UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction |
(I.R.S. Employer |
(Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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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.
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).
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.
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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 October 30, 2023, there were
CSG SYSTEMS INTERNATIONAL, INC.
FORM 10-Q for the Quarter Ended September 30, 2023
INDEX
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Page No. |
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Part I - FINANCIAL INFORMATION |
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Item 1. |
Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (Unaudited) |
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4 |
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5 |
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6 |
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8 |
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Part II - OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 5. |
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Item 6. |
30 |
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31 |
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32 |
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2
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(in thousands)
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September 30, 2023 |
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December 31, 2022 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Short-term investments |
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Total cash, cash equivalents, and short-term investments |
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Settlement and merchant reserve assets |
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Trade accounts receivable: |
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Billed, net of allowance of $ |
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Unbilled |
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Income taxes receivable |
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Other current assets |
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Total current assets |
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Non-current assets: |
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Property and equipment, net of depreciation of $ |
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Operating lease right-of-use assets |
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Software, net of amortization of $ |
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Goodwill |
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Acquired customer contracts, net of amortization of $ |
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Customer contract costs, net of amortization of $ |
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Deferred income taxes |
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Other assets |
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Total non-current assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
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$ |
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$ |
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Operating lease liabilities |
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Customer deposits |
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Trade accounts payable |
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Accrued employee compensation |
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Settlement and merchant reserve liabilities |
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Deferred revenue |
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Income taxes payable |
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Other current liabilities |
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Total current liabilities |
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Non-current liabilities: |
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Long-term debt, net of unamortized discounts of $ |
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Operating lease liabilities |
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Deferred revenue |
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Income taxes payable |
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Deferred income taxes |
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Other non-current liabilities |
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Total non-current liabilities |
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Total liabilities |
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Stockholders' equity: |
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Preferred stock, par value $ |
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Common stock, par value $ |
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Additional paid-in capital |
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Treasury stock, at cost; |
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Accumulated other comprehensive income (loss): |
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Unrealized gain on short-term investments, net of tax |
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Cumulative foreign currency translation adjustments |
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Accumulated earnings |
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Total stockholders' equity |
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Total liabilities and stockholders' equity |
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$ |
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$ |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(in thousands, except per share amounts)
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Quarter Ended |
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Nine Months Ended |
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September 30, 2023 |
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September 30, 2022 |
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September 30, 2023 |
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September 30, 2022 |
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Revenue |
$ |
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$ |
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$ |
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$ |
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Cost of revenue (exclusive of depreciation, shown separately below) |
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Other operating expenses: |
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Research and development |
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Selling, general and administrative |
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Depreciation |
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Restructuring and reorganization charges |
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Total operating expenses |
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Operating income |
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Other income (expense): |
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Interest expense |
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Interest and investment income, net |
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Loss on derivative liability upon debt conversion |
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Other, net |
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Total other |
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Income before income taxes |
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Income tax provision |
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( |
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( |
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( |
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( |
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Net income |
$ |
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$ |
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$ |
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$ |
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Weighted-average shares outstanding: |
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Basic |
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Diluted |
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Earnings per common share: |
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Basic |
$ |
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$ |
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$ |
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$ |
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Diluted |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - UNAUDITED
(in thousands)
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Quarter Ended |
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Nine Months Ended |
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September 30, 2023 |
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September 30, 2022 |
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September 30, 2023 |
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September 30, 2022 |
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Net income |
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$ |
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$ |
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$ |
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$ |
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Other comprehensive income (loss), net of tax: |
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Foreign currency translation adjustments |
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( |
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( |
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( |
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( |
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Unrealized holding gain on short-term investments arising during period |
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Other comprehensive loss, net of tax |
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( |
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( |
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( |
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( |
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Total comprehensive income (loss), net of tax |
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$ |
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$ |
( |
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$ |
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$ |
( |
) |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED
(in thousands)
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Shares of Common Stock Outstanding |
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Common Stock |
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Additional Paid-in Capital |
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Treasury Stock |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Earnings |
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Total Stockholders' Equity |
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For the Nine Months Ended September 30, 2023: |
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BALANCE, January 1, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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Comprehensive income: |
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Net income |
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- |
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- |
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- |
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- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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- |
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- |
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Total comprehensive income |
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Repurchase of common stock |
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( |
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( |
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( |
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- |
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- |
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- |
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( |
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Issuance of common stock pursuant to employee stock |
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- |
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- |
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- |
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- |
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Issuance of restricted common stock pursuant to |
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( |
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- |
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- |
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- |
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- |
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Cancellation of restricted common stock issued |
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( |
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- |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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Dividends |
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- |
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- |
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- |
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- |
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- |
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( |
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( |
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BALANCE, March 31, 2023 |
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( |
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( |
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Comprehensive income: |
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Net income |
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- |
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- |
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- |
