CSG Systems INTERNATIONAL reports FIRST Quarter 2021 RESULTS

•

Total revenue was $253.1 million and total non-GAAP adjusted revenue was $236.7 million.

•

GAAP operating income was $31.4 million, or 12.4% of total revenue, and non-GAAPoperating income was $40.2 million, or 17.0% of non-GAAP adjusted revenue.

•

GAAP earnings per diluted share (EPS) was $0.61 and non-GAAP EPS was $0.82.

•

Cash flows used in operations were ($2.8) million, with a non-GAAP free cash flow deficit of ($11.0) million.

•

In March 2021, CSG declared its quarterly cash dividend of $0.25 per share of common stock, or a total of approximately $8 million, to shareholders.

•

During the first quarter of 2021, CSG repurchased under its stock repurchase program, approximately 142,000 shares of its common stock for approximately $7 million.

Quarter Ended March 31,

Percent

2021

2020

Changed

GAAP Results:

Revenue

$

253,119

$

245,617

3.1

%

Operating Income

31,377

33,159

(5.4

%)

Operating Margin Percentage

12.4

%

13.5

%

EPS

$

0.61

$

0.66

(7.6

%)

Non-GAAP Results:

Adjusted Revenue

$

236,669

$

227,293

4.1

%

Operating Income

40,207

42,154

(4.6

%)

Adjusted Operating Margin Percentage

17.0

%

18.5

%

EPS

$

0.82

$

0.87

(5.7

%)

GAAP Measures:

Revenue

$995 - $1,035 million

Operating Margin Percentage

12.2% - 12.7%

EPS

$2.30 - $2.53

Cash Flows from Operating Activities

$135 - $155 million

Non-GAAP Measures:

Adjusted Revenue

$922 - $954 million

Adjusted Operating Margin Percentage

16.25% - 16.75%

EPS

$3.02 - $3.24

Adjusted EBITDA

$212 - $222 million

Free Cash Flow

$110 - $120 million

•

CSG's business may be disrupted and its results of operations and cash flows adversely affected by the COVID-19 pandemic;

•

CSG derives over forty percent of its revenue from its two largest customers;

•

Continued market acceptance of CSG's products and services;

•

CSG's ability to continuously develop and enhance products in a timely, cost-effective, technically advanced and competitive manner;

•

CSG's ability to deliver its solutions in a timely fashion within budget, particularly large and complex software implementations;

•

CSG's dependency on the global telecommunications industry, and in particular, the North American telecommunications industry;

•

CSG's ability to meet its financial expectations;

•

Increasing competition in CSG's market from companies of greater size and with broader presence;

•

CSG's ability to successfully integrate and manage acquired businesses or assets to achieve expected strategic, operating and financial goals;

•

CSG's ability to protect its intellectual property rights;

•

CSG's ability to maintain a reliable, secure computing environment;

•

CSG's ability to conduct business in the international marketplace;

•

CSG's ability to comply with applicable U.S. and International laws and regulations; and

•

Fluctuations in credit market conditions, general global economic and political conditions, and foreign currency exchange rates.

March 31,

December 31,

2021

2020

ASSETS

Current assets:

Cash and cash equivalents

$

150,609

$

188,699

Short-term investments

54,539

51,598

Total cash, cash equivalents and short-term investments

205,148

240,297

Settlement assets

108,578

149,785

Trade accounts receivable:

Billed, net of allowance of $3,718 and $3,628

247,025

226,623

Unbilled

40,789

37,785

Income taxes receivable

2,421

2,167

Other current assets

39,047

41,688

Total current assets

643,008

698,345

Non-current assets:

Property and equipment, net of depreciation of $110,797 and $105,073

81,944

81,759

Operating lease right-of-use assets

106,173

110,756

Software, net of amortization of $143,662 and $139,836

25,585

26,453

Goodwill

273,265

272,322

Acquired customer contracts, net of amortization of $107,846 and $105,778

46,273

48,012

Customer contract costs, net of amortization of $42,802 and $39,893

47,334

47,238

Deferred income taxes

9,892

10,205

Other assets

41,007

36,910

Total non-current assets

631,473

633,655

Total assets

$

1,274,481

$

1,332,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Current portion of long-term debt, net of unamortized discounts of $3,119 and zero

$

241,881

$

14,063

Operating lease liabilities

23,309

22,651

Customer deposits

32,565

39,992

Trade accounts payable

32,949

29,834

Accrued employee compensation

71,120

86,289

Settlement liabilities

107,023

148,819

Deferred revenue

55,840

52,357

Income taxes payable

5,797

6,627

Other current liabilities

17,249

19,383

Total current liabilities

587,733

420,015

Non-current liabilities:

Long-term debt, net of unamortized discounts of $1,017 and $5,346

107,733

337,154

Operating lease liabilities

91,028

95,926

Deferred revenue

15,505

17,275

Income taxes payable

2,467

2,436

Deferred income taxes

11,569

5,109

Other non-current liabilities

30,731

31,690

Total non-current liabilities

259,033

489,590

Total liabilities

846,766

909,605

Stockholders' equity:

Preferred stock, par value $.01 per share; 10,000 shares authorized; zero shares issued and outstanding

-

-

Common stock, par value $.01 per share; 100,000 shares authorized; 32,963 and 32,713 shares outstanding

704

700

Additional paid-in capital

471,364

470,557

Treasury stock, at cost; 36,122 and 35,980 shares

(900,644

)

(894,126

)

Accumulated other comprehensive income (loss):

Unrealized gains on short-term investments, net of tax

7

13

Cumulative foreign currency translation adjustments

(31,506

)

(31,151

)

Accumulated earnings

887,790

876,402

Total stockholders' equity

427,715

422,395

Total liabilities and stockholders' equity

$

1,274,481

$

1,332,000

Quarter Ended

March 31,

2021

March 31,

2020

Revenue

$

253,119

$

245,617

Cost of revenue (exclusive of depreciation, shown separately below)

133,542

131,206

Other operating expenses:

Research and development

32,212

30,337

Selling, general and administrative

48,815

44,384

Depreciation

6,113

5,565

Restructuring and reorganization charges

1,060

966

Total operating expenses

221,742

212,458

Operating income

31,377

33,159

Other income (expense):

Interest expense

(3,592

)

(4,213

)

Amortization of original issue discount

(772

)

(730

)

Interest and investment income, net

124

529

Other, net

(555

)

(69

)

Total other

(4,795

)

(4,483

)

Income before income taxes

26,582

28,676

Income tax provision

(6,951

)

(7,162

)

Net income

$

19,631

$

21,514

Weighted-average shares outstanding:

Basic

31,844

31,994

Diluted

32,146

32,358

Earnings per common share:

Basic

$

0.62

$

0.67

Diluted

0.61

0.66

Quarter Ended

March 31,

2021

March 31,

2020

Cash flows from operating activities:

Net income

$

19,631

$

21,514

Adjustments to reconcile net income to net cash used in operating activities -

Depreciation

6,113

5,565

Amortization

10,737

10,788

Amortization of original issue discount

772

730

Asset impairment

102

259

(Gain)/loss on short-term investments and other

15

(85

)

Deferred income taxes

6,508

9,310

Stock-based compensation

5,395

4,857

Subtotal

49,273

52,938

Changes in operating assets and liabilities, net of acquired amounts:

Trade accounts receivable, net

(23,874

)

(23,304

)

Other current and non-current assets and liabilities

(999

)

(8,452

)

Income taxes payable/receivable

(1,022

)

(3,092

)

Trade accounts payable and accrued liabilities

(28,101

)

(32,455

)

Deferred revenue

1,914

7,152

Net cash used in operating activities

(2,809

)

(7,213

)

Cash flows from investing activities:

Purchases of software, property and equipment

(8,239

)

(4,822

)

Purchases of short-term investments

(32,304

)

(16,037

)

Proceeds from sale/maturity of short-term investments

29,340

18,670

Acquisition of and investments in business, net of cash acquired

(648

)

(9,991

)

Net cash used in investing activities

(11,851

)

(12,180

)

Cash flows from financing activities:

Proceeds from issuance of common stock

619

564

Payment of cash dividends

(8,635

)

(8,277

)

Repurchase of common stock

(11,738

)

(13,876

)

Payments on long-term debt

(2,813

)

(1,875

)

Net cash used in financing activities

(22,567

)

(23,464

)

Effect of exchange rate fluctuations on cash

(863

)

(5,947

)

Net decrease in cash and cash equivalents

(38,090

)

(48,804

)

Cash and cash equivalents, beginning of period

188,699

156,548

Cash and cash equivalents, end of period

$

150,609

$

107,744

Supplemental disclosures of cash flow information:

Cash paid during the period for-

Interest

$

5,661

$

6,194

Income taxes

1,468

857

Quarter Ended

Quarter Ended

Quarter Ended

March 31, 2021

December 31, 2020

March 31, 2020

Amount

% of Revenue

Amount

% of Revenue

Amount

% of Revenue

Comcast

$

53,454

21

%

$

54,845

21

%

$

52,679

21

%

Charter

53,382

21

%

54,121

21

%

50,712

21

%

Quarter Ended

Quarter Ended

Quarter Ended

March 31,

December 31,

March 31,

2021

2020

2020

Broadband/Cable/Satellite

57

%

56

%

58

%

Telecommunications

18

%

22

%

17

%

All other

25

%

22

%

25

%

Total revenue

100

%

100

%

100

%

Quarter Ended

Quarter Ended

Quarter Ended

March 31,

December 31,

March 31,

2021

2020

2020

Americas

86

%

84

%

88

%

Europe, Middle East and Africa

10

%

12

%

9

%

Asia Pacific

4

%

4

%

3

%

Total revenue

100

%

100

%

100

%

•

Certain internal financial planning, reporting, and analysis;

•

Forecasting and budgeting;

•

Certain management compensation incentives; and

•

Communications with CSG's Board of Directors, stockholders, financial analysts, and investors.

