Liz Bauer - SVP, Chief Communication and IR Officer Bret Griess - CEO Rollie Johns - CFO.

Matt VanVliet - Stifel Nicolaus Chris Moore - CJS Securities.

Good day, and welcome to the CSG Systems International Second Quarter 2018 Earnings Announcement. All participants are in listen-only, a question-and-answer session will follow today's presentation and instructions will be provided at that time. Today's conference is being recorded.

At this time, I would like to turn the conference over to Liz Bauer, Senior Vice President, Chief Communication and Investor Relations Officer. Please go ahead..

Thank you, Michael, 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 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 Bret Griess, our Chief Executive Officer; and Rollie Johns, our Chief Financial Officer.

With that, I'd now like to turn this call over to Bret..

Thank you, Liz, and thank you all for joining us today. I'm pleased to report that we delivered record second quarter revenues and non-GAAP earnings per share. For the second quarter, we grew our revenues by 11% to $213 million, and grew our non-GAAP earnings per share by 18% to $0.73.

Overall, our results reflect the solid progress that we are making on our strategic initiatives aimed at driving revenue growth and profits to unlock shareholder value. Now let’s talk about our execution on these strategic initiatives. First, revenues from our Ascendon, SaaS based cloud platform continued to growth double-digits.

Our Ascendon platform continues to be recognized by our partners like Amazon web services and industry experts as a differentiated next generation platform that is enabling and monetizing the digital transformation of service providers businesses.

With Ascendon, we are seeing our clients and customer accounts grow, which is good for us, as we get paid on a per-sub, per month basis or a revenue share percentage.

We’re seeing more international communication service providers seriously evaluate our phased transformation to public cloud, which is good for us as it grows our managed services revenues in addition to our Ascendon revenues because operators value the domain expertise in risk mitigation and operational efficiencies that we deliver, and we are seeing Ascendon open new doors to new verticals and industries, which is good for us.

As it helps us grow revenues and diversify our client base and revenue streams. In addition, we continue to gain traction with our solutions aimed at helping our clients improve their customer experience.

This quarter we expanded our workforce express footprint in to the telecom space with a win at Telecom Argentina, and their sister company, Personal Paraguay. Telecom Argentina has 3,000 telecom technicians who will be using our industry-leading field force automation platform.

This is important as this is our first Workforce Express client outside of cable and increases the number of South American countries in which Workforce Express will be deployed. Next, we expanded our footprint with JP Morgan Chase, with our customer communications management solution.

Once implemented, JP Morgan Chase will be one of our largest non-cable or telco customers. With this expanded contract, we will be processing all the consumer fraud alert notifications for the debit division using our voice, text and email solutions.

Wins like these are important as we seek to diversify our revenue streams into new verticals in a deliberate and thoughtful manner. And finally, we continue to expand our foot print within our two largest managed services clients, MTN and Telstra.

Our continued execution on delivering the value that was promised, combined with the domain expertise of our people opens new doors and new division in both companies. I am extremely proud of the hard work that our teams on the ground have done at both of these accounts.

Next, while we spent a large portion of our time talking about our investments and our digital monetization platform Ascendon, we also continue to invest our R&D dollars in a balanced way across our solutions that have momentum.

This past quarter we introduced an extension to our industry-leading Work Force Express solution with our Where's My Tech app. This solution enables a service providers and consumers to track the location of their technician to determine where they are and what time they will arrive at their appointment. Think of it as the app for appointments.

Our continued investment in R&D is an important contributor as to why our clients are willing to sign multi-year contracts with us. They know that we are investing not only in our success but theirs as well. Over the past 10 years, we’ve invested approximately 13% to 15% of our revenues in to R&D.

From our perspective, we believe these investments create a sustainable competitive advantage, provide us with opportunities to get broader and deeper in our clients operations, gain new logos in the existing markets that we serve, as well as win in new verticals. And finally and most important, they help to drive our topline growth.

While we deliver a very solid first quarter from our revenue and earnings perspective, there’s one metric this is not indicative of the strength of our business model and what is going on in the business. And that metric is our negative cash flow from operations number this quarter.

