CSG Systems International(CSGS) - 2018 Q4 - Annual Report

PART I Business CSG provides revenue management, digital monetization, customer experience, and payment solutions, primarily for the communications industry - CSG provides revenue management, digital monetization, customer experience, and payment solutions, with a primary focus on the global communications industry[9] - The company's business strategy is centered on creating long-term recurring relationships, expanding its product portfolio through innovation, delivering on commitments, and investing in talent[18][20] Key Client Revenue Contribution (2017-2018) | Client | 2018 Revenue (millions) | 2018 % of Total | 2017 Revenue (millions) | 2017 % of Total | | :--- | :--- | :--- | :--- | :--- | | Comcast | $221 | 25% | $219 | 28% | | Charter | $179 | 20% | $171 | 22% | | DISH | $80 | 9% | $89 | 11% | Research & Development Expenses (2017-2018) | Year | R&D Expense (millions) | % of Total Revenues | | :--- | :--- | :--- | | 2018 | $124.0 | 14% | | 2017 | $113.2 | 14% | - The company's primary product solutions include Revenue Management & Digital Monetization (ACP, Ascendon), Customer Communications Management, Payments (enhanced by the Forte acquisition), and Managed Services[25][28] - As of December 31, 2018, the company had 3,965 employees, an increase of 592 from the previous year, largely due to the acquisitions of Business Ink and Forte[37] Risk Factors The company faces significant risks from client concentration, cybersecurity threats, data privacy, acquisition integration, and global operational complexities - A significant portion of revenues (approximately 55%) is derived from three largest clients (Comcast, Charter, and DISH), posing a concentration risk[43] - The delivery of solutions depends on computing systems and networks that are subject to risks of interruption, outages, and security breaches, including cyber-attacks[46] - The company processes and stores confidential and personally identifiable information (PII), making it subject to data privacy laws like GDPR and risks associated with security breaches[48] - Acquisitions involve numerous risks, including difficulties in assimilation, expansion into new markets, and the potential inability to achieve expected financial targets and synergies[52] - The business is highly dependent on the global communications industry, which is subject to market consolidation, increased competition from digital lifestyle providers, and fluctuating capital investment cycles[55][56] - The company's payment processing business is subject to U.S. payments regulations, including state money transmitter licensing requirements, and anti-money laundering (AML) laws[63][69] - Global operations expose the company to additional risks, including foreign currency fluctuations, compliance with varied legal frameworks like the FCPA, political instability, and potential adverse tax impacts[70][73] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - There are no unresolved staff comments[84] Properties CSG operates globally from over 25 leased sites, including its Colorado headquarters and four U.S. statement production facilities - The company's corporate headquarters is located in Greenwood Village, Colorado[88] - CSG leases over 25 sites worldwide, covering more than 700,000 square feet for office space and approximately 350,000 square feet for four statement production and mailing facilities[87][89] - Leases for office and production facilities expire between 2019 and 2027[88][89] Legal Proceedings The company is not currently involved in any material pending or threatened legal proceedings - In the opinion of management, the company is not presently a party to any material pending or threatened legal proceedings[91] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[92] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities CSG's common stock is listed on NASDAQ under 'CSGS', with details on stock performance, equity compensation, and Q4 2018 share repurchases - The company's common stock is listed on the NASDAQ Stock Market under the symbol 'CSGS'[114] Issuer Repurchases of Equity Securities (Q4 2018) | Period | Total Shares Purchased | Average Price Paid Per Share ($) | | :--- | :--- | :--- | | Oct 1 - Oct 31 | 108,396 | $36.43 | | Nov 1 - Nov 30 | 89,160 | $35.92 | | Dec 1 - Dec 31 | 116,500 | $32.46 | | Total | 314,056 | $34.81 | - As of December 31, 2018, there were 4,460,053 securities remaining available for future issuance under equity compensation plans approved by security holders[119] Selected Financial Data This section provides a five-year summary of key financial metrics, reflecting acquisitions, revenue