Good day, everyone, and welcome to the CSG System International First Quarter 2021 Earnings Announcement. [Operator Instructions] Today's call is being recorded. .

At this time, I would like to turn the conference over to Mr. John Rea, Head of Investor Relations. Please go ahead. .

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operator, and thanks to everyone for joining us. For this quarter's earnings call, we will be working from a slide deck which can be found on the Investor Relations section of our website. Please take a moment to locate those slides. .

Today's discussion will contain a number of forward-looking statements.

These will include, but are not limited to, statements regarding our projected financial results, our ability to meet our client's 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 Brian Shepherd, Chief Executive Officer; and Rollie Johns, Chief Financial Officer. With that, I'd like to now turn the call over to Brian. .

Thanks, John. For those accessing the slides for today's earnings call, please follow along starting on Slide 4.

Since being named CEO at the end of 2020, I committed on behalf of the entire CSG leadership team that we would accelerate our revenue growth, diversify and grow our industry vertical revenues, and build a consistent track record of outperforming.

While only one quarter in to our more ambitious strategy, I'm pleased to report that even in the face of continued COVID-related headwinds, the business momentum we regained in Q4 2020 has accelerated, with strong Q1 results across our business.

CSG employees all around the world continue to rise to the occasion, and we are extremely grateful to each one of them. Together, we are CSG..

The refreshed CSG mission is clearly resonating with customers globally, as we help solve their toughest business problems. By channeling the power of all, CSG makes ordinary customer and employee experiences extraordinary.

As we continue turning this mission into reality, CSG is more committed than ever to turbocharge our growth and amplify the social impact we make by unleashing the full potential of our people and our culture. We will achieve this by relentlessly executing against 3 strategic growth pillars..

First, CSG will obsess over the success and the value we create for our customers, as we help them design and digitally enable exceptional customer and employee experiences. We believe in jointly innovating customers to redesign and technologically enable personalized engagements for their consumer and enterprise customers.

While seemingly simple concepts, being easier to do business with and adding more value than competitors are key CSG differentiators..

Second, CSG will develop, partner and acquire category-leading technology that address the market's biggest and most pressing needs.

Our SaaS platforms and pre-integrated solutions in revenue management, digital monetization, customer engagement and cloud payments give our customers a cost and a marketplace advantage in an increasingly real-time data-driven digital world.

Speed, agility and market-responsive innovation, combined with mission-critical operational excellence, will continue to set us apart..

And third, CSG will be the technology provider of choice for communication service providers globally, while simultaneously accelerating diversified industry vertical revenues in digital engagement and cloud payments. We will grow our CSP market share by outpacing the organic market growth and by becoming a much more consistent strategic acquirer.

Equally important, we will diversify our revenues as we help leading brands that many industry verticals improve and digitize their customer engagement and payment processes.

The business synergies and cross-selling benefits that we get from our increasingly higher growth software portfolio and more partner-friendly approach strengthen our market positioning, as we help great brands worldwide acquire, monetize, engage and retain their customers..

And the good news is that our efforts in all 3 strategic areas are translating into even better financial results. In Q1, CSG generated $253 million of revenue, which represents 3.1% year-over-year organic revenue growth, our best organic quarterly revenue growth since Q3 2019.

Even better, our Q1 adjusted revenue, which excludes transaction fees, was $237 million, which represents 4.1% year-over-year organic adjusted revenue growth..

We are especially proud of the fact that our Q1 revenue growth was 100% organic. This means that the health of our business, the strength of our balance sheet and our low debt leverage has earned us the right to become a much more consistent and strategic acquirer to elevate our business and grow faster.

We fully expect to execute against our inorganic strategic growth plan with good discipline in the quarters ahead. .

In Q1, we also made good on our commitment to return money to our shareholders, with $8 million spent on dividends and $7 million on share repurchases. Finally, with the business momentum generated by these good Q1 results, we are pleased to reconfirm all our financial targets for 2021..

To add more color on our revenue acceleration, please refer to the left side of Slide 5, which provides some Q1 highlights from across our business. A key driver of our optimism is the continued strong sales performance and win rate conversion of our sales pipeline.

As we have highlighted in recent calls, CSG's sales pipeline is significantly larger than it has ever been, contained deals that are both larger and in later stages of the sales cycle, and we continue to win meaningful deals all around the world.