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- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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- |
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- |
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Total comprehensive income |
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Repurchase of common stock |
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( |
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- |
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( |
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- |
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- |
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- |
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( |
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Issuance of common stock pursuant to employee stock |
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- |
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- |
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- |
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- |
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Issuance of restricted common stock pursuant to |
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( |
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- |
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- |
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- |
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- |
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Cancellation of restricted common stock issued |
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( |
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- |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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Dividends |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
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BALANCE, June 30, 2023 |
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( |
) |
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( |
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Comprehensive income: |
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Net income |
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- |
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- |
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- |
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- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
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- |
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( |
) |
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- |
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Total comprehensive income |
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Repurchase of common stock |
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( |
) |
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- |
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( |
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( |
) |
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- |
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- |
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( |
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Issuance of common stock pursuant to employee stock |
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- |
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- |
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- |
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- |
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Issuance of restricted common stock pursuant to |
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- |
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- |
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- |
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- |
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- |
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- |
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Cancellation of restricted common stock issued |
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( |
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- |
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- |
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- |
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- |
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- |
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- |
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Stock-based compensation expense |
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- |
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- |
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- |
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- |
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- |
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Purchase of capped call transactions (net of tax) |
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- |
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- |
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( |
) |
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- |
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- |
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- |
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( |
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Dividends |
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- |
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- |
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- |
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- |
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- |
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( |
) |
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( |
) |
BALANCE, September 30, 2023 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
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6
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Shares of Common Stock Outstanding |
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Common Stock |
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Additional Paid-in Capital |
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Treasury Stock |
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Accumulated Other Comprehensive Income (Loss) |
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Accumulated Earnings |
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Noncontrolling Interest |
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Total Stockholders' Equity |
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For the Nine Months Ended September 30, 2022: |
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||||||||
BALANCE, January 1, 2022 |
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$ |
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$ |
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$ |
( |
) |
$ |
( |
) |
$ |
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$ |
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$ |
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Comprehensive income: |
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Net income |
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- |
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- |
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- |
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- |
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- |
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- |
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Unrealized loss on short-term investments, net of tax |
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- |
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- |
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- |
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- |
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( |
) |
|
- |
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- |
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Foreign currency translation adjustments |
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- |
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- |
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- |
|
|
- |
|
|
( |
) |
|
- |
|
|
- |
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Repurchase of common stock |
|
( |
) |
|
( |
) |
|
( |
) |
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
Issuance of common stock pursuant to employee stock |
|
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|||
Issuance of restricted common stock pursuant to |
|
|
|
|
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
||
Cancellation of restricted common stock issued |
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Stock-based compensation expense |
|
- |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
||
Settlement of convertible debt securities, net of tax |
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
Adjustments due to adoption of new accounting |
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
Dividends |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
( |
) |
BALANCE, March 31, 2022 |
|
|
|
|
|
|
|
( |
) |
|
( |
) |
|
|
|
|
|
|
||||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
- |
|
|
|
||
Unrealized gain on short-term investments, net of tax |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
|
||
Foreign currency translation adjustments |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
- |
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||||||
Repurchase of common stock |
|
( |
) |
|
- |
|
|
( |
) |
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
Issuance of common stock pursuant to employee stock |
|
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|||
Issuance of restricted common stock pursuant to |
|
|
|
|
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
||
Cancellation of restricted common stock issued |
|
( |
) |
|
( |
) |
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Stock-based compensation expense |
|
- |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
||
Dividends |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
( |
) |
Write-off of noncontrolling interest |
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
|
( |
) |
|
BALANCE, June 30, 2022 |
|
|
|
|
|
|
|
( |
) |
|
( |
) |
|
|
|
- |
|
|
|
|||||
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
Net income |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
- |
|
|
|
||
Unrealized gain on short-term investments, net of tax |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
|
||
Foreign currency translation adjustments |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
- |
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||||||
Repurchase of common stock |
|
( |
) |
|
- |
|
|
( |
) |
|
( |
) |
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
Issuance of common stock pursuant to employee stock |
|
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|||
Issuance of restricted common stock pursuant to |
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Cancellation of restricted common stock issued |
|
( |
) |
|
( |
) |
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
Stock-based compensation expense |
|
- |
|
|
- |
|
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
||
Dividends |
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
( |
) |
|
- |
|
|
( |
) |
BALANCE, September 30, 2022 |
|
|
$ |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
$ |
|
$ |
|
$ |
|
||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
7
CSG SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(in thousands)
|
Nine Months Ended |
|
|
|||||
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income |
$ |
|
|
$ |
|
|
||
Adjustments to reconcile net income to net cash provided by operating activities- |
|
|
|
|
|
|
||
Depreciation |
|
|
|
|
|
|
||
Amortization |
|
|
|
|
|
|
||
Asset impairment |
|
|
|
|
|
|
||
Gain on lease modifications |
|
( |
) |
|
|
|
|
|
Loss on short-term investments and other |
|
|
|
|
|
|
||
Loss on derivative liability upon debt conversion |
|
|
|
|
|
|
||
Unrealized foreign currency transactions gain, net |
|
( |
) |
|
|
( |
) |
|
Deferred income taxes |
|
( |
) |
|
|
( |
) |
|
Stock-based compensation |
|
|
|
|
|
|
||
Changes in operating assets and liabilities, net of acquired amounts: |
|
|
|
|
|
|
||
Trade accounts receivable, net |
|
( |
) |
|
|
( |
) |
|
Other current and non-current assets and liabilities |
|
( |
) |
|
|
( |
) |
|
Income taxes payable/receivable |
|
( |
) |
|
|
( |
) |
|
Trade accounts payable and accrued liabilities |
|
( |
) |
|
|
( |
) |
|
Deferred revenue |
|
|
|
|
( |
) |
|
|
Net cash provided by operating activities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Purchases of software, property and equipment |
|
( |
) |
|
|
( |
) |
|
Proceeds from sale/maturity of short-term investments |
|
|
|
|
|
|
||
Net cash used in investing activities |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from issuance of common stock |
|
|
|
|
|
|
||
Payment of cash dividends |
|
( |
) |
|
|
( |
) |
|
Repurchase of common stock |
|
( |
) |
|
|
( |
) |
|
Deferred acquisition payments |
|
( |
) |
|
|
( |
) |
|
Proceeds from long-term debt |
|
|
|
|
|
|
||
Payments on long-term debt |
|
( |
) |
|
|
( |
) |
|
Purchase of capped call transactions related to convertible notes |
|
( |
) |
|
|
|
|
|
Payments of deferred financing costs |
|
( |
) |
|
|
|
|
|
Settlement and merchant reserve activity |
|
( |
) |
|
|
( |
) |
|
Net cash used in financing activities |
|
( |
) |
|
|
( |
) |
|
Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Net decrease in cash, cash equivalents, and restricted cash |
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
|
|
|
|
||
Cash, cash equivalents, and restricted cash, end of period |
$ |
|
|
$ |
|
|
||
|
|
|
|
|
|
|
||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
||
Cash paid during the period for- |
|
|
|
|
|
|
||
Interest |
$ |
|
|
$ |
|
|
||
Income taxes |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Reconciliation of cash, cash equivalents, and restricted cash: |
|
|
|
|
|
|
||
Cash and cash equivalents |
$ |
|
|
$ |
|
|
||
Settlement and merchant reserve assets |
|
|
|
|
|
|
||
Total cash, cash equivalents, and restricted cash |
$ |
|
|
$ |
|
|
||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
8
CSG SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. GENERAL
We have prepared the accompanying unaudited condensed consolidated financial statements as of September 30, 2023 and December 31, 2022, and for the quarters and nine months ended September 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 nine months ended September 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.
