Liz Bauer - SVP, IR and Strategic Communications Peter Kalan - CEO Randy Wiese - CFO

Matt Van Vliet - Stifel Howard Smith - First Analysis

Thank you, Mike, and thanks to everyone for joining us. Today's discussion will contain a number of forward-looking statements.

These will include, but are not limited to, statements regarding our projected financial results, our ability to meet our client's needs through our products, services and performance and our ability to successfully convert the backlog of customer accounts onto our solutions in a timely manner. While these statements reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially.

Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new or future events. In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release, as well as our most recently filed 10-K and 10-Q, which are all available on the investor relations section of our website.

Also, we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures, when reviewed in conjunction with our GAAP financial measures, provide investors with greater transparency to the information used by our management team in our financial and operational decision making.

For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me today on the phone are Peter Kalan, our Chief Executive Officer; and Randy Wiese, our Chief Financial Officer.

With that, I'd now like to turn the call over to Peter.

Thank you, Liz, and thanks to everyone for joining us today. For the third quarter, we reported total revenues of $187 million, and non-GAAP earnings per share of $0.72.

This quarter's non-GAAP EPS is a record for the company and reflects the benefits from the various actions that we've taken to improve the performance of our company over the last several quarters. When comparing the first nine months of 2015 to the first nine months of 2014, we've delivered double digit growth in non-GAAP earnings.

We've accomplished these strong results through a combination of improvements in the cost structure of both our domestic and international operations, the migration of new customer accounts onto our processing solution in North America, critically evaluating where we place our investment dollars; and the scale benefits and continued maturation of our international managed services and content monetization offerings. I'd like to spend some time providing you with some additional detail surrounding the actions that have led us to these strong and improving results.

First let me provide some context. Five years ago we made a significant acquisition that provided us with product capabilities that we believed our North American cable and DBS clients would need as their businesses evolved, and also in order to monetize content and digital services in new ways.

In addition, this acquisition allowed us to expand our reach outside of North America, with an impressive list of communication service providers around the world, reducing our client concentration in North America, and expanding our domain expertise into the wireline and wireless telco space. While strategically this acquisition accomplished our goals, financially this acquisition has not met our expectations.

We've been focusing on improving this portion of our business over the last several quarters to better align our spending levels with our revenue opportunities. Looking at our business on a broader basis, our teams have been executing on several initiatives over the last several years that are improving our market position and profitability, as is evidenced by our progress this year.

First, as we continue to add new customer accounts onto our advanced convergent platform, or ACP, we're able to gain additional scale benefits as we further leverage our existing infrastructure and people cost. Since our last earnings call, in August, we've converted 1.3 million more Comcast customer accounts off of a competitor's platform and onto our ACP platform, bringing the total to 1.6 million Comcast customers converted in 2015.

And we've converted approximately one-third of the total subscribers to be converted since we signed the contract in the third quarter of 2014. Second, we introduced our managed services offering for international clients, leveraging our expertise and running large scale platforms.

From our client's vantage point, this allows them to maximize existing platforms while evolving their systems and operations to help them compete more effectively. From our vantage point, this allows us to do what we do best, helping our clients automate and standardize processes, technologies and operations so that they – to drive the efficiencies and excellence in their business.

From a CSG business model perspective, we're substituting more predictable, visible and recurring annual revenues in place of the traditionally more lumpy and short-term oriented software and services. This allows us to manage our employee and technology costs more effectively, thereby improving the profitability of our international engagements.

Third, we brought in a new head of professional services to improve our global practices. One of the key improvements was to move from a regional to a global delivery model.

This has also allowed us to move to more centralized delivery centers, inclusive of low-cost centers and has resulted in increased utilization of our staff, and most important, improve the quality in our implementations. Fourth, as a result of the visibility that we have in our long-term relationships with our clients, we've driven cost efficiencies in our own structure by renegotiating our contracts with several of our technology partners.

We're also seeing the benefits from many of the expense management initiatives that we began last year and have continued into this year, whether that be a more focused spend on sales and marketing in our international markets, more targeted R&D spending; or improving our offshore versus onshore resource mix. Our prudent management of our costs has not only allowed us to reduce our overall cost, but has also allowed us to redirect resources to more strategic investments, such as our managed services and content monetization offerings.

And finally, we divested our Invotas cyber security business this past quarter. While we believe that there is a great opportunity for the Invotas team to be successful in the high growth cyber security markets, we believe that we can create more value for our clients and our shareholders by focusing our investments and resources on the changing communications landscape.

In the past, we've communicated that our long-term goal was to improve our non-GAAP operating margins to the 18% to 20% range. Obviously for the first nine months of 2015, we've achieved the midpoint of that range, and we believe that we can sustain this for the foreseeable future.

