CSG Systems International(CSGS) - 2021 Q4 - Annual Report

PART I Business CSG is a SaaS platform company offering revenue management, digital monetization, and customer experience solutions, primarily serving the communications sector and expanding into new verticals Who We Are - CSG is a SaaS platform company enabling large enterprises to manage business complexity in the digital age, focusing on customer acquisition, monetization, engagement, and retention[22] - The company serves a wide variety of industries including telecom, broadband, cable media, retail, healthcare, financial services, insurance, and government[25] What We Do - CSG's core solutions include Revenue Management and Digital Monetization, Transformational Customer Experiences, and Payments[29][31][35] - The payments platform handles tens of billions of dollars in payment volumes for more than 81,000 merchants annually in a secure, PCI-compliant environment[36] - The company provides operational services including infrastructure management, application configuration, and business operations management, allowing customers to focus on their core business[39] How We Grow - CSG's growth strategy is focused on accelerating revenue growth through disciplined strategic, financial, and targeted acquisitions[45] - Key business priorities include becoming the SaaS technology provider of choice for Communication Service Providers (CSPs) and expanding into high-growth industry verticals like retail, healthcare, financial services, and government[49][50] Customers - Key customers include major CSPs like Charter, Comcast, MTN, Verizon, and AT&T, as well as large brands in financial services (Bank of America, Citigroup) and retail[51] Revenue from Major Customers (2021 vs 2020) | Customer | 2021 Amount (millions) | 2021 % of Revenue | 2020 Amount (millions) | 2020 % of Revenue | | :--- | :--- | :--- | :--- | :--- | | Charter | $221 | 21% | $209 | 21% | | Comcast | $216 | 21% | $213 | 22% | Competition - CSG competes with a diverse range of companies, including on-premise providers (Amdocs, Netcracker), packaged software vendors (SalesForce, Adobe), systems integrators (Accenture), and large payments processors (FIS, Fiserv)[56] Human Capital - As of December 31, 2021, CSG employed approximately 5,200 people globally[62] Workforce Distribution by Region (as of Dec 31, 2021) | Region | % of Workforce | | :--- | :--- | | North America | 47% | | Asia-Pacific-Australia | 39% | | Europe, Middle East, Africa | 10% | | South and Central America | 4% | - The company has implemented a "Flexible First" approach, allowing approximately 90% of employees the option to work from home[61] Regulatory Matters - The company is subject to numerous international and U.S. laws and regulations, including those related to data privacy, information security, anti-money laundering, and anti-corruption (e.g., FCPA)[68][69][70] Risk Factors The company faces significant risks including customer concentration, cybersecurity threats, acquisition integration challenges, industry dependence, and compliance with evolving global regulations Risks Related to Our Business - Over 40% of revenue is generated from two largest customers, Charter and Comcast, creating significant concentration risk[78] - The company's solutions are delivered through various computing environments (public/hybrid cloud, data centers) which are subject to risks of interruption, outage, or security breaches like ransomware attacks[82][83] - Acquisitions involve risks such as diversion of management's attention, integration challenges, and the inability to achieve expected financial targets and synergies[88][89] - The payments business is exposed to fraud and chargeback risks, which could increase loss rates and diminish merchant and consumer confidence[94] Risks Related to Our Industry - A large percentage of revenue is generated from the global communications industry, making the company highly dependent on the health and business trends of this sector, particularly North American cable and satellite customers[102] - Market consolidation within the communications industry could lead to fewer providers with greater bargaining power, potentially resulting in price pressure or loss of business if an existing customer is acquired[104] Risks Related to Laws and Regulations - The company processes confidential and personally identifiable information (PII), making it subject to numerous evolving data privacy laws such as GDPR, CCPA, and HIPAA, with security breaches posing a significant risk[109] - The payments business is subject to state money transmitter licensing requirements, which can be costly and complex to obtain and maintain, and failure to comply could result in enforcement actions[111][112] - Global operations require compliance with U.S. and international laws such as the Foreign Corrupt Practices Act (FCPA) and economic sanctions programs administered by OFAC[115] General Risks - The COVID-19 pandemic continues to present uncertainty regarding its impact on global economic activity, customer