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
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 nine months ended September 30, 2023 and 2022 were as follows (in thousands):
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||||
SaaS and related solutions |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
||||
Software and services |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Maintenance |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
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 nine months ended September 30, 2023 and 2022, as a percentage of our total revenue, were as follows:
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||||
Americas (principally the U.S.) |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Europe, Middle East, and Africa |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Asia Pacific |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Total revenue |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
9
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 nine months ended September 30, 2023 and 2022, as a percentage of our total revenue, were as follows:
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||||
Broadband/Cable/Satellite |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Telecommunications |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Other |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Total revenue |
|
|
% |
|
|
% |
|
|
% |
|
|
% |
|
||||
Deferred revenue as of December 31, 2022 and 2021, recognized during the quarters ended September 30, 2023 and 2022 was $
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 September 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 September 30, 2023 and December 31, 2022, we had $
Short-term Investments. Our short-term investments as of September 30, 2023 and December 31, 2022 were
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 to 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 for payment would be against us. 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):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
||||
Settlement assets/liabilities |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Merchant reserve assets/liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
10
Financial Instruments. Our financial instruments as of September 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):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
|
Level 1 |
|
|
Level 2 |
|
|
Total |
|
||||||
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Money market funds |
|
$ |
|
|
$ |
- |
|
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
|
||||
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Asset-backed securities |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||||
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):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
2023 Convertible Notes (par value) |
|
$ |
|
|
$ |
|
|
$ |
- |
|
|
$ |
- |
|
||
2021 Credit Agreement (carrying value including |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Term Loan |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revolver |
|
|
|
|
|
|
|
|
|
|
|
|
||||
The fair value of our convertible notes was estimated based upon quoted market prices or recent sales activity, while the fair value of our credit agreement was estimated using a discounted cash flow methodology, both of which are considered Level 2 inputs.
3. GOODWILL AND INTANGIBLE ASSETS
Goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30, 2023 were as follows (in thousands):
January 1, 2023, balance |
|
$ |
|
|
Adjustments related to prior acquisitions |
|
|
( |
) |
Impairment charge related to Keydok, LLC |
|
|
( |
) |
Effects of changes in foreign currency exchange rates |
|
|
|
|
September 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.
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Amount |
|
||||||
Acquired customer contracts |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
Software |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
||||
Total other intangible assets |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
11
The total amortization expense related to other intangible assets for the third quarters of 2023 and 2022 were $
Customer Contract Costs. As of September 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):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||||||||||
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Amount |
|
|
Gross Carrying Amount |
|
|
Accumulated Amortization |
|
|
Net Amount |
|
||||||
Customer contract costs |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
||||
The total amortization expense related to customer contract costs for the third quarters of 2023 and 2022 were $
4. DEBT
Our long-term debt, as of September 30, 2023 and December 31, 2022, was as follows (in thousands):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
2023 Convertible Notes: |
|
|
|
|
|
|
||
2023 Convertible Notes – senior unsecured convertible notes, due |
|
$ |
|
|
$ |
|
||
Less – deferred financing costs |
|
|
( |
) |
|
|
|
|
2023 Convertible Notes, net of unamortized discounts |
|
|
|
|
|
|
||
2021 Credit Agreement: |
|
|
|
|
|
|
||
2021 Term Loan, due , interest at adjusted SOFR plus |
|
|
|
|
|
|
||
Less – deferred financing costs |
|
|
( |
) |
|
|
( |
) |
2021 Term Loan, net of unamortized discounts |
|
|
|
|
|
|
||
$ |
|
|
|
|
|
|
||
Total debt, net of unamortized discounts |
|
|
|
|
|
|
||
Current portion of long-term debt, net of unamortized discounts |
|
|
( |
) |
|
|
( |
) |
Long-term debt, net of unamortized discounts |
|
$ |
|
|
$ |
|
||
2023 Convertible Notes. In September 2023, we completed an offering of $
The 2023 Convertible Notes will be convertible at the option of the noteholders before June 15, 2028 upon the occurrence of certain events. On or after June 15, 2028 and until the close of business on the second scheduled trading day immediately preceding the maturity date, noteholders may convert all or any portion of their notes at any time regardless of these conditions. We are required to satisfy our conversion obligation as follows: (i) paying cash up to the aggregate principal amount of notes to be converted; and (ii) to the extent the value of our conversion obligation exceeds the par value, we will satisfy the remaining conversion obligation in our common stock, cash, or a combination thereof, at our election. As of September 30, 2023, none of the conditions to early convert have been met.
