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, 2023
OR
☐
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 jurisdictionof incorporation or organization)
(I.R.S. EmployerIdentification No.)
169 Inverness Dr W, Suite 300
Englewood, Colorado 80112
(Address of principal executive offices, including zip code)
(303) 200-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share
CSGS
NASDAQ Stock Market LLC
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 ☒
As of July 31, 2023, there were 31,748,796 shares of the registrant’s common stock outstanding.
FORM 10-Q for the Quarter Ended June 30, 2023
INDEX
Page No.
Part I - FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 (Unaudited)
3
Condensed Consolidated Statements of Income for the Quarters and Six Months Ended June 30, 2023 and 2022 (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Quarters and Six Months Ended June 30, 2023 and 2022 (Unaudited)
5
Condensed Consolidated Statements of Stockholders’ Equity for the Quarters and Six Months Ended June 30, 2023 and 2022 (Unaudited)
6
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2023 and 2022 (Unaudited)
7
Notes to Condensed Consolidated Financial Statements (Unaudited)
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
26
Item 4.
Controls and Procedures
27
Part II - OTHER INFORMATION
Legal Proceedings
28
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
Exhibit Index
29
Signatures
30
2
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands)
June 30, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
$
146,212
150,365
Short-term investments
-
71
Total cash, cash equivalents, and short-term investments
150,436
Settlement and merchant reserve assets
176,397
238,653
Trade accounts receivable:
Billed, net of allowance of $4,618 and $5,528
256,310
274,189
Unbilled
78,510
52,830
Income taxes receivable
3,770
1,270
Other current assets
64,216
48,577
Total current assets
725,415
765,955
Non-current assets:
Property and equipment, net of depreciation of $113,196 and $105,466
70,457
71,787
Operating lease right-of-use assets
38,810
49,687
Software, net of amortization of $156,240 and $150,337
18,890
22,774
Goodwill
306,641
304,036
Acquired customer contracts, net of amortization of $126,757 and $120,080
40,486
45,417
Customer contract costs, net of amortization of $34,594 and $30,601
54,114
54,735
Deferred income taxes
30,698
26,206
Other assets
7,558
7,956
Total non-current assets
567,654
582,598
Total assets
1,293,069
1,348,553
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt
22,500
37,500
Operating lease liabilities
16,624
21,012
Customer deposits
32,713
40,472
Trade accounts payable
37,961
47,720
Accrued employee compensation
62,789
68,321
Settlement and merchant reserve liabilities
174,777
237,810
Deferred revenue
56,468
46,033
Income taxes payable
500
5,455
Other current liabilities
26,770
22,886
Total current liabilities
431,102
527,209
Non-current liabilities:
Long-term debt, net of unamortized discounts of $2,283 and $2,656
402,092
375,469
38,560
53,207
20,792
21,991
3,605
3,410
131
117
Other non-current liabilities
13,476
11,901
Total non-current liabilities
478,656
466,095
Total liabilities
909,758
993,304
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; 31,751 and 31,269 shares outstanding
713
708
Additional paid-in capital
501,486
495,189
Treasury stock, at cost; 38,210 shares
(1,018,034
)
Accumulated other comprehensive income (loss):
Unrealized gain on short-term investments, net of tax
1
Cumulative foreign currency translation adjustments
(54,278
(58,830
Accumulated earnings
953,423
936,215
Total stockholders' equity
383,311
355,249
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except per share amounts)
Quarter Ended
Six Months Ended
June 30, 2022
Revenue
286,327
262,168
585,066
526,568
Cost of revenue (exclusive of depreciation, shown separately below)
151,142
138,134
306,163
276,552
Other operating expenses:
Research and development
36,645
34,630
72,109
67,611
Selling, general and administrative
62,686
57,465
121,833
114,807
Depreciation
5,573
5,651
11,293
11,789
Restructuring and reorganization charges
2,075
19,005
7,269
32,111
Total operating expenses
258,121
254,885
518,667
502,870
Operating income
28,206
7,283
66,399
23,698
Other income (expense):
Interest expense
(7,837
(2,686
(15,056
(5,958
Interest and investment income, net
772
126
1,341
256
Loss on derivative liability upon debt conversion
(7,456
Other, net
(1,428
2,442
(3,860
3,254
Total other
(8,493
(118
(17,575
(9,904
Income before income taxes
19,713
7,165
48,824
13,794
Income tax provision
(5,759
(1,848
(13,942
(2,364
Net income
13,954
5,317
34,882
11,430
Weighted-average shares outstanding:
Basic
30,629
31,301
30,524
31,358
Diluted
30,726
31,492
30,668
31,651
Earnings per common share:
0.46
0.17
1.14
0.36
0.45
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
1,709
(16,000
4,552
(17,182
Unrealized holding gain on short-term investments arising during period
Other comprehensive income (loss), net of tax
(15,995
(17,179
Total comprehensive income (loss), net of tax
15,663
(10,678
39,434
(5,749
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
Shares of Common Stock Outstanding
Common Stock
Additional Paid-in Capital
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Accumulated Earnings
Total Stockholders' Equity
For the Six Months Ended June 30, 2023:
BALANCE, January 1, 2023
31,269
(58,829
Comprehensive income:
20,928
2,843
Total comprehensive income
23,771
Repurchase of common stock
(166
(2
(9,304
(9,306
Issuance of common stock pursuant to employee stock purchase plan
19
893
Issuance of restricted common stock pursuant to stock-based compensation plans
574
(6
Cancellation of restricted common stock issued pursuant to stock-based compensation plans
(18
Stock-based compensation expense
6,412
Dividends
(8,796
BALANCE, March 31, 2023
31,678
712
493,184
(55,986
948,347
368,223
(112
18
771
64
(1
(7
7,644
(8,878
BALANCE, June 30, 2023
31,751
(54,277
Noncontrolling Interest
For the Six Months Ended June 30, 2022:
BALANCE, January 1, 2022
32,495
705
488,303
(930,106
(38,353
916,060
3,635
440,244
6,113
Unrealized loss on short-term investments, net of tax
(1,182
4,929
(389
(7,804
(15,996
(23,801
12
650
476
(5
(34
5,581
Settlement of convertible debt securities, net of tax
(4,845
Adjustments due to adoption of new accounting standard
(9,802
9,802
(8,586
BALANCE, March 31, 2022
32,560
709
472,078
(946,102
(39,537
923,389
414,172
Total comprehensive loss
(362
(116
(21,557
(21,673
15
773
42
(60
6,536
(8,473
Write-off of noncontrolling interest
(3,635
BALANCE, June 30, 2022
32,195
479,271
(967,659
(55,532
920,233
377,022
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Cash flows from operating activities:
Adjustments to reconcile net income to net cash provided by (used in) operating activities-
11,506
14,210
Amortization
22,808
25,520
Asset impairment
1,689
24,436
Gain on lease modifications
(3,812
Loss on short-term investments and other
20
7,456
Unrealized foreign currency transactions (gain)/loss, net
241
(805
(4,673
(7,816
Stock-based compensation
14,056
12,117
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net
(7,789
(7,833
Other current and non-current assets and liabilities
(16,083
(16,098
Income taxes payable/receivable
(7,235
(13,157
Trade accounts payable and accrued liabilities
(26,853
(65,537
9,046
2,792
Net cash provided by (used in) operating activities
27,783
(13,265
Cash flows from investing activities:
Purchases of software, property and equipment
(16,428
(19,647
Proceeds from sale/maturity of short-term investments
26,755
Net cash provided by (used in) investing activities
(16,357
7,108
Cash flows from financing activities:
Proceeds from issuance of common stock
1,664
1,423
Payment of cash dividends
(17,712
(17,200
(9,418
(45,113
Deferred acquisition payments
(1,220
Proceeds from long-term debt
30,000
245,000
Payments on long-term debt
(18,750
(246,051
Settlement and merchant reserve activity
(63,107
26,754
Net cash used in financing activities
(78,543
(35,187
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash
(3,328
Net decrease in cash, cash equivalents, and restricted cash
(66,409
(44,672
Cash, cash equivalents, and restricted cash, beginning of period
389,018
391,902
Cash, cash equivalents, and restricted cash, end of period
322,609
347,230
Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest
14,672
8,323
Income taxes
23,720
23,324
Reconciliation of cash, cash equivalents, and restricted cash:
133,770
213,460
Total cash, cash equivalents, and restricted cash
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
We have prepared the accompanying unaudited condensed consolidated financial statements as of June 30, 2023 and December 31, 2022, and for the quarters and six months ended June 30, 2023 and 2022, 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, 2022 (our “2022 10-K”), filed with the SEC. The results of operations for the quarter and six months ended June 30, 2023 are not necessarily indicative of the expected results for the entire year ending December 31, 2023.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates in Preparation of Financial Statements. The preparation of our Financial Statements requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our Financial Statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications. Certain amounts within our net cash used in operating activities on our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2022 have been reclassified to conform to the June 30, 2023 presentation.
