CSG Systems International(CSGS) - 2021 Q1 - Quarterly Report

Part I Condensed Consolidated Financial Statements For the quarter ended March 31, 2021, CSG reported revenue of $253.1 million, a 3.1% increase year-over-year, but net income declined to $19.6 million from $21.5 million, with total assets decreasing to $1.27 billion and total liabilities falling to $846.8 million, notably reclassifying $226.9 million in convertible notes to current liabilities, resulting in a net cash outflow from operations of $2.8 million due to customer payment timing Condensed Consolidated Balance Sheets As of March 31, 2021, total assets were $1.27 billion, down from $1.33 billion at year-end 2020, while total liabilities decreased to $846.8 million from $909.6 million, with a significant increase in the current portion of long-term debt to $241.9 million due to convertible note reclassification, and cash and cash equivalents decreasing from $188.7 million to $150.6 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $1,274,481 | $1,332,000 | | Total current assets | $643,008 | $698,345 | | Total non-current assets | $631,473 | $633,655 | | Total Liabilities | $846,766 | $909,605 | | Total current liabilities | $587,733 | $420,015 | | Total non-current liabilities | $259,033 | $489,590 | | Total Stockholders' Equity | $427,715 | $422,395 | - The current portion of long-term debt increased substantially from $14.1 million to $241.9 million, reflecting the reclassification of the 2016 Convertible Notes[7][46] Condensed Consolidated Statements of Income For the first quarter of 2021, revenue increased 3.1% year-over-year to $253.1 million, but operating income decreased to $31.4 million from $33.2 million, and net income fell to $19.6 million from $21.5 million in the prior-year period, resulting in diluted earnings per share (EPS) decreasing to $0.61 from $0.66 Q1 Income Statement Comparison (in thousands, except per share amounts) | Metric | Q1 2021 | Q1 2020 | Change | | :--- | :--- | :--- | :--- | | Revenue | $253,119 | $245,617 | +3.1% | | Operating Income | $31,377 | $33,159 | -5.4% | | Net Income | $19,631 | $21,514 | -8.8% | | Diluted EPS | $0.61 | $0.66 | -7.6% | Condensed Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2021 was $19.3 million, a substantial increase from $6.4 million in Q1 2020, primarily due to a significantly smaller negative impact from foreign currency translation adjustments, which were $(0.4) million in Q1 2021 compared to $(15.1) million in the prior-year quarter Q1 Comprehensive Income Comparison (in thousands) | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net Income | $19,631 | $21,514 | | Foreign currency translation adjustments | $(355) | $(15,084) | | Total Comprehensive Income | $19,270 | $6,406 | Condensed Consolidated Statements of Stockholders' Equity During Q1 2021, total stockholders' equity increased from $422.4 million to $427.7 million, primarily driven by $19.6 million in net income, partially offset by $11.7 million in common stock repurchases and $8.2 million in dividend payments Reconciliation of Stockholders' Equity for Q1 2021 (in thousands) | Description | Amount | | :--- | :--- | | Balance, January 1, 2021 | $422,395 | | Net Income | $19,631 | | Repurchase of common stock | $(11,721) | | Dividends | $(8,243) | | Other (Stock comp, currency adj., etc.) | $5,583 | | Balance, March 31, 2021 | $427,715 | Condensed Consolidated Statements of Cash Flows For Q1 2021, the company reported a net cash usage of $2.8 million from operating activities, compared to a $7.2 million usage in Q1 2020, with investing activities using $11.9 million and financing activities using $22.6 million, resulting in a net decrease in cash and cash equivalents of $38.1 million, ending the quarter with a balance of $150.6 million Q1 Cash Flow Summary (in thousands) | Cash Flow Activity | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Net cash used in operating activities | $(2,809) | $(7,213) | | Net cash used in investing activities | $(11,851) | $(12,180) | | Net cash used in financing activities | $(22,567) | $(23,464) | | Net decrease in cash and cash equivalents | $(38,090) | $(48,804) | | Cash and cash equivalents, end of period | $150,609 | $107,744 | Notes to Condensed Consolidated Financial Statements (Unaudited) The notes provide detailed disclosures on accounting policies, asset composition, debt structure, and equity activities, including a breakdown of revenue by type and geography, the reclassification of $226.9 million in convertible notes to a current liability, and specifics on stock repurchases and dividends paid during the quarter - As of March 31, 2021, the company had approximately $900 million in remaining performance obligations, with about 80% expected to be recognized as revenue by the end of 2023[23] - The net carrying value of the 2016 Convertible Notes of $226.9 million was reclassified as a current liability as of March 31, 2021, because holders have the option to convert them starting December 15, 2021[46] - In Q1 2021, the company repurchased 142,000 shares for $6.5 million under its stock repurchase program and paid a quarterly cash dividend of $0.25 per share, totaling $8.2 million[59][63] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 3.1% Q1 revenue growth to strength in revenue management solutions and professional services, with the decrease in operating income to $31.4 million primarily due to higher employee-related costs, while customer concentration remains a key risk with Comcast and Charter each accounting for 21% of revenue, and the company maintains strong liquidity with $205.1 million in cash and investments and a $200 million undrawn credit facility, despite a temporary negative operating cash flow due to the timing of a customer payment Management Overview of Quarterly Results In Q1 2021, revenue increased by 3.1% to $253.1 million compared to Q1 2020, driven by growth in revenue management solutions, but operating income margin declined from 13.5% to 12.4%, and diluted EPS fell from $0.66 to $0.61, mainly due to increased employee-related costs, with operating cash flow negative at $(2.8) million because a significant recurring customer payment was received just after the quarter ended Q1 2021 vs Q1 2020 Highlights (in thousands, except per share data) | Metric | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Revenue | $253,119 | $245,617 | | Operating