The 2023 Convertible Notes will be convertible at an initial conversion rate of
Holders may require us, subject to certain conditions, to repurchase all or a portion of their 2023 Convertible Notes for cash upon the occurrence of a fundamental change (as defined in the Indenture related to the 2023 Convertible Notes (“2023 Notes Indenture”)). The repurchase price will be equal to the principal amount thereof plus accrued and unpaid interest to, but excluding, the repurchase date.
12
We may not redeem the 2023 Convertible Notes prior to September 21, 2026. On or after
The 2023 Notes Indenture includes customary terms, including certain events of default after which the 2023 Convertible Notes may be due and payable immediately. The 2023 Notes Indenture contains customary affirmative covenants, including a reporting covenant.
In September 2023, in connection with the pricing of the 2023 Convertible Notes, we entered into privately negotiated capped call transactions (the “Capped Call Transactions”) with certain of the initial purchasers of the 2023 Convertible Notes and other financial institutions (collectively, the “Option Counterparties”). We used $
The Capped Call Transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the 2023 Convertible Notes,
The Capped Call Transactions are expected generally to reduce the potential dilution to the common stock upon conversion of the 2023 Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the 2023 Convertible Notes, in the event that the market price per share of common stock (as measured under the terms of the Capped Call Transactions) is greater than the strike price of the Capped Call Transactions. The strike price of the Capped Call Transactions initially corresponds to the initial conversion price of the 2023 Convertible Notes, or approximately $
The Capped Call Transactions are separate transactions, entered into by us with the Option Counterparties. They are not part of the terms of the 2023 Convertible Notes and do not change the holders’ rights under the 2023 Convertible Notes. Holders of the 2023 Convertible Notes do not have any rights with respect to the Capped Call Transactions. The Capped Call Transactions do not meet the criteria for separate accounting as a derivative as they meet the criteria for equity classification. The premiums paid for the Capped Call Transactions of $
The proceeds from the sale of the 2023 Convertible Notes, net of financing costs, were $
In conjunction with the closing of the 2023 Convertible Notes, we incurred financing costs of $
2021 Credit Agreement. During the nine months ended September 30, 2023, we made $
As of September 30, 2023, the interest rate on our 2021 Term Loan and our 2021 Revolver was
The interest rates under the 2021 Credit Agreement are based upon our choice of an adjusted SOFR rate plus an applicable margin of
In April 2023, we entered into the First Amendment to the 2021 Credit Agreement (the “First Amendment”). The First Amendment replaced the interest rate benchmark, from LIBOR to the Secured Overnight Financing Rate ("SOFR"), and all references to “Eurodollar Borrowing(s)” or “Eurodollar Loans” were replaced with “Term SOFR Borrowing(s)” or “Term
13
SOFR Loans”. Any loan amounts outstanding at the effective date of the First Amendment continued to bear interest at the applicable LIBOR rate until the end of the interest election period applicable to such loan. All Term SOFR Loans are subject to a
In September 2023, we entered into the Second Amendment to the 2021 Credit Agreement (the “Second Amendment”). The Second Amendment permits the issuance and sale of the 2023 Convertible Notes and the related Capped Call Transactions (described above). In conjunction with the Second Amendment, we incurred financing costs of $
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
The DGIT acquisition includes provisions for up to approximately $
6. RESTRUCTURING AND REORGANIZATION CHARGES
During the third quarters of 2023 and 2022, we recorded restructuring and reorganization charges of $
During the nine months ended September 30, 2023 we implemented the following restructuring and reorganizational activities:
The activity in the restructuring and reorganization reserves during the nine months ended September 30, 2023 was as follows (in thousands):
|
|
Termination Benefits |
|
|
Other |
|
|
Total |
|
|||
January 1, 2023, balance |
|
$ |
|
|
$ |
- |
|
|
$ |
|
||
Charged to expense during period |
|
|
|
|
|
|
|
|
|
|||
Cash payments |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Adjustment for asset impairment |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Adjustment for gain on lease modifications |
|
|
- |
|
|
|
|
|
|
|
||
Adjustment for accelerated depreciation |
|
|
- |
|
|
|
( |
) |
|
|
( |
) |
Other |
|
|
|
|
|
- |
|
|
|
|
||
September 30, 2023, balance |
|
$ |
|
|
$ |
|
|
$ |
|
|||
As of September 30, 2023, $
14
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 September 30, 2023, we had $
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 September 30, 2023, we had performance guarantees of $
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
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 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 September 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 September 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.
15
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 common shares is included in the following table (in thousands):
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||||
Basic weighted-average common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Dilutive effect of restricted common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Diluted weighted-average common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
The dilutive effect of restricted common stock is computed using the treasury stock method. The dilutive effect of the 2023 Convertible Notes is computed using the if-converted method and will only have an effect in those quarterly periods in which our average stock price exceeds the current effective conversion price.