Revenue. The majority of our future revenue is related to our revenue management solution customer contracts that include variable consideration dependent upon a series of monthly volumes and/or daily usage of services and have contractual terms ending from 2023 through 2036. Our customer contracts may include guaranteed minimums and fixed monthly or annual fees. As of June 30, 2023, our aggregate amount of the transaction price allocated to the remaining performance obligations is $1.6 billion, which is made up of fixed fee consideration and guaranteed minimums expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied). We expect to recognize approximately 70% of this amount by the end of 2025, with the remaining amount recognized by the end of 2036. We have excluded variable consideration expected to be recognized in the future related to performance obligations that are unsatisfied from this amount.
The nature, amount, timing, and uncertainty of our revenue and how revenue and cash flows are affected by economic factors is most appropriately depicted by revenue type, geographic region, and customer vertical.
Revenue by type for the quarters and six months ended June 30, 2023 and 2022 were as follows (in thousands):
SaaS and related solutions
255,600
230,712
513,476
465,689
Software and services
18,766
20,068
49,657
38,504
Maintenance
11,961
11,388
21,933
22,375
Total revenue
We use the location of the customer as the basis of attributing revenue to geographic regions. Revenue by geographic region for the quarters and six months ended June 30, 2023 and 2022, as a percentage of our total revenue, were as follows:
Americas (principally the U.S.)
87
%
85
Europe, Middle East, and Africa
9
11
Asia Pacific
100
We generate our revenue primarily from the global communications markets; however, we serve an expanding group of customers in other industry markets including retail, healthcare, financial services, insurance, and government entities. Revenue by customer vertical for the quarters and six months ended June 30, 2023 and 2022, as a percentage of our total revenue, were as follows:
Broadband/Cable/Satellite
54
55
53
Telecommunications
Other
Deferred revenue recognized during the quarters ended June 30, 2023 and 2022 was $11.3 million and $12.3 million, respectively, and during the six months ended June 30, 2023 and 2022 was $31.5 million and $40.3 million, respectively.
Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of three months or less at the date of the purchase to be cash equivalents. As of June 30, 2023 and December 31, 2022, our cash equivalents consist primarily of institutional money market funds, commercial paper, and time deposits held at major banks. For the cash and cash equivalents denominated in foreign currencies and/or located outside the U.S., we do not anticipate any material amounts being unavailable for use in running our business, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls and potential negative economic consequences.
Restricted Cash. Restricted cash includes cash that is legally or contractually restricted, as well as our settlement and merchant reserve assets (discussed below). The nature of the restrictions on our settlement and merchant reserve assets consists of contractual restrictions with the merchants and restrictions arising from our policy and intention. It has historically been our policy to segregate settlement and merchant reserve assets from our operating cash balances and our intention is to continue to do so. As of June 30, 2023 and December 31, 2022, we had $0.9 million and $1.0 million, respectively, of restricted cash that serves to collateralize bank guarantees and outstanding letters of credit included in cash and cash equivalents in our unaudited Condensed Consolidated Balance Sheets (“Balance Sheets” or “Balance Sheet”).
Short-term Investments. Our short-term investments as of June 30, 2023 and December 31, 2022 were zero and $0.1 million, respectively. Primarily all short-term investments held by us have contractual maturities of less than two years from the time of acquisition. Our short-term investments as of June 30, 2023 and December 31, 2022 consisted of fixed income securities. Proceeds from the sale/maturity of short-term investments for the six months ended June 30, 2023 and 2022 were $0.1 million and $26.8 million, respectively.
Settlement and Merchant Reserve Assets and Liabilities. Settlement assets and settlement liabilities represent cash collected on behalf of merchants via payment processing services which is held for an established holding period until settlement with the customer. The holding period is generally one to four business days depending on the payment model and contractual terms with the customer. During the holding period, cash is subject to restriction and segregation based on the nature of our custodial relationship with the merchants. Should we fail to remit these funds to our merchants, the merchant’s sole recourse would be against us, for payment. These rights and obligations are set forth in the contracts between us and the merchants. Settlement assets are held with various major financial institutions and a corresponding liability is recorded for the amounts owed to the customer. At any given time, there may be differences between the cash held and the corresponding liability due to the timing of operating-related cash transfers.
Merchant reserve assets/liabilities represent deposits collected from merchants to mitigate our risk of loss due to nonperformance of settlement obligations initiated by those merchants using our payment processing services, or non-payment by customers for services rendered by us. We perform a credit risk evaluation on each customer based on multiple criteria, which provide the basis for the deposit amount required for each merchant. For the duration of our relationship with each merchant, we hold their reserve deposits with major financial institutions. We hold these funds in separate accounts and are fully offset by corresponding liabilities.
The following table summarizes our settlement and merchant reserve assets and liabilities as of the indicated periods (in thousands):
Assets
Liabilities
Settlement assets/liabilities
159,161
157,541
219,368
218,525
Merchant reserve assets/liabilities
17,236
19,285
Total
Financial Instruments. Our financial instruments as of June 30, 2023 and December 31, 2022 include cash and cash equivalents, short-term investments, settlement and merchant reserve assets and liabilities, accounts receivable, accounts payable, and debt. Due to their short maturities, the carrying amounts of cash equivalents, settlement and merchant reserve assets and liabilities, accounts receivable, and accounts payable approximate their fair value.
Our short-term investments and certain of our cash equivalents are considered “available-for-sale” and are reported at fair value in our Balance Sheets, with unrealized gains and losses, net of the related income tax effect, excluded from earnings and reported in a separate component of stockholders’ equity. Realized and unrealized gains and losses were not material in any period presented.
The following table represents the fair value hierarchy based upon three levels of inputs, of which Levels 1 and 2 are considered observable and Level 3 is unobservable, for our financial assets measured at fair value (in thousands):
Level 1
Level 2
Cash equivalents:
Money market funds
5,431
5,318
Short-term investments:
Asset-backed securities
5,389
Valuation inputs used to measure the fair values of our money market funds were derived from quoted market prices. The fair values of all other financial instruments are based upon pricing provided by third-party pricing services. These prices were derived from observable market inputs.