Consistently stronger sales, winning bigger new customer deals and delivering exceptionally well on our customer commitments are keys to us sustaining higher organic revenue growth..

In our North American cable and satellite business, CSG continues to extend our market share leadership position. We continue to lengthen and strengthen our relationship with our top 2 customers, Charter and Comcast, as evidenced by our 5.3% and 1.5% year-over-year increases in Q1 revenue from each of these important customers.

We continue to deploy new solutions to help these 2 industry-leading broadband and entertainment providers enhance their digital customer experience, and it goes without saying that as Comcast, Charter and our other North American cable customers continue to add high speed internet subscribers each quarter, CSG's SaaS revenue also continues to grow nicely..

Turning to our global communication business. We continue to accelerate our growth and our sales win rate with leading telecom operators all around the world.

Cincinnati Bell Technology Solutions selected CSG Ascendon to help them deploy a digital monetization solution to provide resilient and secure voice data network services for their enterprise customers.

With our Ascendon cloud platform, CBTS will be able to scale and change feature sets on demand and roll out new applications without additional investment needed for equipment or people.

CBTS will also leverage our output solutions to improve the overall customer experience with a fully redesigned customer invoice and greater flexibility for targeted marketing messages. .

In the Malaysian market, we are proud of our new win with Maxis, a leading CSP with over 11 million subscribers. Maxis selected CSG Ascendon to help with their go-live market launch of Maxis TV, a new consumer marketplace to digitally stream movies and TV programs from regional partners.

Ascendon is fully implemented at Maxis TV and is powering the consumer experience and enabling the flexible offerings consumers demand, including date passes for special content and bundle offers across multiple content partners. Plans are already underway to add additional partners and more new digital services.

We are excited to help Maxis realize their full digital potential. .

And finally, we were proud to announce earlier this week the signing of a close partnership with Axiata Digital Labs, the technology center for one of Asia's largest telecom groups. As I mentioned earlier, co-creating and jointly innovating with leading customers are keys to our future success.

This exciting new partnership combines our CSG charging and digital monetization capabilities with Axiata's Digital Telco Enabler technology to create a new digital marketplace in Asia that adheres to TM Forum's Open API standards.

This marketplace enables partner companies to rapidly launch and monetize an infinite number of digital services and offers to their own consumer and enterprise customers. Net-net, more and more large global CSPs are selecting us to solve their toughest business problems..

Now moving to the right side of Slide 5, I'll share some recent wins related to our strategic priority to diversify our industry vertical revenues outside of our core CSP market.

Since 2017, not only have we significantly reduced CSG's customer concentration, we've also increased the percentage of revenue coming from higher growth, non-CSP industry verticals by 16 percentage points. We are committed to continuing this positive trend that benefits both our business and our shareholders. .

While our largest CSP customers are extremely important to us and continue to grow nicely, we're also consistently winning good new customers in diversified industry verticals because these new customers value what we have always delivered, future-ready technology backed with reliable operations and great customer service.

As a result, large industry-leading brands in high growth verticals are increasingly turning to CSG and our innovative software solutions to digitally engage and communicate with their customers..

In Q1, we expanded our business with 4 very large and very important CSG customers, 2 of the largest drug store chains in the U.S. and 1 of the largest retailers in the world selected CSG software to power their customer engagement communications for the retail and clinic operations.

Our solution is increasingly important to all 3 of these large customers, given the unprecedented number of inbound requests that healthcare providers, retail pharmacies and government agencies are getting related to COVID vaccinations and appointments.

We are also proud to announce that we signed an exciting new conversational AI deal with one of the largest software companies in the world to digitize part of their customer service and call center operations..

And finally, a quick update on our cloud payments business. While we continue to see high single-digit reduction in our payments transaction volumes as we continue to feel the impacts from COVID, our payments business is weathering the storm well.

We saw improved results in the last month of Q1 and continue to have a good sales win rate, which gives us cautious optimism that we can return sometime in 2021 to the healthy, organic revenue growth rate that we had in our payments business prior to the COVID pandemic.

And the fact that we delivered our highest year-over-year organic quarterly revenue growth as a company since Q3 2019, even as our payments unit continued to face COVID headwinds in Q1, is another testament to the strength and the resiliency of our cloud-based business..

In closing, we are extremely grateful that CSG employees worldwide continue to put our customers first and deliver greater value than our competitors. Consistently doing this quarter in quarter out is foundational to accelerating our revenue growth and diversifying our industry vertical revenues.

