CSG SYSTEMS INTERNATIONAL INC Q2 FY2021 earnings

CSG Systems International closed its second quarter of 2021 with revenue of $255.1 million, up 6.2% from $240.3 million in the same quarter of 2020. Management attributed the gain to growth in revenue management solutions, favorable foreign currency movements, and the drag the pandemic put on the prior-year quarter. Revenue for the six months ended June 30, 2021 was $508.3 million, up 4.6% year over year.

Profitability improved faster than the top line. GAAP operating income for the quarter reached $32.2 million, up 62.7% from $19.8 million a year earlier, and GAAP operating margin was 12.6%, up from 8.2%. Net income was $19.3 million, up 86.4% from $10.4 million, and diluted EPS was $0.60 against $0.32. Part of that swing came from an approximately $10 million impairment charge for capitalized customer contract costs tied to a discontinued implementation in the second quarter of 2020.

Non-GAAP results told a similar story. Adjusted revenue was $238.5 million, also up 6.2%, and non-GAAP operating income was $39.8 million, or 16.7% of adjusted revenue. Non-GAAP EPS came in at $0.82, compared with $0.59 a year earlier. Management said the growth was overwhelmingly organic.

Cash generation was the soft spot. Operating cash flow for the quarter was $45.0 million, down 22.4% from $58.1 million. The six-month figure was $42.2 million, down 17.0% from $50.9 million. Recurring customer payments slipped past quarter-end in the first quarter of 2021, and similar delays hit the first and second quarters of 2020, which management flagged as the cause. Non-GAAP free cash flow was $37.5 million for the quarter and $27.1 million for the six months. Capital expenditures for the six months were $15.2 million, up 5.7%.

Customer concentration remains the central structural risk. Charter took 22% of second quarter revenue and Comcast 21%, and CSG says it derives over forty percent of revenue from its two largest customers. During the quarter the company converted approximately 300,000 Charter subscribers in the Kansas City market from a competitor's billing platform onto its ACP solution. The Charter agreement runs through December 31, 2021, with an option to extend for another year, and renewal talks are underway. A loss or sharp reduction at either account would hurt.

Deferred revenue (current portion) was $55.0 million at June 30, 2021, up 5.3% from a year earlier, while remaining performance obligations fell to $900 million from $1.0 billion, a 10.0% decline. CSG keeps buying growth. It acquired Tango in May 2021 for about $13 million and closed the $40 million Kitewheel purchase on July 1, 2021, paying $34 million at closing with $6 million due over the next three years.

Guidance for the full year 2021 moved up across the board. GAAP revenue is now expected between $1,015 million and $1,045 million, up from a prior range of $995 million to $1,035 million, with GAAP EPS of $2.35 to $2.53 and a GAAP operating margin of 12.3% to 12.7%. Cash flows from operating activities are guided to $140 million to $160 million. On a non-GAAP basis, management targets adjusted revenue of $946 million to $964 million, an adjusted operating margin of 16.5% to 17.0%, EPS of $3.16 to $3.34, adjusted EBITDA of $217 million to $225 million, and free cash flow of $115 million to $125 million.

The raised outlook assumes organic growth holds and the two big cable customers renew or expand. Other risks listed in the filings include competition from larger rivals, the difficulty of delivering large software implementations on time and within budget, integration of acquired businesses, foreign currency swings, and the pandemic. CSG had $200 million available on its revolver at June 30, 2021, leaving room for more deals.