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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANISITON PERIOD FROM _____ TO _____

Commission File Number 0-27512

 

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of Registrant as specified in its Charter)

 

 

Delaware

47-0783182

(State or other jurisdiction
of incorporation or organization)

(I.R.S. Employer
Identification No.)

6175 S. Willow Drive, 10th Floor

Greenwood Village, Colorado

 

80111

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (303) 200-2000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock, Par Value $0.01 Per Share

 

CSGS

 

NASDAQ Stock Market LLC

 

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes   No 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes  No 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes  No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

 

Non-accelerated filer

 

 

 

 

 

 

 

 

 

 

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

 

 

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.   

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No   

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on June 30, 2020, was $968,792,220.

The number of shares of Registrant’s Common Stock outstanding as of February 16, 2021 was 32,642,556.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement for its 2021 Annual Meeting of Stockholders to be filed on or prior to April 30, 2021, are incorporated by reference into Part III of this Report.

 

 

 

 


 

 

CSG SYSTEMS INTERNATIONAL, INC.

2020 FORM 10-K

TABLE OF CONTENTS

 

 

 

 

  

Page

PART I

  

 

 

 

 

 

Item 1.

 

Business

  

3

Item 1A.

 

Risk Factors

  

9

Item 1B.

 

Unresolved Staff Comments

  

17

Item 2.

 

Properties

  

17

Item 3.

 

Legal Proceedings

  

17

Item 4.

 

Mine Safety Disclosures

  

17

 

 

 

PART II

  

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  

21

Item 6.

 

Selected Financial Data

  

23

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

25

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

  

37

Item 8.

 

Financial Statements and Supplementary Data

  

39

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  

71

Item 9A.

 

Controls and Procedures

  

71

Item 9B.

 

Other Information

  

71

 

 

 

PART III

  

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

  

72

Item 11.

 

Executive Compensation

  

72

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  

72

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

  

72

Item 14.

 

Principal Accounting Fees and Services

  

72

 

 

 

PART IV

  

 

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

  

72

Item 16.

 

Form 10-K Summary

 

72

 

 

Signatures

  

94

 

 

 

2


 

 

PART I

 

Item 1.

Business

Overview

CSG Systems International, Inc. (the “Company”, “CSG”, or forms of the pronoun “we”) is one of the world’s leading providers of revenue management, customer experience, and payment solutions that enable a growing list of companies around the world to monetize relationships with their customers in an era of rapid change and digital transformation.  We leverage more than 35 years of experience to deliver innovative customer engagement solutions that help our customers solve their toughest challenges, helping them make ordinary customer experiences extraordinary. Our 4,800-plus 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.

Our proven solutions are built on a combination of on-premise, public and private cloud platforms, either customized or pre-integrated, as well as managed services models that adapt to fit our customers’ unique business needs and enable the transformative change required to create personalized experiences that drive loyalty and retention.

Our corporate headquarters is located at 6175 S. Willow Drive, 10th Floor, Greenwood Village, Colorado 80111, and the telephone number at that address is (303) 200-2000.

Our common stock is listed on the NASDAQ Stock Market LLC (“NASDAQ”) under the symbol “CSGS”. We are a member of the S&P Small Cap 600 and Russell 2000 indices.

Industry Overview

Background. We provide software and services solutions that help companies around the world monetize and digitally enable the customer experience.  While our heritage is born out of the communications industry, we count among our customers some of the world’s largest and most sophisticated communications, financial services, healthcare, and media and entertainment companies, as well as a long list of governmental entities, with an increasingly diversified revenue mix.  Our solutions allow service providers to:

 

Monetize new revenue streams through multiple services, across multiple locations and channels, quickly.

 

Optimize their business costs to enable the redeployment of capital to support business growth and transformation.

 

Protect and maintain existing revenue streams by improving service delivery that drives higher customer satisfaction and increases retention.

 

Leverage data and insights to better know and understand their customers and deliver exceptional experiences.

 

Enhance their future-readiness so they can adapt quickly and efficiently to industry changes and innovations.

Market Trends of Communications Industry. Our primary market, the global communications industry, continues to undergo rapid change and increasing competitiveness.  Some key trends are emerging as communications service providers (“CSPs”) try to evolve and compete in this highly complex ecosystem:

 

Consumer choice:  Customers have an increasing number of choices for information, communications, and entertainment services.  This shift in power to the consumer requires service providers to adopt and deliver new technologies and services which enable a more ubiquitous, flexible, and personalized customer experience.  Service providers – whether more traditional or digital native – are developing offerings to cultivate a more recurring, loyal, and “branded” customer experience.  Increasing importance is placed on “brand” and “experience” as they both now play a larger role in purchasing decisions.  Customer experience will determine the winners and losers in this “always connected” digital world.  

3


 

 

Competitive landscape:  The proliferation of digital native service providers (e.g., Amazon, Apple, Facebook, Google, Netflix, etc.) has changed the competitive landscape forever.  This has forced traditional providers to evaluate the viability of their existing business models, including scale, breadth of offerings, speed to react, and customer experience, and to evolve their businesses to remain not only relevant, but competitive, innovative, and thriving.  While consolidation continues between traditional Communications Service Providers (“CSPs”) and content providers (e.g., Charter and Time Warner Cable), companies are also scaling their offerings through acquisitions within their respective media (e.g., Comcast and Sky, Starz and Lionsgate) and communications industries (e.g., T-Mobile and Sprint).  Direct-to-consumer offerings are becoming more prevalent, (e.g., Disney+, Comcast’s Peacock, and Discovery+) and cooperation not only with new partners, but even among competitors (e.g., Netflix and Amazon Prime Video are now available on certain traditional cable platforms) is accelerating.

 

Technology: Fueled by the intersection of artificial intelligence, the Internet of Things (“IoT”), cloud technologies, and analytics, service providers are fundamentally changing the way they get their products to market and engage with their customers.  5G technologies will continue to propel the expansion of IoT and sensor-enabled services and devices.  IoT will underpin the “service-ification” of offerings — the transition of routine activities and purchases (e.g., checking gas meters, driving a car, buying groceries, etc.) to on demand services and pervasive consumer relationships (e.g., only servicing meters that show faults, optimizing parking spots, recommending dinner meals, etc.).  To meet the requirements of this hyper-connected ecosystem, which requires increased speed-to-market, agility, and scalability cost structure, service providers are transitioning their legacy technology infrastructure to a combination of private and public cloud technologies to support billions of device connections.  Further, traditional broadband service providers continue to push the boundaries of hybrid-fiber coax and fiber-to-the-home technologies in order to deliver increased bandwidth and customer experiences.  

 

New Revenue Sources:  CSPs are facing increased pressure to maintain their current as well as find new revenue sources, while managing their cost structure and quality of service delivery as they transform their business.  They are navigating declining revenue and profits associated with their traditional services such as wireline voice and video as a result of new or increased competition.  In order to offset these declines, CSPs are increasingly looking for ways to improve their cost structure, grow through acquisitions, and launch new revenue-generating services with minimal capital investment. The result is that many CSPs are cutting costs associated with their traditional systems, integrating disparate acquired business operations, and launching new digital services with more flexible, lower-cost solutions.

Overall, these market trends drive the demand for scalable, flexible, and cost-efficient revenue management, customer experience, and payment solutions, which we believe will provide our customers opportunities to monetize and grow revenue from their customers in this age of digital transformation.  As a result, we have historically invested meaningfully in research and development (“R&D”) and have acquired companies that enable us to expand our solutions in a timely and efficient manner. We believe that our scalable, modular, and flexible platform-based offerings, combined with our rich domain expertise and ability to effectively migrate customers to our solutions, provide our customers with proven solutions to improve their profitability and their customers’ experiences.  We have specifically built our solutions to offer service providers a phased, incremental approach to transforming their businesses, thereby reducing the business interruption risk associated with this evolution.

A summary of our revenue by industry for the indicated periods was as follows: 

 

 

 

 

 

 

2020

 

 

2019

 

 

2018

 

Broadband/Cable/Satellite

 

58%

 

 

 

58

%

 

 

64

%

Telecommunications

 

19%

 

 

 

19

%

 

 

21

%

Other

 

23%

 

 

 

23

%

 

 

15

%

Total revenue

 

 

100

%

 

 

100

%

 

 

100

%

4


 

 

Business Strategy

Our vision is to channel the power of all to make ordinary customer experiences extraordinary.  We do this by focusing on three goals:

Energizing and developing our Employees.  Our diverse group of employees make us exceptional and separate us from our competition.  They are ambassadors of the CSG brand and values; they are the point of connection with our customers, for each other, and within our communities.

Delivering for our Customers.  Our customers depend on us to help them achieve their business objectives.  We have established a reputation for doing what we say, being easy to do business with, and delivering highly scalable, robust solutions.  This reputation has resulted in our becoming a trusted enabler and partner to our customers.

Enhancing stockholder value.  One of our key responsibilities is to deliver long-term value creation to shareholders by driving profitable growth.  We achieve this through thoughtfully investing in our business and returning an appropriate amount of capital to stockholders through dividends and share repurchases.

We believe the successful execution of our goals will allow us to grow revenue and earnings, and therefore, create long-term value for our customers, employees, and stockholders.

Our strategic focus to accomplish our goals is as follows:

Drive Profitable Growth through Long-Term Relationships:  Our relentless focus on our customers is built upon providing market-leading solutions, world-class operations, delivery capabilities and services, and helping our customers solve their toughest challenges.  By building strong, long-term relationships based on trust and by delivering on our commitments (i.e., doing what we say), our customers stay and grow with us.  Further, we are focused on extending our brand and market presence outside our core global communications industry.

Lead with Technology Innovation:  We believe our broad portfolio of on-premise, cloud and pre-integrated solutions give service providers a competitive advantage.  These solutions allow service providers to efficiently manage their traditional businesses while being able to quickly deliver new digital services and a more personalized and relevant experience to their consumers.  We continually add new relevant capabilities to what we do as a company, both in terms of our people and our solutions.  

Deliver an Exceptional Customer Experience:  We believe we deliver more business value by having developed a long track record of doing what we say and being easy to do business with.  We do this by putting the customer at the heart of our decision-making which is always directed at improving our agility, delivery capabilities, operational excellence, efficiency, and reliability to enable our customers’ success.

Attract and Retain Talent:  In order to maintain our competitiveness in the market, we foster a culture in which our diverse workforce can do their best work.  We do this by investing in our people and programs that foster a culture of diversity, innovation, collaboration, and professional fulfillment.