Put simply, our Q1 results prove CSG's business is healthier and more resilient than ever, and it tells us that we have earned the right to dream bigger, act more boldly and grow faster. On behalf of the global CFP leadership team, we will continue to envision, invent and shape a better, more future ready world.

We thank our customers for their continued trust that we will create value for them every single day and we thank you, our shareholders, for believing that we will deliver for you. .

With that, I'll turn it over to Rollie to review the financial details of our Q1 performance. .

Thanks, Brian. As Brian highlighted, we have a strong resilient business that generated healthy year-over-year revenue growth in the first quarter, even in the face of the ongoing COVID pandemic. With a strong first quarter start, we are pleased to reconfirm our 2021 full year financial guidance targets.

So let's walk through our financial results for the first quarter and revisit our 2021 outlook. .

Turning to Slide 7. We generated $253 million of revenue in the first quarter representing 3.1% year-over-year organic growth, our best quarterly organic growth since the third quarter of 2019.

In addition, our first quarter non-GAAP adjusted revenue, which excludes transaction fees related to our payments business, was $237 million representing a 4.1% year-over-year increase.

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

Additionally, we started to see some real momentum this quarter with our digital communication solutions building on some key wins that Brian highlighted outside of our cable and telco industry verticals. As Brian mentioned earlier, our first quarter growth is all organic growth.

That said, acquisitions are an important component of our growth strategy aimed at advancing our diversification into new industry verticals and increasing our leadership position in our core markets.

As we accelerate our inorganic growth in the quarters ahead, we will remain disciplined by focusing on strategic, financial and cultural fit with an appropriate risk return profile for each acquisition we close. .

Moving on to the bottom of the slide. Our first quarter non-GAAP operating income is $40 million or 17% of non-GAAP adjusted revenue as compared to $42 million or 18.5% in the same prior year period.

As I highlighted this time last year, our first quarter 2020 operating margin benefited from lower deferred compensation expenses resulting from the steep decline in the stock market, following the onset of the COVID pandemic.

We believe that our first quarter of 2021 non-GAAP operating margin of 17%, which is at the midpoint of our long-term target range of 16% to 18%, is representative of our ongoing operations absent any factors outside of our control, like the benefit I just mentioned. .

Moving on. Non-GAAP EPS for the current quarter was $0.82, down $0.05 year-over-year due mostly to the impact on operating margin that I just discussed.

And finally, our non-GAAP adjusted EBITDA was $54 million for the first quarter or 23% of non-GAAP adjusted revenue, down 1% compared to our performance in the first quarter of 2020 and impacted by the prior year margin benefit I already mentioned..

Turning to the balance sheet. Our cash flow generation and shareholder remuneration for the quarter are included on Slide 8. Our first quarter 2021 cashflow results represent a modest increase over the same period last year.

However, I will point out that both periods were negatively impacted by the timing of key customer payments that were delayed and subsequently received after those quarter ends.

For the first quarter of 2021, that delayed payment was approximately $26 million and resulted in net cash flow used in operations of $3 million and a non-GAAP free cash flow deficit of $11 million for the quarter.

I should also note that while this quarter represents an increase over the same period last year, our first quarter of each fiscal year is generally lower than other quarters due mainly to the payments of our year-end accrued employee incentive compensation..

Moving on. We ended the first quarter with $205 million of cash and short-term investments. That, along with our outstanding debt at quarter end, results in $149 million of net debt and a net leverage ratio of 0.7x.

As a reminder, our convertible debt can be settled in the first quarter of 2022 and as a result, is now classified as a current liability on our balance sheet. We are currently reviewing several options to further optimize our balance sheet, including the possibility of increasing the amount of leverage we carry. .

During the first quarter of 2021, we increased our dividend by approximately 6% year-over-year and declared $8 million in dividends. In addition, we repurchased $7 million of common stock under our stock repurchase program.

We remain committed to balancing our use of cash and return on invested capital, focusing on inorganic growth opportunities, internal investment and providing return to shareholders. .

Moving on to Slide 9. I'll conclude with some key takeaways and revisit our 2021 financial objectives. We were pleased with our first quarter of 2021 operating results.

Taken together, the strong start to the first quarter and our outlook for the remainder of the year give us the confidence to reconfirm our 2021 financial guidance that we laid out earlier this year, as outlined in the table on the right of the slide.