income | $31,377 | $33,159 | | Operating income margin | 12.4% | 13.5% | | Diluted EPS | $0.61 | $0.66 | - The decrease in operating income was mainly attributed to increased employee-related costs, as Q1 2020 operating income had benefited from a mark-to-market reduction in a compensation liability[83] - Operating cash flow was negative due to the timing of a key recurring customer payment that was received after quarter-end[85] Significant Customer Relationships The company's revenue is highly concentrated, with its two largest customers, Comcast and Charter, each accounting for 21% of total revenue in Q1 2021, posing an inherent risk, and the current agreement with Charter is set to expire on December 31, 2021, with renewal discussions underway Revenue from Major Customers (as % of Total Revenue) | Customer | Q1 2021 | Q1 2020 | | :--- | :--- | :--- | | Comcast | 21% | 21% | | Charter | 21% | 21% | - The company is currently engaged in discussions with Charter regarding contract renewal terms for the agreement that runs through December 31, 2021[89] Results of Operations Total revenue for Q1 2021 increased 3.1% to $253.1 million, driven by growth in revenue management solutions and strong professional services revenue, while total operating expenses rose 4.4% to $221.7 million, primarily due to higher employee-related costs, with SG&A expenses seeing the largest percentage increase at 10.0%, reflecting investment in the company's growth strategy Operating Expense Breakdown (in thousands) | Expense Category | Q1 2021 | Q1 2020 | % Change | | :--- | :--- | :--- | :--- | | Cost of Revenue | $133,542 | $131,206 | +1.8% | | R&D Expense | $32,212 | $30,337 | +6.2% | | SG&A Expense | $48,815 | $44,384 | +10.0% | - The increase in R&D expense was mainly due to higher employee-related costs and the reassignment of personnel from cost of revenue projects to R&D projects[97] Liquidity and Capital Resources As of March 31, 2021, the company's liquidity consisted of $205.1 million in cash and short-term investments, plus a $200 million undrawn revolving credit facility, with Q1 operating cash flow negative $(2.8) million, impacted by a delayed customer payment of approximately $26 million, and key uses of capital included $6.5 million for stock repurchases and $8.6 million for dividend payments, as the company reclassified its $230 million convertible notes to a current liability ahead of a potential conversion period - Principal sources of liquidity as of March 31, 2021, included $205.1 million in cash, cash equivalents, and short-term investments, and a $200 million undrawn revolving credit facility[105][106] - Q1 2021 operating cash flow was negatively impacted by the timing of a key customer payment of approximately $26 million, which was received after the quarter ended[109] - The 2016 Convertible Notes were reclassified to a current liability as they will be convertible at the option of note holders from December 15, 2021, to March 15, 2022[144] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate risk on its variable-rate debt, market value fluctuations of its convertible debt, and foreign currency exchange risk, with the interest rate on the 2018 Credit Agreement being variable, though management states a hypothetical 10% change would not be material, and foreign currency risk is mitigated as 88% of Q1 2021 revenue was denominated in U.S. dollars, while the fair value of the convertible debt is subject to market risk but is only disclosed for informational purposes - The interest rate on the 2018 Credit Agreement is variable (based on LIBOR), exposing the company to interest rate risk, though a 10% adverse change is not considered material[149][150] - The fair value of the 2016 Convertible Notes was estimated at $243.5 million as of March 31, 2021, which is exposed to market risk from changes in interest rates and the company's stock price[155] - Foreign currency exchange rate risk is limited as approximately 88% of revenue in Q1 2021 was generated in U.S. dollars[157] Controls and Procedures Based on an evaluation conducted as of March 31, 2021, the company's CEO and CFO concluded that its disclosure controls and procedures were effective, and no changes occurred during the first quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - 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[159] - Management's evaluation found no changes during the quarter that materially affected or are reasonably likely to materially affect the company's internal control over financial reporting[160] Part II Legal Proceedings The company reports that it is not currently a party to any material pending or threatened legal proceedings - From time-to-time, the company is involved in litigation arising from normal business operations, but it is not presently a party to any material legal proceedings[165] Risk Factors There were no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - No material changes to the risk factors disclosed in the 2020 Form 10-K occurred during the first quarter of 2021[166] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2021, the company repurchased a total of 251,687 shares of its common stock at a weighted-average price of $46.64 per share, with 141,900 shares repurchased as part of its publicly announced stock repurchase program, and as of March 31, 2021, 4,195,217 shares remained available for repurchase under the program Q1 2021 Share Repurchase Summary | Month (2021) | Total Shares Purchased | Average Price Paid | Shares Purchased as Part of Program | | :--- | :--- | :--- | :--- | | January | 54,911 | $44.68 | 53,900 | | February | 87,732 | $46.22 | 38,700 | | March | 109,044 | $47.97 | 49,300 | | Total | 251,687 | $46.64 | 141,900 | - As of the end of March 2021, the company had authorization to repurchase a maximum of 4,195,217 additional shares under its plan[168] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to master service agreements with Charter Communications and Comcast, CEO and CFO certifications as required by the Sarbanes-Oxley Act, and Inline XBRL documents - Filed exhibits include the 48th, 49th, and 50th amendments to the agreement with Charter Communications Operating, LLC[174] - A third amendment to the master agreement with Comcast Cable Communications Management, LLC was also filed[174] - Certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 were included as exhibits[174]