Good afternoon. My name is Christian, and I'll be your conference operator today. At this time, I would like to welcome everyone to the CSG Systems International, Inc. Q2 2021 Earnings Call. . Presenters, you may begin your conference..

Thank you, operator, and thanks to everyone for joining us. Like last quarter, 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 these slides. Today's discussion will contain a number of forward-looking statements.

These 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 risks 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 Sheppard, Chief Executive Officer; and Raleigh John's 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. Over the last three quarters, I have highlighted how CSG will win big in the market and consistently outperform by investing in our culture, investing in our talent, and investing in our future-ready software platforms.

These investments, combined with our customer-obsessed values are the foundation upon which our accelerated business momentum is being built. As I meet with talented CSG teams globally, the energy and competitive intensity are evident.

CSGers all around the world are turbocharging our growth and diversifying our revenue into higher growth industry verticals, including financial services, healthcare, retail, government and more. As we walk through our results today, I hope you will see why we absolutely believe that our best quarters and years are ahead of us.

With this as the backdrop, we are very pleased to report that Q2 2021 was another strong quarter. We delivered 6.2% year-over-year top line revenue growth, which was substantially all driven by organic sales growth.

As a result of this strong performance and the execution of our inorganic growth strategy as we closed both the Tango Telecom and Kitewheel strategic acquisitions, we are raising all guidance metrics for 2021. Put simply, CSG has never been healthier.

Our future outlook has never been more encouraging and our accelerated growth and revenue diversification has never been more real. With that summary, please turn to Slide 5 to see how we are performing against six strategic priorities.

First, we told you that CSG would more than double our long-term organic revenue growth rate and our results prove we are delivering on this commitment. In Q2, CSG delivered $255 million in total revenue, which represents 6.2% year-over-year growth, substantially all coming from organic revenue growth.

Our Q2 adjusted revenue was $238 million, also growing 6.2% year-over-year. Our robust Q2 results, combined with our good Q1 performance, led to a very strong first half of the year. Second, we told you that we would boldly elevate our market aspirations, and this is exactly what team CSG is doing.

Based on both our strong organic revenue performance and the size, strength and overall health of our sales pipeline, CSG is raising our full year 2021 guidance targets across the board.

Our revised fiscal year 2021 revenue guidance is now $1.015 billion to $1.045 billion, which represents a $20 million increase on the low end of our range and a $10 million increase on the top end. We also are raising adjusted operating margin by 25 basis points on both the low and high-end of our guidance range to 16.5% to 17%.

In a few minutes, Rolland will share more details on our revised guidance, which also includes raises to cash flow, EBITDA and EPS. Our business success is attributable to our dedicated CSG employees and leaders all around the world. While COVID continues to have lingering impacts in our business.

I'm extremely grateful to all of our global employees for propelling CSG upward regardless of the obstacles standing in our way.

Third, we told you that CSG will be the technology provider of choice for communication service providers globally, and our continued sales success with global CSP, proves that we are executing well against this strategic priority.

In the cable marketplace, we continue to grow our relationship with Charter Communications, one of the largest and most successful U.S. cable providers. We successfully converted almost 300,000 subscribers in the Kansas City market to CSG from a competitor's billing platform in Q2.

This is the latest example of how we continue to grow with Charter and look forward to earning more business from this world-class communications company. In the global telecom market, we continue to find success with new wins and contract extensions with leading telecom operators.

In May, we announced a multiyear extension and expansion with MTN South Africa, the largest mobile network operator in Africa with over 30 million subscribers.

As part of this agreement, we are advancing and enhancing MTN's digital ecosystem, which includes migrating MTN's enterprise and consumer customers to a new technology platform that will drive future growth and enable rapid delivery of innovative products and services.

We look forward to continuing our journey with MTN as we help them digitally transform their business. Another great highlight in Q2 was our multiyear contract extension with VietnaMobile, one of Asia Pacific's leading mobile operators with 5.5 million subscribers.

As VietnaMobile's technology provider of choice, CSG will drive their customer billing, mediation and settlement operations to support the company's accelerated growth and introduction of new products and services.

And finally, we are proud to have won more business with a leading telecom operator in Africa, where we were selected to help digitize their revenue management solution as we replace a competitor's legacy technology stack. Turning to Slide 6.