We have chosen not to record our debt at fair value, with changes recognized in earnings each reporting period. The following table indicates the carrying value and estimated fair value of our debt as of the indicated periods (in thousands):
Carrying Value
Fair Value
2021 Credit Agreement (carrying value including current maturities) :
Term Loan
136,875
140,625
Revolver
290,000
275,000
The fair value for our credit agreement was estimated using a discounted cash flow methodology.
10
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill. The changes in the carrying amount of goodwill for the six months ended June 30, 2023 were as follows (in thousands):
January 1, 2023, balance
Adjustments related to prior acquisitions
(20
Impairment charge related to Keydok, LLC
(1,118
Effects of changes in foreign currency exchange rates
3,743
June 30, 2023, balance
See Notes 5 and 6 for further discussion of management's decision to shut down Keydok, LLC ("Keydok") resulting in the impairment charge recorded above.
Other Intangible Assets. Our other intangible assets subject to ongoing amortization consist primarily of acquired customer contracts and software. As of June 30, 2023 and December 31, 2022, the carrying values of these assets were as follows (in thousands):
Gross Carrying Amount
Accumulated Amortization
Net Amount
Acquired customer contracts
167,243
(126,757
165,497
(120,080
Software
175,130
(156,240
173,111
(150,337
Total other intangible assets
342,373
(282,997
59,376
338,608
(270,417
68,191
The total amortization expense related to other intangible assets for the second quarters of 2023 and 2022 were $6.4 million and $7.7 million, respectively, and for the six months ended June 30, 2023 and 2022 were $13.0 million and $14.8 million, respectively. Based on the June 30, 2023 net carrying value of our intangible assets, the estimated total amortization expense for each of the five succeeding fiscal years ending December 31 are: 2023 - $25.1 million; 2024 - $14.7 million; 2025 - $11.3 million; 2026 - $7.7 million; and 2027 - $3.1 million.
Customer Contract Costs. As of June 30, 2023 and December 31, 2022, the carrying values of our customer contract cost assets, related to those contracts with a contractual term greater than one year, were as follows (in thousands):
Customer contract costs
88,708
(34,594
85,336
(30,601
The total amortization expense related to customer contract costs for the second quarters of 2023 and 2022 were $4.8 million and $3.8 million, respectively, and for the six months ended June 30, 2023 and 2022 were $9.4 million and $10.3 million, respectively.
4. DEBT
Our long-term debt, as of June 30, 2023 and December 31, 2022, was as follows (in thousands):
2021 Credit Agreement:
2021 Term Loan, due September 2026, interest at adjusted SOFR plus applicable margin (combined rate of 6.967% at June 30, 2023)
Less – deferred financing costs
(2,283
(2,656
2021 Term Loan, net of unamortized discounts
134,592
137,969
$450 million revolving loan facility, due September 2026, interest at adjusted SOFR plus applicable margin (combined rate of 6.967% at June 30, 2023)
Total debt, net of unamortized discounts
424,592
412,969
Current portion of long-term debt, net of unamortized discounts
(22,500
(37,500
Long-term debt, net of unamortized discounts
2021 Credit Agreement. During the six months ended June 30, 2023, we made $3.8 million of principal repayments on our $150.0 million aggregate principal five-year term loan (the “2021 Term Loan”). As of June 30, 2023 we had borrowed $290.0 million from our $450.0 million aggregate principal five-year revolving loan facility (the “2021 Revolver”). In July 2023, we borrowed an additional $15.0 million on the 2021 Revolver, currently leaving $145.0 million available to us.
As of June 30, 2023, the interest rate on our 2021 Term Loan and our 2021 Revolver was 6.967% (adjusted SOFR, spread adjustment of 0.10%, plus 1.625% per annum) and our commitment fee on the unused $160.0 million was 0.20%.
The interest rates under the 2021 Credit Agreement are based upon our choice of an adjusted SOFR rate plus an applicable margin of 1.375% - 2.125%, or an alternate base rate (“ABR”) plus an applicable margin of 0.375% - 1.125%, with the applicable margin, depending on our then-net secured total leverage ratio. We pay a commitment fee of 0.150% - 0.325% of the average daily unused amount of the 2021 Revolver, with the commitment fee rate also dependent upon our then-net secured total leverage ratio.
In April 2023, we entered into the First Amendment to the 2021 Credit Agreement (the “First Amendment”). The First Amendment replaces the interest rate benchmark, from LIBOR to the Secured Overnight Financing Rate ("SOFR"), and all references to “Eurodollar Borrowing(s)” or “Eurodollar Loans” have been replaced with “Term SOFR Borrowing(s)” or “Term SOFR Loans”. Any loan amounts outstanding at the effective date of the First Amendment, continued to bear interest at the applicable LIBOR rate, discussed above, until the end of the interest election period applicable to such loan. All Term SOFR Loans are subject to a 0.10% spread adjustment.
5. ACQUISITIONS
Keydok, LLC. On September 14, 2021, we acquired Keydok, a digital identity and document management platform provider, headquartered in Mexico. In March 2023, we decided to dissolve the Keydok business. See Note 6 for additional discussion.
DGIT Systems Pty Ltd. On October 4, 2021, we acquired DGIT Systems Pty Ltd (“DGIT”), a provider of configure, price and quote (CPQ) and order management solutions for the telecommunications industry. We acquired 100% of the equity of DGIT for a purchase price of approximately $16 million, approximately $14 million paid upon close and the remaining escrowed funds of approximately $2 million to be paid through the first quarter of 2025, subject to certain reductions, as applicable. As of June 30, 2023, $1.3 million of the escrowed funds had been paid.
The DGIT acquisition includes provisions for up to approximately $13 million of potential future earn-out payments. The earn-out payments are tied to performance-based goals and a defined service period by the eligible recipients and are accounted for as post-acquisition compensation, as applicable. The earn-out period is through September 30, 2025. During 2022, $0.3 million of the earn-out had been achieved and was paid out in March 2023.
6. RESTRUCTURING AND REORGANIZATION CHARGES
During the second quarters of 2023 and 2022, we recorded restructuring and reorganization charges of $2.1 million and $19.0 million, respectively, and for the six months ended June 30, 2023 and 2022, we recorded restructuring and reorganization charges of $7.3 million and $32.1 million, respectively.
During the six months ended June 30, 2023 we implemented the following restructuring and reorganizational activities:
The activity in the restructuring and reorganization reserves during the six months ended June 30, 2023 was as follows (in thousands):
Termination Benefits
2,491
Charged to expense during period
3,859
Cash payments
(4,943
(3,240
(8,183
Adjustment for asset impairment
(1,675
Adjustment for gain on lease modifications
3,812
Adjustment for accelerated depreciation
(213
400
1,358
2,543
3,901
As of June 30, 2023, all of the restructuring and reorganization reserves were included in current liabilities.
7. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Guarantees. In the ordinary course of business, we may provide guarantees in the form of bid bonds, performance bonds, or standby letters of credit. As of June 30, 2023, we had $1.6 million of restricted assets used to collateralize these guarantees, with $0.9 million included in cash and cash equivalents and $0.7 million included in other non-current assets.
We have performance guarantees in the form of surety bonds and money transmitter bonds, both issued through a third-party that are not required to be on our Balance Sheet. As of June 30, 2023, we had performance guarantees of $4.2 million. We are ultimately liable for claims that may occur against these guarantees. We have no history of material claims or are aware of circumstances that would require us to pay under any of these arrangements. We also believe that the resolution of any claim that may arise in the future, either individually or in the aggregate, would not be material to our Financial Statements. As of June 30, 2023, we had total aggregate money transmitter bonds of $19.9 million outstanding. These money transmitter bonds are for the benefit of various states to comply with the states’ financial requirements and industry regulations for money transmitter licenses.