And looking beyond 2021, our higher recurring revenue business model, combined with the strength of our sales pipeline, gives us the confidence that we will execute well against the strategic priorities that Brian discussed earlier..

CSG is committed to accelerating our revenue growth and diversifying our industry vertical revenues. And we believe this investment in our future strategic growth, while also consistently distributing capital in the form of both dividends and share buybacks, will serve our shareholders well. .

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

[Operator Instructions] And first, we'll go to Tom Roderick from Stifel. .

Congratulations on a very nice quarter, really nice to see some sustainable growth there. So Brian, I guess I'll ask my first question to you. In some of these wins -- and by the way, great slide. I love having some of the visual to go with it. Some of the wins there, you highlighted Ascendon as being a key critical component of landing the customer.

And we've talked about Ascendon for so long, but yet it hasn't risen to the point of being a material revenue driver, but it seems like it's becoming -- finding its way into more and more conversations.

Can you talk a little bit more about customers, maybe even new customers, embracing Ascendon and what you're doing from a go-to-market perspective to drive that into the hands of customers?.

No, it's a great question, Tom. Thanks for joining us and hope you're doing well these days. Maybe a little color is, first, more from the marketplace. We see the market adopting and becoming more comfortable with a cloud-first approach, which hadn't historically been the case in revenue management.

So that's a great trend to see in the market more holistically..

Secondly, as we've always talked, CSG technology has to be future ready. And that means investing ahead of the curve, which is exactly what we did in our cloud-native Ascendon platform. And last year, as a reminder, was our fastest growth and our highest revenue in 2020 for Ascendon. And we continued to like what we're seeing in the marketplace.

And with the 3 wins we announced, we see more and more interest and more and more adoption in Ascendon, to your point, as a percentage of our overall revenue. It's still small, but we like the growth rate. We like what we're seeing in the market. And we just have to continue to sell and win and deliver more value with it.

But we also have great other revenue management solutions. So it's still smaller on the overall materiality, but we like what we're seeing in the business. .

Yes, it's a great trend. Turning the attention here to the payment side of the business. So fully understand what sort of transpired in 2020 relative to COVID being some headwinds on that business.

Remind us if you don't mind, Brian, just in terms of some of the challenges that the revenue or the transactional headwind face, how much of that was sort of customer churn versus just transactions themselves dropping.

In other words, if the churn wasn't that bad from a customer perspective, are you seeing those transactions come back? And then, as we think about this on a sequential basis, as opposed to year-on-year, has that revenue base stabilized? It seems like it probably has to the extent you might start seeing some year-on-year growth in the back half of the year, but on a sequential trend line, that would be helpful to understand as well.

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No, again, good question. What we saw, it was great to see a stronger March month close in the Q1, but on your question around what drove the decline last year or the erosion of our growth, this is a business that pre-COVID was growing nicely, a double-digit organic growth rate.

And what we saw is we saw transaction volumes drop by about 8% to 12%, depending on the month. And that was about half of the drop we saw in the industry. So overall, we fared well because of the recurring nature of our customer base and the merchants we saw..

When you talk about the majority of that was actually driven by just a reduction in transaction volumes from our merchants. We lost 1 or 2 customers that struggled in the COVID environment, but that would have been a small impact on the overall headwinds that we've been facing.

So as we progress into 2021 and continue to regain the momentum, last year, we saw a business that eroded the growth, but still performed quite nicely. We're cautiously optimistic that we can get back to growth in the second half of the year. But I would just say, we need to see another quarter and some more strong months like we saw at the end of Q1.

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Great. Rollie, last quick one for you. I know this is kind of philosophical, but would love to hear how you also think about it. Super low interest rate environment. The rates are starting to tick back up a little bit, but you've done well with acquisitions and diversifying the business.

And Brian, you mentioned that's a core tenet of how you think about the future.

What would keep CSG philosophically from levering up the business, taking on some debts and accelerating that M&A road map? Are there not enough targets in your immediate line of sight? Or do you just prefer not to have that extra leverage on the balance sheet? How do you think about the push and pull of that topic?.

No, fair points. I think from a debt perspective, we're in a really good position where we're at. I would say, historically, you raised it, we have been under levered. I think we have the potential to increase our leverage. Certainly, we could afford 2 to 3x for future investments and the ability to provide returns to our shareholders.

