Elizabeth Bauer - Senior Vice President, Investor Relations and Strategic Communications Peter Kalan - President and Chief Executive Officer Randy Wiese - Executive Vice President and Chief Financial Officer.

Howard Smith - First Analysis Matt VanVliet - Stifel Spencer Green - RBC Capital Markets.

Good day everyone, and welcome to the CSG Systems International second quarter 2015 earnings announcement conference call. Today's conference is being recorded. 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.

At this time, I would like to turn the conference over to Liz Bauer. Please go ahead..

Thank you, Gwen, 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 convert the backlog of customer accounts on to our solution in a timely manner.

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 on 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 thank you everyone for joining us today. For the second quarter we reported total revenues of $183 million and non-GAAP earnings per share of $0.61. Our performance for the quarter shows the strength of our business model in challenging times.

For the first half of 2015, we delivered double-digit EPS growth and improved non-GAAP operating margins, in spite of the fact that our revenues were weaker in some areas than we had expected.

We believe we can continue to drive this level of performance, as we migrate North American cable subscribers to our processing platform, increase the scale of our international managed services and our Ascendon content monetization platform and continue to refine the investments we make in our business.

In the past, we've communicated that our long-term goal was to improve our non-GAAP operating margin to the 18% to 20% range. I am pleased to report that for the first half of 2015, we've achieved the bottom-end of that range, and we believe that we can sustain this for the foreseeable future and continue to expand the margins going forward.

Additionally, we continue to generate the strong cash flows that our business is know for, and has enabled us to continue to invest in our business, while continuing to return cash to our shareholders. This is a hallmark of our business. However, as I stated earlier, these are challenging times.

Our revenues for the quarters and the first half of the year came in on the low-end of our expectations, as a result of several factors. While foreign currency movements negatively impacted our international revenues, just like every other company, which does business overseas, I'd like to talk about those areas that lagged our internal expectations.

First, consolidation, whether between separate operators or multinational companies centralizing their operations, consolidation has slowed decision making on both large software sales and discretionary spending, as service providers try to plan their business operations, while also responding to the changing communications market.

Consolidation is becoming more prevalent, as companies look to leverage their cost structure through greater scale, whether that be in programming cost, network infrastructure or the labor force, doing this across a larger geographic footprint or revenue base.

It seems like everyday we're reading about combinations being announced, combination falling apart and new combinations not even anticipated coming forward. We're seeing that with companies like AT&T acquiring DirecTV, French operator Altice acquiring Suddenlink, and Charter Communications acquiring Time Warner Cable and Bright House Networks.

While consolidation is slowing down decision making, as companies plan for these future scenarios, there are some future opportunities as a result of these announced combinations. For example, let's take Charter's planned acquisitions of Time Warner.

Today Charter is one of our largest clients, and we do a 100% of the customer care and billing for Charter's 6-plus million subscribers. As you may recall, last quarter, we announced that the Charter extended their contract with CSG through 2019. Time Warner is our third-largest client, and we've been doing business with them for over 30 years.

Currently, we do the customer care and billing for over 6 million of Time Warner's 14 million customers, and their contract currently comes up for renewal in 2017. Finally, we don't do any of the billing for Bright House Networks 2-plus million customers.

It's anticipated that the Charter acquisition transactions will close no earlier than the end of this year. When this transaction closes, we'll do the processing for approximately 13 million of Charter's 23 million customers.

Obviously, we'll work very hard over the coming years to demonstrate to Charter the value that consolidating all 23 million customers under our solutions will not only bring them from efficiency and cost-effective perspectives, but from an enhanced customer engagement and experienced perspective, just like the efforts other Tier 1 providers are already executing upon.

We believe that we will be successful, not overnight, but over a reasonable period of time, because we've proven that by working side-by-side with our clients, helping them solve problems and successfully execute upon their business plans, that this opens the door for many other opportunities within our client's operations.

A second contributor to our first half revenue softness is we continue to see delayed decisions in our software and services solutions, impacting our maintenance revenue stream as well.

Service providers are doing much more analysis and involving many more parts of their organizations on their overall operational ecosystem design, whether that'd be shifting various solutions to the cloud, outsourcing their internal operations to trusted partners or reallocating resources and investments to new revenue producing ventures.