Warranties. We generally warrant that our solutions and related offerings will conform to published specifications, or to specifications provided in an individual customer arrangement, as applicable. The typical warranty period is 90 days from the date of acceptance of the solution or offering. For certain service offerings we provide a warranty for the duration of the services provided. We generally warrant that those services will be performed in a professional and skillful manner. The typical remedy for breach of warranty is to correct or replace any defective deliverable, and if not possible or practical, we will accept the return of the defective deliverable and refund the amount paid under the customer arrangement that is allocable to the defective deliverable. Our contracts also generally contain limitation of damages provisions in an effort to reduce our exposure to monetary damages arising from breach of warranty claims. Historically, we have incurred minimal warranty costs, and as a result, do not maintain a warranty reserve.
Solution and Services Indemnifications. Arrangements with our customers generally include an indemnification provision that will indemnify and defend a customer in actions brought against the customer that claim our products and/or services
13
infringe upon a copyright, trade secret, or valid patent. Historically, we have not incurred any significant costs related to such indemnification claims, and as a result, do not maintain a reserve for such exposure.
Claims for Company Non-performance. Our arrangements with our customers typically limit our liability for breach to a specified amount of the direct damages incurred by the customer resulting from the breach. From time-to-time, these arrangements may also include provisions for possible liquidated damages or other financial remedies for our non-performance, or in the case of certain of our solutions, provisions for damages related to service level performance requirements. The service level performance requirements typically relate to platform availability and timeliness of service delivery. As of June 30, 2023, we believe we have adequate reserves, based on our historical experience, to cover any reasonably anticipated exposure as a result of our nonperformance for any past or current arrangements with our customers.
Indemnifications Related to Officers and the Board of Directors. Other guarantees include promises to indemnify, defend, and hold harmless our directors, and certain officers. Such indemnification covers any expenses and liabilities reasonably incurred by a person, by reason of the fact that such person is, was, or has agreed to be a director or officer, in connection with the investigation, defense, and settlement of any threatened, pending, or contemplated action, suit, proceeding, or claim. We maintain directors’ and officers’ (“D&O”) insurance coverage to protect against such losses. We have not historically incurred any losses related to these types of indemnifications and are not aware of any pending or threatened actions or claims against any officer or member of our Board of Directors (the "Board"). As a result, we have not recorded any liabilities related to such indemnifications as of June 30, 2023. In addition, as a result of the insurance policy coverage, we believe these indemnification agreements are not significant to our results of operations.
Legal Proceedings. From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business.
8. EARNINGS PER COMMON SHARE
Basic and diluted earnings per common share (“EPS”) amounts are presented on the face of our unaudited Condensed Consolidated Statements of Income (the "Income Statements").
The reconciliation of the basic and diluted EPS denominators related to the common shares is included in the following table (in thousands):
Basic weighted-average common shares
Dilutive effect of restricted common stock
97
191
144
293
Diluted weighted-average common shares
Potentially dilutive common shares related to non-participating unvested restricted stock and stock warrants were excluded from the computation of diluted EPS, as the effect was antidilutive, and were not material in any period presented. Stock warrants (see Note 9) will only have a dilutive effect upon vesting in those periods in which our average stock price exceeds the exercise price of $26.68 per warrant.
14
9. STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION PLANS
Stock Repurchase Program. We currently have a stock repurchase program, approved by our Board, authorizing us to repurchase shares of our common stock from time-to-time as market and business conditions warrant (the “Stock Repurchase Program”). We did not make any share repurchases during the second quarter and six months ended June 30, 2023. During the second quarter and six months ended June 30, 2022, we repurchased approximately 360,000 shares of our common stock for $21.6 million (weighted-average price of $59.88 per share), and approximately 626,000 shares of our common stock for $37.6 million (weighted-average price of $59.99 per share), respectively, under a SEC Rule 10b5-1 Plan.
As of June 30, 2023, the total remaining number of shares available for repurchase under the Stock Repurchase Program totaled 2.1 million shares.
Stock Repurchases for Tax Withholdings. In addition to the above-mentioned stock repurchases, during the second quarters of 2023 and 2022, we repurchased and then cancelled approximately 2,000 shares of common stock for $0.1 million for both periods, and during the six months ended June 30, 2023 and 2022 we repurchased and then cancelled approximately 168,000 shares of common stock for $9.4 million and approximately 125,000 shares of common stock for $7.9 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.
Cash Dividends. During the second quarter of 2023, our Board approved a quarterly cash dividend of $0.28 per share of common stock, totaling $8.9 million. During the second quarter of 2022, our Board approved a quarterly cash dividend of $0.265 per share of common stock, totaling $8.5 million. Dividends declared for the six months ended June 30, 2023 and 2022 totaled $17.7 million and $17.1 million, respectively.
Warrants. In 2014, in conjunction with the execution of an amendment to our agreement with Comcast Corporation (“Comcast”), we issued stock warrants (the “Warrant Agreement”) for the right to purchase up to 2.9 million shares of our common stock (the “Stock Warrants”) as an additional incentive for Comcast to convert customer accounts onto our solutions based on various milestones. The Stock Warrants have a ten-year term and an exercise price of $26.68 per warrant.
As of June 30, 2023, 1.0 million Stock Warrants remain issued, none of which have vested. The remaining unvested Stock Warrants will be accounted for as a customer contract cost asset once the performance conditions necessary for vesting are considered probable.
Stock-Based Awards. A summary of our unvested restricted common stock activity during the quarter and six months ended June 30, 2023 is as follows (shares in thousands):
Shares
Weighted-Average Grant Date Fair Value
Unvested awards, beginning
1,290
53.80
1,147
53.34
Awards granted
88
49.44
688
51.66
Awards forfeited/cancelled
(10
53.75
(29
54.03
Awards vested
56.72
(472
50.25
Unvested awards, ending
1,334
53.44
Included in the awards granted during the six months ended June 30, 2023 are awards issued to members of executive management and certain key employees in the form of: (i) performance-based awards of approximately 134,000 restricted common stock shares, which vest in the first quarter of 2025 upon meeting certain pre-established financial performance objectives over a two-year performance period; and (ii) market-based awards of approximately 45,000 restricted common stock shares, which vest in the first quarter of 2026 upon meeting a relative total shareholder return performance achievement tier. Certain of these awards become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment.
The other restricted common stock shares granted during the six months ended June 30, 2023 are primarily time-based awards, which vest annually over two to three years with no restrictions other than the passage of time. Certain shares of the restricted common stock become fully vested upon a change in control, as defined, involuntary terminations of employment, or death.
We recorded stock-based compensation expense for the second quarters of 2023 and 2022 of $7.6 million and $6.5 million, respectively, and for the six months ended June 30, 2023 and 2022 of $14.1 million and $12.1 million, respectively.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The information contained in this MD&A should be read in conjunction with the Financial Statements and Notes thereto included in this Form 10-Q and the audited consolidated financial statements and notes thereto in our 2022 10-K.
Forward-Looking Statements
This report contains a number of forward-looking statements relative to our future plans and our expectations concerning our business and the industries we serve. These forward-looking statements are based on assumptions about a number of important factors and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are outlined within Part I, Item 1A. Risk Factors of our 2022 10-K. Readers are strongly encouraged to review that section closely in conjunction with MD&A.