In short, we believe our strategy is a key enabler to help our customers compete more effectively, efficiently, and successfully in an evolving market.

Description of Business

Key Customers. We work with some of the world’s largest and most sophisticated communications, financial services, healthcare, and media and entertainment companies.  A partial list of our key customers as of December 31, 2020 is included below:  

 

Airtel Africa

  

Maximus

América Móvil

 

Mediacom

AT&T

 

Microsoft

Charter Communications

  

Mobily

Comcast

 

MTN

DISH

 

New Leaf Service Contracts

Formula 1

  

State of California DMW

Hutchison 3 Indonesia

 

TalkTalk

Inmarsat

 

Telstra

Mastercard

 

 

5


 

 

Customers that represented 10% or more of our revenue for 2020 and 2019 were as follows (in millions, except percentages):

 

 

  

2020

 

 

2019

 

 

  

Amount

 

  

% of Revenue

 

 

Amount

 

  

% of Revenue

 

Comcast

  

$

213

 

 

 

22

 

$

229

 

 

 

23

Charter

  

 

209

 

 

 

21

 

 

195

 

 

 

20

See the Significant Customer Relationships section of our Management’s Discussion and Analysis (“MD&A”) for additional information regarding our business relationships with these key customers.

Research and Development.  Our customers around the world are facing competition from new entrants and at the same time, are deploying new services at a rapid pace and dramatically increasing the complexity of their business operations. Therefore, we continue to make meaningful investments in R&D to ensure that we stay ahead of our customers’ needs and advance our customers’ businesses as well as our own. We believe our value proposition is to provide scalable solutions that help our customers ensure that each customer interaction is an opportunity to create value and deepen the business relationship.

Our total R&D expenses for 2020 and 2019 were $122.8 million and $128.0 million, respectively, or approximately 12% and 13%, respectively, of our total revenue.  We anticipate the level of R&D investment in the near-term to be relatively consistent with that of 2020.

There are certain inherent risks associated with significant technological innovations.  Some of these risks are described in this report in our Risk Factors section below.

Solutions and Services.  Our solutions and services help over 500 companies simplify, automate, and scale complex transaction-centric activities and manage the opportunities and challenges associated with accurately capturing, managing, generating, and optimizing the revenue associated with and manage the intricate nature of those customer relationships.  Below is a high-level overview:

 

Our solutions provide global service providers with a robust, integrated real-time revenue management framework in either a cloud-based or stand-alone environment to optimize and monetize transactions at every stage of the customer lifecycle.  Our flexible, configurable business support systems (also referred to as BSS) help companies worldwide monetize and digitally enable their customer’s experiences.  We support more than 555 million end users worldwide on behalf of our customers, managing every aspect from billing to customer care to partner settlement, and we help our customers quickly launch and monetize new services while having the flexibility to keep up with rapidly changing customer demands and markets.  

 

Our solutions offer a diverse and integrated suite of tools designed to manage and improve every aspect of the customer experience, from onboarding to upgrades, payments to field service management. These solutions allow customers to connect with their customers anytime, anywhere, on any channel, at any stage in their customer experience journey.  We are an industry leader in supporting omni-channel communications between our customers and their customers, processing more than 1.5 billion voice, SMS/text, print, and e-mail messages each year.  More than 70,000 of our customers’ field technicians and dispatchers complete over 100 million work orders per year by leveraging our field service management solutions to optimize routing and provide real-time insights into arrival times for their customers.  We help our customers deliver a unique customer experience across both traditional and digital channels.

 

We empower our customers with options to manage and process payments from their customers by offering an advanced, cloud-based, integrated suite of solutions across a variety of industries.  Our broad offering and strategic partnerships with more than 65,000 merchants, resellers, and independent software vendors has fueled growth and success in the integrated payments space.

 

We leverage our 35+ year history in running highly scalable, complex business support solutions to improve operational efficiencies and effectiveness.  For our managed services customers, we assume long-term responsibility for delivering our software solutions and related operations under a defined scope and specified service levels.  Under managed services agreements, we may operate software products (primarily our software solutions) on behalf of our customers: (i) out of a customer’s data center; (ii) out of a data center we own and operate; or (iii) out of a third-party data center (including public cloud providers) we contract with for such services.  

Historically, a substantial percentage of our total revenue has been generated from our revenue management and customer engagement solutions.  These solutions are expected to provide a large percentage of our total revenue in the foreseeable future as well.

Business Acquisitions. Our strategy includes acquiring assets and businesses which provide the technology and personnel to expedite our solutions and services development efforts, provide complementary solutions and services, increase market share, and/or provide access to new markets and customers.

6


 

Professional Services. We employ professional services experts globally who bring a wide-ranging expertise – including solution architecture, project management, systems implementation, system integration, and business consultancy – to every project.  We apply a structured methodology to each of our engagements, leveraging consistent world-class processes, best-practice programs, and systemized templates in the development of our solutions.

Sales and Marketing. We organize our sales efforts to customers primarily within our geographically dispersed, dedicated account teams, with senior level account managers who are responsible for new revenue and renewal of existing contracts within a customer account.  The account teams are supported by sales support personnel who are experienced in the various solutions and services that we provide.

Competition. The market for revenue management solutions and services in the global communications industry, as well as in other industries we serve, is highly competitive.  We compete with both independent providers and in-house developers of customer management systems.  We believe that our most significant competitors in our primary markets are Amdocs Limited and NEC Corporation (specifically their Netcracker division); network equipment providers such as Ericsson and Huawei; and customer-developed internal solutions.  Some of our actual and potential competitors have substantially greater financial, marketing, and technological resources than us and in some instances, we may partner and collaborate with our competitors on large opportunities and projects.

We believe service providers in the multiple industry verticals that we serve use the following criteria when selecting a vendor for the mission critical management of their revenue, customer experience, and digital ecosystem: (i) functionality, scalability, flexibility, interoperability, and architecture of the software assets; (ii) the breadth and depth of pre-integrated product solutions; (iii) solution quality, customer service, and support; (iv) operational excellence and reliability; (v) quality of R&D efforts; and (vi) total cost of ownership.  We believe that our solutions allow us to compete effectively in these areas.

Proprietary Rights and Licenses

We rely on a combination of trade secret, copyright, trademark, and patent laws in the United States (“U.S.”) and similar laws in other countries, and non-disclosure, confidentiality, and other types of contractual arrangements to establish, maintain, and enforce our intellectual property rights in our solutions.  Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented, or misappropriated.  Although we hold a select number of patents and patent applications on some of our newer solutions, we do not rely upon patents as a primary means of protecting our rights in our intellectual property.  In any event, there can be no assurance that our patent applications will be approved, that any issued patents will adequately protect our intellectual property, or that such patents will not be challenged by third parties.  Also, much of our business and many of our solutions rely on key technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms.  Our failure to adequately establish, maintain, and protect our intellectual property rights could have a material adverse impact on our business, financial position, and results of operations.  For a description of the risks associated with our intellectual property rights, see “Item 1A - Risk Factors - Failure to Protect Our Intellectual Property Rights or Claims by Others That We Infringe Their Intellectual Property Rights Could Substantially Harm Our Business, Financial Position and Results of Operations,” and “Item 1A – Risk Factors - We Rely on A Limited Number of Third-Party Vendor Relationships to Execute Our Business Which Exposes Us to Supply Disruptions, Costs Increases, and Cyber-Attacks.”

Regulatory Matters  

We are subject to numerous international, federal, state, and local laws and regulations.  These laws and regulations govern matters that include environmental and occupational health and safety matters. Additionally, these laws and regulations also require us to obtain and comply with permits, registrations, and other authorizations issued by governmental authorities.  These authorities can modify or revoke our permits, registrations, or other authorizations and can enforce compliance through fines and injunctions.  We expect to incur ongoing costs to comply with existing and future requirements.

We are also subject to regulation by various U.S. federal regulatory agencies and by the applicable regulatory authorities in countries in which we operate.  Additionally, as a U.S. entity operating through subsidiaries in non-U.S. jurisdictions, we are subject to foreign exchange control, transfer pricing, and custom laws that regulated the flow of funds between CSG and its subsidiaries.  We are also required to be in compliance with transfer pricing, securities laws, and other statutes and regulations, such as the Foreign Corrupt Practices Act (“FCPA”), and other countries’ anti-corruption and anti-bribery laws.

7


 

In addition, we are subject to laws relating to information security, privacy, anti-money laundering, counter-terrorist financing, consumer credit, protection, and fraud.  An increasing number of government and industry groups worldwide have established data privacy laws and standards for the protection of personal information, including financial information, social security numbers, and health information.  We are also subject to labor and employment laws, including regulations established by the U.S. Department of Labor and other local regulatory agencies, which sets laws governing working conditions, paid leave, workplace safety, wage and hour stands, and hiring and employment practices.

We believe that our operations are in compliance with all applicable laws and regulations in all material respects, and that we hold all necessary permits to operate our business in each jurisdiction in which we operate. Laws and government regulations are subject to change and interpretation. In some cases, compliance with applicable laws and regulations may cause us to make additional capital and operational expenditures. While there are no current regulatory matters that we expect to be material to our results of operations, financial position, or cash flows, there can be no assurances that existing or future environmental laws or other regulations applicable to our operations would not lead to a material adverse impact on our results of operations, financial position, or cash flows.

Human Capital  

As of December 31, 2020, we had a total of 4,807 employees, an increase of 468 employees when compared to the number of employees we had as of December 31, 2019. Of our total employees, 2,332 are located in the U.S. and 2,475 are located in 22 foreign countries.  We are subject to various foreign employment laws and regulations based on the country in which our employees are located. Based on the results of a recent employee survey, we believe our relations with our employees are good.

Our success is dependent upon our ability to attract, develop, and retain qualified employees.  We are dedicated to being an employer of choice by maintaining a work environment that is designed to recruit and motivate top talent.  We are committed to building a culture of diversity, professional growth, and high performance through offering our employees challenging and engaging growth opportunities that contribute to their overall career development.  

We invest in creating and maintaining a diverse, inclusive, and safe work environment for all employees.  Our work environment requires each and every employee be treated with dignity and respect and be free from discrimination and harassment. We expect all of our employees to observe the highest level of business ethics and live our core values – be customer obsessed, be authentic, be bold, be relentless, be agile, and be inclusive.  

We believe our culture serves as a competitive differentiator in the marketplace and gives CSG a competitive edge.  