This has been most impactful in our Americas and EMEA regions with our cyber security offering. In the short-term, this creates pressure on our revenue streams. Longer-term though, we believe it presents a tremendous opportunity for us to exploit our strengths at a time when service providers need a technology partner that they can depend on.

We've always understood the benefits that the cloud brings, is our core solution, serving the North American cable and satellite industry is a private cloud solution. In addition, we have a proven heritage of running highly complex IT solutions on behalf of our North American cable and satellite clients.

These are tremendous strengths that we believe positions us very well, as operators look to evolve and transform their businesses for the new digital frontier.

Two years ago, we introduced our international managed services offering, in which we manage the highly complex BSS infrastructure on behalf of service provider, with the goal of improving the customer experience, standardizing and automating operations and providing financial efficiencies.

We established a goal of generating $50 million to $100 million in annual recurring revenues from our international clients and prospects in the next three to four years, and we're on track to achieve that goal based on existing clients in a solid and qualified pipeline of prospects.

We have seen 20%-plus year-over-year growth in this area of our business, and are pleased with the work that we've done here.

This not only is a growth driver for the company, but will help us increase our annual recurring revenues, with a goal being to increase the percent of revenues that we have under contract, as we enter each year from 80% today to over 90%-plus in the next several years.

In addition, several years ago, we introduced our cloud-based content monetization platform, which enable service providers to open up new markets and generate new revenues from digital services, while at the same time create a more compelling individualized an interactive customer engagement.

Many of the world's most trusted brand are using our content monetization platform to turn any screen, whether a mobile phone, a tablet, a computer or the dashboard of your car into a content engagement opportunity.

We continue to see 50%-plus year-over-year growth in revenues generated by our clients from new digital service offerings like over-the-top video, e-books and music. So when I look at our results for the quarter and first half of the year, I am pleased with our execution on several of our key corporate initiatives.

We're growing our recurring revenues through market share wins in the North American cable market and the migration of new customer accounts on to our solution. We're continuing to have success in our international managed services expansion and have a solid pipeline of qualified opportunities.

And we're launching new content offerings and new content packages on behalf of some of the world's leading brands on a regular basis with our Ascendon content monetization solution.

While these successes have not offset the slowness in our software and services, I am pleased that we're continuing to make progress in ways that create shareholder value. Simply put, I like our business model.

We have a clear line of sight and opportunities that will allow us to grow revenues and continue to deliver industry-leading operating margins and double-digit EPS growth. We have a team that understands what it takes to be a trusted partner to communication providers around the world.

And this team is energized by the changes that are going on in the industry. What other view as threats, we view as opportunities. As Randy will share with you, we've got a lot of work in front of us for the second half of this year. But we have visibility to what we need to do and the team to execute on the opportunities.

I'd like to thank our employees for continuing to earn the trust of our clients all over the world with their commitment, dedication and handwork.

While there is a lot of uncertainty in the markets we serve, this dynamic is driving lots of new opportunities and we're excited about those opportunities, and what they mean for our clients, our company and our shareholders. With that, Randy I'll turn it over to you..

Thank you, Peter. And welcome to all of you on the call today to discuss our financial results for the current quarter and the first half of 2015, as well as our outlook for the remainder of the year.

While our revenue performance has fallen short of our expectations, we are pleased with improvements we made in our non-GAAP operating margin in the first half of the year, especially in light of the challenging market environment.

Our operating improvements, combined with management of our capital structure, have allowed us to grow our non-GAAP EPS for the first half of 2015 by approximately 10% over the same period last year. Now, I'd like to walk you through the financial results in more detail.

Total revenues for the second quarter were $183 million, down 1% from the same period last year, reflecting the negative impact of approximately $4 million in foreign currency movements. Absent the currency impact, quarterly revenues would have been relatively flat between years.

Sequentially, revenues in the quarter decreased 2%, mainly due to the seasonally higher level of client discretionary spending on ancillary services we typically see in the first quarter. Overall, our second quarter revenues continue to reflect our strong processing business, which grew approximately 4% from last year.

This growth has been driven mainly by our success in our international managed services and content monetization offerings, and the conversion of new cable customer accounts on to our solutions.