Company Overview
We are a purpose-driven SaaS platform company that enables large enterprise customers in a wide variety of industry verticals to tackle the ever-growing complexity of business in the digital age. Our industry leading revenue management and digital monetization, customer experience, and payments solutions make ordinary customer experiences extraordinary. Our cloud-first architecture and customer-centric approach help companies around the world acquire, monetize, engage, and retain the B2B (business-to-business), B2C (business-to-consumer), and B2B2X (business-to-business-to-consumer) customers. As brands reimagine their engagement strategies in an increasingly connected world, we sit at the center of a complex, multi-sided business model ensuring monetization and customer engagement is handled at all levels of the ecosystem.
We leverage 40 years of experience to deliver innovative customer engagement solutions for every stage of the customer lifecycle so our customers can deliver an outstanding customer experience that adapts to their customers’ rapidly changing demands. Our diverse, worldwide workforce draws from real-world knowledge and extensive expertise to design and implement business solutions that make our customers’ hardest decisions simpler so that they can focus on delivering differentiated and real-time experiences to their customers. As a global technology leader, we aspire to envision, invent, and shape a better, more future-ready world.
We focus our research and development (“R&D”) and acquisition investments on expanding our offerings in a timely and efficient manner to address the complex, transformative needs of our customers. Our scalable, modular, and flexible solutions combined with our domain expertise and our ability to effectively migrate customers to our solutions, provide the industry with proven solutions to improve their profitability and consumers’ experiences. We have specifically architected our solutions to offer a phased, incremental approach to transforming our customers' businesses, thereby reducing the business interruption risk associated with this evolution.
As discussed in Note 2 to our Financial Statements, we generate a majority of our revenue from the global communications markets; however, we serve an expanding group of customers in other markets including retail, healthcare, financial services, insurance, and government entities.
We are a member of the S&P Small Cap 600 and Russell 2000 indices.
Management Overview of Quarterly Results
Second Quarter Highlights. A summary of our results of operations for the second quarter of 2023, when compared to the second quarter of 2022, is as follows (in thousands, except per share amounts and percentages):
Transaction fees (1)
21,176
18,713
Operating Results:
Operating margin percentage
9.9
2.8
Diluted EPS
Supplemental Data:
Restructuring and reorganization charges (2)
Acquisition-related costs:
Amortization of acquired intangible assets
2,998
3,956
Transaction-related costs
2,004
(39
Stock-based compensation (2)
7,667
6,535
Revenue. Revenue for the second quarter of 2023 was $286.3 million, a 9.2% increase when compared to revenue of $262.2 million for the second quarter of 2022. The increase can be mainly attributed to the continued growth of our revenue management solutions.
Operating Results. Operating income for the second quarter of 2023 was $28.2 million, or a 9.9% operating margin percentage, compared to $7.3 million, or a 2.8% operating margin percentage for the second quarter of 2022. The increase in operating income can be mainly attributed to the $16.9 million decrease in restructuring and reorganization charges between years.
Diluted EPS. Diluted EPS for the second quarter of 2023 was $0.45 compared to $0.17 for the second quarter of 2022, with the increase mainly attributed to the higher operating income in the second quarter of 2023, discussed above.
Cash and Cash Flows. As of June 30, 2023, we had cash, cash equivalents, and short-term investments of $146.2 million, as compared to $167.7 million as of March 31, 2023, and $150.4 million as of December 31, 2022. Our cash flows provided by operating activities for the second quarter of 2023 were $12.4 million. See the Liquidity section below for further discussion of our cash flows.
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Significant Customer Relationships
Customer Concentration. A large percentage of our historical revenue has been generated from our two largest customers, which are Charter Communications Inc. (“Charter”) and Comcast.
Revenue from these customers for the indicated periods was as follows (in thousands, except percentages):
March 31, 2023
Amount
% of Revenue
Charter
60,175
21
61,532
53,173
Comcast
53,757
53,415
52,919
During the first quarter of 2023 we completed the consolidation of Charter's residential and small and medium business internet, video, and landline voice customers that began in late 2021.
The percentages of net billed accounts receivable balances attributable to our largest customers as of the indicated dates were as follows:
As of
23
22
Charter. In April 2023, we entered into an Amended and Restated CSG Master Subscriber Management System Agreement (the “Agreement”) with Charter. The primary purpose of the Agreement was to consolidate the previous agreement and amendments with Charter into one document. The Agreement formalized the extension of the term through March 31, 2028, from December 31, 2027, as was contemplated in the previous agreement, in connection with the final conversion of Charter’s customer accounts, discussed above. The Agreement continues to provide that the term will automatically be extended for an additional one-year term, subject to Charter achieving certain conditional processing minimums on July 1, 2027, unless Charter provides us with written notice of non-renewal. All other material terms, provisions, and conditions of the previous agreement remain unchanged.
A copy of the Agreement, with confidential information redacted, is filed as Exhibit 10.25 to this Form 10-Q.
Comcast. On June 29, 2023, Comcast exercised their option to extend the term of their processing and other related solutions agreement through December 31, 2025, which aligns with the term of their print and mail services agreement. Terms of the processing agreement extension remain consistent with the financial terms and obligations under the original agreement.
A copy of the Comcast agreement and related amendments, with confidential information redacted, is included in the exhibits to our periodic filings with the SEC.
Risk of Customer Concentration. We expect to continue to generate a significant percentage of our future revenue from our largest customers. There are inherent risks whenever a large percentage of total revenue is concentrated with a limited number of customers. Should a significant customer: (i) terminate or fail to renew their contracts with us, in whole or in part, for any reason; (ii) significantly reduce the number of customer accounts processed on our solutions, the price paid for our services, or the scope of services that we provide; or (iii) experience significant financial or operating difficulties, it could have a material adverse effect on our financial condition and results of operations.
Critical Accounting Policies
The preparation of our Financial Statements in conformity with U.S. GAAP requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Financial Statements.
We have identified the most critical accounting policies that affect our financial position and the results of our operations. Those critical accounting policies were determined by considering the accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to the following items: (i) revenue recognition; (ii) impairment assessments of long-lived assets; (iii) income taxes; and (iv) loss contingencies. These critical accounting policies, as well as our other significant accounting policies, are discussed in our 2022 10-K.
Results of Operations
Revenue. Total revenue for the: (i) second quarter of 2023 was $286.3 million, a 9.2% increase when compared to $262.2 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $585.1 million, an 11.1% increase when compared to $526.6 million for the six months ended June 30, 2022. These increases in revenue are primarily attributed to the continued growth of our revenue management solutions as we generated continued year-over-year growth in our SaaS and related solutions revenue driven mainly by conversion of customer accounts onto our solutions, increased usage of our other ancillary services, and higher payment volumes. Additionally, the first quarter of 2023 saw strong software and services revenue due to the timing of the closure of software license upgrades and from our communication design and delivery centers. In the first quarter of 2023, we also completed the final conversions of Charter's customer accounts onto our platforms, converting over nine million customer accounts since June 2022 and more than fourteen million in total.
We use the location of the customer as the basis of attributing revenue to individual countries. Revenue by geographic regions for the second quarters and six months ended June 30, 2023 and 2022 was as follows (in thousands):
248,443
222,309
499,419
445,269
26,620
28,981
63,293
60,542
11,264
10,878
22,354
20,757
Total Operating Expenses. Total operating expenses for the: (i) second quarter of 2023 were $258.1 million, a 1.3% increase when compared to $254.9 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 were $518.7 million, a 3.1% increase when compared to $502.9 million for the six months ended June 30, 2022. The increases in total operating expenses are reflective of the higher revenue between periods, to include increased employee-related costs, offset to a certain degree by the decreases in restructuring and reorganization charges, discussed below.