recognition standard adoption, and debt activities Selected Financial Data (2014-2018, in thousands, except per share amounts) | Metric | 2018 (thousands) | 2017 (thousands) | 2016 (thousands) | 2015 (thousands) | 2014 (thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $875,059 | $789,582 | $760,958 | $752,520 | $751,286 | | Operating income | $104,932 | $105,685 | $132,629 | $113,140 | $75,690 | | Net income | $66,130 | $61,364 | $62,882 | $62,567 | $35,711 | | Diluted EPS ($) | $2.01 | $1.87 | $1.90 | $1.87 | $1.06 | | Dividend per share ($) | $0.84 | $0.79 | $0.74 | $0.70 | $0.62 | | Total assets | $1,114,362 | $904,534 | $891,879 | $862,731 | $839,367 | | Total debt | $359,826 | $331,736 | $416,260 | $279,130 | $250,376 | - In 2018, the company adopted the new revenue recognition standard ASC 606 using the cumulative effect approach, which resulted in a cumulative adjustment increasing beginning retained earnings by approximately $7 million (net of tax)[125] - The 2018 results include operations from the acquisitions of Business Ink (ten months) and Forte Payment Systems (three months), which contributed approximately $74 million in revenue[125] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2018, CSG's revenues grew 11% to $875.1 million, driven by acquisitions, while operating income slightly decreased due to investment costs 2018 vs. 2017 Results of Operations Summary | Metric | 2018 | 2017 | | :--- | :--- | :--- | | Revenues (millions) | $875.1 | $789.6 | | Operating Income (millions) | $104.9 | $105.7 | | Operating Margin (%) | 12.0 | 13.4 | | Diluted EPS ($) | $2.01 | $1.87 | - The 11% revenue increase in 2018 was mainly attributed to the acquisitions of Business Ink and Forte, which together generated approximately $74 million in revenues during the year[149] - The company acquired Business Ink for approximately $70 million and Forte Payment Systems for approximately $85 million in 2018, funded with existing cash[131][133] - The effective income tax rate for 2018 was 24%, a decrease from 30% in 2017, primarily due to the U.S. Tax Cuts and Jobs Act which reduced the corporate tax rate from 35% to 21%[136][207] - Cash flows from operating activities increased to $143.3 million in 2018 from $127.2 million in 2017[152] Results of Operations Total revenues increased 11% to $875.1 million in 2018, primarily from acquisitions, while operating margin contracted to 12.0% due to rising expenses Revenue by Type (2016-2018, in thousands) | Revenue Type | 2018 (thousands) | 2017 (thousands) | 2016 (thousands) | | :--- | :--- | :--- | | Cloud and related solutions | $766,377 | $651,010 | $606,936 | | Software and services | $58,101 | $62,892 | $79,400 | | Maintenance | $50,581 | $75,680 | $74,622 | | Total revenues | $875,059 | $789,582 | $760,958 | - The 18% increase in Cloud and related solutions revenue was driven by $74.1 million from acquisitions (Business Ink and Forte) and a $26.0 million reclassification of revenue from other categories due to the adoption of ASC 606[177] - R&D expense increased 10% to $124.0 million in 2018, representing 14% of total revenues, reflecting a heightened level of investment in growth initiatives[194][196] - Operating income margin decreased from 13.4% in 2017 to 12.0% in 2018, reflecting costs from acquisitions and planned business investments[203] Liquidity and Capital Resources Cash and equivalents decreased to $162.9 million in 2018 due to acquisitions, while operating cash flow increased, supported by a refinanced credit agreement - Cash, cash equivalents, and short-term investments decreased to $162.9 million at year-end 2018 from $261.4 million in 2017, mainly due to approximately $155 million used for the acquisitions of Business Ink and Forte[209] Cash Flow Summary (2017-2018, in thousands) | Cash Flow Activity | 2018 (thousands) | 2017 (thousands) | | :--- | :--- | :--- | | Net Cash from Operating Activities | $143,341 | $127,195 | | Net Cash used in Investing Activities | ($86,139) | ($29,904) | | Net Cash used in Financing Activities | ($37,509) | ($105,494) | - In March 2018, the company refinanced its credit agreement, extending the term to March 2023, borrowing $150 million, and securing a $200 million revolving credit facility, which remained undrawn as of year-end[210][211][251] - Key uses of cash in 2018 included $144.8 million for acquisitions, $57.1 million for capital expenditures, $34.7 million for common stock repurchases, and $28.0 million for dividend payments[226][228][236][237] Contractual Obligations as of Dec 31, 2018 (in thousands) | Obligation Type | Total (thousands) | Less than 1 Year (thousands) | Years 2-3 (thousands) | Years 4-5 (thousands) | More than 