•

A more complete understanding of CSG's underlying operational results, trends, and cash generating capabilities;

•

Consistency and comparability with CSG's historical financial results; and

•

Comparability to similar companies, many of which present similar non-GAAP financial measures to investors.

•

Non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles;

•

The way in which CSG calculates non-GAAP financial measures may differ from the way in which other companies calculate similar non-GAAP financial measures;

•

Non-GAAP financial measures do not include all items of income and expense that affect CSG's operations and that are required by GAAP to be included in financial statements;

•

Certain adjustments to CSG's non-GAAP financial measures result in the exclusion of items that are recurring and will be reflected in CSG's financial statements in future periods; and

•

Certain charges excluded from CSG's non-GAAP financial measures are cash expenses, and therefore do impact CSG's cash position.

Non-GAAP Exclusions

Adjusted Revenue

Operating Income

Adjusted Operating Margin Percentage

EPS

Transaction fees

X

-

X

-

Restructuring and reorganization charges

-

X

X

X

Executive transition costs

-

X

X

X

Acquisition-related expenses:

-

X

X

X

Amortization of acquired intangible assets

-

X

X

X

Earn-out compensation

-

X

X

X

Transaction-related costs

-

X

X

X

Stock-based compensation

-

X

X

X

Amortization of original issue discount ('OID')

-

-

-

X

Gain (loss) on extinguishment of debt

-

-

-

X

Unusual income tax matters

-

-

-

X

•

Transaction fees are primarily comprised of interchange and other payment-related fees paid, in conjunction with the delivery of service to customers under CSG's payment services contracts, to third-party payment processors and financial institutions by CSG. Because CSG controls the integrated service provided under its payment services customer contracts, these transaction fees are presented gross, and not netted against revenue; however, other payments companies who do not provide and/or control an integrated service present their revenue net of transaction fees. The exclusion of these fees in calculating CSG's non-GAAP adjusted revenue provides management and investors an additional means to use to compare CSG's current revenue with historical and future periods, as well as with other payments companies.

•

Restructuring and reorganization charges are expenses that result from cost reduction initiatives and/or significant changes to CSG's business, to include such things as involuntary employee terminations, changes in management structure, divestitures of businesses, facility consolidations and abandonments, and fundamental reorganizations impacting operational focus and direction. These charges are not considered reflective of CSG's recurring business operating results. The exclusion of these items in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.

•

Executive transition costs include expenses incurred related to the departure of CSG's former CEO under the terms of his separation agreement. These costs were primarily recognized during the third and fourth quarters of 2020 (the CEO's remaining term) and were not considered reflective of CSG's recurring business operating results. The exclusion of these costs in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.

•

Acquisition-related expenses include amortization of acquired intangible assets, earn-out compensation, and transaction-related costs. Transaction-related costs, which typically include expenses related to legal, accounting, and other professional services, are direct and incremental expenses related to business acquisitions, and thus, are not considered reflective of CSG's recurring business operating results. The total amount of acquisition-related expenses can vary significantly between periods based on the number and size of acquisition activities, previously acquired intangible assets becoming fully amortized, and ultimate realization of earn-out compensation. In addition, the timing of these expenses may not directly correlate with underlying performance of the CSG's operations. Therefore, the exclusion of acquisition-related expenses in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.

•

Stock-based compensation results from CSG's issuance of equity awards to its employees under incentive compensation programs. The amount of this incentive compensation in any period is not generally linked to the level of performance by employees or CSG. The exclusion of these expenses in calculating CSG's non-GAAP financial measures allows management and investors an additional means to evaluate the non-cash expense related to compensation included in CSG's results of operations, and therefore, the exclusion of this item allows investors to further evaluate the cash generating capabilities of CSG's business.

•

The convertible notes OID is the result of allocating a portion of the principal balance of the debt at issuance to the equity component of the instrument, as required under current accounting rules. This OID is then amortized to interest expense over the life of the respective convertible debt instrument. The interest expense related to the amortization of the OID is a non-cash expense, and therefore, the exclusion of this item allows investors to further evaluate the cash interest costs of CSG's convertible notes for cash flow, liquidity, and debt service purposes.