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 anti-dilutive, 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 $
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”). During the third quarter and nine months ended September 30, 2023, we repurchased approximately
The repurchases during third quarter of 2023 were executed as follows:
As part of the 2022 Inflation Reduction Act, effective January 1, 2023, a one percent excise tax is imposed on net share repurchases during the year. As of September 30, 2023, we accrued $
As of September 30, 2023, the total remaining number of shares available for repurchase pursuant to the prior authorization (as defined below) under the Stock Repurchase Program totaled
Stock Repurchases for Tax Withholdings. In addition to the above-mentioned stock repurchases, during the third quarters of 2023 and 2022, we repurchased and then cancelled approximately
16
Stock Incentive Plan. In August 2023, we increased the number of shares of our common stock authorized and reserved for issuance under the Amended and Restated 2005 Stock Incentive Plan by
Cash Dividends. During the third quarter of 2023, our Board approved a quarterly cash dividend of $
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
As of September 30, 2023,
Stock-Based Awards.
|
|
Quarter Ended |
|
|
Nine Months Ended |
|
|
||||||||||
|
|
September 30, 2023 |
|
|
September 30, 2023 |
|
|
||||||||||
|
|
Shares |
|
|
Weighted- |
|
|
Shares |
|
|
Weighted- |
|
|
||||
Unvested awards, beginning |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
||||
Awards granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Awards forfeited/cancelled |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
||
Awards vested |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
||
Unvested awards, ending |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
||||
Included in the awards granted during the nine months ended September 30, 2023 are awards issued to members of executive management and certain key employees in the form of: (i) performance-based awards of approximately
The other restricted common stock shares granted during the nine months ended September 30, 2023 are primarily time-based awards, which vest annually over to
We recorded stock-based compensation expense for the third quarters of 2023 and 2022 of $
17
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.
18
Management Overview of Quarterly Results
Third Quarter Highlights. A summary of our results of operations for the third quarter of 2023, when compared to the third quarter of 2022, is as follows (in thousands, except per share amounts and percentages):
|
|
Quarter Ended |
|
|
|||||
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||
Revenue |
|
$ |
286,868 |
|
|
$ |
273,308 |
|
|
Transaction fees (1) |
|
|
20,314 |
|
|
|
18,177 |
|
|
Operating Results: |
|
|
|
|
|
|
|
||
Operating income |
|
$ |
32,731 |
|
|
$ |
19,977 |
|
|
Operating margin percentage |
|
|
11.4 |
% |
|
|
7.3 |
% |
|
Diluted EPS |
|
$ |
0.62 |
|
|
$ |
0.40 |
|
|
Supplemental Data: |
|
|
|
|
|
|
|
||
Restructuring and reorganization charges (2) |
|
$ |
1,152 |
|
|
$ |
14,193 |
|
|
Executive transition costs |
|
|
1,148 |
|
|
|
27 |
|
|
Acquisition-related costs: |
|
|
|
|
|
|
|
||
Amortization of acquired intangible assets |
|
|
2,996 |
|
|
|
3,405 |
|
|
Transaction-related costs |
|
|
(40 |
) |
|
|
495 |
|
|
Stock-based compensation (2) |
|
|
7,216 |
|
|
|
8,650 |
|
|
Revenue. Revenue for the third quarter of 2023 was $286.9 million, a 5.0% increase when compared to revenue of $273.3 million for the third quarter of 2022. The increase can be mainly attributed to the continued growth of our revenue management solutions.
Operating Results. Operating income for the third quarter of 2023 was $32.7 million, or an 11.4% operating margin percentage, compared to $20.0 million, or a 7.3% operating margin percentage for the third quarter of 2022. The increase in operating income can be mainly attributed to the $13.0 million decrease in restructuring and reorganization charges between years.
Diluted EPS. Diluted EPS for the third quarter of 2023 was $0.62 compared to $0.40 for the third quarter of 2022, with the increase mainly attributed to the higher operating income in the third quarter of 2023, discussed above.
Cash and Cash Flows. As of September 30, 2023, we had cash, cash equivalents, and short-term investments of $146.7 million, as compared to $146.2 million as of June 30, 2023, and $150.4 million as of December 31, 2022. Our cash flows provided by operating activities for the third quarter of 2023 were $24.6 million. See the Liquidity section below for further discussion of our cash flows.
19
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):
|
|
Quarter Ended |
|
|||||||||||||||||||||
|
|
September 30, 2023 |
|
|
June 30, 2023 |
|
|
September 30, 2022 |
|
|||||||||||||||
|
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
|
Amount |
|
|
% of Revenue |
|
||||||
Charter |
|
$ |
59,432 |
|
|
|
21 |
% |
|
$ |
60,175 |
|
|
|
21 |
% |
|
$ |
57,974 |
|
|
|
21 |
% |
Comcast |
|
|
53,653 |
|
|
|
19 |
% |
|
|
53,757 |
|
|
|
19 |
% |
|
|
53,533 |
|
|
|
20 |
% |
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 |
|
|||||||||
|
|
September 30, 2023 |
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
|||
Charter |
|
|
21 |
% |
|
|
23 |
% |
|
|
22 |
% |
Comcast |
|
|
17 |
% |
|
|
18 |
% |
|
|
17 |
% |
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 included as Exhibit 10.25 in our periodic filings with the SEC.
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.
