Edgar Filing: CSG SYSTEMS INTERNATIONAL INC

csgs-10q_20180630.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware

47-0783182

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

6175 S. Willow Drive, 10^th Floor

Greenwood Village, Colorado 80111

(Address of principal executive offices, including zip code)

(303) 200-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒ NO ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES ☒ NO ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ☐ NO ☒

Shares of common stock outstanding at July 31, 2018: 33,514,309

CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q for the Quarter Ended June 30, 2018

INDEX

		Page No.

Part I -FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (Unaudited)	3

	Condensed Consolidated Statements of Income for the Quarters and Six Months Ended June 30, 2018 and 2017 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended June 30, 2018 and 2017 (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Controls and Procedures	32

Part II -OTHER INFORMATION

Item 1.	Legal Proceedings	33

Item 1A.	Risk Factors	33

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6.	Exhibits	33

	Index to Exhibits	34

	Signatures	35

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands, except per share amounts)

	June 30,			December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	119,671		$	122,243
Short-term investments		66,693			139,117
Total cash, cash equivalents and short-term investments		186,364			261,360
Trade accounts receivable:
Billed, net of allowance of $3,961 and $4,149		239,913			219,531
Unbilled		38,832			31,187
Income taxes receivable		10,951			13,839
Other current assets		38,185			28,349
Total current assets		514,245			554,266
Non-current assets:
Property and equipment, net of depreciation of $108,542 and $123,126		75,040			44,651
Software, net of amortization of $114,010 and $108,986		30,926			26,906
Goodwill		210,605			210,080
Client contracts, net of amortization of zero and $97,109		-			43,626
Acquired client contracts, net of amortization of $79,398 and zero		41,573			-
Client contract costs, net of amortization of $30,932 and zero		35,527			-
Deferred income taxes		12,303			14,057
Other assets		7,012			10,948
Total non-current assets		412,986			350,268
Total assets	$	927,231		$	904,534
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	7,500		$	22,500
Client deposits		35,626			31,053
Trade accounts payable		37,316			38,420
Accrued employee compensation		44,498			62,984
Deferred revenue		39,558			41,885
Income taxes payable		1,006			1,216
Other current liabilities		26,262			24,535
Total current liabilities		191,766			222,593
Non-current liabilities:
Long-term debt, net of unamortized discounts of $16,721 and $18,264		353,904			309,236
Deferred revenue		9,074			12,346
Income taxes payable		2,396			2,415
Deferred income taxes		9,162			4,584
Other non-current liabilities		11,069			10,614
Total non-current liabilities		385,605			339,195
Total liabilities		577,371			561,788
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; 33,561 and 33,516 shares outstanding		692			689
Common stock warrants; 439 warrants vested and 1,425 issued		9,082			9,082
Additional paid-in capital		431,450			427,091
Treasury stock, at cost; 34,334 and 34,075 shares		(826,066	)		(814,732	)
Accumulated other comprehensive income (loss):
Unrealized loss on short-term investments, net of tax		(114	)		(88	)
Cumulative foreign currency translation adjustments		(37,255	)		(28,734	)
Accumulated earnings		772,071			749,438
Total stockholders' equity		349,860			342,746
Total liabilities and stockholders' equity	$	927,231		$	904,534

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(in thousands, except per share amounts)

	Quarter Ended						Six Months Ended
	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Revenues:
Cloud and related solutions	$	187,401		$	157,879		$	364,917		$	316,656
Software and services		13,331			15,896			25,290			30,954
Maintenance		12,301			18,938			24,530			37,573
Total revenues		213,033			192,713			414,737			385,183
Cost of revenues (exclusive of depreciation, shown separately below):
Cloud and related solutions		95,212			77,286			182,120			153,338
Software and services		8,614			10,405			17,147			21,679
Maintenance		5,666			9,969			11,321			20,351
Total cost of revenues		109,492			97,660			210,588			195,368
Other operating expenses:
Research and development		30,953			27,939			60,332			54,779
Selling, general and administrative		40,624			36,819			81,272			74,165
Depreciation		4,548			3,316			8,462			6,631
Restructuring and reorganization charges		3,329			2,731			4,229			2,979
Total operating expenses		188,946			168,465			364,883			333,922
Operating income		24,087			24,248			49,854			51,261
Other income (expense):
Interest expense		(4,480	)		(4,146	)		(8,746	)		(8,452	)
Amortization of original issue discount		(661	)		(625	)		(1,313	)		(1,513	)
Interest and investment income, net		770			704			1,581			1,510
Loss on extinguishment of debt		-			-			(810	)		-
Other, net		1,008			122			362			(153	)
Total other		(3,363	)		(3,945	)		(8,926	)		(8,608	)
Income before income taxes		20,724			20,303			40,928			42,653
Income tax provision		(5,607	)		(8,722	)		(11,797	)		(10,835	)
Net income	$	15,117		$	11,581		$	29,131		$	31,818