This was offset by lower revenues from our international software and services offerings, driven in part by foreign currency headwinds and long sales cycles on largest projects along with the timing of certain software maintenance contract renewals. Moving on, our non-GAAP operating income for the second quarter was $35 million with a margin of 19%.

GAAP operating income for the quarter was $26 million or a margin 14%. We saw notable sequential increase in our non-GAAP operating margin from the first quarter that I'd like to walk you through in more detail.

First, the first quarter's margin was depressed by a contract loss we recorded on a large software and services implementation project, which did not impact the second quarter.

And second, our operating margin reflects the scale benefits from increasing the numbers of customer accounts and clients on our solutions, and our ability to effectively mange our long-term cost structure with our key technology partners.

These factors combined to provide us with a favorable lift in our non-GAAP operating margin during the second quarter. Moving on, for the second quarter our non-GAAP adjusted EBITDA was $42 million or 23% of our total revenues.

Our non-GAAP effective income tax rate was 38% for the quarter, a slight increase from last quarter, due mainly to lower estimated profitability from our foreign operations. Non-GAAP EPS for the second quarter was $0.61 which compares to $0.52 for the same period last year. GAAP EPS for the quarter was $0.39. Now on to our cash flows and balance sheet.

Overall, we ended the quarter with $194 million of cash and short-term investments, an increase of $24 million from the first quarter, driven mainly by our strong operating cash flows. We generated $40 million of cash flow from operations for the quarter and free cash flow of $35 million.

For the first half of the year, we generated $59 million of cash flow from operations and free cash flow of $47 million.

For the first half of the year, we paid over $11 million in dividends to our shareholders and repurchased $57 million of common stock, $50 million of which was through our accelerated stock repurchase plan or ASR plan, which we initiated in March.

The execution of the ASR marks the first step in our planned repurchase of $150 million of our outstanding shares over the next three years. Moving on to our outlook for the remainder of the year. Our 2015 revenue guidance is unchanged from our previous range of $755 million to $770 million.

As a result of our lower than expected performance during the first half of the year, however, we now expect to land more towards the lower-end of this range. When we started the year, we anticipated our revenues and earnings performance would be more heavily weighted towards the back half of the year.

That assumptions still holds true at this time as well. Our ability to deliver the second half of the year performance is heavily dependent on several things. First, we need a strong finish to the year on various software deals we typically see in the fourth quarter.

Second, we must continue to progress on several large implementation projects around the world, as we have several key delivery and operating milestones scheduled for the second half of the year. And third, we must continue to successfully convert new cable customer accounts on to our advanced conversion platform.

As I noted previously, we saw a sequential quarterly increase in our non-GAAP operating margin from the first quarter, resulting in approximately 18% operating margin for the first half of the year, which we expect to sustain in the second half of 2015.

This is up from our previous full year expectation of approximately 17.5%, and puts us in our target operating range of 18% to 20%. We are maintaining our 2015 non-GAAP EPS guidance range of $2.33 to $2.40.

As a result of our continued improvements and strengthening of our operating margin, we are able to overcome some near-term pressures associated with an increasing effective income tax rate and shares outstanding.

We now anticipate our full year 2015 non-GAAP effective income tax rate to come in at 38%, slightly higher than our previous expectation of 37%. In addition, when we set our prior EPS guidance, it included outstanding shares of approximately 32.5 million for the year.

We now believe this share number will be slightly higher than our previous expectation and closer to 33 million diluted shares, as a result of an increase in our stock price from earlier this year.

Due to our operating margin improvement, we anticipate our 2015 non-GAAP adjusted EBITDA will increase slightly to $165 million to $169 million, which is up slightly from our previously guided $162 million to $165 million.

And finally, we expect cash flows from operations to fall within our previously provided range of $105 million to $120 million for the year. And expect our capital expenditures to be unchanged from our previous expectation of $30 million for the year. Overall, we are pleased with the progress we are making on several key initiatives.

We continue to strengthen our leadership position in the North American video market. We continue to be an enabler of digital service around the world. And finally, we continue to make steady progress in our managed services business internationally. As mentioned earlier by Peter, we have a strong business model.

Our successful execution on these three initiatives will provide long-term growth in our revenues, and allow us to grow and expand our operating margin percentage. This combined with our effective management of our capital structure provides us the opportunity to grow our non-GAAP EPS at a double-digit pace.