We’ve been in this situation before where the client has held their payments and so after quarter end then they pay it within days.

We do not believe that this is a trend in which this client is changing their payment patterns or trying to manage their accounts payable in a certain way going forward and therefore believe that our guidance for cash flow from operations is still achievable in spite of this quarter’s performance.

And while we are on the topic of cash, our strength in generating cash is a topic that comes up in many of our investor meetings, so I thought I’d share our philosophy on cash and remind you of our capital allocation policy. First we like cash; it gives our company lots of options.

It gives us opportunities to invest in business improvements to drive value like R&D or sales and marketing. It gives us opportunities to create value by making smart deliberate acquisitions and it gives us opportunities to return cash to our shareholders via share buybacks or dividend of pay down debt.

Second, we have great visibility through our cash generation as a majority of our solutions are offered via private or public cloud. Under long term contracts resulting in recurring revenues, our solutions are business critical and basically rate and build for all the international services that our provider is monetizing.

This provides us with 90% plus revenue visibility going in to each year enabling us to manage our expenses and investments resulting in strong cash flow. So beyond the cash flow generation nicesities there is more to the role that we play in our clients operations. It is a very serious business and one we do not take lightly.

While there is always risk in managing any type of data, the rating, billing and management of a company’s cash sources, well let’s say a very important role. Our teams wake up every day treating that role with a proper respect and attention it warrants. With that as a backdrop, we take a balanced approach to how we use and deploy our capital.

We will pay out over $25 million in dividends this year. We’ve already repurchased $11 million of stock back this year and plan to buy back enough to offset any dilution associated with employee equity compensation. And to date we have utilized $70 million of our cash for an acquisition that we expect to be accretive in the first year.

Finally, we are investing in our people, our solutions and our go-to-market strategies at what we believe is at appropriate level. We evaluate our uses of cash on a regular basis to determine the optimal method for creating a sustainable competitive advantage in the market place, while creating long term shareholder value.

Finally, we are doing what we set out to do this y ear. So as I’ve said in the past, I like our position for several reasons. First, we have an enviable business model with strong fundamentals to position us well to drive shareholder value. Second, we unrivalled domain expertise in the communications, information and entertainment industries.

Third, we work with some of the largest and most innovative communications service providers in the world and we are establishing ourselves with a trusted digital transformation partner for companies undertaking this journey. Fourth, we have proven technology and a solid reputation for operating our solutions really well.

And fifth, we have a financially sound company, we generate strong cash flows and have a solid balance sheet which gives us tremendous flexibility for investing in our people, our solutions and our clients to grow a diversified business, and still return capital to our shareholders through our dividend and share repurchases.

And most important, we have talented and dedicated employees across the global, who are committed to helping our clients and our company achieve greatness. With that turn it over to Rollie, who as most of you know was named CFO in June after five years as our Chief Accounting Officer. .

we are keeping our 2018 revenue guidance at 845 million to 865 million, which represents a 7% to 10% growth over last year. Our expectation for our non-GAAP operating margin for this year is unchanged at approximately 17%, which is consistent with our results for the first half of the year.

We are maintaining our 2018 non-GAAP EPS at $2.81 to $2.93 which reflects a growth of 12% to 17% compared to the last year. We continue to anticipate our 2018 non-GAAP tax rate to be approximately 27% and our outstanding shares to be 33 million shares for the year.

We also continue to expect our operating cash flows to be within the range of $130 million to $150 million, which assumes more normal working capital levels through the end of the year. We are maintaining our outlook for CapEx of approximately $40 million for the year as well. In summary, we are executing according to plan.

We are achieving revenue growth above the industry rate, as a result of our investments in our business. We are continuing to operate at a profitable margin and drive bottom line returns.

We are executing upon our long term business objectives and investing in our people, our products our clients to drive a long term business value, and we are returning cash to our shareholders to provide additional long term shareholder value.

We are pleased with our achievements this y ear to deliver a solid result and build strong business for the future. With that I’ll turn it over to the operator for questions. .

[Operator Instructions] And our first question comes from Matt VanVliet from Stifel Nicolaus. .