20
Results of Operations
Revenue. Total revenue for the: (i) third quarter of 2023 was $286.9 million, a 5.0% increase when compared to $273.3 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $871.9 million, a 9.0% increase when compared to $799.9 million for the nine months ended September 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 third quarters and nine months ended September 30, 2023 and 2022 was as follows (in thousands):
|
|
Quarter Ended |
|
|
Nine Months Ended |
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|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
||||
Americas (principally the U.S.) |
|
$ |
246,880 |
|
|
$ |
233,733 |
|
|
$ |
746,299 |
|
|
$ |
679,002 |
|
Europe, Middle East, and Africa |
|
|
25,502 |
|
|
|
28,336 |
|
|
|
88,795 |
|
|
|
88,878 |
|
Asia Pacific |
|
|
14,486 |
|
|
|
11,239 |
|
|
|
36,840 |
|
|
|
31,996 |
|
Total revenue |
|
$ |
286,868 |
|
|
$ |
273,308 |
|
|
$ |
871,934 |
|
|
$ |
799,876 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total Operating Expenses. Total operating expenses for the: (i) third quarter of 2023 were $254.1 million, a 0.3% increase when compared to $253.3 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 were $772.8 million, a 2.2% increase when compared to $756.2 million for the nine months ended September 30, 2022. The increases in total operating expenses are reflective of the higher revenue between periods, to include increased employee-related costs, partially offset 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) third quarter of 2023 was $152.7 million, a 10.3% increase when compared to $138.5 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $458.9 million, a 10.6% increase when compared to $415.0 million for the nine months ended September 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) third quarters of 2023 and 2022 was 53.2% and 50.7%, respectively; and (ii) nine months ended September 30, 2023 and 2022 was 52.6% and 51.9%, respectively.
R&D Expense (Exclusive of Depreciation). R&D expense for the: (i) third quarter of 2023 was $35.3 million, a 1.3% decrease when compared to $35.8 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $107.4 million, a 3.9% increase when compared to $103.4 million for the nine months ended September 30, 2022. The year-to-date increase in R&D expense is mainly attributed to higher employee-related costs. As a percentage of total revenue, R&D expense for the: (i) third quarters of 2023 and 2022 was 12.3% and 13.1%, respectively; and (ii) nine months ended September 30, 2023 and 2022 was 12.3% and 12.9%, respectively.
Our R&D efforts are focused on the evolution of our solutions that 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) third quarter of 2023 was $59.1 million, relatively consistent when compared to $59.0 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $180.9 million, a 4.1% increase when compared to $173.8 million for the nine months ended September 30, 2022. The year-to-date 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: (i) third quarters of 2023 and 2022 were 20.6% and 21.6%, respectively; and (ii) nine months ended September 30, 2023 and 2022 were 20.8% and 21.7%, respectively.
21
Restructuring and Reorganization Charges. Restructuring and reorganization charges for the: (i) third quarter of 2023 were $1.2 million, a $13.0 million decrease when compared to $14.2 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 were $8.4 million, a $37.9 million decrease when compared to $46.3 million for the nine months ended September 30, 2022. The restructuring and reorganization charges for the third quarter and nine months ended September 30, 2023 relate mainly to the following:
See Note 6 to our Financial Statements for additional discussion.
Operating Income. Operating income for the: (i) third quarter of 2023 was $32.7 million, or 11.4% of total revenue, compared to $20.0 million, or 7.3% of total revenue for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $99.1 million, or 11.4% of total revenue, compared to $43.7 million, or 5.5% of total revenue, for the nine months ended September 30, 2022. The increase in operating income can be mainly attributed to lower restructuring and reorganization charges, discussed above, with the year-to-date increase also attributed to higher revenue and improved profitability.
Interest Expense. Interest expense for the: (i) third quarter of 2023 was $8.0 million, a $3.7 million increase when compared to $4.3 million for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $23.1 million, a $12.8 million increase when compared to $10.3 million for the nine months ended September 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) third quarter of 2023 was $0.8 million of other income, a $2.0 million change when compared to $2.8 million of other income for the third quarter of 2022; and (ii) nine months ended September 30, 2023 was $3.0 million of other expense, a $9.0 million change when compared to $6.0 million of other income for the nine months ended September 30, 2022, with the changes primarily attributed to foreign currency movements.
Income Tax Provision. The effective income tax rates for the third quarters and nine months ended September 30, 2023 and 2022 were as follows:
Quarter Ended |
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|
Nine Months Ended |
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September 30, 2023 |
|
|
September 30, 2022 |
|
|
September 30, 2023 |
|
|
September 30, 2022 |
|
|
||||
|
30 |
% |
|
|
33 |
% |
|
|
29 |
% |
|
|
26 |
% |
|
Our estimated full year 2023 effective income tax rate is approximately 29%.
The effective income tax rate for the third quarter of 2022 was impacted by the timing of certain discrete tax items during the quarter. The full year 2022 effective income tax rate was 28%.