Throughout the COVID-19 crisis, we have remained focused on protecting the health and safety of our employees, while meeting the needs of our customers.  During the early stages of the COVID-19 pandemic, we formed a COVID-19 Steering Team that has been leading and coordinating our overall response.  These efforts included moving a large percentage of our workforce to a remote working environment and significantly reducing travel.  For those locations that remain open, such as our statement production centers, we require daily temperature checks and self-assessments.  Additionally, we have reconfigured our office spaces to ensure proper social distancing, distributed personal protective equipment, and secured additional cleaning services and supplies.  We also enhanced a number of our benefits to support our employees though the challenges arising from the COVID-19 pandemic, to include extended overtime pay and spot bonus awards to those employees at our statement production centers, and a one-time cash bonus given to all CSG employees. We continue to provide work from home options to those employees who are able to conduct business remotely through December 31, 2021, or such later date as conditions warrant.  

Available Information

Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy materials, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available free of charge on our website at www.csgi.com.  Additionally, these reports are available on the SEC’s website at www.sec.gov.  

Code of Conduct and Business Ethics

A copy of our Code of Conduct and Business Ethics (the “Code of Conduct”) is maintained on our website.  Any future amendments to the Code of Conduct, or any future waiver of a provision of our Code of Conduct, will be timely posted to our website upon their occurrence.  Historically, we have had minimal changes to our Code of Conduct and have had no waivers of a provision of our Code of Conduct.

 


8


 

 

Item 1A.Risk Factors

We or our representatives from time-to-time may make or may have made certain forward-looking statements, whether orally or in writing, including without limitation, any such statements made or to be made in MD&A contained in our various Securities and Exchange Commission (“SEC”) filings or orally in conferences or teleconferences. We wish to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure, to the fullest extent possible, the protections of the safe harbor established in the Private Securities Litigation Reform Act of 1995.

We operate in rapidly changing and evolving markets throughout the world addressing the complex needs of communication service providers, financial institutions, and many others, and as a result, new risk factors will likely emerge and currently identified risk factors will likely evolve in their scope. Further, as we enter new market sectors as well as new geographic markets, we could be subject to new regulatory requirements that increase the risk of non-compliance and the potential for economic harm to us and our customers. Accordingly, the risk factors and any forward-looking statements are qualified in their entirety by reference to and are accompanied by the following meaningful cautionary statements:

 

If any of the following risk factors would occur, it could have a material adverse effect on our business, financial position, results of operations, and/or trading price of our common stock.

 

This list of risk factors is not exhaustive and management cannot predict all of the relevant risk factors, nor can it assess the potential impact, if any, of such risk factors on our business or the extent to which any risk factor, or combination of risk factors, may create.

 

There can be no assurances that forward-looking statements will be accurate indicators of future actual results, and it is likely that actual results will differ from results projected in the forward-looking statements, and that such differences may be material.

Risks Related to Our Business

We Derive a Significant Portion of Our Revenue from a Limited Number of Customers, and the Loss of the Business of a Significant Customer Could Have a Material Adverse Effect on Our Financial Position and Results of Operations.

Over the past decade, the global communications industry has experienced significant consolidation, resulting in a large percentage of the market being served by a limited number of communication service providers with greater size and scale, and there are possibilities of further consolidation. Consistent with this market concentration, we generate over 40% of our revenue from our two largest customers, which are Comcast and Charter, which each individually accounted for over 10% or more of our total revenue. See the Significant Customer Relationships section of MD&A for key renewal dates and a brief summary of our business relationship with these customers.

There are inherent risks whenever a large percentage of total revenue are concentrated with a limited number of customers. Such risks are that a significant customer could: (i) undergo a formalized process to evaluate alternative providers for solutions and services we provide; (ii) terminate or fail to renew their contracts with us, in whole or in part for any reason; (iii) significantly reduce the number of customer accounts processed on our solutions, the price paid for our solutions and services, or the scope of solutions and services that we provide; or (iv) experience significant financial or operating difficulties.

Our industry is highly competitive, and as a result, it is possible that a competitor could increase its footprint and share of customers serviced at our expense or a customer could develop their own internal solutions. While our customers may incur some costs in switching to our competitors or their own internally developed solutions, they may do so for a variety of reasons, including: (i) price; (ii) dissatisfaction with our solutions or service levels; or (iii) dissatisfaction with our relationships.

The Delivery of Our Solutions is Dependent on a Variety of Computing and Processing Environments and Communications Networks Which May Not Be Available or May Be Subject to Security Attacks.

Our solutions are generally delivered through a variety of sources including public cloud, third-party data center and other service providers, and internally operated computing and processing environments (collectively referred to hereafter in this section as “Systems”). We and/or end users are connected to the Systems through a variety of public and private communications networks, which we will collectively refer to herein as “Networks.” Our solutions are generally considered to be mission critical customer management systems by our customers. As a result, our customers are highly dependent upon the high availability and uncompromised security of the Networks and Systems to conduct their business operations.

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Networks and Systems are subject to the risk of an extended interruption, outage, or security breach due to many factors such as: (i) changes to the Systems and Networks for such things as scheduled maintenance and technology upgrades, or conversions to other technologies, service providers, or physical location of hardware; (ii) failures or lack of continuity of services from public cloud or third-party data center and other service providers; (iii) defects in software program(s); (iv) human and machine error; (v) acts of war and/or nature; (vi) intentional, unauthorized attacks from computer “hackers”, or cyber-attacks; and (vii) using the Systems to perpetrate identity theft through unauthorized authentication to our customers’ customers’ accounts. Most recently, the marketplace is experiencing an ever-increasing exposure to both the number and severity of cyber-attacks.  In addition, we continue to expand our use of third-party Systems and Networks with our solution offerings thereby permitting, for example, our customers’ customers to use the Internet to review account balances, order services or execute similar account management functions. Access to Networks and Systems via the Internet has the potential to increase their vulnerability to unauthorized access and corruption, as well as increasing the dependency of the Systems’ reliability on the availability and performance of the Internet and end users’ infrastructure they obtain through other third-party providers.

The method, manner, cause and timing of an extended interruption, outage, or security breach in third-party and/or the Networks or Systems are impossible to predict. As a result, there can be no assurances that these Networks and Systems will not fail, not suffer a security breach or that the third-party and/or our business continuity or remediation plans will adequately mitigate the negative effects of a disruption or security breach to the Networks or Systems. Further, our property, technology errors and omissions, contractual relationship with third-party providers, and business interruption insurance may not adequately compensate us for losses that we incur as a result of such interruptions or security breaches. Should the Networks or Systems: (i) experience an extended interruption or outage; (ii) have their security breached; (iii) have their data lost, corrupted or otherwise compromised; and/or (iv) fail to meet contractual requirements related to our cybersecurity program, it would impede our ability to meet solution and service delivery obligations, and likely have an immediate impact to the business operations of our customers. This would most likely result in damaging our reputation as well as our long-term ability to attract and retain new customers. The loss of confidential information could result in losing the customers’ confidence, as well as claims for contractual breach, and imposition of penalties, fines, and/or damages.   These risks will increase as our business continues to expand to include new solutions, technologies, and markets.

We May Not Be Able to Efficiently and Effectively Implement New Solutions or Migrate Customers and Merchants onto Our Solutions.

Our continued growth plans include the implementation of new solutions, as well as migrating both new and existing customers and merchants to our solutions. Such implementations or migrations (collectively referred to hereafter in this section as “implementations”), regardless of whether they involve new solutions or new customers, have become increasingly more difficult because of the sophistication, complexity, and interdependencies of the various software and network environments impacted, combined with the increasing complexity of our current and potential customers’ and merchants’ underlying business processes. In addition, the complexity of the implementations increases when the arrangement includes other vendors participating in the project, including but not limited to, prime and subcontractor relationships with our company. For these reasons, implementations subject our customers and merchants to potential business disruption, which could cause them to delay or even cancel future implementations.  

As a result, there is a risk that we may experience cancellations, delays, or unexpected costs associated with implementations. In addition, our inability to complete implementations in an efficient and effective manner could damage our reputation in the marketplace, reducing our opportunity to grow our business with both new and existing customers and merchants.

We May Not Be Successful in the Integration or Achievement of Financial Targets of Our Acquisitions.

As part of our growth strategy, we seek to acquire assets, technology, and businesses which will provide the technology and personnel to expedite our solutions and services development efforts, provide complementary solutions, or provide access to new markets and customers.

Acquisitions involve a number of risks and difficulties, including: (i) expansion into new markets and business ventures; (ii) the requirement to understand local business practices; (iii) the diversion of management’s attention to the integration of acquired operations and personnel; (iv) being bound by acquired customer or vendor contracts with unfavorable terms; and (v) potential adverse effects on a company’s operating results for various reasons, including, but not limited to, the following items: (a) the inability to achieve financial targets; (b) the inability to achieve certain integration expectations, operating goals, and synergies; (c) costs incurred to exit current or acquired contracts or activities; (d) costs incurred to service any acquisition debt; and (e) the amortization or impairment of acquired intangible assets.

Due to the multiple risks and difficulties associated with any acquisition, there can be no assurance that we will be successful in achieving our expected strategic, operating, and financial goals for any such acquisition.

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We May Not Be Able to Respond to Rapid Technological Changes.

The market for business support solutions, such as customer care, billing solutions, and payment solutions is characterized by rapid changes in technology and is highly competitive with respect to the need for timely solution innovations and new solution introductions. As a result, we believe that our future success in sustaining and growing our revenue depends upon: (i) our ability to continuously expand, adapt, modify, maintain, and operate our solutions to address the increasingly complex and evolving needs of our customers without sacrificing the reliability or quality of the solutions; (ii) the integration of acquired technologies and their widely distributed, complex worldwide operations; and (iii) creating and maintaining an integrated suite of customer care and billing solutions, which are portable to new verticals.  In addition, the market is demanding that our solutions have greater architectural flexibility and interoperability, and that we are able to meet the demands for technological advancements to our solutions at a greater pace. Our attempts to meet these demands subject our R&D efforts to greater risks.   As a result, substantial and effective R&D and solution investment will be required to maintain the competitiveness of our solutions in the market. Technical problems may arise in developing, maintaining, integrating, and operating our solutions as the complexities are increased. Development projects can be lengthy and costly, and may be subject to changing requirements, programming difficulties, a shortage of qualified personnel, and/or unforeseen factors which can result in delays. In addition, we may be responsible for the implementation of new solutions and/or the conversion of customers to new solutions, and depending upon the specific solution, we may also be responsible for operations of the solution.