Fourth, we told you that CSG would continue to diversify our industry vertical revenue significantly above the 23% of total CSG revenue that we delivered last year. In the first half of 2021, we grew revenue coming from higher growth industry verticals outside of our core CSP base to approximately 24%.

As a reminder, since year-end 2017, we have grown CSG revenue from exciting new industry verticals like retail, government, financial services and healthcare from $55 million or 7% of total CSG revenue to more than $225 million or 23% of total revenue last year, and now through the first half of 2021, we've continued our industry vertical diversification even further.

Being a partner of choice for some of the biggest customers in higher growth industry verticals where CSG is helping them digitize and modernize their customer engagement and cloud payments capabilities is an important driver of CSG's accelerated growth.

During the quarter, we signed a deal with a leading insurance provider to digitize their customer engagement services. This is an important win because it underpins our diversification ambitions and adds another great brand to our enterprise-grade customer engagement software platform, which also serves the property and casualty insurance market.

Last quarter, we also announced that we signed an exciting new Conversational AI, short for artificial intelligence, deal with one of the largest software companies in the world to digitize part of their customer service and call center operations.

We are proud to announce that CSG now processes and supports 100% of the production traffic for this client's online customer engagement.

In our payments business, we continue to see positive signs in our sales and revenue performance, which is underpinned by the industry-leading nature of our cloud payment gateway and payment processing technology, which was highlighted by CSG winning three separate industry payment awards in Q2.

CSG Forte was recognized by card-not-present a leading voice in the growing segment of the payment industry as the Customers' Choice winner for best e-commerce gateway platform. Forte was also recognized by Fintech Breakthrough, a leading market intelligence organization as best point-of-sale company.

Finally, CSG Forte was ranked #2 by the Strawhecker Group, also known as CSG's best-of-breed API set, which ranks the top payment companies in overall API experience with CSG Forte ranking well ahead of many of the biggest payment competitors in the market. Moving to the middle of the slide.

Fifth, we told you that CSG would become a more consistent acquirer while still maintaining good financial discipline on the strategic software assets we buy, and this is exactly what we've accomplished in Q2.

A few weeks ago, we closed our acquisition of Kitewheel, a cloud-based technology platform company that supports real-time interaction management through omnichannel journey orchestration and analytics software. We're extremely excited to have the Kitewheel team become part of the CSG family.

From a strategic perspective, the acquisition unlocks a $10 billion high growth market opportunity and further position CSG as a leader in the large multi-industry vertical, customer experience management category. Additionally, this acquisition gives us new footholds and expansion opportunities in retail, financial services and healthcare.

Put simply, this acquisition creates a powerhouse cloud-based engagement platform that orchestrates real-time contextually relevant customer experiences for leading brands. We also announced the acquisition of Tango Telecom, a leading supplier of convergent policy, control and messaging solutions.

The acquisition is a combination of a long-standing relationship that delivers end-to-end digital monetization and 5G solutions to some of the world's largest and most successful CSPs. We are focused on successfully integrating these two acquisitions and ensuring we leverage the talented people and symbiotic cultures from both companies.

Lastly, we told you that we would obsess over the success and value we create for customers as large brands all around the world count on CSG to be easier to do business with than our competitors. Our customers count on our innovative recurring revenue technology platforms to solve their toughest business problems.

In our most recent customer satisfaction survey, our customers rated us higher than industry benchmarks on overall satisfaction, responsiveness, delivering on our promises and understanding their business.

Specifically, CSG's customer satisfaction ratings of 82% exceeded the 76% software industry benchmark, further highlighting this competitive advantage that we have. Across all six of these important strategic priorities, the results speak for themselves. CSG is building momentum that we fully expect will fuel our continued long-term transformation.

Before I wrap up my opening remarks and turn it over to Rollie, let me leave you with a few more forward-looking insights into how we think about delivering long-term sustained value of CSG, which can be found on Slide 7.

At CSG, we care about the results we see in the rearview mirror, and we care even more about the results we aspire to deliver as we look through our front windshield.

Given this, you might be asking yourself, what did the CSG management team see on the horizon in the quarters and years ahead? We see a CSG that will win big and outpace market growth, because we have the best talent and the best culture in the industry, and we know that the best, most energized talent wins.