demand, and the company's ability to deliver solutions[119] - The company's success depends on its ability to attract and retain key management and highly skilled personnel, with intense competition for talent in areas like R&D and technical support[121] - As of December 31, 2021, the company has approximately $207 million of long-lived assets (other than goodwill) and $321 million of goodwill, which are subject to impairment risk[123] Properties As of December 31, 2021, CSG operates over 30 leased global sites, including its Colorado headquarters and four U.S. production facilities, totaling approximately 700,000 square feet - As of December 31, 2021, the company operated in over 30 leased sites worldwide, covering approximately 700,000 square feet[125] - The company leases four statement production and mailing facilities in Omaha, NE; Crawfordville, FL; Austin, TX; and Fort Worth, TX, with leases expiring between 2022 and 2028[127] Legal Proceedings The company is not currently a party to any material pending or threatened legal proceedings arising from its normal business operations - In the opinion of management, CSG is not presently a party to any material pending or threatened legal proceedings[129] 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, with 4.7 million securities available for future issuance under equity plans and 310,092 shares repurchased in Q4 2021 - As of December 31, 2021, there were 4,703,890 securities remaining available for future issuance under the company's equity compensation plans[156] Issuer Repurchases of Equity Securities (Q4 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Oct 2021 | 43,359 | $50.18 | | Nov 2021 | 75,840 | $52.41 | | Dec 2021 | 190,893 | $55.25 | | Total | 310,092 | $53.84 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses FY2021 financial results, noting a 5.6% revenue increase to $1,046.5 million and improved operating income, alongside liquidity, capital resources, and critical accounting policies Management Overview Key Financial Results (2021 vs 2020) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Revenue | $1,046.5M | $990.5M | | Operating Income | $124.2M | $105.6M | | Operating Margin | 11.9% | 10.7% | | Diluted EPS | $2.26 | $1.82 | - Revenue for 2021 increased 5.6% to $1,046.5 million, mainly attributed to organic growth in revenue management platforms[168] - The increase in 2021 operating income reflects higher revenue and the absence of $13.0 million in executive transition costs and a ~$10 million impairment charge that impacted 2020 results[169] Significant Customer Relationships - Charter and Comcast are the two largest customers, with revenue from Charter at $221 million (21%) in 2021 and from Comcast at $216 million (21%) in 2021[174][178] - An amended agreement with Charter, effective January 1, 2022, extends the contractual relationship through December 31, 2027, and provides a framework for consolidating more customer accounts onto CSG's ACP platform[174] Critical Accounting Policies - The most critical accounting policies involve significant judgments and estimates related to revenue recognition, impairment of long-lived assets, income taxes, and loss contingencies[184] - Revenue recognition for complex SaaS, software license, and bundled service arrangements requires significant judgment in identifying performance obligations, determining transaction prices, and allocating value[186][187][188] Detailed Discussion of Results of Operations Revenue by Geographic Region (in thousands) | Region | 2021 | 2020 | | :--- | :--- | :--- | | Americas | $887,428 | $856,858 | | Europe, Middle East, and Africa | $117,431 | $96,480 | | Asia Pacific | $41,628 | $37,195 | | Total Revenue | $1,046,487 | $990,533 | - Total operating expenses increased 4.2% to $922.3 million in 2021, primarily due to increased employee-related costs and costs from acquired businesses[198] - R&D expense increased 9.6% to $134.7 million in 2021, representing 12.9% of total revenue, up from 12.4% in 2020[202][205] - The effective income tax rate was 28% in 2021, compared to 31% in 2020, with the 2020 rate impacted by executive transition costs[203][213] Liquidity - As of December 31, 2021, principal sources of liquidity included $233.7 million in cash, cash equivalents, and short-term investments, and $450 million available under a revolving credit facility[215][216] - Net cash flows from operating activities decreased to $140.2 million in 2021 from $173.0 million in 2020[221] - Investing activities in 2021 included $63.6 million for acquisitions and investments, primarily for Tango, Kitewheel, DGIT, and MobileCard[228] - Financing activities in 2021 included repurchasing $36.0 million of common stock, paying $32.6 million in dividends, and a net increase in debt of $21.6 million from refinancing[233][236][237] Capital Resources - As of December 31, 2021, the company had 3.6 million shares remaining for repurchase under its Stock Repurchase Program[251] - The company has elected to redeem all of its outstanding $230.0 million 2016 