There is an inherent risk in the successful development, implementation, conversion, integration, and operation of our solutions as the technological complexities, and the pace at which we must deliver these solutions to market, continue to increase. The risk of making an error that causes significant operational disruption to a customer, or results in incorrect computer processing of customer or vendor data that we perform on behalf of our customers, increases proportionately with the frequency and complexity of changes to our solutions and new delivery models. There can be no assurance: (i) of continued market acceptance of our solutions; (ii) that we will be successful in the development of enhancements or new solutions that respond to technological advances or changing customer needs at the pace the market demands; or (iii) that we will be successful in supporting the implementation, conversion, integration, and/or operations of enhancements or new solutions.

We Rely on A Limited Number of Third-Party Vendor Relationships to Execute Our Business Which Exposes Us to Supply Disruptions, Cost Increases, and Cyberattacks.

We rely on third-party providers for software, distributed computing infrastructure environments (or commonly referred to as “cloud” computing services), processing, and other suppliers to deliver our solutions to our customers.  Our ability to deliver according to our contractual commitments and market demands depends significantly on being able to obtain the necessary licenses, components, computing capacity, and other vital services and supplies as needed and on competitive terms.  In addition, if a third party were to experience a material breach of their information technology systems which results in the unauthorized access, theft, use, destruction, or unauthorized disclosures of customers' or employees' data or confidential information of the Company stored in such systems, including through cyberattacks or other external or internal methods, it could result in a material loss of revenues from the potential adverse impact to our reputation, our ability to retain or attract new customers, potential disruption or loss of services from the vendor and disruption to our business.  Such a breach could also result in contractual claims, and could lead to our being named as a party in consumer litigation brought by or on behalf of impacted individuals.  Although we strive to avoid single-source supplier solutions, this is not always possible.  Failure by any of our third-party vendors could interrupt our operations and the delivery of our solutions, and/or drastically increase our costs.  Additionally, if these third-party vendors would decide to significantly increase our costs, it could have an adverse financial impact to our business as we have limited third-party options and the ability to shift to a competing solution, or redesign our solutions would take considerable time, effort, and money. 

Failure to Deal Effectively with Fraud, Fictitious Transactions, Bad Transactions, and Negative Experiences Could Increase Our Loss Rate and Harm Our Payment Processing Business, and Could Severely Diminish Merchant and Consumer Confidence in and Use of Our Services.

In the event that merchants do not fulfill their obligations to consumers, or a consumer disputes a transaction for various reasons, we may incur losses as a result of chargebacks and/or claims from consumers. We would seek to recover such losses from the merchant; however, we may not be able to recover the amounts in full if the merchant is unwilling or unable to pay.  While we have established financial reserves based on assumptions and estimates that we believe are reasonable to cover such eventualities, these reserves on individual merchants may be insufficient. We may also incur losses from claims that the consumer did not authorize the purchase, from consumer fraud, from erroneous transactions, and as a result of consumers who have closed bank accounts or have insufficient funds in their bank accounts to satisfy payments. In addition, if losses incurred by us related to payment card transactions become excessive, we could lose the right to process credit card transactions, which would significantly impact our payment processing business. We have taken measures to detect and reduce the risk of fraud, including underwriting and risk management procedures and processes, but these measures need to be continually updated to address emerging means of perpetrating fraud or to accommodate new solution offerings.

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A Reduction in Demand for Our Key Business Support Solutions Could Have a Material Adverse Effect on Our Financial Position and Results of Operations.

Historically, a substantial percentage of our total revenue has been generated from our core cloud-based product, ACP, and related solutions. These solutions are expected to continue to provide a large percentage of our total revenue in the foreseeable future. Any significant reduction in demand for ACP and related solutions could have a material adverse effect on our business.

Our Global Operations Subject Us to Additional Risks.

We currently conduct a portion of our business outside the U.S. We are subject to certain risks associated with operating internationally including the following items:

 

Our solutions not meeting local requirements;

 

Fluctuations in foreign currency exchange rates for which a natural or purchased hedge does not exist or is ineffective;

 

Staffing and managing of our foreign operations;

 

Longer sales cycles for new contracts;

 

Longer collection cycles for customer billings or accounts receivable, as well as heightened customer collection risks, especially in countries with highly inflationary economies and/or restrictions on the movement of cash out of the country;

 

Trade barriers;

 

Governmental sanctions;

 

Complying with varied legal and regulatory requirements across jurisdictions;

 

Reduced protection for intellectual property rights in some countries;

 

Inability to recover value added taxes and/or goods and services taxes in foreign jurisdictions;

 

Political instability and threats of terrorism and/or war;  

 

A potential adverse impact to our overall effective income tax rate resulting from, among other things:

 

Operations in foreign countries with higher tax rates than the U.S.;

 

The inability to utilize certain foreign tax credits; and

 

The inability to utilize some or all of losses generated in one or more foreign countries.

Our Use of Open Source Software May Subject Us to Certain Intellectual Property-Related Claims or Require Us to Re-Engineer Our Software, Which Could Harm Our Business.

We use open source software in connection with our solutions, processes, and technology. Companies that use or incorporate open source software into their products have, from time to time, faced claims challenging their use, ownership and/or licensing rights associated with that open source software. As a result, we could be subject to suits by parties claiming certain rights to what we believe to be open source software. Some open source software licenses require users who distribute open source software as part of their software to publicly disclose all or part of the source code in their software and make any derivative works of the open source code available on unfavorable terms or at no cost. In addition to risks related to license requirements, use of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties, support, or controls with respect to origin of the software. Use of open source software also complicates compliance with export-related laws. While we take measures to protect our use of open source software in our solutions, open source license terms may be ambiguous, and many of the risks associated with usage of open source software cannot be eliminated. If we were found to have inappropriately used open source software, we may be required to release our proprietary source code, re-engineer our software, discontinue the sale of certain solutions in the event re-engineering cannot be accomplished on a timely basis, or take other remedial action that may divert resources away from our development efforts.

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Failure to Protect Our Intellectual Property Rights or Claims by Others That We Infringe Their Intellectual Property Rights Could Substantially Harm Our Business, Financial Position and Results of Operations.

We rely on a combination of trade secret, copyright, trademark, and patent laws in the U.S. and similar laws in other countries, and non-disclosure, confidentiality, and other types of contractual arrangements to establish, maintain, and enforce our intellectual property rights in our solutions. Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented, or misappropriated. Further, our contractual arrangements may not effectively prevent disclosure of our confidential information or provide an adequate remedy in the event of unauthorized disclosure of our confidential information. Others may independently discover trade secrets and proprietary information, which may complicate our assertion of trade secret rights against such parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position. In addition, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the U.S. Therefore, in certain jurisdictions, we may be unable to protect our proprietary technology adequately against unauthorized third party copying or use, which could adversely affect our competitive position.

Although we hold a limited number of patents and patent applications on some of our solutions, we do not rely upon patents as a primary means of protecting our rights in our intellectual property. In any event, there can be no assurance that our patent applications will be approved, that any issued patents will adequately protect our intellectual property, or that such patents will not be challenged by third parties. Also, much of our business and many of our solutions rely on key technologies developed or licensed by third parties, and we may not be able to obtain or continue to obtain licenses and technologies from these third parties at all or on reasonable terms.

Finally, third parties may claim that we, our customers, licensees or other parties indemnified by us are infringing upon their intellectual property rights. Even if we believe that such claims are without merit, they can be time consuming and costly to defend and distract management’s and technical staff’s attention and resources. Claims of intellectual property infringement also might require us to redesign affected solutions, enter into costly settlement or license agreements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain of our solutions. Even if we have an agreement to indemnify us against such costs, the indemnifying party may be unable to uphold its contractual obligations. If we cannot or do not license the infringed technology on reasonable pricing terms or at all, or substitute similar technology from another source, our business could be adversely impacted. Our failure to adequately establish, maintain, and protect our intellectual property rights could have a material adverse effect on our business.

We May Incur Material Restructuring Charges in the Future.

In the past, we have recorded restructuring charges related to involuntary employee terminations, various facility abandonments, and various other restructuring and reorganization activities. We continually evaluate ways to reduce our operating expenses through new restructuring opportunities, including more effective utilization of our assets, workforce, and operating facilities. As a result, there is a risk, which is increased during economic downturns and with expanded global operations, that we may incur material restructuring or reorganization charges in the future.

Risks Related to Our Industry

Our Business is Highly Dependent on the Global Communications Industry.

Since a large percentage of our revenue are generated from customers that operate within the global communications industry, we are highly dependent on the health and the business trends occurring within this industry (in particular for our North American cable and satellite customers).  Key factors within this industry that could potentially impact our customers’ businesses, and thus, our business, are as follows:

 

Key Market Conditions:  The global communications industry has undergone significant fluctuations in growth rates and capital investment cycles in the past decade.

In addition, changes in demand for traditional services for CSPs are causing them to seek new revenue sources, while also managing their cost structure and quality of service delivery during their business transformation. The result is that many CSPs are delaying investment decisions on legacy systems, and making investments in new solutions to drive their business forward into new areas.

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Market Consolidation:  The pace of consolidation within the industry continues to accelerate as communication service providers look to increase the scale of their operations and footprint within the entire communications ecosystem.  Potential byproducts of this consolidation that could impact us are as follows: (i) there could be fewer providers in the market, each with potentially greater bargaining power and economic leverage due to their larger size, which may result in our having to lower our prices to remain competitive, retain our market share, or comply with the surviving customer’s current more favorable contract terms, and (ii) the controlling entity in a consolidation that is not our current customer, may acquire one of our existing customers and choose to consolidate both entities onto the controlling entity’s software platform, thus reducing and possibly eliminating our business with our existing customer.

Also, as consolidated entities execute upon their revenue and operational synergies, there is generally a slowdown in decision-making on discretionary spending and/or on new business initiatives.  While this could be a timing issue only, it could impact quarterly and annual results.  

 

Competition:  Our customers operate in a highly competitive environment. Competitors range from traditional wireline and wireless providers to new entrants like digital native service providers such as Amazon, Apple, Facebook, Google, and Netflix. Should these competitors be successful in their strategies, it could threaten our customers’ market share, pricing power, and level of services delivered.  These threats could negatively impact our customers’ revenue, putting pressure on our source of revenue, as generally speaking, these companies do not use our core solutions and there can be no assurance that new entrants will become our customers. In addition, demand for spectrum, network bandwidth and content continue to increase and any changes in the regulatory environment could have a significant impact to not only our customers’ businesses, but in our ability to help our customers be successful.