The components of total operating expenses are discussed in more detail below.
Cost of Revenue (Exclusive of Depreciation). The cost of revenue for the: (i) second quarter of 2023 was $151.1 million, a 9.4% increase when compared to $138.1 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $306.2 million, a 10.7% increase when compared to $276.6 million for the six months ended June 30, 2022. The increase in cost of revenue between periods is reflective of the increase in revenue year-over-year, to include increased employee-related costs. Total cost of revenue as a percentage of revenue for the: (i) second quarters of 2023 and 2022 was 52.8% and 52.7%, respectively; and (ii) six months ended June 30, 2023 and 2022 was 52.3% and 52.5%, respectively.
R&D Expense (Exclusive of Depreciation). R&D expense for the: (i) second quarter of 2023 was $36.6 million, a 5.8% increase when compared to $34.6 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $72.1 million, a 6.7% increase when compared to $67.6 million for the six months ended June 30, 2022, with the increase mainly attributed to higher employee-related costs. As a percentage of total revenue, R&D expense for the: (i) second quarters of 2023 and 2022 was 12.8% and 13.2%, respectively; and (ii) six months ended June 30, 2023 and 2022 was 12.3% and 12.8%, respectively.
Our R&D efforts are focused on the evolution of our solutions which enable our customers to launch, monetize, and scale new digital services quickly and across any channel, while delivering an exceptional customer experience.
Selling, General, and Administrative ("SG&A") Expense (Exclusive of Depreciation). SG&A expense for the: (i) second quarter of 2023 was $62.7 million, a 9.1% increase when compared to $57.5 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $121.8 million, a 6.1% increase when compared to $114.8 million for the six months ended June 30, 2022. This increase in SG&A expense is primarily attributed to increases in employee-related costs, to include incentive compensation, offset to a certain degree by lower building related costs due to our office closures in 2022. Our SG&A costs as a percentage of total revenue for the: second quarters of 2023 and 2022 were 21.9% for both periods; and (ii) six months ended June 30, 2023 and 2022 were 20.8% and 21.8%, respectively.
Restructuring and Reorganization Charges. Restructuring and reorganization charges for the: (i) second quarter of 2023 were $2.1 million, a $16.9 million decrease when compared to $19.0 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 were $7.3 million, a $24.8 million decrease when compared to $32.1 million for the six months ended June 30, 2022. The restructuring and reorganization charges for the second quarter and six months ended June 30, 2023 relate mainly to the following:
See Note 6 to our Financial Statements for additional discussion.
Operating Income. Operating income for the: (i) second quarter of 2023 was $28.2 million, or 9.9% of total revenue, compared to $7.3 million, or 2.8% of total revenue for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $66.4 million, or 11.3% of total revenue, compared to $23.7 million, or 4.5% of total revenue, for the six months ended June 30, 2022. The increase in operating income can be mainly attributed to lower restructuring and reorganization charges, discussed above, and to a lesser degree, higher revenue and improved profitability.
Interest Expense. Interest expense for the: (i) second quarter of 2023 was $7.8 million, a $5.1 million increase when compared to $2.7 million for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $15.1 million, a $9.1 million increase when compared to $6.0 million for the six months ended June 30, 2022. Our interest expense relates primarily to our 2021 Credit Agreement. The increase in interest expense between periods can be attributed to rising interest rates and a higher average outstanding debt balance during 2023.
See Note 4 to our Financial Statements for additional discussion of our long-term debt.
Loss on Derivative Liability Upon Debt Conversion. In March 2022, we settled our 2016 Convertible Notes for approximately $242 million in cash. As a result of the conversion of the 2016 Convertible Notes, we recognized a $7.5 million loss on a derivative liability related to the change in our stock price over the observation period prior to settlement.
Other, net. Other, net for the: (i) second quarter of 2023 was $1.4 million of other expense, a $3.8 million change when compared to $2.4 million of other income for the second quarter of 2022; and (ii) six months ended June 30, 2023 was $3.9 million of other expense, a $7.2 million change when compared to $3.3 million of other income for the six months ended June 30, 2022, with the changes primarily attributed to foreign currency movements.
Income Tax Provision. The effective income tax rates for the second quarters and six months ended June 30, 2023 and 2022 were as follows:
Our estimated full year 2023 effective income tax rate is approximately 28%.
The effective income tax rate for the six months ended June 30, 2022 was impacted by the combination of lower net income for the period and a discrete tax benefit related to the vesting of restricted common stock during the first quarter of 2022. The full year 2022 effective income tax rate was 28%.
Liquidity
Cash and Liquidity. As of June 30, 2023, our principal sources of liquidity included cash, cash equivalents, and short-term investments of $146.2 million, compared to $167.7 million as of March 31, 2023, and $150.4 million as of December 31, 2022. We generally invest our excess cash balances in low-risk, short-term investments to limit our exposure to market and credit risks.
As part of our 2021 Credit Agreement, we have a $450.0 million senior secured revolving loan facility with a syndicate of financial institutions that expires in September 2026. As of June 30, 2023, we had $290.0 million outstanding on the 2021 Revolver. In July 2023, we borrowed an additional $15.0 million, currently leaving $145.0 million available to us. The 2021 Credit Agreement contains customary affirmative, negative, and financial covenants. As of June 30, 2023, and the date of this filing, we believe that we are in compliance with the provisions of the 2021 Credit Agreement.
Our cash, cash equivalents, and short-term investment balances as of the end of the indicated periods were located in the following geographical regions (in thousands):
101,355
91,569
Europe, Middle East and Africa
34,390
49,099
10,467
9,768
Total cash, equivalents, and short-term investments
We generally have ready access to substantially all of our cash, cash equivalents, and short-term investment balances, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls and potential negative economic consequences.
As of June 30, 2023 and December 31, 2022, we had $0.9 million and $1.0 million, respectively, of cash restricted as to use primarily to collateralize guarantees and outstanding letters of credit included in our total cash, cash equivalents, and short-term investments balance. In addition, as of June 30, 2023 and December 31, 2022, we had $176.4 million and $238.7 million, respectively, of settlement and merchant reserve assets which are deemed restricted due to contractual restrictions with the merchants and restrictions arising from our policy and intention. It has historically been our policy to segregate settlement and merchant reserve assets from our operating cash balances and we intend to continue to do so.
Cash Flows from Operating Activities. We calculate our cash flows from operating activities beginning with net income, adding back the impact of non-cash items or non-operating activity (e.g., depreciation, amortization, impairments, gains/losses on items such as investments, lease modifications, and debt extinguishments/conversions, unrealized foreign currency gain/losses, deferred income taxes, stock-based compensation, etc.), and then factoring in the impact of changes in operating assets and liabilities. See our 2022 10-K for a description of the primary uses and sources of our cash flows from operating activities.
Our cash flows from operating activities, broken out between operations and changes in operating assets and liabilities, for the indicated quarterly periods are as follows (in thousands):
Net Cash
Changes in
Provided by
Operating
(Used In) Operating
Assets and
Activities –
Operations
Totals
Cash Flows from Operating Activities:
2023:
March 31 (1)
50,158
(34,761
15,397
June 30
26,539
(14,153
12,386
76,697
(48,914
2022:
(55,236
(5,549
June 30 (2)
36,881
(44,597
(7,716
86,568
(99,833
Variations in our net cash provided by/(used in) operating activities are generally related to the changes in our operating assets and liabilities (related mostly to fluctuations in timing at quarter-end of customer payments and changes in accrued expenses), and generally over longer periods of time, do not significantly impact our cash flows from operations.