Convertible Notes on March 15, 2022, which will be settled in cash using available cash and the 2021 Revolver[241][260] - Management believes that current cash, the 2021 Revolver, and cash generated from operations will be sufficient to meet capital requirements for at least the next twelve months[263] Quantitative and Qualitative Disclosures About Market Risk CSG faces market risks from interest rate fluctuations on its credit agreement, investment value changes, and foreign currency exposure, though 87% of 2021 revenue was USD - The company is exposed to interest rate risk through its 2021 Credit Agreement, which is based on an adjusted LIBOR rate plus an applicable margin[265] - As of December 31, 2021, the fair value of the 2016 Convertible Notes was estimated at $245.0 million, which is exposed to market risk from changes in interest rates and the company's stock price[270] - The company is exposed to foreign currency exchange risk, but this is mitigated as approximately 87% of its revenue in 2021 was generated in U.S. dollars[271][272] Financial Statements and Supplementary Data This section presents the consolidated financial statements for FY2021, including balance sheets, income statements, and cash flows, along with management's report and KPMG's unqualified audit opinion Consolidated Balance Sheets Consolidated Balance Sheet Highlights (as of Dec 31) | Account | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Total Current Assets | $748,199 | $714,591 | | Total Assets | $1,387,149 | $1,332,000 | | Total Current Liabilities | $695,102 | $436,260 | | Total Liabilities | $946,905 | $909,605 | | Total Stockholders' Equity | $440,244 | $422,395 | Consolidated Statements of Income Consolidated Statement of Income (Year Ended Dec 31) | Metric | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Revenue | $1,046,487 | $990,533 | | Operating Income | $124,186 | $105,556 | | Net Income | $72,331 | $58,711 | | Diluted EPS | $2.26 | $1.82 | Consolidated Statements of Cash Flows Consolidated Statement of Cash Flows (Year Ended Dec 31) | Cash Flow Activity | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $140,223 | $172,993 | | Net cash used in investing activities | ($66,706) | ($66,258) | | Net cash used in financing activities | ($33,391) | ($92,113) | Notes to Consolidated Financial Statements - Revenue from SaaS and related solutions was $926.3 million in 2021, up from $880.8 million in 2020[335] - As of December 31, 2021, the aggregate transaction price allocated to remaining performance obligations is approximately $2 billion, with about 70% expected to be recognized by the end of 2024[333] - In 2021, the company acquired Tango Telecom, Kitewheel, Keydok, DGIT Systems, and MobileCard, leading to an increase in goodwill from $272.3 million to $321.3 million[371][404][407][409][411][412] - In September 2021, the company entered into a new $600 million credit agreement, refinancing its previous debt and increasing its revolving loan facility from $200 million to $450 million[381][382] Controls and Procedures Management concluded disclosure controls were effective as of December 31, 2021, with internal control evaluation excluding recent acquisitions, and KPMG issued an unqualified attestation report - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[462] - The evaluation of internal control over financial reporting excluded the recently acquired MobileCard, Keydok, and DGIT Systems, as permitted by SEC rules for the first year post-acquisition[464] PART III Directors, Executive Officers and Corporate Governance Information on directors is incorporated by reference from the 2022 Proxy Statement, while executive officer details are in Part I of this Form 10-K - Information regarding directors is incorporated by reference from the 2022 Annual Meeting Proxy Statement, and information on executive officers is included in Part I of this Form 10-K[470] Executive Compensation Executive compensation information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2022 Annual Meeting Proxy Statement[471] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference from the 2022 Proxy Statement, with equity compensation details in Item 5 - Information regarding security ownership is incorporated by reference from the 2022 Annual Meeting Proxy Statement, and equity compensation plan information is located in Item 5[472] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the 2022 Annual Meeting Proxy Statement[473] Principal Accounting Fees and Services Principal accounting fees and services information is incorporated by reference from the company's 2022 Annual Meeting Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the 2022 Annual Meeting Proxy Statement[474] PART IV Exhibits, Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, with financial statements indexed on page 41 and an extensive exhibit index provided - This section lists all financial statements and exhibits filed with the report, with financial statements indexed on page 41, and an exhibit index beginning on page 76[476]