•

Gains and losses related to the extinguishment of debt are a result of the refinancing of CSG's credit agreement and/or repurchase of CSG's convertible notes. These activities are not considered reflective of CSG's recurring business operating results. Any resulting gain or loss is generally non-cash income or expense, and therefore, the exclusion of this item allows investors to further evaluate the cash impact of these repurchases for cash flow and liquidity purposes. In addition, the exclusion of these gains and losses in calculating CSG's non-GAAP EPS allows management and investors an additional means to compare CSG's current operating results with historical and future periods.

•

Unusual items within CSG's quarterly and/or annual income tax expense can occur from such things as income tax accounting timing matters, income taxes related to unusual events, or as a result of different treatment of certain items for book accounting and income tax purposes. Consideration of such items in calculating CSG's non-GAAP financial measures allows management and investors an additional means to compare CSG's current financial results with historical and future periods.

Quarter Ended

March 31,

2021

2020

GAAP revenue

$

253,119

$

245,617

Less: Transaction fees

(16,450

)

(18,324

)

Non-GAAP adjusted revenue

$

236,669

$

227,293

Quarter Ended

March 31,

2021

2020

GAAP operating income

$

31,377

$

33,159

Restructuring and reorganization charges (1)

1,060

966

Executive transition costs

55

-

Acquisition-related expenses:

Amortization of acquired intangible assets

2,241

3,051

Transaction-related costs

79

53

Stock-based compensation (1)

5,395

4,925

Non-GAAP operating income

$

40,207

$

42,154

Non-GAAP adjusted revenue

$

236,669

$

227,293

Non-GAAP adjusted operating margin percentage

17.0

%

18.5

%

(1)

Stock-based compensation included in the tables above and following excludes amounts that have been recorded in restructuring and reorganization charges.

Quarter Ended

Quarter Ended

March 31, 2021

March 31, 2020

Amounts

EPS (3)

Amounts

EPS (3)

GAAP net income

$

19,631

$

0.61

$

21,514

$

0.66

GAAP income tax provision (2)

6,951

7,162

GAAP income before income taxes

26,582

28,676

Restructuring and reorganization charges (1)

1,060

966

Executive transition costs

55

-

Acquisition-related costs:

Amortization of acquired intangible assets

2,241

3,051

Transaction-related costs

79

53

Stock-based compensation (1)

5,395

4,925

Amortization of OID

772

730

Non-GAAP income before income taxes

36,184

38,401

Non-GAAP income tax provision (2)

(9,770

)

(10,176

)

Non-GAAP net income

$

26,414

$

0.82

$

28,225

$

0.87

(2)

For the quarters ended March 31, 2021 and 2020 the GAAP effective income tax rates were approximately 26% and 25%, respectively, and the non-GAAP effective income tax rate was approximately 27% for both periods.

(3)

The outstanding diluted shares for the quarters ended March 31, 2021 and 2020 were 32.1 million and 32.4 million, respectively.

Quarter Ended

March 31,

2021

2020

GAAP net income

$

19,631

$

21,514

GAAP income tax provision

6,951

7,162

Interest expense (4)

3,592

4,213

Amortization of OID

772

730

Interest and investment income and other, net

431

(460

)

GAAP operating income

31,377

33,159

Restructuring and reorganization charges (1)

1,060

966

Executive transition costs

55

-

Acquisition-related expenses:

Amortization of acquired intangible assets (5)

2,241

3,051

Transaction-related costs

79

53

Stock-based compensation (1)

5,395

4,925

Amortization of other intangible assets (5)

3,336

3,285

Amortization of customer contract costs (5)

4,722

4,026

Depreciation

6,113

5,565

Non-GAAP adjusted EBITDA

$

54,378

$

55,030

Non-GAAP adjusted EBITDA as a percentage of non-GAAP adjusted revenue

23

%

24

%

(4)

Interest expense includes amortization of deferred financing costs as provided in Note 5 below.

(5)

Amortization on the statement of cash flows is made up of the following items for the indicated periods (in thousands):

Quarter Ended

March 31,

2021

2020

Amortization of acquired intangible assets

$

2,241

$

3,051

Amortization of other intangible assets

3,336

3,285

Amortization of customer contract costs

4,722

4,026

Amortization of deferred financing costs

438

426

Total amortization

$

10,737

$

10,788

Quarter Ended

March 31,

2021

2020

Net cash used in operating activities

$

(2,809

)

$

(7,213

)

Purchases of software, property and equipment

(8,239

)

(4,822

)

Non-GAAP free cash flow

$

(11,048

)

$

(12,035

)