built from our proven and highly scalable intermediate and interactivate solution that can process -- for some of our clients, they're processing 1 billion transactions a day, amazing volumes come through.

And what we have found that there is a need to quickly and actively -- and rapidly act when a threat is detected, so that we can put the network security and information specialist, the network specialist in a business, in a best position to alleviate the dangers that their business is facing when that threat is there.

And in many cases, that's a very manual process. It's a process that they go through, what they call, security battle books and go through and determine what they need to do and there's no reason technology can't be used. We think we've created a new subsegment of cyber security. We don't think there's others that are doing it.

There are some who -- some technologies that aren't proven like ours where people are trying to be fast followers to what we do. But we think right now, that this is a really big market and that we're first to market, and what we've got to do is move quickly and build upon the RSA announcement that we came up with in February of this year.

So right now, we still remain very enthused about this and we're building '14 to give us a foundation for '15. .

Our next question comes from the line of Howard Smith with First Analysis. .

Question regarding the $4 million of excess cost that you took in the cost to services.

If I look through your portfolio of what you're working on, how would you assess the risks -- how many large projects like this where you might have some additional exposure in the future?.

That's a good question for us, Howard. I would tell you that one is we think is -- one is this is a Singl.eView implementation, so just to give some context, which is our more complicated implementations. This is a transformation project for our client, not an extension of an existing system.

It is a solution that the client is looking to really change the way that they conduct their business. We don't do a lot of this per year. This is one of the larger ones that we've got in our queue for this year. We strive to have several of these going on at the same time.

We don't we have anything else queued up right now in our delivery that has the complexity that's in front of us. Without a doubt, we misscoped this project and its complexity, and as a result, it's taking us more time and effort to deliver the solution that meets the clients expectation.

But what gives me very positive confidence is that this solution is important to our clients' transformation and we believe that we're in a good position to not only learn from this but make sure that we really cement ourselves with the client. Make no mistake, we're very disappointed that's what happened on this.

But we think we've learned some lessons on the scoping on these complex projects that we thought we were pretty good on, but this one, we got caught on some misses and also managing the customers expectations clearly because that can be an exposure for you as well if you don't have that fully sized and managed as you go through the projects.

So a long-winded answer for you, Howard, but as I have -- it sounds like I'm long-winded today, but we don't think we have any meaningful exposure on other projects at this point.

Randy, you look at the portfolios as well, do you differ?.

I think you're right, Peter. At this point, there's no other contract of this size that has the same degree of risk profile. .

And then probably, unrelated but possibly related question. You do a great job of outlining Evotis [ph]. Another growth driver here potentially is the managed services. I was just wondering if we could get an update on that.

And the part that might be related, when you contract for some of these managed services engagements, how much economic risk are you taking in kind of bringing those up and implementing? It's different than kind of the Singl.eView implementation risk, I understand, but just trying to ballpark that. .

Well, there's different pieces of our managed services. There's some where we're going back into clients with existing implementations already active and live and taking on more of the operational support.

So you really don't -- you don't have an implementation effort on it and those projects are assumption of staff or replacement of staff and you take an ongoing project that's already live and really improve the operations and the effectiveness of the way the system is running. We've don't think those have cost risk.

There's others where we all go out and we'll go to a new client with a new implementation of a system, and as part of that, we are putting the system in, and, then managing it on a go-forward basis. What we strive to do on those is manage the cash flows so that the cash flows are aligned up more in line with where our costs are.

So we don't take as much cash flow risk on it. We do have to perform, we do have to deliver, but we think at least manage the kind of the cash economics of it going forward. Randy, I maybe stepping on your area, but anything you would add to... .

I think you summarized it very well. .

And just kind of unrelated to the risk side, could you give us an update on your feeling toward managed services?.

Yes, sure, I'm sorry... .

No, we don't want to gloss over the good stuff, right?.

I think it's -- I'm very enthusiastic. There's -- we're continuing to see our pipeline grow and we've signed several deals over the last, really, the last 2 quarters and we have several deals that we still expect to sign this year. The deals that we signed in the fourth quarter and the first quarter were smaller.

They don't have as big an impact to kind of the long-term evolution of the best of that we're trying to do. But we have some larger opportunities in our pipeline that we're feeling confident about and our clients are showing the right type of interest and we believe in the coming periods that we'll have some very positive things to announce on that.

Our pipeline is strong and we remain very, very bullish on this, not only for what it does for the clients, but what it really does to transform the way we think about this kind of the international business and how it will influence probably our domestic business long-term, as well. .