Further, we are driven by a broader purpose to envision, invent and shape a better, more future-ready world. As such, CSG will hold ourselves accountable to make a bigger social impact as we expand our commitment to ESG with more transparent data-driven disclosures and by continuing to be a more diverse, equitable and inclusive CSG.

We see a strong healthy growing sales pipeline and new logo win rate because customers trust CSG to deliver every single day for them. Our customers also know that our product-based business model, our category defining software and our dedicated employees will not let them down.

We see lots of optimism regarding our big customer renewals on the horizon, including with two of our largest cable and pay-TV customers.

And even more importantly, we believe that these big customer renewals will be a springboard to our continued growth in 2022 and beyond, not an excuse for why we can maintain and grow top line revenue in the year following key customer renewals.

We see the innovative investments we make in category defining technology, enabling CSG to be more and more relevant in higher growth, diversified industry vertical segments, which we believe is a cornerstone of how we will hold ourselves accountable to expand our valuation multiples for shareholders.

We see an enhanced capital structure and a thoughtful refinance plan being executed in the second half of 2021 that centers on our target net debt leverage of 2 times.

This refinancing and capital structure will enable us to fund our future organic and inorganic growth, while also consistently returning capital to shareholders via our dividend and share repurchase programs.

Finally, we see CSG continuing to consistently close, integrate and grow, more strategic value-adding and disciplined acquisitions with a relentless focus to grow multiple category defining new businesses that serve high-growth industry verticals all around the world in revenue management, digital monetization, customer engagement and mobile money payment solutions.

In short, we're excited by the opportunities in front of us. It's an honor to lead this energized and passionate CSG team that works harder and smarter every day so that our quarterly business and financial results speak much louder than our words.

With that, I will turn it over to Rollie for more detail on Q2 financials and updated 2021 financial guidance targets..

Thanks Brian. As Brian highlighted, we're off to a strong start in 2021. Given our first half financial performance, we are pleased to raise our 2021 financial guidance targets across the Board. So let's first start by walking through our second quarter financial results, and then I'll share a little more detail about our enhanced 2021 outlook.

Turning to Slide 9. We generated $255 million of revenue and $238 million of non-GAAP adjusted revenue during the second quarter. This result represents 6.2% year-over-year growth, substantially all of which was organic. On a year-to-date basis, both our revenue and adjusted revenue were up approximately 5% year-over-year.

The year-over-year increase in revenue and adjusted revenue was driven primarily by the continued growth of CSG's revenue management solutions, where we serve many of the largest CSPs in the world. We also had some favorable foreign currency movements of approximately $4 million that contributed to our revenue growth for the second quarter.

While our revenue growth was primarily organic, inorganic growth through acquisitions is an important component of our overall growth strategy aimed at advancing our diversification into faster growth, new industry verticals, and increasing our leadership position in other core markets.

Over the past few months, you've seen us execute on that strategy as we closed multiple new acquisitions, including Tango Telecom and Kitewheel.

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 second quarter non-GAAP operating income was $40 million or 16.7% of non-GAAP adjusted revenue, as compared to $31 million or 15.6% in the same prior year period. This year-over-year increase was primarily related to current year revenue growth.

On a year-to-date basis, our non-GAAP adjusted operating margin as a percentage of non-GAAP adjusted revenue was 16.8%. Non-GAAP EPS for the current quarter was $0.82, up $0.23 year-over-year due mostly to our operating performance. On a year-to-date basis, our non-GAAP EPS was $1.65, a 13% increase from the same prior year period.

We are extremely proud to deliver not only top line growth, but EPS growth for our shareholders, a performance trend that the entire CSG management team is focused on perpetuating going forward.

And finally, our non-GAAP adjusted EBITDA was $54 million for the second quarter or 22.8% of non-GAAP adjusted revenue, as compared to $44 million or 19.6% in the same prior year period. On a year-to-date basis, our non-GAAP adjusted EBITDA was $109 million or 22.9% of non-GAAP adjusted revenue.

The growth and expansion that we are seeing in our EBITDA and EPS demonstrate that as we increase our revenue growth rate, CSG continues to stay focused on growing our bottom line as fast or faster than our top line revenue growth. Turning to the balance sheet. Our cash flow generation and shareholder returns for the quarter are included on Slide 10.

Our second quarter 2021 cash flow from operations was $45 million, compared to $58 million in the same prior year period. Further, we generated non-GAAP free cash flows of $38 million in Q2 of 2021 as compared to $48 million in Q2 of 2020.