The above industry factors are impacting our customers’ businesses, and thus could cause delays, cancellations/loss of business, and/or downward pricing pressure on our sales and services. This could cause us to either fall short of revenue expectations or have a cost model that is misaligned with revenue.  

We Face Significant Competition in Our Industry.

The market for our solutions is highly competitive. We directly compete with both independent providers and in-house solutions developed by existing and potential customers. In addition, some independent providers are entering into strategic alliances with other independent providers, resulting in either new competitors, or competitors with greater resources. Many of our current and potential competitors have significantly greater financial, marketing, technical, and other competitive resources than our company, many with significant and well-established domestic and international operations. There can be no assurance that we will be able to compete successfully with our existing competitors or with new competitors.

Risks Related to Laws and Regulations

The Occurrence or Perception of a Security Breach or Disclosure of Confidential Personally Identifiable Information Could Harm Our Business.

In providing solutions to our customers, we transmit, use, store and otherwise process, confidential and personally identifiable information (“PII”), including social security numbers, health-related information (including protected health information, or “PHI” as defined under HIPAA), and financial information (including information regulated under the GLBA and other financial privacy laws). Our treatment of such information is subject to contractual restrictions and federal, state, and foreign data privacy laws and regulations, which continue to evolve resulting in greater scrutiny and regulation over the protection of PII. In response to these evolving restrictions and regulations (which include, without limitation, the Health Insurance Portability and Accountability Act (“HIPAA”), the Health Information Technology for Economic and Clinical Health Act (“HITECH”), the California Consumer Privacy Act (“CCPA”), the Gramm-Leach-Bliley Act (“GLBA”), and other U.S. federal and state financial privacy laws and regulations, and the European Union’s General Data Protection Regulation (“GDPR”), we have implemented and maintain administrative, technical, and physical security measures and it is our standard practice to contractually require our service providers to whom we disclose data (including PII) to implement and maintain reasonable privacy, data protection, and information security measures, in each case to protect against loss, theft, misuse, or unauthorized access to or disclosure of such information, and otherwise comply with these laws and regulations. These measures include standard industry practices (e.g., payment card industry (“PCI”) requirements), periodic security reviews of our systems by independent parties, secure development practices, network firewalls, policy directives, procedural controls, training of our personnel, intrusion detection systems, and antivirus applications. However, due to the inherent risks and complexities to defend against cybercrime and other information security incidents, these measures may fail to adequately protect this information. Any failure on our part to protect the security and privacy of PII and other confidential information, or otherwise comply with data privacy laws and regulations may subject us to contractual liability and damages, loss of business, damages from individual claimants (including class action litigation), substantial fines/penalties, criminal prosecution, and unfavorable publicity.

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Even the mere perception of a security breach or inadvertent disclosure of PII could damage our reputation and inhibit market acceptance of our solutions. In addition, third-party vendors that we engage to perform services for us may unintentionally release PII or otherwise fail to comply with applicable laws and regulations. Under our terms of service and our contracts with customers, if there is a breach of PII that we store, we could be liable to the customer for their losses and related expenses.  As new laws and regulations emerge and evolve and as our business continues to expand to include new products and technologies, these risks will increase and our compliance costs are likely to increase substantially.  As we increase our customer base and expand our business, third parties may increasingly seek to compromise our security controls or gain unauthorized access to our, and our customers’, sensitive information and PII.  Further, as we continue to have a significant number of our employees working remotely, these security risks may be increased. We have implemented heightened monitoring of our Networks and Systems, but cannot guarantee that our efforts, or those of third parties on whom we rely or with whom we partner, will be successful in preventing any such information security incidents or attacks.

We May Be Subject to Payments Regulation in the U.S.  

Many states in which we operate have laws that govern payment activities and have implemented various definitions and licensing requirements for entities deemed to be money transmitters, including licensure. We have applied for money transmitter licenses in a number of states, and for those states where we have applied and not yet received licensure, we could be subject to enforcement actions and financial penalties and other costs.  An enforcement action could result in restrictions upon, or a prohibition on engaging in, the business of money transmission in one or more states and it could delay or prevent us from obtaining a money transmitter license in one or more states.  Enforcement actions could also result in reputational harm to our business and force us to cease or limit certain aspects of our business or prevent us from growing our business.  Further, laws governing payment activities may evolve and changes in such law could affect our ability to provide our solutions or services in the same form and on the same terms as we have historically, or at all.  

And while we have currently applied for money transmitter licenses in a number of states, there can be no assurance that we will be able to obtain any such licenses and such application process may be prolonged and costly.  During the application process, states may impose disclosure and vetting requirements of persons deemed in control of our business. In addition, there are substantial costs and potential solution changes involved in maintaining such licenses, and we could be subject to fines or other enforcement action if we are found to have violated applicable federal, state, and local laws and regulations, including those related to licensing and supervision, anti-money laundering, the Bank Secrecy Act, financial privacy, and cybersecurity and data security.  These factors could impose substantial additional costs and involve considerable delay to the development or provision of our solutions or services, or could require significant and costly operational changes or prevent us from providing our solutions or services in a given market. These limitations may adversely affect our ability to grow our business. 

We may also be subject to card association and network rules and requirements, and violations of such rules and requirements could result in fines or the inability to use third-party networks to conduct our business.

We May be Subject to Various Anti-Money Laundering and Counter-Terrorist Financing Laws and Regulations.

We are subject to various anti-money laundering (“AML”) and counter-terrorist financing laws and regulations that prohibit, among other things, our involvement in processing the proceeds of criminal activities. We maintain an AML Compliance Policy and Procedure applicable to our payments processing business which policy is intended to comply with any applicable U.S. federal requirements.  The laws or their application, our interpretation of the laws, and/or our services may change so that we could be subject to additional regulation and incur additional costs of compliance. We may not be able to meet additional regulatory requirements or the cost of adhering to such requirements could be substantial or could severely impact our ability to continue to maintain and/or grow our payments processing business or retain merchants or partners. The regulations of other countries and/or any increased compliance costs associated with such regulations, could prevent us from entering new markets for our services.

Our Global Operations Require Us to Comply With Applicable U.S. and International Laws and Regulations.

Doing business on a global basis requires our company and our subsidiaries to comply with the laws and the regulations of the U.S. government and various international jurisdictions.  In addition, the number of countries enacting anti-corruption laws and related enforcement activities is increasing. These regulations place restrictions on our operations, trade practices and trade partners. In particular, our global operations are subject to U.S. and foreign anti-corruption laws and regulations such as the Foreign Corrupt Practices Act (“FCPA”), the U.K. Anti-Bribery Act and economic sanction programs administered by the Office of Foreign Assets Control (“OFAC”).  

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The FCPA prohibits us from providing anything of value to foreign officials for the purposes of influencing official decisions or obtaining or retaining business. In addition, the FCPA imposes accounting standards and requirements on publicly traded U.S. corporations and their foreign affiliates, which are intended to prevent the diversion of corporate funds to the payment of bribes and other improper payments, and to prevent the establishment of “off books” slush funds from which such improper payment can be made. As part of our business, we regularly deal with state-owned business enterprises, the employees of which are considered foreign officials for purposes of the FCPA. In addition, some of the international locations in which we operate lack a developed legal system and have higher than normal levels of corruption. We inform our personnel and third-party sales representatives of the requirements of the FCPA and other anti-corruption laws, including, but not limited to their reporting requirements. We have also developed and will continue to develop and implement systems for formalizing contracting processes, performing due diligence on agents and partners while improving our recordkeeping and auditing practices regarding these regulations. However, there is no guarantee that our employees, third-party sales representatives or other agents have not or will not engage in conduct undetected by our processes and for which we might be held responsible under the FCPA or other anti-corruption laws.

Economic sanctions programs restrict our business dealings with certain countries and individuals. As a global provider, we are exposed to a heightened risk of violating OFAC regulations. Violations of these laws and regulations are punishable by civil penalties, including fines, injunctions, asset seizures, debarment from government contracts and revocations or restrictions of licenses, as well as criminal fines and imprisonment. While we actively screen and monitor the global companies and individuals that we do business with, utilizing a risk-based approach, there is no guarantee that we have not or will not, through the lack of accurate information, changing customer business structures, process failure, oversight, or error, have violations occur.

General Risks

Our Business May be Disrupted and Our Results of Operations and Cash Flows May be Adversely Affected by the Recent Coronavirus (COVID-19) Pandemic.

In March 2020, the World Health Organization declared a global pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak which has led to a global health emergency.  Although vaccines have been produced and are being distributed on a limited basis there is still significant uncertainty related to the duration and scope of the pandemic.  The significance of the impact on our operations is not yet certain and depends on numerous evolving factors that we may not be able to accurately predict or effectively respond to, including, among others:

 

the effect on global economic activity and the resulting impact on our customer’s businesses, their credit and liquidity, and their demand for our solutions and services, as well as their ability to pay;

 

our ability to deliver and implement our solutions in a timely manner, including as a result of supply chain challenges, one or more print and mail facility closures for an extended period, restrictions on travel for our and customer personnel, as well as shelter-in-place orders; and

 

actions taken by U.S., foreign, state, and local governments, suppliers, and individuals in response to the outbreak.

While we have significant sources of cash and liquidity and access to a committed credit line, a prolonged period of generating lower cash from operations could adversely affect our financial condition and the achievement of our strategic objectives.

Failure to Attract and Retain Our Key Management and Other Highly Skilled Personnel Could Have a Material Adverse Effect on Our Business.

Our future success depends in large part on the continued service of our key management, sales, product development, professional services, and operational personnel. We believe that our future success also depends on our ability to attract and retain a diverse, highly skilled technical, managerial, operational, and sales and marketing personnel, including, in particular, personnel in the areas of R&D, professional services, and technical support. Competition for qualified personnel at times can be intense, particularly in the areas of R&D, conversions, software implementations, and technical support. This risk is heightened with a widely dispersed customer base and employee populations. For these reasons, we may not be successful in attracting and retaining the personnel we require, which could have a material adverse effect on our ability to meet our commitments and new solution delivery objectives.

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Variability of Our Quarterly Revenue and Our Failure to Meet Revenue and Earnings Expectations Would Negatively Affect the Market Price of Our Common Stock.

From time to time, we may experience variability in quarterly revenue and operating results. Common causes of failure to meet revenue and operating expectations include, among others:

 

Inability to close and/or recognize revenue on certain transactions in the period originally anticipated;

 

Inability to accurately forecast payment processing transaction volumes and related transaction costs;

 

Delays in renewal of multiple or individually significant agreements;

 

Inability to renew existing customer or vendor arrangements at anticipated rates;

 

Delays in timing of initiation and/or implementation of significant projects or arrangements;

 

Inability to meet customer expectations materially within our cost estimates;

 

Changes in spending and investment levels;

 

Foreign currency fluctuations; and

 

Economic and political conditions.