Significant fluctuations in key operating assets and liabilities between 2023 and 2022 that impacted our cash flows from operating activities are as follows:
Billed Trade Accounts Receivable
Management of our billed accounts receivable is one of the primary factors in maintaining strong cash flows from operating activities. Our billed trade accounts receivable balance includes significant billings for several non-revenue items (primarily postage, sales tax, and deferred revenue items). As a result, we evaluate our performance in collecting our accounts receivable through our calculation of days billings outstanding (“DBO”) rather than a typical days sales outstanding (“DSO”) calculation.
Our gross and net billed trade accounts receivable and related allowance for doubtful accounts receivable (“Allowance”) as of the end of the indicated quarterly periods, and the related DBOs for the quarters then ended, are as follows (in thousands, except DBOs):
Gross
Allowance
Net Billed
DBOs
March 31
261,028
(5,254
255,774
68
260,928
(4,618
65
243,292
(4,924
238,368
70
241,682
(5,105
236,577
66
As of June 30, 2023 and 2022, approximately 93% and 94%, respectively, of our billed accounts receivable balance were less than 60 days past due.
We may experience adverse impacts to our DBOs if and when customer payment delays occur. However, these recurring monthly payments that cross a reporting period-end do not raise any collectability concerns, as payment is generally received subsequent to quarter-end. All other changes in our gross and net billed accounts receivable reflect the normal fluctuations in the timing of customer payments at quarter-end, as evidenced by our relatively consistent DBO metric.
As a global provider of solutions and services, a portion of our accounts receivable balance relates to international customers. This diversity in the geographic composition of our customer base may adversely impact our DBOs as longer billing cycles (i.e., billing terms and cash collection cycles) are an inherent characteristic of international transactions. For example, our ability to invoice and collect arrangement fees may be dependent upon, among other things: (i) the completion of various customer administrative matters, local country billing protocols and processes (including local cultural differences), and non-customer administrative matters; (ii) meeting certain contractual invoicing milestones; (iii) the overall project status in certain situations in which we act as a subcontractor to another vendor on a project; or (iv) due to currency controls in certain foreign jurisdictions.
Unbilled Trade Accounts Receivable
Unbilled trade accounts receivable increased $25.7 million to $78.5 million as of June 30, 2023, from $52.8 million as of December 31, 2022, due primarily to large implementation projects where various milestone and contractual billing dates have not yet been reached or delayed. Unbilled accounts receivable are an inherent characteristic of certain software and services transactions and may fluctuate between quarters, as these types of transactions typically have scheduled invoicing terms over several quarters, as well as certain milestone billing events.
Cash Flows from Investing Activities. Our typical investing activities consist of purchases/sales of short-term investments and purchases of software, property and equipment, which are discussed below.
Purchases/Sales of Short-Term Investments
During the six months ended June 30, 2023 and 2022, we sold (or had mature) $0.1 million and $26.8 million, respectively, of short-term investments. We continually evaluate the appropriate mix of our investment of excess cash balances between cash equivalents and short-term investments in order to maximize our investment returns and liquidity.
Purchases of Software, Property and Equipment
Our capital expenditures for the six months ended June 30, 2023 and 2022 for software, property and equipment were $16.4 million and $19.6 million, respectively, and consisted principally of investments in: (i) communication design and delivery center equipment and infrastructure; (ii) software and related equipment; and (iii) computer hardware.
Cash Flows from Financing Activities. Our financing activities typically consist of activities associated with our common stock, long-term debt, and settlement and merchant reserve activity, discussed below. Additionally, during the six months ended June 30, 2023, we made deferred acquisition payments of $1.2 million related to DGIT earn-out and escrowed payments.
Cash Dividends Paid on Common Stock
During the six months ended June 30, 2023 and 2022, the Board approved dividends totaling $17.7 million and $17.1 million, respectively, and made dividend payments of $17.7 million and $17.2 million, respectively, through June 30, 2023 and 2022, with the differences between the amount approved and paid attributed to dividends on accrued unvested incentive shares that are paid upon vesting and previously approved.
Repurchase of Common Stock
During the six months ended June 30, 2023, we did not make any stock repurchases under the guidelines of our Stock Repurchase Program. During the six months ended June 30, 2022, we repurchased approximately 626,000 shares of our common stock under the guidelines of our Stock Repurchase Program for $37.6 million.
Outside of our Stock Repurchase Program, during the six months ended June 30, 2023 and 2022, we repurchased from our employees and then cancelled approximately 168,000 and 125,000 shares of our common stock, respectively, for $9.4 million and $7.9 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.
Through the six months ended June 30, 2023 and 2022, we have paid $9.4 million and $45.1 million, respectively, for our total repurchases of common stock, with the differences when compared to the amounts purchased attributed to the timing of the settlement.
Long-term Debt
During the six months ended June 30, 2023 and 2022, we made principal repayments on our 2021 Term Loan of $3.8 million during each period. Additionally, during the six months ended June 30, 2023, we borrowed $30.0 million from our 2021 Revolver for general corporate purposes and repaid $15.0 million. During the six months ended June 30, 2022, we borrowed $245.0 million from our 2021 Revolver to settle our 2016 Convertible Notes for $242.3 million.
In July 2023, we borrowed an additional $15.0 million on the 2021 Revolver, currently leaving $145.0 million available to us.
Settlement and Merchant Reserve Activity
During the six months ended June 30, 2023 and 2022, we had net settlement and merchant reserve activity of ($63.1) million and $26.8 million, respectively, related to the cash collected, held on behalf, and paid to our merchants related to our payment processing services and the net change in deposits held on behalf of our merchants. These balances can significantly fluctuate between periods due to activity at the end of the period and the day in which the period ends.
See Note 2 to our Financial Statements for additional discussion of our settlement and merchant reserves.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are mainly limited to money transmitter bonds, bid bonds, and performance bonds. These arrangements do not have a material impact and are not reasonably likely to have a material future impact to our financial condition, results of operation, liquidity, capital expenditures, or capital resources. See Note 7 to our Financial Statements for additional information on these guarantees.
Capital Resources
The following are the key items to consider in assessing our sources and uses of capital resources:
Current Sources of Capital Resources. Below are the key items to consider in assessing our current sources of capital resources:
Uses/Potential Uses of Capital Resources. Below are the key items to consider in assessing our uses/potential uses of capital resources:
Under our Stock Repurchase Program, we may repurchase shares in the open market or in privately negotiated transactions, including through an accelerated stock repurchase plan or under a SEC Rule 10b5-1 plan. The actual timing and amount of share repurchases are dependent on the current market conditions and other business-related factors. In August 2023, we announced our intention to enter into an approximately $100 million share repurchase plan through the end of 2024. Our common stock repurchases are discussed in more detail in Note 9 to our Financial Statements.
During the six months ended June 30, 2023, we did not repurchase any of our common stock under our Stock Repurchase Program.
Outside of our Stock Repurchase Program, during the six months ended June 30, 2023, we repurchased from our employees and then cancelled approximately 168,000 shares of our common stock for $9.4 million in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.
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Additionally, there are provisions for up to approximately $13 million of potential future earn-out payments through September 30, 2025. Through June 30, 2023, we made earn-out payments of $0.3 million.