The year-over-year decrease was primarily related to movements in our working capital, mostly connected with the timing of certain tax payments. Moving on, we ended the second quarter with $212 million of cash and short-term investments.

That, along with our outstanding debt at quarter end, results in $138 million of net debt leverage ratio of 0.6 times. 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.

And as Brian mentioned, we are currently reviewing ways to enhance our capital structure and look to execute a thoughtful plan in the second half of 2021.

From the leverage standpoint, we could operate comfortably with a target of two times net debt, which would enable us to fund our future growth while consistently returning capital to our shareholders through our dividend and share repurchase programs. During the second quarter of 2021, we declared $8 million in dividends.

In addition, we repurchased $7 million of common stock under our stock repurchase program, which is a substantial increase over the prior year period.

We fully expect to consistently execute our strategy in order to accelerate shareholder returns through a combination of higher organic growth, faster inorganic growth, strong bottom line growth and continued EPS expansion. Moving on to Slide 11, I'll conclude with some key takeaways and revisit our 2021 financial objectives.

Given the overall health and momentum across our global CSG business and to include recent acquisition activity, we are pleased to be in a position to increase all of our 2021 financial guidance targets, as outlined in the table on the right of the slide.

On the top line, we're now expecting 2021 revenue to come in between $1,015,000,000 and $1,045,000,000. This represents a $20 million increase on the low end of our original guidance and a $10 million increase on the top end. Similarly, we are increasing our adjusted revenue guidance and now expect to deliver between 946 and $964 million in 2021.

Further, we are increasing our 2021 adjusted operating margin guidance by 25 basis points to a range of 16.5% to 17%, raising our non-GAAP EPS range to between $3.16 and $3.34 and upping our non-GAAP free cash flow by $5 million to a range between 115 and $125 million. Put simply, we're raising our 2021 guidance targets across the board.

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

Net-net, we plan to be more relevant and deliver greater value than we ever have to our shareholders, our customers and our global employees. With that, I'll turn it over to the operator to facilitate the question-and-answer session..

Your first question is from Tom Roderick from Stifel. Your line is open..

Thanks for taking my question. So Brian, let me start with you. I mean, 6% growth is a number we're not necessarily used to seeing around these parts. That's great to see the acceleration.

And I guess I couldn't help but notice some of your commentary regarding end of the year renewals not necessarily signaling sort of a typical downturn or peel back onto the revenue profile. So, I think that's quite a certain combination of optimism that's really encouraging.

I would love to hear a little bit more behind that as you think into the midterm and long term, what gives you sort of that confidence? Maybe you could even start with the 300,000 additive subs coming from Charter as the evidence of share gains, but getting away from just the quarter itself, talk about some of that midterm confidence and maybe you could read in that Charter data point.

That would be great. Thanks..

Tom, hope you're doing well. Great questions. So first, it's really across the board. We've been talking for several quarters about the health, the size, the shape, the strength of our sales pipeline and a huge gratitude to all of our global sales and P&L leaders around the world.

We just continue to execute well on our organic sales, both in our core cable and telecom CSP space, but also in these new higher growth industry verticals. So, that really is what's fueling and driving this but we also like the strategic acquisitions that we're closing that we think also become additive. So in the core, we continue to grow in cable.

We continue to grow and win more in global telecom all around the world with our platforms, and that's really what's fueling this ongoing growth, and it just builds on itself. So, we understand that we want to double, more than double our growth rate and it comes with great organic sales. In the cable business, you asked specifically about Charter.

I'll maybe just digress for a minute. It's fantastic to see the health and the strength of our customers. We've seen great results coming from the cable space. We've seen DISH announce big wins. We've seen our global customer base continue to do big things in the market.

So, we've got a strong, healthy customer base, and we just work damn hard every day to bring them more value, to be easier to do business with and to be their provider of choice. So, we are very proud to continue to grow with Charter.

We're always excited when we can pick up subscribers, convert them on to our platform and displace competitors, and we think if we serve them better than any of their other vendors and partners that net-net, we're going to pick up more business.

And so as we think about these renewals with our big two, but also with just customers all around the world in multiple verticals, we focus on bringing them value, bringing them more agility, helping them become more digital and in the process, we think we can actually expand the business we do within, as we also bring them good value.

