Edgar Filing: CSG SYSTEMS INTERNATIONAL INC

csgs-10q_20180930.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 September 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 every Interactive Data File required to be submitted 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 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	☐	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 November 2, 2018: 33,328,416

CSG SYSTEMS INTERNATIONAL, INC.

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

INDEX

		Page No.

Part I -FINANCIAL INFORMATION

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

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

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

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	34

Part II -OTHER INFORMATION

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 6.	Exhibits	35

	Index to Exhibits	36

	Signatures	37

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands, except per share amounts)

	September 30,			December 31,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	197,172		$	122,243
Short-term investments		2,130			139,117
Total cash, cash equivalents and short-term investments		199,302			261,360
Trade accounts receivable:
Billed, net of allowance of $4,182 and $4,149		246,731			219,531
Unbilled		36,847			31,187
Income taxes receivable		7,452			13,839
Other current assets		38,706			28,349
Total current assets		529,038			554,266
Non-current assets:
Property and equipment, net of depreciation of $108,266 and $123,126		78,265			44,651
Software, net of amortization of $116,761 and $108,986		31,953			26,906
Goodwill		210,697			210,080
Client contracts, net of amortization of zero and $97,109		-			43,626
Acquired client contracts, net of amortization of $81,286 and zero		39,863			-
Client contract costs, net of amortization of $37,038 and zero		35,584			-
Deferred income taxes		11,011			14,057
Other assets		10,898			10,948
Total non-current assets		418,271			350,268
Total assets	$	947,309		$	904,534
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt	$	7,500		$	22,500
Client deposits		36,079			31,053
Trade accounts payable		39,054			38,420
Accrued employee compensation		56,578			62,984
Deferred revenue		41,388			41,885
Income taxes payable		448			1,216
Other current liabilities		21,590			24,535
Total current liabilities		202,637			222,593
Non-current liabilities:
Long-term debt, net of unamortized discounts of $15,641 and $18,264		353,109			309,236
Deferred revenue		13,578			12,346
Income taxes payable		2,372			2,415
Deferred income taxes		5,881			4,584
Other non-current liabilities		11,313			10,614
Total non-current liabilities		386,253			339,195
Total liabilities		588,890			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; 33,451 and 33,516 shares outstanding		693			689
Common stock warrants; 439 warrants vested; 1,425 issued		9,082			9,082
Additional paid-in capital		436,412			427,091
Treasury stock, at cost; 34,470 and 34,075 shares		(831,585	)		(814,732	)
Accumulated other comprehensive income (loss):
Unrealized loss on short-term investments, net of tax		(7	)		(88	)
Cumulative foreign currency translation adjustments		(37,364	)		(28,734	)
Accumulated earnings		781,188			749,438
Total stockholders' equity		358,419			342,746
Total liabilities and stockholders' equity	$	947,309		$	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						Nine Months Ended
	September 30, 2018			September 30, 2017				September 30, 2018			September 30, 2017
Revenues:
Cloud and related solutions	$	186,473		$	164,789			$	551,390		$	481,445
Software and services		14,283			15,726				39,573			46,680
Maintenance		12,299			18,680				36,829			56,253
Total revenues		213,055			199,195				627,792			584,378
Cost of revenues (exclusive of depreciation, shown separately below):
Cloud and related solutions		95,092			79,856				277,212			233,194
Software and services		8,669			9,725				25,816			31,404
Maintenance		5,291			10,136				16,612			30,487
Total cost of revenues		109,052			99,717				319,640			295,085
Other operating expenses:
Research and development		31,477			30,324				91,809			85,103
Selling, general and administrative		39,243			35,816				120,515			109,981
Depreciation		4,831			3,344				13,293			9,975
Restructuring and reorganization charges		2,799			1,618				7,028			4,597
Total operating expenses		187,402			170,819				552,285			504,741
Operating income		25,653			28,376				75,507			79,637
Other income (expense):
Interest expense		(4,456	)		(4,186	)			(13,202	)		(12,638	)
Amortization of original issue discount		(671	)		(634	)			(1,984	)		(2,147	)
Interest and investment income, net		675			800				2,256			2,310
Loss on extinguishment of debt		-			-				(810	)		-
Other, net		(709	)		(970	)			(347	)		(1,123	)
Total other		(5,161	)		(4,990	)			(14,087	)		(13,598	)
Income before income taxes		20,492			23,386				61,420			66,039
Income tax provision		(4,391	)		(8,806	)			(16,188	)		(19,641	)
Net income	$	16,101		$	14,580			$	45,232		$	46,398

Weighted-average shares outstanding:
Basic		32,507			32,561				32,541			32,383
Diluted		32,806			32,901				32,939			32,825

Earnings per common share:
Basic	$	0.50		$	0.45			$	1.39		$	1.43
Diluted		0.49			0.44				1.37			1.41

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

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(in thousands)


	Quarter Ended					Nine Months Ended
	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017
Net income	$	16,101		$	14,580	$	45,232		$	46,398
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(109	)		5,609		(8,630	)		15,173
Unrealized holding gains on short-term investments arising during period		107			7		81			154
Other comprehensive income (loss), net of tax		(2	)		5,616		(8,549	)		15,327
Total comprehensive income, net of tax	$	16,099		$	20,196	$	36,683		$	61,725

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)