Weighted-average shares outstanding:
Basic		32,589			32,572			32,558			32,294
Diluted		32,908			32,996			33,005			32,795

Earnings per common share:
Basic	$	0.46		$	0.36		$	0.89		$	0.99
Diluted		0.46			0.35			0.88			0.97

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED

(in thousands)


	Quarter Ended					Six Months Ended
	June 30, 2018			June 30, 2017		June 30, 2018			June 30, 2017
Net income	$	15,117		$	11,581	$	29,131		$	31,818
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(16,231	)		5,225		(8,521	)		9,564
Unrealized holding gains (losses) on short-term investments arising during period		68			103		(26	)		147
Other comprehensive income (loss), net of tax		(16,163	)		5,328		(8,547	)		9,711
Total comprehensive income (loss), net of tax	$	(1,046	)	$	16,909	$	20,584		$	41,529

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)

	Six Months Ended
	June 30, 2018			June 30, 2017
Cash flows from operating activities:
Net income	$	29,131		$	31,818
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation		8,462			6,631
Amortization		20,957			14,418
Amortization of original issue discount		1,313			1,513
Asset impairment		1,001			2,147
Gain on short-term investments and other		(108	)		(37	)
Loss on extinguishment of debt		810			-
Deferred income taxes		4,944			1,725
Stock-based compensation		10,213			11,644
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net		(11,369	)		7,796
Other current and non-current assets		(13,995	)		(4,787	)
Income taxes payable/receivable		1,828			(1,402	)
Trade accounts payable and accrued liabilities		(27,772	)		(19,266	)
Deferred revenue		799			12,288
Net cash provided by operating activities		26,214			64,488

Cash flows from investing activities:
Purchases of property and equipment		(26,715	)		(18,738	)
Purchases of short-term investments		(44,345	)		(73,831	)
Proceeds from sale/maturity of short-term investments		116,866			104,291
Acquisition of and investments in business, net of cash acquired		(68,636	)		-
Acquisition of and investments in client contracts		-			(7,526	)
Net cash provided by (used in) investing activities		(22,830	)		4,196

Cash flows from financing activities:
Proceeds from issuance of common stock		1,134			846
Payment of cash dividends		(14,375	)		(13,713	)
Repurchase of common stock		(18,319	)		(16,482	)
Proceeds from long-term debt		150,000			-
Payments on long-term debt		(121,875	)		(7,500	)
Settlement of convertible notes		-			(34,771	)
Payments of deferred financing costs		(1,490	)		-
Net cash used in financing activities		(4,925	)		(71,620	)
Effect of exchange rate fluctuations on cash		(1,031	)		1,696

Net decrease in cash and cash equivalents		(2,572	)		(1,240	)

Cash and cash equivalents, beginning of period		122,243			126,351
Cash and cash equivalents, end of period	$	119,671		$	125,111

Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest	$	7,744		$	7,629
Income taxes		4,778			10,490

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL

We have prepared the accompanying unaudited condensed consolidated financial statements as of June 30, 2018 and December 31, 2017, and for the quarters and six months ended June 30, 2018 and 2017, in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position and operating results have been included. The unaudited Condensed Consolidated Financial Statements (the “Financial Statements”) should be read in conjunction with the Consolidated Financial Statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 10-K”), filed with the SEC. The results of operations for the quarter and six months ended June 30, 2018 are not necessarily indicative of the expected results for the entire year ending December 31, 2018.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue. We adopted Topic 606 Revenue from Contracts with Customers (“ASC 606”) as of January 1, 2018 using the cumulative effect method and have applied ASC 606 to all contracts with clients that had not been completed as of the date of initial application. In conjunction with the adoption of ASC 606, we recorded a cumulative adjustment increasing beginning retained earnings (net of tax) by approximately $7 million, primarily related to contracts that we were previously required to defer revenue as we did not have vendor specific objective evidence (“VSOE”) of fair value for certain undelivered elements. Since we adopted ASC 606 using the cumulative effect method, comparative information in our Financial Statements has not been adjusted and continues to be as previously reported.