I guess just on for [Tom Ryder] today, thanks for taking my question. I guess first off looking at some of the expansion that you talked about your two largest mainly services clients.

Could you maybe give us a little education in terms of what types of expansions are you moving in to other areas of the business, is it just growth, but then sort of what you’ve been operating in and what brought about some of those expansions?.

Absolutely Matt, thanks for being here, really appreciate it. At MTN and Telstra, even though they are going to be our largest international managed services clients, they are still small compared to some of the North American clients we have.

And what we’re seeing transpire there is what we see happen with most customers if not all is the more that they are around our people in the domain expertise and the operational expertise, the more they want to deal with us.

And the good thing about it is by having people on the floor working with them, what happens is, when they are dealing with business challenges day in and day out and customers like MTN and Telstra, we’re all in.

And so our teams are there with them and if its operationally, if its cost effectiveness of the solution, if its automation or sometimes it can even be things like Ascendon feature functionality as a potential solution for the business challenges they are working on.

So what we’re really seeing is just the early stages, now being a year and a half to two and half years in to them and us working together to solve those problems. And a couple of those agreement have actually been extended four and five times, and each time that happens it’s exactly what you’ve seen us do traditionally in North America.

We want to strengthen and lengthen the relationships with our clients. So it’s around each of those areas operationally, economically and hopefully long term more feature functionality with a cloud native solution that solves problem for them. .

And looking at the deals you announced with JP Morgan Chase, can you talk a little bit more about what aspects of your platform are they looking to use and how many other contracts or clients do you have that are sort of similar to that on (inaudible) space. .

Well it falls within our customer communications management component Matt which is really a change in what used to be viewed as either direct IVR or direct present mail or those types of things. We view it as a total customer communication strategy in solution to get a 360 degree view and solve for those types of things.

So I am sure that you as a person probably have credit cards or airline that you deal with and so it’s your experience, it’s not just one of the other.

And as mentioned in the prepared comments its everything around specifically going to the end user with those updates and communications via IVR and also through the print Mayo and also through aspects of it. So it a continued growing of that., we do that at some of our other cable customers to provide that input to them.

And we also see it as an opportunity to grow broader. So you’ve heard us talk about customers in the past like Wal-Greens and some of the others like that where we have been able to do that.

And so we’ll continue to look to build that, 360 degree view of the customer, lengthen and strengthen those agreements even in that transaction business and drive the long term value by bringing more diversity in our revenue streams. .

And then looking at the performance of Business Inc. during the quarter, you called out that, looks like you generated about 16 million in revenue.

Can you just talk about maybe how the integration is going, bring that in to the fold and then also what are the growth rates or at least may be some new bookings trends that you’re seeing with our business now that it’s part of CSG?.

I hate to sound like a broken record Matt, but the reality is, we’re executing to plan. That’s what we’re doing. And what we’re seeing from an integration is almost spot-on for what in our internal investment memorandum to drive that accretion and drive the internal rate of return of what we’re doing.

Like anything this isn’t easy, if it was easy they called it a chocolate sundae, but it isn’t, its work. So we have to get after it and the reality of it is there’s ups and downs as we go through there.

We’ve had a couple of small client issues, employee issues all of which was expected and planned for and its coming in right where we thought it would and so we’re getting some good revenue traction. You know it’s not a fast growing business as we said beforehand.

So as far as there have been new booking since the acquisition, not to the point where I think it’s material or relevant that we want to start tooting a pipeline, a horn as we go and just remind everybody the intent is it’s a scale play with great economics that are very compelling and we are executing to plan. .

[Operator Instructions] Our next question comes from Chris Moore from CJS Securities..

Can you kind of talk about Arrow Electronics in terms of kind of the current status of the relationship.

Is there still lot of development going on, kind of how far are you guys away from any kind of meaningful recurring revenue there?.

Yeah Chris, we mentioned in the prepared remarks about what we’re seeing from a revenue perspective and its double-digit growth sequentially year-over-year. We don’t disclose the specifics of those numbers, nor do I think it’s something that’s earth shattering at this point.