Should we fail to meet our revenue and earnings expectations of the investment community, by even a relatively small amount, it could have a disproportionately negative impact upon the market price of our common stock.

Substantial Impairment of Long-lived Assets in the Future May Be Possible.

As a result of various acquisitions and the growth of our company over the last several years, we have approximately $203 million of long-lived assets other than goodwill (principally, property and equipment, software, acquired customer contracts, and customer contract costs) as of December 31, 2020. Long-lived assets are required to be evaluated for possible impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. We utilize our market capitalization and/or cash flow models as the primary basis to estimate the fair value amounts used in our long-lived asset impairment valuations. If an impairment was to be recorded in the future, it could materially impact our results of operations in the period such impairment is recognized, but such an impairment charge would be a non-cash expense, and therefore would have no impact on our cash flows.  

 

Item 1B.

Unresolved Staff Comments

None.

 

Item 2.

Properties

As of December 31, 2020, we were operating in over 25 leased sites around the world, representing approximately 700,000 square feet.

Our corporate headquarters is located in Greenwood Village, Colorado. In addition, we lease office space in the U.S. in Allen, Texas; Atlanta, Georgia; Chicago, Illinois; Irving, Texas; Omaha, Nebraska; and Philadelphia, Pennsylvania.  The leases for these office facilities expire in the years 2023 through 2031. We also maintain leased facilities internationally in Australia, Brazil, Canada, Colombia, France, India, Ireland, Malaysia, Portugal, South Africa, Sweden, United Arab Emirates, and the U.K. The leases for these international office facilities expire in the years 2021 through 2026. We utilize these office facilities primarily for the following: (i) customer services, training, and support; (ii) product and operations support; (iii) systems and programming activities; (iv) professional services staff; (v) R&D activities; (vi) sales and marketing activities; and (vii) general and administrative functions.

Additionally, we lease four statement production and mailing facilities totaling approximately 350,000 square feet. These facilities are located in: (i) Omaha, Nebraska; (ii) Crawfordville, Florida; (iii) Austin, Texas; and (iv) Fort Worth, Texas. The leases for these facilities expire in the years 2022 through 2028.

We believe that our facilities are adequate for our current needs and that additional suitable space will be available as required. We also believe that we will be able to either: (i) extend our current leases as they terminate; or (ii) find alternative space without experiencing a significant increase in cost. See Note 6 to our Financial Statements for information regarding our obligations under our facility leases.

 

17


 

Item 3.

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 4.

Mine Safety Disclosures

Not applicable.

************************************************************************************************

 

Executive Officers of the Registrant

As of the date of this filing, our executive officers are Brian A. Shepherd (President and Chief Executive Officer), Rolland B. Johns (Chief Financial Officer), and Kenneth M. Kennedy (Chief Operating Officer, President – Revenue Management and Digital Monetization and Executive Vice President).  We have employment agreements with each of our executive officers.

Brian A. Shepherd

President and Chief Executive Officer

Mr. Shepherd, 53, joined CSG in 2016, and is President and Chief Executive Officer (“CEO”) of CSG. Mr. Shepherd was appointed President and CEO and a member of our Board in January 2021. Before becoming CEO, Mr. Shepherd was Executive Vice President and Group President of CSG, where he led the profit and loss organization for the entire global organization. He also served as Executive Vice President and President of Global Broadband, Cable and Satellite Business from 2016 to 2017, where he focused on accelerating the growth and strategic direction of CSG’s global broadband, cable and direct broadcast satellite business. Mr. Shepherd is a global business expert with strong management, customer relationship, global sales, strategy and corporate growth experience. In previous executive roles at companies such as TeleTech, Amdocs, DST Innovis, and McKinsey & Company, Mr. Shepherd built a successful history of helping companies drive and achieve their strategic growth initiatives. With 20 years of experience in the cable and communications industries, he has built wide and deep relationships with C-suite leaders, decision-makers and policy influencers who have shaped these industries globally. Mr. Shepherd graduated magna cum laude from Wabash College with a B.A. in Economics. He also received an M.B.A. from Harvard Business School.

Rolland B. Johns

Executive Vice President and Chief Financial Officer

Mr. Johns, 51, serves as Chief Financial Officer (“CFO”) of CSG, where he oversees finance, accounting, treasury, and investor relations for the organization. Mr. Johns joined CSG in 2013 as Chief Accounting Officer and was named to his current position in May 2018. Mr. Johns brings more than 25 years of global finance and accounting expertise to the position. Prior to joining CSG, he was an audit partner at KPMG, serving in many leadership and management roles, including lead audit engagement partner on several large public company engagements in various industries across the globe. Mr. Johns is a member of the AICPA and the Nebraska Society of Certified Public Accountants. He holds a B.S. in Accounting from the University of San Diego.

Kenneth M. Kennedy

Executive Vice President, Chief Operating Officer and President – Revenue Management and Digital Monetization

Mr. Kennedy, 51, is Chief Operating Officer (“COO”) of CSG and President – Revenue Management & Digital Monetization, responsible for driving revenue and creating scalable monetization solutions that help CSG deepen customer relationships. Prior to becoming COO, Mr. Kennedy served as President of Technology and Product, where he oversaw all product management, engineering, platform architecture and operations across CSG’s solutions portfolio. Mr. Kennedy also served as CSG’s Executive Vice President of Product Development from 2016 to 2017, and as Chief Technology Officer and Senior Vice President of Product Management, Development and Operations from 2006 to 2016. Prior to CSG, Mr. Kennedy was one of the original founders of Telution, where he served as Vice President of Software Development and Professional Services from 1998 to 2006. Before Telution, Mr. Kennedy worked at Accenture (f.k.a. Andersen Consulting), where he was responsible for developing highly scalable distributed software solutions for the financial services and communications industries. Mr. Kennedy holds a B.B.A. in Management Information Systems from the University of Notre Dame.

 

18


 

 

Board of Directors of the Registrant

Information related to our Board of Directors (the “Board”) is provided below.

Donald B. Reed

Mr. Reed, 76, was appointed to the Board in May 2005 and has served as CSG's non-executive Chairman of the Board since January 2010. He is presently retired. Mr. Reed served as CEO of Cable & Wireless Global, a subsidiary of Cable & Wireless plc, from 2000 to 2003 and was employed in other executive positions at Cable & Wireless from 1998 until May 2000. Prior to that he was CEO of Cabletron Systems and held numerous executive positions at NYNEX Corporation including President and Group Executive of Nynex, Executive Vice President at Bell Atlantic, and President of Nynex New England (New England Telephone) with various responsibilities for directing regional, national, and international government affairs, public policy initiatives, legislative and regulatory matters, and public relations. He has previously served on the public boards of Bell Atlantic, Idearc Inc., and Aggregate Industries plc (London) as a director. Mr. Reed is a graduate of Virginia Military Institute (VMI) and served in the United States military as an officer with the 82nd Airborne and 1st Infantry Divisions in Vietnam.

David G. Barnes

Mr. Barnes, 59, was appointed to the Board in February 2014. He is currently Chief Financial Officer of Trimble Inc., a position he assumed in January 2020. Previously, he served as Executive Vice President, Global Operations of Stantec Inc., a publicly traded global provider of engineering, consulting, and construction services from 2016 through 2018. From 2009 through 2016, he served as Executive Vice President and CFO of MWH Global Inc., an employee-owned engineering and construction firm. MWH Global Inc. was acquired by Stantec Inc. in 2016. From 2006 to 2008, he was Executive Vice President of Western Union Financial Services. From 2004 to 2006, Mr. Barnes served as CFO of Radio Shack Corporation, and from 1999 to 2004, he was Vice President, Treasurer, and U.S. CFO for Coors Brewing Company. Mr. Barnes holds an M.B.A. degree from the University of Chicago and a B.A. degree from Yale University.

Ronald H. Cooper

Mr. Cooper, 64, was appointed to the Board in November 2006. He most recently served as the President and CEO of Clear Channel Outdoor Americas, Inc. (an outdoor advertising company) from 2009 through 2012. Prior to this position, he was a Principal at Tufts Consulting LLC from 2006 through 2009. Previously, he spent nearly 25 years in the cable and telecommunications industry, most recently at Adelphia Communications where he served as President and COO from 2003 to 2006. Prior to Adelphia, Mr. Cooper held a series of executive positions at AT&T Broadband, RELERA Data Centers & Solutions, MediaOne and its predecessor Continental Cablevision, Inc. He has served on various boards of directors and committees with the National Cable Television Association, California Cable & Telecommunications Association, Cable Television Association for Marketing, New England Cable Television Association, and Outdoor Advertising Association of America. Mr. Cooper holds a B.A. degree from Wesleyan University.

Marwan H. Fawaz

Mr. Fawaz, 58, was appointed to the Board in March 2016. He is currently an Executive Advisor to Google and Alphabet Inc., after joining Alphabet as the CEO of Nest Labs, Inc. With more than 30 years of experience in the media, cable, telecommunications, and broadband industries, Mr. Fawaz offers a wealth of knowledge and expertise, developed from his time as Executive Vice President and CEO of Google/Motorola Mobility from 2012 to 2013 and Executive Vice President of Strategy and Operations and Chief Technology Officer of Charter Communications from 2006 to 2011. In addition, he served as Senior Vice President and Chief Technology Officer of Adelphia Communications from 2003 to 2006 and held leadership positions for other cable industry companies such as MediaOne, among others. He was the founder and principal of Sarepta Advisors, a strategic advisory and consulting group supporting the technology, media, and telecommunications industries. He holds an M.S. degree in Electrical and Communication Engineering and a B.S. degree in Electrical Engineering, both from California State University at Long Beach.

Rajan Naik

Dr. Naik, 49, was appointed to the Board in August 2018. He currently serves as Chief Strategy and Innovation Officer for Motorola Solutions, Inc., where he is responsible for the corporate strategy organization, chief technology office, M&A, venture capital portfolio, and competitive and market intelligence. Motorola Solutions creates mission-critical communication solutions, including devices, networks, software, services, and video. Prior to joining Motorola Solutions, Dr. Naik held the role of Senior Vice President, Chief Strategy Officer at Advanced Micro Devices (AMD), a provider of high performance computing, graphics and visualization technologies. From 2000 to 2012, Dr. Naik was a Partner at McKinsey & Company in the technology/media/telecom practice. He holds a BSc. degree in Engineering from Cornell University and a Ph.D. degree in Engineering from the Massachusetts Institute of Technology.