Finally, we remain committed to creating value for our shareholders by growing our business, while also returning cash to our shareholders through dividends and share repurchases. With that, I will turn the call over to the moderator for questions..

[Operator Instructions] And we'll take our first question from Howard Smith with First Analysis..

A question, you mentioned the weak software and services kind of international is also affecting your maintenance.

And I was wondering if you could dive into that a little further? Are people not renewing or is it just you don't get the growth from the new software licenses coming on?.

It's more, Howard, that some of those renewals are taking a longer to get executed. We do believe we are able to maintain our revenue streams, but they're not coming in at the pace that we thought. When we do sell incremental new software, we are typically seeing that we can get incremental maintenance on that incremental software..

On slow renewals, a follow-up here, is there a catch-up when they actually do sign the paperwork or it's just kind of it's a perpetual thing, and it just never really catches up?.

They have to pay for it back to the time when it lapsed..

And then secondly, also kind of on the international operations, you've been very candid in the past with assessment of some of your challenges and sales in APAC, which you rectified and things.

If you look at the softness there, would you say it's almost entirely due to the environment, the buying environment or do you still feel you have execution challenges that's more specific to CSG that's impacting that line?.

Well, a couple of viewpoints. I don't know, if we believe that we're having separate sales execution issues. We continue to see similar environments as we've seen before, slow decision making, consolidation affecting that decision making. It's just a generally challenging environment.

In fact, we're probably seeing more impact in the Americas and EMEA more recently. Our issues that we had in Asia-Pacific were really more delivery execution. And that drove some of the issues both in the first quarter of this year and last year and those we think we've rectified.

We have brought in a new head of our professional services, that professional services team.

He is taking a clean look at and making sure that we've got proper processes, rethinking about how we do our work, as well as we're paying close attention to the projects that are underway as well as the projects that we signed up, so we think we have that under control.

And we believe that as we continue to execute on our business strategy of more IMS and more content monetization and continuing on the software opportunities that we'll be able to execute operationally for those..

And we'll take our next question from Tom Roderick with Stifel..

Matt VanVliet on for Tom. Just a couple of questions for you guys. So last quarter we talked about a couple of the Comcast conversions sort of being put on hold, not anything that you guys could have done about that, but decisions at Comcast.

Just curious at how that's benefiting, if it is at all, the margin performance that you're seeing right now or if maybe we're thinking about that incorrectly?.

Well, I'll give a few color comments first, Matt, then Randy can add any color on the margins. I think for just general scoping, we were expecting somewhere up to 2 million conversions in 2015 to be brought to our business.

Some of those, we originally were thinking we could achieve more in 2015, because work with Comcast that we expected would come through, but as the earlier challenges with the Time Warner acquisition drag on, some of our initial expectations got reset.

But when we last spoke to you, we were expecting that we'd have up to about 2 million cable subscribers converted this year. Those are still lining up very well. All the planning and efforts between ourselves and our clients are continuing to progress. And it's not just Comcast, it's also some new market wins that we've had and previously announced.

And in fact, just this last weekend, we converted approximately between 250,000 and 300,000 subscribers under our system. It went very well.

And probably most importantly, the processes that our teams have put into place are not only accelerating the kind of the programmatic efforts that go into that, but more importantly positioning ourselves and our clients to take steps and move on more quickly to the next opportunities that are in front of us on conversions.

From a margin perspective, Randy, you want to give some color about how to look at that?.

I think the one thing is the movement of the conversion to the second half of the year really doesn't impact the cost structure that you're questioning about. We've got the team on staff and they've been working on the conversions for long periods of time.

So there really was no change to the cost base as a result of those conversions going into second half of the year. And I would remind you that keep in mind that as we convert new subscribers over, they become profitable for us the first year that they get on, right. They start generating profits and there is no ramp up period so to speak.

So as soon as we bring those subscribers on, they start generating profits for us..

And then looking at the Charter deal, and as you look to convert some of those customers, can you remind us how many are kind of initially coming over, and then what the profitability impact of those customers, if they're coming from existing CSG service, or how many are coming from CSG service?.