[Operator Instructions] And our next question comes from the line of Ryan Miller with Rolling Rock Capital. .

I was hoping if you could comment on capital use, capital allocation. It seems like if you hit your numbers at the end of this year, you're going to have roughly $8 this year in cash, that's around 30% of the market cap to go on a cash adjusted tax -- cash adjusted EPS basis, the company is trading at around 7x adjusted EPS.

Where management's head on moving EPS forward? It's been flat for about 5 years now. .

Yes, Ryan, this is Randy. We laid out a framework last year to give you an idea of what our expectations are. Right now, we would expect to take 25% to 50% of our free cash flow and distribute it in some form back to the shareholders. Right now, our dividend that we do on a quarterly basis really puts you at the bottom of that range of 25%.

And if you look at probably over the last several years, what we've been doing is we've been buying back shares at the pace that we've been issuing on a net basis, into our employee incentive plans, so it's been anywhere from $10 million to $15 million of share buybacks, in that form.

So if you do the math there, you get pretty much in the mid range of that 25% to 50%. The balance of the 50% really is -- allows us to invest back into the business in the form of either M&A or just internal investments. So we're looking for a 50/50 split, 25% to 50%, back to the shareholders and 50% to invest back into the business. .

And I guess that begs the question, if that's the current cash flow, which is around 10% or so, the share price a year, you're sitting on -- at end of this year you'll be sitting on $260 million of cash for a company with this type of stability, with long-term contracts, high margins, high free cash flow to use it on a gross basis you'd be around 1.5x levered.

Given that and given the positive in earnings growth in the past 5 years, I think it would be interesting to hear your take on something more substantial than a current income distribution. .

So I think what I hear you saying, Ryan, is that do you believe our existing capital structure, separate apart from what our cash flow uses are, is appropriate for a company with our kind of financial profile. It's something that we continually evaluate. We have discussions with our board on this.

One of the things that we are currently looking at from as we look at the business is we are servicing markets that are going through extreme transformation.

And what we believe, is that we believe we're well-positioned, but we're not -- we're not going to go in with the idea that says we have everything understood and conquered, and therefore, we need the flexibility of having a strong capital position to be able to respond if the market opportunities allow us to need to do something in an investment in our business.

Especially with -- you look at what's happening with the consolidation in the North American cable space, the contemplation of what you may hear along with broader communication space. The cable space in Europe is consolidating with the wireless providers.

We thing that creates opportunities for us, but we want to make sure as this plays out, that we have a flexible capital structure that allows us to be responsive and win in those ways. So completely understand your viewpoint that says we could easily lever up and change the capital structure, more debt and less equity on the books.

But as we've, in the near-term, looked at this, we don't think that's the most appropriate based on the dynamics happening in the market place. .

Yes, and I don't think I'll be advocating for something irresponsible, but we're looking at cash balances that in terms of -- that would -- an acquisition would be a -- would have to be an enormous acquisition, larger than the Intec acquisition.

Does this management team have appetite for that type of transformational acquisition, obviously, Intec, there were certainly a lot of -- you've stumbled along that road. .

Completely understand that those are the things that would have to be considered on this and what we're looking at today is, as we work with our board, is that we talked about retaining flexibility as we go through this.

The opportunity is not going away for us on this, but we believe that there are some unique opportunities coming up in front of us that we want certainty on as we think about how we build our balance sheet for the future. .

Okay. That's helpful. So it sounds like there are things in the pipe that could be large for you guys, from an acquisition standpoint. .

Not just from an acquisition, from business opportunities that we want to make sure that we have a clear grasp of what -- both from an M&A, the opportunities for consolidation, what the impacts of consolidation in the space create as opportunities for us.

Understanding all those and having those fully baked into our plans is an appropriate thing to when the market is going through a lot of change. .

[Operator Instructions] And I'm showing no further questions in the queue. I would like to hand the call back over to Mr. Kalan for closing remarks. .

Well, thank you, and for all of those on the call, we just appreciate the continued support both on our business.

We are in interesting times, as I think that the Chinese proverb would state, that those interesting times are creating opportunities for us and we see it as consumers and what the opportunities are and as a provider of business solutions to this space, we're probably more excited than we've ever been to see what's happening.

So we look forward to report future successes as we move forward, and we'll talk to you in 3 months. .

Ladies and gentlemen, this does conclude the CSG System's Q1 2014 Earnings Announcement. We thank you for your participation, and you may now disconnect..