	Nine Months Ended
	September 30, 2018			September 30, 2017
Cash flows from operating activities:
Net income	$	45,232		$	46,398
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation		13,293			9,975
Amortization		31,974			21,670
Amortization of original issue discount		1,984			2,147
Asset impairment		1,428			2,135
Gain on short-term investments and other		(65	)		(76	)
Loss on extinguishment of debt		810			-
Deferred income taxes		2,150			1,487
Stock-based compensation		14,805			16,659
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net		(15,952	)		7,567
Other current and non-current assets		(21,763	)		(1,788	)
Income taxes payable/receivable		5,365			1,715
Trade accounts payable and accrued liabilities		(13,174	)		(16,007	)
Deferred revenue		7,182			10,940
Net cash provided by operating activities		73,269			102,822

Cash flows from investing activities:
Purchases of software, property and equipment		(44,047	)		(23,370	)
Purchases of short-term investments		(53,285	)		(116,203	)
Proceeds from sale/maturity of short-term investments		190,467			150,768
Acquisition of and investments in business, net of cash acquired		(71,443	)		-
Acquisition of and investments in client contracts		-			(10,082	)
Net cash provided by investing activities		21,692			1,113

Cash flows from financing activities:
Proceeds from issuance of common stock		1,701			1,259
Payment of cash dividends		(21,197	)		(20,405	)
Repurchase of common stock		(24,034	)		(24,764	)
Proceeds from long-term debt		150,000			-
Payments on long-term debt		(123,750	)		(11,250	)
Settlement of convertible notes		-			(34,771	)
Payments of deferred financing costs		(1,490	)		-
Net cash used in financing activities		(18,770	)		(89,931	)
Effect of exchange rate fluctuations on cash		(1,262	)		2,396

Net increase in cash and cash equivalents		74,929			16,400

Cash and cash equivalents, beginning of period		122,243			126,351
Cash and cash equivalents, end of period	$	197,172		$	142,751

Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest	$	14,181		$	13,638
Income taxes		8,426			16,407

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 September 30, 2018 and December 31, 2017, and for the quarters and nine months ended September 30, 2018 and 2017, in accordance with accounting principles generally accepted (“GAAP”) in the United States of America (“U.S.”) 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 U.S. 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 nine months ended September 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 U.S. 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 nine months ended September 30, 2018 (in thousands, except per share amounts):

	As of September 30, 2018
Condensed Balance Sheet	As Reported			Adjustments			Balances without adoption of ASC 606
Unbilled trade accounts receivable	$	36,847		$	(533	)	$	36,314
Other current assets		38,706			4,014			42,720
Client contracts, net of amortization		-			66,364			66,364
Acquired client contracts, net of amortization		39,863			(39,863	)		-
Client contract costs, net of amortization		35,584			(35,584	)		-
Other non-current assets		10,898			5,069			15,967
Other assets		785,411			-			785,411
Total assets (1)	$	947,309		$	(533	)	$	946,776
Deferred revenue	$	54,966		$	2,655		$	57,621
Deferred income taxes		5,881			8			5,889
Other liabilities		528,043			-			528,043
Total liabilities		588,890			2,663			591,553
Accumulated earnings		781,188			(3,196	)		777,992
Other stockholders' equity		(422,769	)		-			(422,769	)
Total stockholders' equity		358,419			(3,196	)		355,223
Total stockholders' equity and liabilities	$	947,309		$	(533	)	$	946,776

(1)

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

	Quarter Ended September 30, 2018
Condensed Statement of Income	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues:
Cloud and related services (2)	$	186,473		$	(6,162	)	$	180,311
Software and services (2)		14,283			1,589			15,872
Maintenance (2)		12,299			5,217			17,516
Total revenues		213,055			644			213,699
Cost of revenues:
Cloud and related services (2)		95,092			(4,544	)		90,548
Software and services (2)		8,669			208			8,877
Maintenance (2)		5,291			4,336			9,627
Total cost of revenues		109,052			-			109,052
Other expenses		83,511			-			83,511
Income before income taxes		20,492			644			21,136
Income tax provision		(4,391	)		(187	)		(4,578	)
Net income	$	16,101		$	457		$	16,558
Net income per diluted share	$	0.49		$	0.01		$	0.50

	Nine Months Ended September 30, 2018
Condensed Statement of Income	As Reported			Adjustments			Balances without adoption of ASC 606
Revenues:
Cloud and related services (2)	$	551,390		$	(19,294	)	$	532,096
Software and services (2)		39,573			4,742			44,315
Maintenance (2)		36,829			15,542			52,371
Total revenues		627,792			990			628,782
Cost of revenues:
Cloud and related services (2)		277,212			(15,542	)		261,670
Software and services (2)		25,816			660			26,476
Maintenance (2)		16,612			13,938			30,550
Total cost of revenues		319,640			(944	)		318,696
Other expenses		246,732			-			246,732
Income before income taxes		61,420			1,934			63,354
Income tax provision		(16,188	)		(561	)		(16,749	)
Net income	$	45,232		$	1,373		$	46,605
Net income per diluted share	$	1.37		$	0.04		$	1.41

(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 nine months ended September 30, 2018. Costs associated with these products were also reclassified to cost of cloud solution services in the quarter and nine months ended September 30, 2018.

	Nine Months Ended September 30, 2018
Condensed Statement of Cash Flows	As Reported			Adjustments			Balances without adoption of ASC 606
Net income	$	45,232		$	1,373		$	46,605
Adjustments to reconcile net income to net cash provided by operating activities -
Amortization		31,974			(3,146	)		28,828
Deferred income taxes		2,150			561			2,711
Other		32,255			-			32,255
Changes in operating assets and liabilities:
Other current and non-current assets		(21,763	)		10,231			(11,532	)
Deferred revenue		7,182			(1,689	)		5,493
Other		(23,761