And so that is our focus. Our focus is to sign good renewals and absolutely, we expect Q3, Q4 to grow. We also expect and hold ourselves accountable to grow in 2022 and beyond, even with these renewals..

Outstanding. That's great. I wanted to ask you a question about Kitewheel. The notion of omni-channel orchestration is a bit of a mouthful but I wanted to hear a little bit more sort of in terms of how that plays out on the customer journey side.

Is it strictly meant to be on the marketing front? Is this something that can be woven into inbound customer care? And Rollie, a question for you. I apologize if you addressed it, but what is the inorganic contribution relative to the rest of the U.S.

guidance from Kitewheel and Tango?.

So Rollie, why don't you hit the second part of Tom's question on the guidance and what's included in that and what you want to share, and then I'll address the strategic question that Tom raised..

Perfect. Yes Tom, if you look at our guidance range, if you look at the midpoint, we're raising midpoints by about $15 million. I'd say half of that is - about half of that's coming from organic growth. The other half is inorganic for the remainder of the year..

Great. Thanks. Perfect..

And then on the strategic question, Tom, I mean, we are very excited about this acquisition. We think it opens up and expands our offering in our integrated full-stack suite in a $10 billion market. That's got huge upside in terms of addressable market that we can go after.

So, you asked what part it really is, think about more transactional engagement.

So, from the time that it's less around marketing and sales, and it's more when a consumer is looking at packages and offers when they sign up for service, when they activate the service, when they get educated on the service offering, on the billing and the other things, when they have a customer inquiry.

What we do from an end-to-end standpoint is we've always had great engagement channels but with this journey orchestration and analytics, we can actually help these large customers and brands look at the individual consumer experience that we're providing throughout that whole engagement of that life cycle, and we can provide insights in real-time to help them provide the channel of choice, provide the information that the consumer is looking for, provide proactive or predictive offers or education to either give the consumer or the enterprise customer, a better experience or to make it easier for them to find the information or the activity they're looking for and to do it in a much more cost-effective way.

So, it really is around transactional engagement across the channel of choice. Some consumers may prefer a text notification. Others may want a phone call. Others may want an email. Some people still might like a printed statement.

And so we make it easy for them to get what they want, when they want in a cost-effective efficient way, and that's what really excites us and the ability sell this to our large cable and wireless customers all around the world, but also to expand into all those other industry verticals.

And it's that combination of growing and staying healthy in our core CSP and moving into all these other high-growth verticals that is also fueling the revenue growth and transformation of CSG..

Yes. That's fantastic. Thanks for the details. I'll jump back in the queue but that's really, really helpful. Congratulations..

Yes. Thanks very much, Tom..

All right. There are no further questions at this time. Mr. Brian Shepherd, I'll turn the call over back to you. My apologies, sir. We have a follow-up question from Tom Roderick from Stifel..

I can call back right now, this is great. So, I do have one more question for you, Rollie.

Just in terms of the cash flows that there was a change there that you made relative to I guess, it was settlement charges, earnout charges, but the settlement fees that were sort of reclassified, can you just go into what that was? And did that have any impact on moving the guidance for your free cash flows for the year or is that irrelevant relative to that was reclassified?.

Yes. I'll start with the last part of the question. Not relevant, no impact. Essentially, what we did was we took a rework at the settlement assets and merchant reserves. And the fact that, that is actually cash held by us, although it's in our mind, it's restricted and it's aligned with settlement obligations.

So, because of the fact that it is actually cash held by us, the guidance would say it was probably more appropriate to include in our cash, cash equivalents and restricted cash. So really, it's a reclassification within the statement of cash flows.

At the end of the day, no impact on or very minimal impact on historical presentation of cash flow from operations. It was one of the things where we saw there was a lot of diversity in practice, and I think just based on the nature of the cash flows, it was prudent for us to include those on our stable cash flows..

And there are no further questions at this time. Mr. Brian Shepherd, I'll turn the call over back to you..

No, I'll just say thanks for joining the call. We're proud of the first half results that team CSG delivered, but we're laser-focused on delivering fantastic Q3 and Q4 and building momentum for the growth we expect to deliver in 2022. So, thank you for joining today..

This concludes today’s conference call. Thank you for your participation. You may now disconnect..