CSG Systems International(CSGS) - 2019 Q2 - Quarterly Report

Part I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents CSG Systems International, Inc.'s unaudited condensed consolidated financial statements for the three and six-month periods ended June 30, 2019 Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $1,179,717 | $1,114,362 | | Total current assets | $572,628 | $599,567 | | Total non-current assets | $607,089 | $514,795 | | Total Liabilities | $805,393 | $753,338 | | Total current liabilities | $335,584 | $350,391 | | Total non-current liabilities | $469,809 | $402,947 | | Total Stockholders' Equity | $374,324 | $361,024 | - Total assets increased to $1.18 billion as of June 30, 2019, from $1.11 billion at year-end 2018, primarily driven by the recognition of $94.0 million in operating lease right-of-use assets upon adoption of a new lease accounting standard[7] Condensed Consolidated Statements of Income Statement of Income Summary (in thousands, except EPS) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Revenues | $245,856 | $213,033 | $490,649 | $414,737 | | Operating Income | $30,338 | $24,087 | $62,431 | $49,854 | | Net Income | $19,379 | $15,117 | $38,630 | $29,131 | | Diluted EPS | $0.60 | $0.46 | $1.19 | $0.88 | - Revenues for Q2 2019 increased 15.4% YoY to $245.9 million, and net income grew 28.2% YoY to $19.4 million. For the six-month period, revenues increased 18.3% YoY, and net income grew 32.6% YoY[10] Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive Income (Loss) (in thousands) | Metric | Q2 2019 | Q2 2018 | Six Months 2019 | Six Months 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Income | $19,379 | $15,117 | $38,630 | $29,131 | | Other Comprehensive Income (Loss) | ($3,808) | ($16,163) | $57 | ($8,547) | | Total Comprehensive Income (Loss) | $15,571 | ($1,046) | $38,687 | $20,584 | Condensed Consolidated Statements of Stockholders' Equity - For the six months ended June 30, 2019, total stockholders' equity increased from $361.0 million to $374.3 million. Key activities included net income of $38.6 million, offset by common stock repurchases of $20.3 million and cash dividend declarations of $14.7 million[13] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for Six Months Ended June 30 (in thousands) | Cash Flow Category | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $28,429 | $26,214 | | Net cash used in investing activities | ($15,647) | ($22,830) | | Net cash used in financing activities | ($38,184) | ($4,925) | | Net decrease in cash and cash equivalents | ($25,500) | ($2,572) | | Cash and cash equivalents, beginning of period | $139,277 | $122,243 | | Cash and cash equivalents, end of period | $113,777 | $119,671 | Notes to Condensed Consolidated Financial Statements This section details accounting policies and financial data, covering revenue recognition, lease accounting, long-lived assets, debt, commitments, and equity activities - As of June 30, 2019, the company had approximately $501 million in remaining performance obligations, primarily from fixed fees and guaranteed minimums, with about 90% expected to be recognized as revenue by the end of 2021[21] Revenues by Type and Geography for Six Months Ended June 30 (in thousands) | Revenue by Type | 2019 | 2018 | | :--- | :--- | :--- | | Cloud and related solutions | $441,773 | $364,917 | | Software and services | $25,201 | $25,290 | | Maintenance | $23,675 | $24,530 | | Total Revenues | $490,649 | $414,737 | | Revenue by Geography | 2019 | 2018 | | Americas | $425,120 | $350,120 | | Europe, Middle East, and Africa | $47,232 | $42,411 | | Asia Pacific | $18,297 | $22,206 | - The company adopted the new lease accounting standard (ASU 2016-02, Topic 842) in January 2019, resulting in the recognition of approximately $80 million in right-of-use assets and lease liabilities on the balance sheet[33][34] Long-Term Debt Summary as of June 30, 2019 (in thousands) | Debt Instrument | Carrying Value | | :--- | :--- | | 2018 Term Loan, net | $138,628 | | 2016 Convertible Notes, net | $219,670 | | Total Debt, net | $358,298 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2019 financial performance, covering revenue growth, client concentration, operational trends, liquidity, and capital allocation Company Overview - CSG is a leading provider of revenue management, digital monetization, customer experience, and payment solutions, primarily serving the communications, media, and entertainment industries[78] - The company generates approximately 60% of its revenues from North American cable and satellite markets and 87% from the Americas region overall for the six months ended June 30, 