19


 

Janice I. Obuchowski

Ms. Obuchowski, 69, was appointed to the Board in November 1997. She is the founder and President of Freedom Technologies, Inc. (a firm providing public policy, strategic, and engineering advice to companies in the communications sector, government agencies, and international clients), a position she has held since 1992. In 2003, Ms. Obuchowski was appointed by President George W. Bush to serve as Ambassador and Head of the U.S. Delegation to the World Radiocommunication Conference. She has served as Assistant Secretary for Communications and Information at the Department of Commerce, Administrator for the National Telecommunications and Information Administration (“NTIA”), and as the head of international government relations at NYNEX Corporation. Ms. Obuchowski formerly served as a director on the board for Inmarsat plc. and Orbital ATK during the past five years. She also has served on several non-profit and other publicly traded company boards. She holds a J.D. degree from Georgetown University and a B.A. degree from Wellesley College, and also attended the University of Paris.

Brian A. Shepherd

Mr. Shepherd’s biographical information is included in the “Executive Officers of the Registrant” section shown directly above.

Frank V. Sica

Mr. Sica, 70, has served as a director of the Company since its formation in 1994. He has been a Partner of Tailwind Capital (a private equity firm) since 2006. He currently serves as a director on the boards of Kohl’s Corporation, and Safe Bulkers, Inc. Mr. Sica holds an M.B.A. degree from the Tuck School of Business at Dartmouth College and a B.A. degree from Wesleyan University.

Haiyan Song

Ms. Song, 55, was appointed to the Board in January 2020. She currently serves as EVP and GM, Security at F5 Networks. Prior to that, Ms. Song served as Senior Vice President and General Manager of Security Markets for Splunk, Inc from 2014-2020. Before joining Splunk, she spent four years from 2010 to 2014 with Hewlett Packard Enterprise Co., in engineering and general manager roles within Hewlett Packard’s ArcSight Business Unit. Ms. Song joined Hewlett Packard following the company’s acquisition of ArcSight, Inc. in 2010. Ms. Song was Vice President of Engineering & Product with ArcSight from 2005 to 2010. Ms. Song holds both M.S. and B.S. degrees in Computer Science from Florida Atlantic University. She also studied at Tsinghua University in China and completed the Stanford University Graduate School of Business Executive Program in General Management in 2012.

Silvio Tavares

Mr. Tavares, 49, was appointed to the Board in May 2020. Since 2013, he has served as President of the board of directors and CEO of the Digital Commerce Alliance (formerly The CardLinx Association), a leading global trade association for the digital commerce, payments and fin-tech industries. Prior to that, Tavares was Senior Vice President and Global Head of Information Products at Visa, Inc., and before that was with First Data Corp. (now part of Fiserv) from 2006-2012, where he was Senior Vice President and Head of the Global Information and Analytics Business Unit and also held other senior finance roles. He holds a J.D. degree from the Boston University School of Law; an M.B.A. degree from the Boston College Carroll Graduate School of Management; and a B.S. degree in Electrical and Computer Engineering from Tufts University.

James A. Unruh

Mr. Unruh, 80, was appointed to the Board in June 2005. He became a founding Principal of Alerion Capital Group, LLC (a private equity investment company) in 1998 and currently holds such position. Mr. Unruh was an executive with Unisys Corporation (a global information technology company) from 1987 to 1997, including serving as its Chairman and CEO from 1990 to 1997. From 1982 to 1986, Mr. Unruh held various executive positions, including Senior Vice President–Finance and CFO with Burroughs Corporation, a predecessor of Unisys corporation. Prior to 1982, Mr. Unruh was CFO with Memorex Corporation and also held various executive positions with Fairchild Camera and Instrument Corporation, including CFO. Mr. Unruh formerly served as director on the boards for Tenet Healthcare Corporation and Prudential Financial, Inc. during the past five years. He holds an M.B.A. degree from the University of Denver and a B.S. degree from the University of Jamestown.

Lily Yang

Tse Li (Lily) Yang, 48, was appointed to the Board in February 2021. She is currently Chief Accounting Officer of Pinterest, where she is responsible for accounting, tax, treasury, and internal audit. Prior to that, she spent two years with Medivation as the Vice President of Finance and Accounting where she was tasked with driving strategic growth and expansion before the company was acquired by Pfizer. Yang worked at Gilead Sciences from 2003 until 2015, finishing her tenure as Vice President - Corporate Controller. Yang holds a B.S. degree in Accounting and Managerial Information Systems from Boston University and is a Certified Public Accountant.

 

20


 

 

PART II

 

Item  5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed on NASDAQ under the symbol ‘‘CSGS’’.  On January 31, 2021, the number of holders of record of common stock was 125.

Stock Price Performance

The following graph compares the cumulative total stockholder return on our common stock, the Russell 2000 Index, and our Standard Industrial Classification (“SIC”) Code Index: Data Preparation and Processing Services during the indicated five-year period. The graph assumes that $100 was invested on December 31, 2015, in our common stock and in each of the two indexes, and all dividends, if any, were reinvested.

 

 

 

 

As of December 31,

 

 

 

2015

 

 

2016

 

 

2017

 

 

2018

 

 

2019

 

 

2020

 

CSG Systems International, Inc.

 

$

100.00

 

 

$

136.89

 

 

$

126.38

 

 

$

93.58

 

 

$

155.37

 

 

$

138.28

 

Russell 2000 Index

 

 

100.00

 

 

 

121.31

 

 

 

139.08

 

 

 

123.76

 

 

 

155.35

 

 

 

186.36

 

Data Preparation and Processing Services

 

 

100.00

 

 

 

117.65

 

 

 

144.13

 

 

 

156.48

 

 

 

218.56

 

 

 

255.15

 

21


 

 

Equity Compensation Plan Information

The following table summarizes certain information about our equity compensation plans as of December 31, 2020:

 

Plan Category

 

Number of securities to be issued upon exercise of outstanding options, warrants, and rights

 

Weighted-average exercise price of outstanding options, warrants, and rights

 

 

Number of securities remaining available for future issuance

 

Equity compensation plans approved by security holders

 

 

$

 

 

 

5,928,624

 

Of the total number of securities remaining available for future issuance, 5,774,916 shares can be used for various types of stock-based awards, as specified in the equity compensation plan, with the remaining 153,708 shares to be used for our employee stock purchase plan. See Note 13 to our Financial Statements for additional discussion of our equity compensation plans.

Issuer Repurchases of Equity Securities

The following table presents information with respect to purchases of our common stock made during the fourth quarter of 2020 by CSG Systems International, Inc. or any “affiliated purchaser” of CSG Systems International, Inc., as defined in Rule 10b-18(a)(3) under the Exchange Act.

 

Period

 

Total

Number of Shares

Purchased (1) (2)

 

 

Average

Price Paid

Per Share

 

 

Total Number of

Shares Purchased as

Part of Publicly

Announced Plans or

Programs (2)

 

 

Maximum Number

(or Approximate

Dollar Value) of

Shares that May

Yet Be Purchased

Under the Plan or

Programs (2)

 

October 1 - October 31

 

 

176,299

 

 

$

40.80

 

 

 

175,500

 

 

 

4,495,967

 

November 1 - November 30

 

 

102,951

 

 

 

41.77

 

 

 

101,650

 

 

 

4,394,317

 

December 1 - December 31

 

 

145,853

 

 

 

44.72

 

 

 

57,200

 

 

 

4,337,117

 

Total

 

 

425,103

 

 

$

42.38

 

 

 

334,350

 

 

 

 

 

 

(1)

The total number of shares purchased that are not part of the Stock Repurchase Program represents shares purchased and cancelled in connection with stock incentive plans.

 

(2)

See Note 12 to our Financial Statements for additional information regarding our share repurchases.

 


22


 

 

Item 6. Selected Financial Data

The following selected financial data have been derived from our audited financial statements. The selected financial data presented below should be read in conjunction with, and is qualified by reference to, our MD&A and our Financial Statements. The information below is not necessarily indicative of the results of future operations.

 

 

 

Year Ended December 31,

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

 

(in thousands, except per share amounts)

 

Statements of Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue (1)(2)(3)

 

$

990,533

 

 

$

996,810

 

 

$

875,059

 

 

$

789,582

 

 

$

760,958

 

Operating income (1)(2)(3)(4)

 

 

105,556

 

 

 

126,109

 

 

 

104,932

 

 

 

105,685

 

 

 

132,629

 

Net income (1)(2)(3)(4)

 

 

58,711

 

 

 

82,770

 

 

 

66,130

 

 

 

61,364

 

 

 

62,882

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average diluted shares outstanding

 

 

32,278

 

 

 

32,465

 

 

 

32,855

 

 

 

32,865

 

 

 

33,014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per common share (1)(2)(3)(4)

 

$

1.82

 

 

$

2.55

 

 

$

2.01

 

 

$

1.87

 

 

$

1.90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividend declared per share

 

$

0.94

 

 

$

0.89

 

 

$

0.84

 

 

$

0.79

 

 

$

0.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Key Capital Activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased under Stock Repurchase Program

 

 

624

 

 

 

576

 

 

 

704

 

 

 

500

 

 

 

318

 

Cost of shares repurchased under Stock Repurchase Program

 

$

26,309

 

 

$

25,457

 

 

$

27,628

 

 

$

20,548

 

 

$

11,565

 

Dividends declared

 

 

30,932

 

 

 

29,445

 

 

 

28,148

 

 

 

26,823

 

 

 

23,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Data (at Period End):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments (2)(6)(7)

 

$

240,297

 

 

$

182,657

 

 

$

162,880

 

 

$

261,360

 

 

$

276,498

 

Total assets (2)(5)

 

 

1,332,000

 

 

 

1,283,030

 

 

 

1,114,362

 

 

 

904,534

 

 

 

891,879

 

Total debt (6)

 

 

351,217

 

 

 

356,822

 

 

 

359,826

 

 

 

331,736

 

 

 

416,260

 

Total treasury stock (6)(7)

 

 

894,126

 

 

 

867,817

 

 

 

842,360

 

 

 

814,732

 

 

 

826,002

 

Total stockholders' equity (3)(6)(7)

 

 

422,395

 

 

 

396,662

 

 

 

361,024

 

 

 

342,746

 

 

 

251,360

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

In December 2019, we entered into a new Master Subscriber Agreement with Comcast that extends our contractual relationship for an additional five years.  The new agreement was effective January 1, 2020, and included certain pricing adjustments that contributed to the approximately $16 million year-over-year decrease in revenue generated from Comcast.