We're currently in the marketplace. We're looking at M&A targets every day. I think, as we've discussed previously and Brian's pointed it out as well is, right now, from a valuation perspective, valuations are pretty frothy. Brian, I don't know if you have anything you want to add to that as well. .

No. All I would say is, it is the right direction and we do believe the strength of our business allows us to increase the debt leverage. And that's something that we're actively looking at. So I'd say stay tuned.

On the acquisitions, we see very attractive strategic assets that could actually fit our culture, give us the offering to solve more future-ready problems of our customers.

I think it's really staying disciplined on the price and making sure that we can get good deals, but also bring the financial attractiveness with the strategy that accelerates growth. We see assets that are actionable, Tom, and it's just making sure that we look at a lot to the ones -- to close the ones that we believe will bring us the most value. .

[Operator Instructions] Next, we'll go to Greg Burns from Sidoti & Company. .

I wanted to, I guess, talk us a little bit more about the acquisition strategy. In the past, you've done some scale positions, you've done Forte, getting you into some new verticals. And then you also mentioned adding technology in these prepared remarks.

So what are your priorities in terms of when you're looking at deals and in terms of acquisitions?.

Greg, hope you're doing well. Thanks for joining. I think the best way, you kind of framed it out, it isn't an either or. There's attractive assets in all of those categories.

And the key for us is adding technology talent that matches our culture and the ability to integrate, that enables us to be more future ready for what customers need in all the industry verticals we serve all around the world. .

And so with the current market conditions and prices being higher and elevated, we are looking at scale deals that add capability and strength, that can expand our global reach. We're looking at high growth strategic assets in new verticals that can drive.

And we're also looking for nice capability or product tuck-in, both in North America as well as globally. So it really does fall in those several categories, and we believe there's value across the board, and we're focused on extracting that.

And you'll see us close acquisitions in all of those categories to continue to elevate and accelerate the business. .

Okay.

And then when we look at the full year guidance relative to the strong start of the year, can you just walk us through maintaining the guidance, relative to the strong start to the year? I guess revenue is kind of a range, so that might not be an issue, but what will drive the margins back down into that full year range versus where you were in the first quarter?.

I'll give you the high level and I'll let Rollie comment [indiscernible]. First, we're one quarter into the year. So we're extremely pleased with how we started. Obviously, building a culture and a track record of outperforming is something that we need to deliver quarter in, quarter out.

So we really want to see that continued execution in the second quarter and the third. And we expect to continue the momentum, but we know we have work to do.

But Rollie, you want to provide a little more color on that, including on the margin question that Greg had?.

Yes. So still, after a strong first quarter, still believe the current ranges are a good indicator for our performance. Like I said, first quarter margin percentage of 17% is right in smack dab in the middle of our long-term target range.

And I think the 17% is a really good indicator of how CSG can perform in the midst of an ongoing pandemic, absent any events or factors that are outside of our control. So as Brian said, we know it's early in the year, but we like what we see. .

Okay. Just with the midpoint of the full year guidance, on the margin front, being a little bit low in the first quarter. I mean is there incremental investment you're planning on making in the balance of the year? Like I'm just trying to get a sense of it. .

No, fair question, Greg. When we had initially provided the guidance ranges, a couple of things that we had highlighted as potential headwinds to our performance trending out of 2020 into '21, one was the potential for higher levels of employee-related costs, especially in the form of travel and entertainment expenses.

The other was the potential for repricing pressure associated with the potential for the early execution on both the Charter and the DISH contracts that are coming up for renewal in December of this year. .

Okay.

So I guess, since you brought that up, is there any update on the progress of the talks there? Do you expect to get that done before the end of the year? Or is there possible extensions to the current deal that can be made?.

Yes. At this stage, there's no update, Greg, around that. What we've always done is just focus on bringing all of our customers, including our large in a renewal window, greater and greater value.

Obviously, we love to see the ongoing revenue growth that we've announced the last several quarters with Charter, and we're continuing to work those and don't have any other updates. Other than, if you look at the history of CSG, they've tended to work out well for us. And that's what we're working darn hard to make sure happens this time as well. .

And with no further questions, I'll turn it back to Brian Shepherd for closing remarks. .

I would just say, hope you're all staying healthy, doing well. We're going to continue to build on the strong start to Q1. Look forward to talking in the quarters ahead. Thank you. .

And that does conclude our call for today. Thank you for your participation. You may now disconnect..