We pride ourselves in delivering solid operating results and strong cash flows on a recurring annual basis, which allows us to make meaningful investments for the long-term health of our business, while still returning attractive levels of capital back to shareholders. This is a hallmark of our business.

However, there's still a lot of work for us to do. The business environment in which we, as well as our clients operate, is still evolving at a very rapid pace, and creates greater challenges for us going forward.

Consolidation continues to slow decision making on larger and more strategic opportunities, as well as discretionary spending initiatives. Large scale billing transformation deferrals have resulted in a slowdown in software opportunities.

This slowdown in software transactions is also negatively impacting our maintenance revenues. And finally, competition from new entrants is causing our clients to evaluate how they interact and engage with their customers, while at the same time having to evolve their own business models to accommodate a changing world in which the consumer has much more choice than ever.

This is not a simple problem to solve as it creates disruption to an ecosystem that includes more than technology partners. It involves content producers, advertisers, and many other key participants in this complex and highly interrelated and dependent network.

However, with these challenges come opportunities. While we're seeing a slowdown in software transactions, we're seeing an increase in service providers desiring a managed services relationship.

We remain on track based on existing engagements and the strength of the pipeline that we've built to achieve our goal of generating $50 million to $100 million in managed services revenues in the next several years. And while the revenues that we generate today from this offering are not large enough to offset the revenue declines that we've seen in our software services and maintenance revenues, we believe that we have the foundation and the pipeline not to only offset the declines in software and services, but grow revenues from our international clients with this offering in future years.

In addition, as communication providers address the changing competitive landscape and new ways to engage and interact with consumers with digital services, our first-mover advantage with our content monetization solution, as well as our track record of helping some of the world's leading media and content providers evolve, positions us to be a trusted partner in this new and dynamic ecosystem. So when I look at our results for the quarter and the first nine months of this year, I'm pleased with our execution on our key corporate initiatives.

We're growing our recurring revenues through market share wins in the North American cable market and the migration of new customer accounts under our solution. We're continuing to have successes in our international managed services expansion, and have a solid pipeline of qualified opportunities.

We're launching new content offerings and new content packages on behalf of some of the world's leading brands on a regular basis with our Ascendon content monetization solution. And we're starting to see the benefits of many of your business improvement initiatives, which have aided in our ability to achieve our operating margin goals and drive solid cash flows.

I'm pleased that we continue to make progress in ways that create shareholder value. As I've said time and time again, I like our business model.

It allows us to continue to invest in our products, our people, and our client relationships, while at the same time returning cash to our shareholders in the form of dividends and share buybacks. Before I turn it over to Randy to review our third quarter and nine month results, I'd like to thank our employees for continuing to earn the trust of our clients all over the globe with their commitment, dedication and hard work.

Randy, with that, I'll turn it over to you.

Thank you, Peter. Welcome to all of you on the call today to discuss our financial results for the third quarter and the first nine months of 2015, as well as our outlook for the remainder of the year.

We are pleased with the continued improvements we have made in our business over the last several quarters, which is reflected in our strong operating results for 2015, especially in light of the challenging market environment. These improved results have allowed us to achieve our long-term targeted operating margin at a pace earlier than we previously anticipated.

Now I'd like to walk you through the financial results in more detail. Total revenues for the third quarter were $187 million, up 1% from the same period last year, which includes a negative impact of $4 million from foreign currency movements.

Sequentially, revenues in the quarter increased approximately 2%. Quarterly revenues on a constant currency basis were up approximately 3% year-over-year.

This growth is primarily from the increase in our processing revenues since last year, which is driven in large part by the migration of new customer accounts onto our solutions. Moving on, our non-GAAP operating income for the third quarter was $40 million with a margin of 21.6%.

GAAP operating income for the quarter was $31 million with a margin of 16.6%. For the second quarter in a row, we experienced a sequential improvement in our non-GAAP operating margin.

As a result, our non-GAAP margin for the first nine months of the year is approximately 19%. This puts us in the middle of our long-term targeted range of 18% to 20%.

We have accomplished this mainly as a result of the key levers that we've been discussing for the last several quarters, which I will summarize as follows. First, our operating business model is based on scale and business process maturity.

Our current operating margin performance reflects the scale benefits from increasing the number of customer accounts and clients on our various revenue management and content monetization solutions, and the progress we have made on our international managed services offering. Second, we are known as prudent operators, effectively managing our cost structure in line with our client commitments and market opportunities.

Over the last year or so, we have implemented several cost saving initiatives within our international business, as well as taken steps to effectively manage our long-term cost structure with our key technology partners. And lastly, we continue to focus the alignment of our investments with our revenue opportunities.