Well, I think we got to make sure we're really clear on this, Matt, about Charter. One is the deal is not completed. It has not been finalized and closed between Charter, Timer Warner and Bright House. And secondly, there is no commitment by Charter at this point to bring any incremental subscribers to CSG.

Remember today that, if the mergers go through, we'll have approximately 13 million subscribers on our platform out of their 23 million total subscribers that they would have, and that's over 50%.

What we have in front of us is to show the value of standardization, the value of scale operations, the value of driving better customer engagement through our common platform and through the tools we have, and that's work in front of us, but nothing that we have out in our expectations for this year or for the near term..

And then lastly, looking at especially on the international side, the managed services pipeline that you see out there, obviously a little bit struggled, a little bit strained, but what kind of investments are you guys making in terms of infrastructure and overhead at this time to hopefully gain on what potentially could be a better spending environment looking out to the end of the year and into next year?.

Well, a couple of bits of color on the international space, Matt. We believe that one, the managed services is not only a better offering for our clients, but it's also a better business model for us. We're seeing what we see as very strong pipelines. The pipelines are growing. There is very good quality in them. The deals are progressing through stages.

And most importantly, when we engage with a client and we start doing managed services for them, we're finding that our pipeline is growing, because they are giving us other opportunities to do more with them. And so we actually are I think quite pleased with how we're progressing on the managed services.

We're on track with our business plan of generating $50 million to $100 million with the revenues in the next three to four years. And as we look at that, we've got confidence and feel good. That business doesn't require a lot of capital infrastructure.

It's a business that in many cases we're running the applications on our client site, on our clients' hardware. So this is embedding our people into their operations and really getting a sustainable business out of it.

Where we had some disappointment, it was really on more of the traditional software sales and those sales cycles are long like IMS sales cycles are long, but those sales cycles are ones that we continue to still feel will come about.

We don't think we've seen any exceptional losses run or extraordinary kind of behavior from what we would have expected. They are just longer deals. The pipelines are still building and the stages are moving.

Lastly, one of the comments I made that you may not have been able to hear in my prepared comments was, we had some expectations in the first half of this year that the cyber initiative that we started last year, that we would have had more success than we've had year-to-date. We continue to feel that there is strong opportunity.

The analyst community, the cyber experts, as well as the prospects like the idea of automation and orchestration. But those sales cycles are long, because it's being a newer offering, and we just didn't see as much in the first half that we expected would come through..

And we'll take your next question from Mark Sue with RBC Capital Markets..

This is Spencer for Mark Sue. We've talked a lot about dynamics in North America.

Just wanted to touch a little bit more on Europe, a little bit of the softness there, what you're seeing, and if you could contrast that to North America, if you're really seeing different dynamics there? And then, following up on that, you talk about this $50 million to $100 million opportunity in IMS space over the next few years.

Are we talking more of an organic opportunity, or is there some potential there you think for some M&A to possibly speed up that process?.

Well, a couple of things. There is consolidation happening in Europe and EMEA just like we're seeing in North America. And we see those dynamics slowing decisions. There is more complexity as people think about how they want to respond to a very competitive environment where their traditional business models are under attack.

And so I think those dynamics are similar. I think the one thing that I would add is in EMEA we are very focused on aggressively pushing our international managed services that have longer sales cycles, but I will just, as I said in my comments to Matt, when you win that business, it really provides you greater growth opportunity for you.

The chance to not only get yourself very embedded, but you just see additional opportunities. So I think that's one of the things that I would probably contrast in EMEA versus North America. We really like the managed services opportunities we're seeing there.

From an organic versus inorganic, our outlook that we give in our goals of $50 million to $100 millions are all organic. We have no expectations in those numbers that we're going to be doing anything to accelerate the opportunities from an inorganic basis.

And I think at this point, talking about the different ways that you could try do that is probably premature, because we want to make sure we have a very solid base, before we think about how do we add to it from M&A or inorganic activities..

And it appears we have no further questions at this time. End of Q&A.

Well, I want to thank everybody for participating and listening in and showing interest in CSG.

We continue to be very focused on delivering the results that we put out as goals for ourselves, and I think for the next quarter we look forward to continuing to report not only on our operational and conversion strengths, but our financial strength and the success that we've set out for you, so until that time, good night..

And this does conclude today's conference. You may disconnect at any time. And thank you for your participation..