2019[81] Management Overview of Quarterly Results Q2 2019 vs Q2 2018 Financial Highlights (in thousands, except EPS) | Metric | Q2 2019 | Q2 2018 | | :--- | :--- | :--- | | Revenues | $245,856 | $213,033 | | Operating income | $30,338 | $24,087 | | Operating income margin | 12.3% | 11.3% | | Diluted EPS | $0.60 | $0.46 | - The 15% YoY revenue increase in Q2 2019 was mainly attributed to additional revenues from the acquisition of Forte on October 1, 2018, and continued growth in cloud solutions and managed service arrangements[86] Significant Client Relationships - The company has a significant client concentration, with Comcast and Charter accounting for 23% and 20% of revenues, respectively, in Q2 2019[90][91] - Comcast exercised a one-year renewal option, extending their agreement through June 30, 2020. The company is currently in discussions with Comcast regarding further contract renewal terms[93][94] Results of Operations - Total revenues for the six months ended June 30, 2019, increased 18% YoY to $490.6 million, driven by the Forte acquisition, growth in cloud solutions, and a full six months of revenue from the Business Ink acquisition[99] - Cloud and related solutions revenues grew 21% YoY for the first six months of 2019, while Software/services and Maintenance revenues saw slight declines, reflecting a strategic shift towards recurring revenue models[101][102][103][104] - Operating expenses for the six months ended June 30, 2019, increased 17% YoY, mainly due to additional costs from the Forte acquisition, including amortization and earn-out compensation[105] - Operating income margin improved to 12.7% for the first six months of 2019 from 12.0% in the prior year period, due to higher revenues and lower restructuring costs[119] Liquidity and Capital Resources - As of June 30, 2019, principal sources of liquidity included $131.5 million in cash, cash equivalents, and short-term investments, and a $200 million undrawn revolving credit facility[123][124] - Net cash from operating activities for the six months ended June 30, 2019 was $28.4 million, a slight increase from $26.2 million in the prior year period[128] - Key uses of cash in the first half of 2019 included $17.9 million for capital expenditures, $14.8 million for dividend payments, and $20.7 million for stock repurchases (including repurchases for tax withholdings)[137][140][141][142] - The company believes its current cash, expected operating cash flows, and available credit will be sufficient to meet capital requirements for at least the next twelve months[162] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, market value, and foreign currency exchange risks, with a hypothetical 10% adverse change not expected to be material - Interest rate risk exists on the 2018 Credit Agreement, which has variable rates based on LIBOR. The 2016 Convertible Notes have a fixed interest rate[165] - Market risk for cash equivalents and short-term investments ($131.5 million total) is considered minimal due to short maturities and strict investment guidelines[167][168] - Foreign currency exchange risk is present due to global operations, though approximately 88% of revenues in the first half of 2019 were in U.S. dollars, mitigating this risk[171][172] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal controls - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[175] Part II - OTHER INFORMATION Item 1. Legal Proceedings The company states that it is not currently a party to any material pending or threatened legal proceedings - CSG is not presently a party to any material pending or threatened legal proceedings[179] Item 1A. Risk Factors There were no material changes to the risk factors previously disclosed in the company's 2018 Form 10-K during the second quarter of 2019 - No material changes to the risk factors disclosed in the 2018 Form 10-K occurred during the second quarter of 2019[180] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchases during Q2 2019, including shares bought under the publicly announced program Common Stock Repurchases in Q2 2019 | Period | Total Shares Purchased | Average Price Paid Per Share ($) | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | April 2019 | 66,447 | $44.19 | 65,400 | | May 2019 | 43,187 | $45.86 | 43,000 | | June 2019 | 38,822 | $46.84 | 35,600 | | Total | 148,456 | $45.37 | 144,000 | Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including key agreements and required certifications - Exhibits filed include multiple amendments to the Master Subscriber Management System Agreements with both Comcast and Charter Communications[188] - Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits[188]