This is most recently evidenced by our divestiture of our cyber security business called Invotas as we determined the investment requirements were likely to be higher and require a longer term investment horizon than we originally anticipated. The operating benefits from these actions are sustainable, which is why we believe we can continue to operate within our target operating margin in the near term.

Moving on, for the third quarter, our non-GAAP adjusted EBITDA was $48 million, or 26% of total revenues. Our non-GAAP effective income tax rate was 38% for the quarter, consistent with our prior expectations.

Non-GAAP EPS for the third quarter was $0.72, which compares to $0.49 for the same period last year. This substantial improvement year-over-year is primarily driven by the improvements in our operating performance that I mentioned earlier.

GAAP EPS for the quarter was $0.50, which compares to $0.15 for the same period last year. And now on to our cash flows and balance sheet.

Overall, we ended the quarter with $200 million of cash and short-term investments, an increase of $6 million from the previous quarter, driven mainly by our strong operating cash flows. We generated $26 million of cash flow from operations for the quarter, and a free cash flow of $20 million.

For the first nine months of the year, we have generated $84 million of cash flow from operations and free cash flow of $68 million. So far this year, we have also paid $17 million in dividends to our shareholders and repurchased $57 million of common stock, of which $50 million was done through our accelerated stock repurchase plan, or ASR plan, which we initiated in March.

The execution of the ASR marks the first step in our planned repurchase of $150 million of our outstanding shares over the 2015 to 2017 timeframe. Moving on to our outlook for the remainder of the year, as a result of a recent divestiture of our Invotas cyber security business and the visibility we see in our business for the remainder of the year, we are modifying our 2015 revenue guidance range to $745 million to $755 million from our previously guided range of $755 million to $770 million.

Our ability to deliver this revenue performance is dependent mainly on a strong finish to the year in our software and services engagements that we typically see in the fourth quarter. In spite of our lower revenue expectations, we expect our full year non-GAAP operating margin to increase to approximately 19.5% for the year, which falls in the mid-to-upper part of our long-term targeted operating range of 18% to 20%.

This implies continued strong operating results for the fourth quarter, and is consistent with the sustainability of the improvements that we have made in our business that I mentioned earlier. As a result of this expected stronger operating performance, we are increasing our 2015 non-GAAP EPS guidance to a range of $2.50 to $2.60 from our previously guided range of $2.33 to $2.40, while maintaining our expectations of a 30% full year 2015 non-GAAP effective income tax rate and diluted shares of approximately 33 million.

Further, we anticipate our 2015 non-GAAP adjusted EBITDA will increase to a range of $174 million to $179 million. That's up from our previously guided range of $165 million to $169 million.

And finally, we expect cash flows from operations to fall within our previously provided range of $105 million to $120 million for the year. However, we now expect our capital expenditures to come in at $25 million for the year, down from our previously guided range of approximately $30 million.

Overall, we are pleased with the continued progress we are making to drive bottom line results in a challenging business environment. Our teams are highly focused on strengthening our leadership position in the North American video marketplace, enabling digital services for communication service providers around the world, and securing long-term relationships with our clients through managed services engagements.

Our continued execution on these opportunities, combined with our effective expense management and the effective management of our capital structure, will enable us to continue to deliver strong operating results and cash flows for our shareholders. With that, I'll turn it over to the operator for questions.

Yes. Hi, guys.

Matt Van Vliet on for Tom. Thanks for taking my questions.

I guess first off, in terms of the revenue guidance, what are the impacts from the divestiture and maybe what you are expecting from an FX impact relative to where we were last quarter?

Randy, do you want to take that?

Yeah, sure. There's really – the expectation from FX from the quarter, from the rest of the year from FX is insignificant.

So there's no big change from foreign currency. From the divestiture of Invotas, think of it maybe as half of the difference that we went down.

Okay.

The other half --

And the other half would really become the visibility into the software and services transactions for the remainder of the year.

All right. And then looking at the progress you made in the quarter with Comcast, I know previously you were kind of at the mercy of their projects.

Has anything changed or was that uptick in conversions expected in the quarter? And then also kind of what you're expecting over the next few quarters as you only have about a third of them converted at the moment.

Well, Matt, this is Peter. We have to work in concert with our client as we work with them for readiness to make sure that their systems migrate onto our platform effectively and they can continue to run their operations at a high level.

And so that we work in concert with them to establish timing and project plans. And what you saw happen in the results that we just reported were scheduled and what we were expecting, and in line with the overall guidance that we updated to Wall Street earlier this year.