However, there are good data points for how those investments are paying off and how it’s actually starting to drive that in the direction we wanted to go. As far as Arrow Electronics specifically they are a great customer and a great partner as we move through that.

So there continues to be activities around the areas of proof of concepts all the way through to activities with their ecosystem of building our subscription based model for their components as we go forward. So they’re a great customer there.

Smart Cities, one in India is a great customer as you go through and we’ve actually got -- we're nearing in on 20 paying customers on the Ascendon platform.

So we don’t break out to the level of revenue there, but getting to almost 20 customers, getting to double digit growth on the revenue front and also getting the perspective with a native cloud based application, very few people in our space have.

What it really does is it opens us in to the discussions that are driving other parts of our business to help deliver those results. So great questioning. .

The 20 paying a year ago would that have been significantly less than that or just trying to get a sense as to kind of the expansion. .

From an expansion perspective Chris I would say it’s minimal, but what is really positive is the fact that it is an area within our industry and space where there is a lot of business model innovation happening. So we’ve had some smaller customers drop out, we’ve had some new ones add in.

But the ones who are in there and the business models that are being innovated on are expanding. That’s the most exciting part about it, if we’re finding business models in these partnerships that work. And so the revenue is growing, their businesses is growing and as we said that’s good for us.

If we find a business model that works, and it works for them and it works for us, that’s how we build this company, and that’s how we’re going to continue to drive the future of it to be relevant for a sustainable competitive advantage and a sustainable investment thesis. .

Let me just stay there for one more second, suppose there was no Ascendon, how would Arrow have filled the void, I mean is it something that most companies would try to do the development internally or there are other perhaps less attractive substitutes that they would look at.

I’m just trying to understand how they’re looking -- a company like Arrow looks at CSG..

Well we’ve seen it happen in numerous different fashions, not only in this wave of business innovation, but years ago when there were a couple 100 cable companies that consolidated, when they came together some of them were more mature than others, some of them were more foresightful, some did it on spreadsheets, some did it on internally developed systems.

Some did it with third party competitors that we are there with. I would tell you that Arrow has been very proactive in their IoT activity and partnering with somebody who is an absolute expert in this space. And so they could have done it in the house, they could have done in on spreadsheet, they could have done it with a different application.

But they realized and understood the complexities of everything from enterprise catalogue down to offer management to order management and what could happen and they are very well positioned now. And we believe that we are a key partner in helping them to do that.

So there’s a lot of different options that you can do, we believe the best option is the one that Arrow proactively chose and that’s where we are seeing expansion in those business models because when you are an expert at what you do and you let others be experts at what they do, you can really bring great business solutions to market which is what we see happening.

.

Got it. Switch gears real quick. So you talked about Telecom Argentina being the first workforce express client outside of cable.

Was there a significant amount of development necessary in order to make that happen or how difficult is it to kind of take this and move it outside of the cable realm?.

That’s a very exciting part of it Chris, as there was very little or almost no development with it. I just want to talk about workforce express getting further in to the South American market place.

What we’ve done in the cable market place, those lines are blurring heavily between telcos, cables and others as they do it, but some of their things that are consistent are the solutions that we bring because they are designed for that broader market and have been around for quite some time.

So Telecom Argentina and the partner company and Personal Paraguay, we are going to be able to roll that out in a very straightforward fashion. So that’s a really exciting part in where we see scale in the products and the business model..

[Operator Instructions] There are currently no questions in the queue. .

Well, thank you and thank you to everybody for being here today. We really appreciate the support across our shareholders, across our customers and across our employee base. I hate to be the broken record like I said, but CSG we’re executing the plan according to the plan that we’ve put in place and we take great pride in that.

We plan to continue to execute according to plan. We’re going to continue to feed our growth engines when they are there in an intelligent, balanced way. We’re going to continue to look at deliberate M&A and keeping that balanced approach across our business to execute according to plan.

So thank you for the time and for our employees for all you’re doing to make it a reality, you are the ones that are executing day to day on this. So thank you and have a great rest of your day. .

Thank you ladies and gentlemen this concludes today’s teleconference. You may now disconnect..