As part of our growth strategy, we are continually evaluating potential business and/or asset acquisitions and investments in market share expansion with our existing and potential new customers and expansion into verticals outside the global communications market.
The stock warrants are discussed in more detail in Note 9 to our Financial Statements.
The mandatory repayments for the next twelve months under our 2021 Credit Agreement are $7.5 million and the cash interest expense (based upon then-current interest rates) for the 2021 Term Loan and 2021 Revolver (assuming the current amount outstanding, no further amounts are borrowed, and the amount is not voluntarily repaid) are $9.5 million and $21.3 million, respectively. We have the ability to make prepayments without penalties on our 2021 Credit Agreement.
Our long-term debt obligations are discussed in more detail in Note 4 to our Financial Statements.
In summary, we expect to continue to have material needs for capital resources going forward, as noted above. We believe that our current cash and cash equivalents balances and our 2021 Revolver, together with cash expected to be generated in the future from our current operating activities, will be sufficient to meet our anticipated capital resource requirements for at least the next twelve months. We also believe we could obtain additional capital through other debt sources which may be available to us if deemed appropriate.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the potential loss arising from adverse changes in market rates and prices. As of June 30, 2023, we are exposed to various market risks, including changes in interest rates, fluctuations and changes in the market value of our cash equivalents, short-term investments and settlement and merchant reserve assets, and changes in foreign currency exchange rates. We have not historically entered into derivatives or other financial instruments for trading or speculative purposes.
Interest Rate Risk
Long-Term Debt. The current interest rates on our 2021 Credit Agreement are based upon an adjusted SOFR rate (including 0.10% spread adjustment) plus an applicable margin, or an ABR plus an applicable margin. In April 2023, we amended the 2021 Credit Agreement to replace the LIBOR rate with the SOFR rate for interest periods entered into after the effective date of amendment. See Note 4 to our Financial Statements for further details related to our long-term debt.
A hypothetical adverse change of 10% in the June 30, 2023 adjusted SOFR rate would not have a material impact upon our results of operations.
Market Risk
Cash Equivalents and Short-Term Investments. Our cash and cash equivalents as of June 30, 2023 and December 31, 2022 were $146.2 million and $150.4 million, respectively. Certain of our cash balances are swept into overnight money market accounts on a daily basis, and at times, any excess funds are invested in low-risk, somewhat longer term, cash equivalent instruments and short-term investments. Our cash equivalents are invested primarily in institutional money market funds held at major banks. We have minimal market risk for our cash and cash equivalents due to the relatively short maturities of the instruments.
Our short-term investments as of June 30, 2023 and December 31, 2022 were zero and $0.1 million, respectively. Currently, we utilize short-term investments as a means to invest our excess cash only in the U.S. The day-to-day management of our short-term investments is performed by a large financial institution in the U.S., using strict and formal investment guidelines approved by our Board. Under these guidelines, short-term investments are limited to certain acceptable investments with a: (i) maximum maturity; (ii) maximum concentration and diversification; and (iii) minimum acceptable credit quality. At this time, we believe we have minimal liquidity risk associated with the short-term investments included in our portfolio.
Settlement and Merchant Reserve Assets. We are exposed to market risk associated with cash held on behalf of our merchants related to our payment processing services. As of June 30, 2023 and December 31, 2022, we had $176.4 million and $238.7 million, respectively, of cash collected on behalf of our merchants. The cash is held in accounts with various major financial institutions in the U.S. and Canada in an amount equal to at least 100% of the aggregate amount owed to our merchants. These balances can significantly fluctuate between periods due to activity at the end of the period and the day in which the period ends.
Foreign Currency Exchange Rate Risk
Due to foreign operations around the world, our balance sheet and income statement are exposed to foreign currency exchange risk due to the fluctuations in the value of currencies in which we conduct business. While we attempt to maximize natural hedges by incurring expenses in the same currency in which we contract revenue, the related expenses for that revenue could be in one or more differing currencies than the revenue stream.
During the six months ended June 30, 2023, we generated approximately 88% of our revenue in U.S. dollars. We expect that, in the foreseeable future, we will continue to generate a very large percentage of our revenue in U.S. dollars.
As of June 30, 2023 and December 31, 2022, the carrying amounts of our monetary assets and monetary liabilities on the books of our non-U.S. subsidiaries in currencies denominated in a currency other than the functional currency of those non-U.S. subsidiaries are as follows (in thousands, in U.S. dollar equivalents):
Monetary
Pounds sterling
(54
1,418
(119
601
Euro
(398
3,398
(425
1,992
U.S. Dollar
(257
29,324
(597
31,646
(24
1,194
(72
503
(733
35,334
(1,213
34,742
A hypothetical adverse change of 10% in the June 30, 2023 exchange rates would not have had a material impact upon our results of operations.
Item 4. Controls and Procedures
(a) Disclosure Controls and Procedures
As required by Rule 13a-15(b), our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
(b) Internal Control Over Financial Reporting
As required by Rule 13a-15(d), our management, including the CEO and CFO, also conducted an evaluation of our internal control over financial reporting, as defined by Rule 13a-15(f), to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the CEO and CFO concluded that there has been no such change during the quarter covered by this report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. In the opinion of our management, we are not presently a party to any material pending or threatened legal proceedings.
Item 1A. Risk Factors
A discussion of our risk factors can be found in Item 1A. Risk Factors in our 2022 Form 10-K. There were no material changes to the risk factors disclosed in our 2022 Form 10-K during the second quarter of 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table presents information with respect to purchases of our common stock made during the second quarter of 2023 by CSG Systems International, Inc. or any “affiliated purchaser” of CSG Systems International, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.
Period
Total Number of Shares Purchased (1) (2)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plan or Programs (2)
April 1 - April 30
563
54.17
2,107,047
May 1 - May 31
888
49.75
June 1 - June 30
738
50.70
2,189
51.21
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
The Exhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.
EXHIBIT INDEX
ExhibitNumber
Description
3.04
Certificate of Amendment of Restated Certificate of Incorporation of CSG Systems International, Inc.
4.60A (1)
First Amendment to Amended and Restated Credit Agreement
10.04 (2)
CSG Systems International, Inc. Amended and Restated 2005 Stock Incentive Plan, as amended on May 17, 2023
10.25**
Amended and Restated CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Charter Communications Operating, LLC
10.27U*
Twentieth Amendment to the CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Comcast Cable Communications Management, LLC
10.27V*
Twenty-First Amendment to the CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Comcast Cable Communications Management, LLC
10.27W*
Twenty-Second Amendment to the CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Comcast Cable Communications Management, LLC
31.01
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02
32.01
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
(1) Incorporated by reference to the exhibit of the same number to the Registrant's Current Report on Form 8-K for the event dated April 12, 2023.
(2) Incorporated by reference to the exhibit of the same number to the Registrant's Current Report on Form 8-K for the event dated May 17, 2023.
* Portions of the exhibit have been omitted pursuant to SEC rules regarding confidential information.
** Certain of the schedules (or similar attachments) to this Exhibit have been omitted in accordance with Item 601(a)(5) of Regulation S-K under the Securities Act because they do not contain information material to an investment or voting decision and that information is not otherwise disclosed in the Exhibit or the disclosure document. The registrant hereby agrees to furnish a copy of all omitted schedules (or similar attachments) to the SEC upon its request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 3, 2023
/s/ Brian A. Shepherd
Brian A. Shepherd
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Hai Tran
Hai Tran
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ David N. Schaaf
David N. Schaaf
Chief Accounting Officer
(Principal Accounting Officer)