We haven't given guidance into future years, but I think what we continue to – as it relates to conversions – but we continue to have a very high confidence in the quality of the work that we're doing for Comcast. We continue to invest more in technologies and processes to make sure that we can not only do things more effectively on our end, but the impacts to our clients is even less impactful to their day-to-day operations once they go through the migration effort so that they have a really streamlined process.

And with that, we think that will continue to have Comcast bringing subs to us on a consistent basis, and we'll look forward to giving you more details when we get together in February of next year.

And then following up on that, what was kind of the timing of those conversions in the quarter, if you can? Were they later in the quarter to where we'd see a full run rate maybe in the fourth quarter or how should we think about kind of how the third quarter results played out?

Yeah, those conversions were very late in the quarter. Anything you'd add to that, Randy?

Late in the quarter and some of them actually spilled into the fourth quarter. So you won't have a full quarter benefit, but you'll get some quarter-on-quarter benefit.

All right. And then lastly, on a regional performance basis, was there anything specific to call out?

I know we've heard a lot of headlines about weakness, especially in APAC. Was there anything that particularly affected your business or what the outlook is for the fourth quarter?

And then on top of that, were any regions impacted more by FX than maybe some of the others that we should continue to think about in the fourth quarter?

Yeah, Matt, I wouldn't probably call out any one specific region as having something that stood out of the ordinary more. We still see traditional software and services transactions as being lumpy and difficult.

But we did see, from an FX perspective, that Latin America probably has greater impacts because of some of the FX items down there. And if I could just go back to one item, just relative to the Comcast subscribers, the timing of those subscribers as they came on were consistent with what we always expected this year.

So relative to our expectations, we are not seeing a timing benefit to our projection for this year. Just to clarify that for you as well, Matt.

All right, great. Thanks for taking my questions.

You bet.

Yes, thank you. Good afternoon and nice execution on the margin side.

I'm hoping to get some more clarity on the effect of the Invotas divestiture. Specifically, what line, in terms of revenue breakout, was that being recorded in?

And on the expense side, maybe you can give us some idea of how R&D heavy it was or run rate expenses or something that's been removed from the organization.

Yeah, Howard, first on the revenue. The revenues have been very insignificant so you won't really see them come across any line item on the revenue side.

On the expense side, it was primarily a go-to-market play [Technical Difficulty] of R&D, but if you remember, this was an asset that we were repurposing, so it was not R&D heavy at all. And since there was not much revenue, there's not much hitting cost of goods sold, so SG&A is your big line item where it would hit.

Okay. That's very helpful.

And then, in terms of your adjusted operating margin, you imply to be above 20% at the midpoint in Q4, came at 21.6% as you said this quarter. You're not changing your kind of 18% to 20%, but you feel comfortable kind of in the middle of that range.

What as we look out to 2017, or maybe not, is keeping you from being more optimistic maybe raising that guidance given the current performance?

Well, Howard, this is Peter. The first thing I would tell you that as we think about the business, the software business still has a certain amount of lumpiness to it, and it can have volatility and show itself in our financial results.

And so as we think about making sure that we appropriately convert this to the right type of long-term revenue model, which is through our managed services and our rollout of Ascendon, we want to make sure we're investing in those at the right pace. And we are optimistic about what the opportunities are in our business.

And we are proud of these healthy margins, but we also know that there will be investment needs in the business. Randy, do you want to give some specifics or add more color?

Yeah, I'd say we've always looked at 18% to 20% really as kind of the healthy range for us, Howard. It provides a very good balance between delivering solid bottom line results while still providing us meaningful investments back into the business.

We've always shown in the past that we have a willingness to invest in the long-term health of the business, whether it’d be repurposing an asset for like Invotas, whether it’d be providing new product offerings such as the content monetization, we've always shown that we will invest in the business as we believe appropriate. And I think depending upon the specific facts and circumstances, we would be willing to operate on either side of that range just as we always have.

But we believe that the 18% to 20% is the right healthy margin for us. Whether or not we would operate above that, as you would suggest, would be dependent upon the facts and circumstances and how the business is operating.

Okay. Thank you.

All right, Mike. Well, this is Peter.

I'll give some closing comments. We continue to be very enthusiastic about what we have as a business and the business model that we operate.

The markets that we serve are creating some unique opportunities for us both with how communication providers are needing to respond to consumer evolution, as well as new competition. And the pressure points that they face and how that plays to some of our strengths in managing and running large scale applications.

So we think we're in a great position long term and we continue to deliver very solid and strong results quarter-by-quarter. So we look forward to our next yearend result reports that will be coming out in February.

And we want to thank all our investors for their support and our employees around the globe who continue to support us and make us what we are with our clients. Until then, thanks.