22
Liquidity
Cash and Liquidity. As of September 30, 2023, our principal sources of liquidity included cash, cash equivalents, and short-term investments of $146.7 million, compared to $146.2 million as of June 30, 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 September 30, 2023, we had $15.0 million outstanding on the 2021 Revolver, leaving $435.0 million available to us. The 2021 Credit Agreement contains customary affirmative, negative, and financial covenants. As of September 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):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||
Americas (principally the U.S.) |
|
$ |
108,705 |
|
|
$ |
91,569 |
|
Europe, Middle East and Africa |
|
|
24,950 |
|
|
|
49,099 |
|
Asia Pacific |
|
|
13,075 |
|
|
|
9,768 |
|
Total cash, equivalents, and short-term investments |
|
$ |
146,730 |
|
|
$ |
150,436 |
|
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 September 30, 2023 and December 31, 2022, we had $1.2 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 September 30, 2023 and December 31, 2022, we had $193.4 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):
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|
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|
|
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Net Cash |
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|||
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|
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|
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Changes in |
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Provided by |
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|||
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|
|
Operating |
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(Used In) Operating |
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Assets and |
|
|
Activities – |
|
|||
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|
Operations |
|
|
Liabilities |
|
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Totals |
|
|||
Cash Flows from Operating Activities: |
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|
|
|
|
|
|
|
|
|||
2023: |
|
|
|
|
|
|
|
|
|
|||
March 31 (1) |
|
$ |
50,158 |
|
|
$ |
(34,761 |
) |
|
$ |
15,397 |
|
June 30 |
|
|
26,539 |
|
|
|
(14,153 |
) |
|
|
12,386 |
|
September 30 |
|
|
34,618 |
|
|
|
(10,036 |
) |
|
|
24,582 |
|
Total |
|
$ |
111,315 |
|
|
$ |
(58,950 |
) |
|
$ |
52,365 |
|
|
|
|
|
|
|
|
|
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|
|||
2022: |
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|
|
|
|
|
|
|
|
|||
March 31 (1) |
|
$ |
49,687 |
|
|
$ |
(55,236 |
) |
|
$ |
(5,549 |
) |
June 30 (2) |
|
|
36,881 |
|
|
|
(44,597 |
) |
|
|
(7,716 |
) |
September 30 |
|
|
35,852 |
|
|
|
(13,014 |
) |
|
|
22,838 |
|
Total |
|
$ |
122,420 |
|
|
$ |
(112,847 |
) |
|
$ |
9,573 |
|
23
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):
Quarter Ended |
|
Gross |
|
|
Allowance |
|
|
Net Billed |
|
|
DBOs |
|
||||
2023: |
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|
|
|
|
|
|
|
|
|
|
|
||||
March 31 |
|
$ |
261,028 |
|
|
$ |
(5,254 |
) |
|
$ |
255,774 |
|
|
|
68 |
|
June 30 |
|
|
260,928 |
|
|
|
(4,618 |
) |
|
|
256,310 |
|
|
|
65 |
|
September 30 |
|
|
279,892 |
|
|
|
(4,731 |
) |
|
|
275,161 |
|
|
|
66 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||
2022: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
March 31 |
|
$ |
243,292 |
|
|
$ |
(4,924 |
) |
|
$ |
238,368 |
|
|
|
70 |
|
June 30 |
|
|
241,682 |
|
|
|
(5,105 |
) |
|
|
236,577 |
|
|
|
66 |
|
September 30 |
|
|
243,829 |
|
|
|
(4,998 |
) |
|
|
238,831 |
|
|
|
66 |
|
As of September 30, 2023 and 2022, approximately 93%, for both periods, of our net 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 $30.8 million to $83.6 million as of September 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 nine months ended September 30, 2023 and 2022, we sold (or had mature) $0.1 million and $27.4 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.
24
Purchases of Software, Property and Equipment
Our capital expenditures for the nine months ended September 30, 2023 and 2022 for software, property and equipment were $22.9 million and $31.6 million, respectively, and consisted principally of investments in: (i) communication design and delivery center equipment and infrastructure; (ii) software and related equipment; (iii) computer hardware; and (iv) leasehold improvements and related infrastructure for our new corporate headquarters.
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 nine months ended September 30, 2023, we made the following deferred acquisition payments: (i) Kitewheel deferred purchase price payment of $2.0 million; and (ii) DGIT earn-out and escrowed payments of $1.2 million.
Cash Dividends Paid on Common Stock
During the nine months ended September 30, 2023 and 2022, the Board approved dividends totaling $26.4 million and $25.4 million, respectively, and we made dividend payments of $26.2 million and $25.4 million, respectively, with the differences between the amount approved and paid attributed to dividends on accrued unvested incentive shares that are paid upon vesting.
Repurchase of Common Stock
During the nine months ended September 30, 2023 and 2022, we repurchased approximately 1,991,000 and 1,114,000 shares of our common stock, respectively, under the guidelines of our Stock Repurchase Program for $107.0 million and $65.5 million, respectively.
Outside of our Stock Repurchase Program, during the nine months ended September 30, 2023 and 2022, we repurchased from our employees and then cancelled approximately 171,000 and 132,000 shares of our common stock, respectively, for $9.6 million and $8.4 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.
Through the nine months ended September 30, 2023 and 2022, we have paid $116.4 million and $73.4 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.
See Note 9 to our Financial Statements for additional discussion of our repurchases of common stock.
Long-term Debt
During the nine months ended September 30, 2023, we borrowed $45.0 million under our 2021 Revolver for general corporate purposes and subsequently repaid $30.0 million. In September 2023, we issued the 2023 Convertible Notes offering and received proceeds of $425.0 million. We used a portion of these proceeds to repay $275.0 million of our 2021 Revolver balance and pay the $34.3 million premiums for the Capped Call Transactions.
Additionally, during the nine months ended September 30, 2023, we paid deferred financing costs of $13.5 million, of which $13.0 million related to the 2023 Convertible Notes and $0.5 million related to the Second Amendment to the 2021 Credit Agreement.
During the nine months ended September 30, 2022, we borrowed $290.0 million under our 2021 Revolver using $242.3 million to settle our 2016 Convertible Notes, and the remainder for general corporate purposes.
Additionally, during the nine months ended September 30, 2023 and 2022, we made principal repayments on our 2021 Term Loan of $5.6 million during each period.
See Note 4 to our Financial Statements for additional discussion of our long-term debt.
Settlement and Merchant Reserve Activity
During the nine months ended September 30, 2023 and 2022, we had net settlement and merchant reserve activity of ($46.2) million and ($13.9) 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.
25
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. Our common stock repurchases are discussed in more detail in Note 9 to our Financial Statements.
During the nine months ended September 30, 2023, we repurchased approximately 1,991,000 shares of our common stock for $107.0 million (weighted-average price of $53.73 per share).
Outside of our Stock Repurchase Program, during the nine months ended September 30, 2023, we repurchased from our employees and then cancelled approximately 171,000 shares of our common stock for $9.6 million in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.