5 Years (thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $570,048 | $23,854 | $56,007 | $137,999 | $352,188 | | Leases | $79,465 | $16,609 | $27,147 | $21,034 | $14,675 | | Purchase obligations | $259,410 | $89,826 | $129,199 | $28,787 | $11,598 | | Total | $908,923 | $130,289 | $212,353 | $187,820 | $378,461 | Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, market, and foreign currency risks, though a significant portion of revenue is USD-denominated - The company is exposed to interest rate risk through its 2018 Credit Agreement, which has interest rates based on a variable adjusted LIBOR rate[265] - Market risk exists for cash equivalents, short-term investments, and the fair value of its convertible debt, which is influenced by interest rates and the company's stock price[267][270] - Foreign currency exchange rate risk is present due to global operations, but is partially mitigated as approximately 87% of 2018 revenues were generated in U.S. dollars[271][272] Financial Statements and Supplementary Data This section includes consolidated financial statements for 2018, management's report on internal controls, and KPMG's unqualified audit opinion - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2018. The assessment excluded the recently acquired Forte Payment Systems, Inc.[283] - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of the company's internal control over financial reporting[286][295] Consolidated Balance Sheet Summary (as of Dec 31, in thousands) | Account | 2018 (thousands) | 2017 (thousands) | | :--- | :--- | :--- | | Total current assets | $599,567 | $554,266 | | Total assets | $1,114,362 | $904,534 | | Total current liabilities | $350,391 | $222,593 | | Total liabilities | $753,338 | $561,788 | | Total stockholders' equity | $361,024 | $342,746 | Consolidated Statement of Income Summary (Year Ended Dec 31, in thousands) | Account | 2018 (thousands) | 2017 (thousands) | 2016 (thousands) | | :--- | :--- | :--- | | Total revenues | $875,059 | $789,582 | $760,958 | | Operating income | $104,932 | $105,685 | $132,629 | | Income before income taxes | $86,987 | $87,710 | $99,999 | | Net income | $66,130 | $61,364 | $62,882 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None reported[491] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2018, excluding a recent acquisition from the internal control assessment - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[491] - Management's evaluation of internal control over financial reporting excluded Forte Payment Systems, Inc., which was acquired on October 1, 2018[492] - There were no changes in internal control over financial reporting during the fourth quarter of 2018 that have materially affected, or are reasonably likely to materially affect, internal controls[494] Other Information The company reports no other information for this item - None[495] PART III Directors, Executive Officers and Corporate Governance Information on directors and executive officers is incorporated by reference from the 2019 Proxy Statement and Part I of this Form 10-K - Information for this item is incorporated by reference from the Registrant's Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders[498] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2019 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the Registrant's Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders[499] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership details are incorporated by reference from the 2019 Proxy Statement, excluding equity compensation plan information in Item 5 - Information for this item is incorporated by reference from the Registrant's Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders[500] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2019 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the Registrant's Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders[501] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2019 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the Registrant's Definitive Proxy Statement for its 2019 Annual Meeting of Stockholders[502] PART IV Exhibits, Financial Statement Schedules This section lists financial statements and exhibits, with no separate schedules, as all required information is in the main financial statements - This section lists the financial statements filed as part of the report, which are indexed on page 40[505] - No separate financial statement schedules are provided, as the required information is included within the main financial statements and their notes[505] - An Exhibit Index is provided, listing all exhibits filed with or incorporated by reference into the Form 10-K[506]