The following tables summarize the impacts of adopting ASC 606 on our Financial Statements as of and for the quarter and six months ended June 30, 2018 (in thousands, except per share amounts):

	As of June 30, 2018
Condensed Balance Sheet	As Reported			Adjustments			Balances without adoption of ASC 606
Unbilled trade accounts receivable	$	38,832		$	(614	)	$	38,218
Other current assets		38,185			3,670			41,855
Client contracts, net of amortization		-			69,125			69,125
Acquired client contracts, net of amortization		41,573			(41,573	)		-
Client contract costs, net of amortization		35,527			(35,527	)		-
Other non-current assets		7,012			4,305			11,317
Other assets		766,102			-			766,102
Total assets (1)	$	927,231		$	(614	)	$	926,617
Deferred revenue	$	48,632		$	3,218		$	51,850
Deferred income taxes		9,162			(179	)		8,983
Other liabilities		519,577			-			519,577
Total liabilities		577,371			3,039			580,410
Accumulated earnings		772,071			(3,653	)		768,418
Other stockholders' equity		(422,211	)		-			(422,211	)
Total stockholders' equity		349,860			(3,653	)		346,207
Total stockholders' equity and liabilities	$	927,231		$	(614	)	$	926,617

(1)

See Note 3 for further discussion related to the reclassification of our client contracts and client contract costs.

	Quarter Ended June 30, 2018
Condensed Statement of Income	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues:
Cloud and related services (2)	$	187,401		$	(6,138	)	$	181,263
Software and services (2)		13,331			1,587			14,918
Maintenance (2)		12,301			5,197			17,498
Total revenues		213,033			646			213,679
Cost of revenues:
Cloud and related services (2)		95,212			(4,703	)		90,509
Software and services (2)		8,614			215			8,829
Maintenance (2)		5,666			4,488			10,154
Total cost of revenues		109,492			-			109,492
Other expenses		82,817			-			82,817
Income before income taxes		20,724			646			21,370
Income tax provision		(5,607	)		(187	)		(5,794	)
Net income	$	15,117		$	459		$	15,576
Net income per diluted share	$	0.46		$	0.01		$	0.47

	Six Months Ended June 30, 2018
Condensed Statement of Income	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues:
Cloud and related services (2)	$	364,917		$	(13,132	)	$	351,785
Software and services (2)		25,290			3,153			28,443
Maintenance (2)		24,530			10,325			34,855
Total revenues		414,737			346			415,083
Cost of revenues:
Cloud and related services (2)		182,120			(10,998	)		171,122
Software and services (2)		17,147			452			17,599
Maintenance (2)		11,321			9,602			20,923
Total cost of revenues		210,588			(944	)		209,644
Other expenses		163,221			-			163,221
Income before income taxes		40,928			1,290			42,218
Income tax provision		(11,797	)		(374	)		(12,171	)
Net income	$	29,131		$	916		$	30,047
Net income per diluted share	$	0.88		$	0.03		$	0.91

(2)

Adjustments are primarily related to software license products and related maintenance contracted as part of our cloud solutions contracts that were not capable of being distinct as a separate performance obligation under ASC 606 and are included in cloud solutions services in the quarter and six months ended June 30, 2018. Costs associated with these products were also reclassified to cost of cloud solution services in the quarter and six months ended June 30, 2018.

	Six Months Ended June 30, 2018
Condensed Statement of Cash Flows	As Reported			Adjustments			Balances without adoption of ASC 606
Net income	$	29,131		$	916		$	30,047
Adjustments to reconcile net income to net cash provided by operating activities -
Amortization		20,957			(2,002	)		18,955
Deferred income taxes		4,944			374			5,318
Other		21,691			-			21,691
Changes in operating assets and liabilities:
Other current and non-current assets		(13,995	)		5,349			(8,646	)
Deferred revenue		799			(1,126	)		(327	)
Other		(37,313	)