26
Additionally, there are provisions for up to approximately $13 million of potential future earn-out payments through September 30, 2025. Through September 30, 2023, we have 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.
Additionally, in October 2023, we exited out of a second reseller agreement, which we will pay a total of $6.3 million, with $3.8 million to be paid in 2024, $1.3 million in 2025, and the remainder in 2026.
The stock warrants are discussed in more detail in Note 9 to our Financial Statements.
27
2023 Convertible Notes
The proceeds from the sale of the 2023 Convertible Notes, net of financing costs, were $411.0 million. We used the net proceeds to: (i) repay the principal amount of $275.0 million of outstanding borrowings under our 2021 Revolver; (ii) repurchase 1.7 million shares of our common stock for $90.1 million; and (iii) pay the $34.3 million premiums for the Capped Call Transactions. The remaining net proceeds were used for general corporate purposes.
Although the 2023 Convertible Notes are convertible at the option of the note holders before June 15, 2028 upon the occurrence of certain events, during the next twelve months there are no scheduled conversion triggers. As a result, we expect our required debt service cash outlay during the next twelve months for the 2023 Convertible Notes to be limited to interest payments of $16.5 million.
2021 Credit Agreement
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 $9.6 million and $1.1 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.
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 September 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 interest rate on our 2023 Convertible Notes is fixed, and thus, as it relates to our convertible debt borrowings, we are not exposed to changes in interest rates.
The current interest rates on our 2021 Credit Agreement are based upon an adjusted SOFR rate (including 0.10% credit spread adjustment) plus an applicable margin, or an ABR plus an applicable margin. See Note 4 to our Financial Statements for further details related to our long-term debt.
A hypothetical adverse change of 10% in the September 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 September 30, 2023 and December 31, 2022 were $146.7 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 September 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.
28
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 September 30, 2023 and December 31, 2022, we had $193.4 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.
Long-Term Debt. The fair value of our convertible debt is exposed to market risk. We do not carry our convertible debt at fair value but present the fair value for disclosure purposes (see Note 2 to our Financial Statements). Generally, the fair value of our convertible debt is impacted by changes in interest rates and changes in the price and volatility of our common stock. As of September 30, 2023, the fair value of the 2023 Convertible Notes was estimated at $414.7 million, using quoted market prices.
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 nine months ended September 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 September 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):
|
|
September 30, 2023 |
|
|
December 31, 2022 |
|
||||||||||
|
|
Monetary |
|
|
Monetary |
|
|
Monetary |
|
|
Monetary |
|
||||
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
||||
Pounds sterling |
|
$ |
(4 |
) |
|
$ |
1,243 |
|
|
$ |
(119 |
) |
|
$ |
601 |
|
Euro |
|
|
(68 |
) |
|
|
2,645 |
|
|
|
(425 |
) |
|
|
1,992 |
|
U.S. Dollar |
|
|
(282 |
) |
|
|
31,742 |
|
|
|
(597 |
) |
|
|
31,646 |
|
Other |
|
|
(4 |
) |
|
|
1,718 |
|
|
|
(72 |
) |
|
|
503 |
|
Totals |
|
$ |
(358 |
) |
|
$ |
37,348 |
|
|
$ |
(1,213 |
) |
|
$ |
34,742 |
|
A hypothetical adverse change of 10% in the September 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.
29
CSG SYSTEMS INTERNATIONAL, INC.
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 third 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 third 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 Securities Exchange Act of 1934, as amended.
|
|
|
|
|
|
|
|
|
|
|
Stock Repurchase Program |
|
|||||||
Period |
|
Total |
|
|
Average |
|
|
Total Number of |
|
|
Maximum Number of |
|
Maximum Dollar Value of |
|
|||||
July 1 - July 31 |
|
|
810 |
|
|
$ |
51.92 |
|
|
|
- |
|
|
|
2,107,047 |
|
|
|
|
August 1 - August 31 |
|
|
260,552 |
|
|
|
54.63 |
|
|
|
259,852 |
|
|
|
1,847,195 |
|
$ |
100,000,000 |
|
September 1 - September 30 |
|
|
1,732,785 |
|
|
|
53.60 |
|
|
|
1,731,594 |
|
|
|
115,601 |
|
|
100,000,000 |
|
Total |
|
|
1,994,147 |
|
|
$ |
53.73 |
|
|
|
1,991,446 |
|
|
|
|
|
|
||
Item 3. Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
Item 5. Other Information
(c) Rule 10b5-1 Trading Plans
During the three months ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) under the Exchange Act)
Item 6. Exhibits
The Exhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.
30
CSG SYSTEMS INTERNATIONAL, INC.
EXHIBIT INDEX
Exhibit |
|
Description |
|
|
|
4.20 (1) |
||
4.25 (1) |
Form of 3.875% Convertible Senior Note due 2028 (included as Exhibit A in Exhibit 4.20) |
|
4.60B (2) |
Second Amendment to Amended and Restated Credit Agreement, dated September 5, 2023 |
|
10.28A* |
||
10.28B* |
||
10.40 (1) |
||
10.53D (3) |
Transition Services Agreement with Kenneth M. Kennedy, dated September 27, 2023 |
|
10.53E (3) |
Separation and Release Agreement with Kenneth M. Kennedy, dated September 28, 2023 |
|
31.01 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
31.02 |
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
32.01 |
||
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) |
|
|
* Portions of the exhibit have been omitted pursuant to SEC rules regarding confidential information.
31
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: November 2, 2023
CSG SYSTEMS INTERNATIONAL, INC. |
/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/ Lori J. Szwanek |
Lori J. Szwanek |
Chief Accounting Officer |
(Principal Accounting Officer) |
32