 

(2)

In January 2020, we acquired Tekzenit, Inc., and as a result, twelve months of their operations are included in our 2020 results.  The overall cost of this acquisition was approximately $10 million and it was funded with existing cash.

During 2018, we acquired Business Ink and Forte Payment Systems, Inc., and as a result, ten and three months of their operations, respectively, are included in our 2018 results (approximately $74 million of revenue impact).  The overall cost of these acquisitions was approximately $155 million and was funded with existing cash.  

See Note 7 to our Financial Statements for additional discussion of these acquisitions.

(3)

In 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), a single comprehensive model which supersedes nearly all existing revenue recognition guidance under U.S. GAAP.  Under the new guidance, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services.  

We adopted the new guidance using the cumulative effect approach, and as a result, recorded a cumulative adjustment increasing beginning retained earnings (net of tax) by approximately $7 million.  

(4)

In February 2016, our former cyber-security business (marketed under the Invotas brand), which had been previously sold to certain former management personnel, was acquired by a third-party.  Based on the terms of the agreement, we received additional consideration upon a liquidation event, as defined in the agreement, which resulted in an additional gain on the sale of $6.6 million.

(5)

In 2019, we adopted ASU 2016-02, Leases (Topic 842), which requires lessees to recognize a lease liability and a right-of-use asset for all leases, including operating leases, with a term greater than twelve months on its balance sheet.  

We adopted this ASU utilizing the effective date method of transition thus, prior period information in our Financial Statements was not adjusted.  In conjunction with the adoption of this ASU we recorded additional assets and liabilities of approximately $80 million related to the right-of-use assets and lease liabilities.

23


 

(6)

In March 2018, we refinanced our Credit Agreement.  As a result, under the refinanced 2018 Credit Agreement, we: (i) extended the term of the agreement to March 2023; (ii) obtained a reduction in the interest rate and other fees; and (iii) borrowed $150 million, resulting in a net increase of available cash of $30 million, after paying off the outstanding $120 million balance from the term loan under the previous 2015 Credit Agreement.

In March 2016, we completed an offering of $230 million of 4.25% senior convertible notes due March 15, 2036.  The net proceeds of approximately $223 million were used to settle the outstanding 2010 Convertible Notes, due March 1, 2017.  During 2016, we repurchased approximately $115 million of the 2010 Convertible Notes for approximately $216 million, and recognized a loss on the repurchases of $8.7 million.  In March 2017, we settled our conversion obligation by paying cash of $34.8 million for the remaining par value of the notes and delivered 694,240 shares of our common shares from treasury stock to settle the $28.8 million value of the conversion obligation in excess of par value.    

See Note 5 to our Financial Statements for additional discussion of our debt.

(7)

In December 2019, Comcast exercised 0.4 million vested stock warrants, which we net cash settled under the provisions of the warrant agreement.  The fair value of the stock warrants were $24.6 million, resulting in a net cash settlement of $12.9 million.  In January 2017, Comcast exercised 1.4 million vested stock warrants, which we net share settled under the provisions of the warrant agreement by delivering 649,221 of our common shares from treasury stock, which had a fair value of $31.5 million.  The carrying value of the shares of treasury stock delivered was $15.4 million.  See Note 12 to our Financial Statements for additional discussion of the stock warrants.

 

 

 


24


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 above within Item 1A., “Risk Factors”. Item 1A. constitutes an integral part of this report, and readers are strongly encouraged to review this section closely in conjunction with MD&A.

Impact of COVID-19

In March 2020, the World Health Organization declared a global pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak which has led to a global health emergency.  This outbreak has negatively affected the U.S. and the global economy, created a significant disruption of the financial markets, disrupted global supply chains, and has resulted in mandated closures, orders to shelter-in-place, and significant travel restrictions.  While we have taken measures to protect the health and safety of our employees, to include a remote working environment for those employees who are able to conduct business from home and significantly reduced travel, we are still conducting business as usual and are working with our customers to minimize any potential disruption.  At this time, we do not believe that our remote working environment and limited staffing in select office locations has adversely impacted our internal controls, financial reporting systems, or our operations.

The full extent of the impact of the COVID-19 pandemic on our business, operations, and financial results will depend on numerous evolving factors that we may not be able to accurately predict.  See Part II Item 1A. Risk Factors of this report for additional details.  While the outbreak did not negatively impact our operating results for the first quarter of 2020, we began to realize these impacts to revenue during the second quarter of 2020 as we experienced extended sales and implementation cycles related to our revenue management and customer experience solutions, as well as processing volume reductions.  During the fourth quarter of 2020, we experienced our second quarter of sequential revenue growth, reflecting stabilization in the impacted areas of our business.  We also continued to build our sales pipeline, driven in large part by the accelerating demand for digital transformation.  Going forward, we will continue to diligently monitor and manage our expense levels in line with our anticipated revenue profile.

As we continue to manage our business in this uncertain environment, our priorities will remain the health and safety of our employees, providing our customers with world-class services and solutions, and prudently managing our liquidity to ensure our continued financial strength.  As of December 31, 2020, we had approximately $240 million in cash, cash equivalents and short-term investments, and an additional $200 million available to borrow under our revolving credit facility.  Given our financial strength, we expect to be able to maintain adequate liquidity as we manage through the current environment, though we cannot reasonably estimate the duration and severity of this global pandemic or its ultimate impact on the global economy and our business results.

Executive Transition Costs

In August 2020, we announced that effective December 30, 2020, Bret Griess, our then-current President and CEO would step down and effective January 1, 2021, Brian Shepherd, our then-current Executive Vice President and Group President would become President and CEO.  

As a result of these changes, we entered into a Separation Agreement, dated August 26, 2020, and a subsequent amendment to the Separation Agreement dated December 31, 2020, with Mr. Griess.  Under the terms of the Separation Agreement, Mr. Griess is entitled to the following:

 

Compensation, benefits, and other payments pursuant to the terms of his Employment Agreement.  The additional compensation, totaling $7.3 million, was expensed ratably over his remaining service period, for which approximately $5 million will be paid in 2021 and approximately $2 million will be paid in 2022.

 

Accelerated vesting of approximately 198,000 shares of unvested restricted stock on December 30, 2020.  This modification resulted in a reversal of stock-based compensation expense of $2.7 million in the third quarter of 2020.  The fair value of the modified award of $8.4 million was recognized ratably from the date of the modification through December 30, 2020.

The net impact of the executive transition costs for 2020 was $13.0 million, and was recorded in selling, general and administrative (“SG&A”) expense.

25


 

Management Overview

Results of Operations. A summary of our results of operations for 2020 and 2019, and other key performance metrics are as follows (in thousands, except percentages and per share amounts):

 

 

 

 

Year Ended December 31,

 

 

 

 

2020

 

 

2019

 

Revenue

 

 

$

990,533

 

 

$

996,810

 

Transaction fees (1)

 

 

 

67,671

 

 

 

69,114

 

Operating Results:

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

105,556

 

 

 

126,109

 

Operating income margin

 

 

 

10.7

%

 

 

12.7

%

Diluted EPS

 

 

$

1.82

 

 

$

2.55

 

Supplemental Data:

 

 

 

 

 

 

 

 

 

Restructuring and reorganization charges (2)

 

 

$

5,328

 

 

$

4,834

 

Executive transition costs (2)

 

 

 

13,012

 

 

 

-

 

Acquisition-related costs:

 

 

 

 

 

 

 

 

 

Amortization of acquired intangible assets

 

 

 

11,816

 

 

 

12,603

 

Earn-out compensation

 

 

 

-

 

 

 

1,260

 

Transaction-related costs

 

 

 

(587

)

 

 

-

 

Stock-based compensation (2)

 

 

 

19,762

 

 

 

20,896

 

Amortization of OID

 

 

 

2,983

 

 

 

2,819

 

 

(1)

Transaction fees are primarily comprised of interchange and other payment-related fees that we pay, in conjunction with the delivery of service to customers under our payment services contracts, to third-party payment processors and financial institutions.  Because we control the integrated service provided under our payment services customer contracts, these transaction fees are presented gross, and not netted against revenue.

 

(2)

Stock-based compensation included in the table above exclude amounts that have been recorded in restructuring and reorganization charges and executive transition costs.

Revenue. Revenue for 2020 was $990.5 million, a 1% decrease when compared to $996.8 million for 2019, with the decrease mainly attributed to the pricing adjustments associated with the five-year Comcast extension effective January 1, 2020, as well as foreign currency headwinds, offset by the year-over-year growth in our revenue management solutions and strong professional services revenue.

Operating Results.  Operating income for 2020 was $105.6 million, or a 10.7% operating income margin percentage, compared to $126.1 million, or a 12.7% operating income margin percentage for 2019. Operating income for 2020 was negatively impacted by the $13.0 million of executive transition costs, discussed above, a $10 million impairment charge, discussed below, and lower revenue generated in 2020, which were offset to a certain extent by the benefit of lower employee-related costs.

Diluted Earnings Per Share (“EPS”).  Diluted EPS for 2020 was $1.82 compared to $2.55 for 2019, reflective of the lower operating income discussed above.  Additionally, 2019 diluted EPS was positively impacted by a lower effective income tax rate due to Comcast’s exercise of 0.4 million vested common stock warrants that resulted in the recognition of an approximately $4 million net income tax benefit.

Balance Sheet and Cash Flows.  As of December 31, 2020, we had cash, cash equivalents, and short-term investments of $240.3 million, compared to $182.7 million as of December 31, 2019.  Cash flows from operating activities for 2020 were $173.0 million, compared to $151.1 million for 2019.  See the Liquidity section below for further discussion of our cash flows.

26


 

Significant Customer Relationships

Comcast.  Comcast continues to be our largest customer.  For 2020 and 2019, revenue from Comcast was $213 million and $229 million, respectively, representing approximately 22% and 23% of our total revenue.  The decrease in Comcast revenue is mainly due to the pricing adjustments associated with the new agreement that was executed in December 2019 and became effective January 1, 2020.  Our agreement with Comcast runs through December 31, 2024 for cloud and related solutions, and through December 31, 2025 for print and mail services for residential customer accounts, with the option to extend the cloud and related services for an additional one-year term.

 

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.

 

Charter. Charter is our second largest customer.  For 2020 and 2019, revenue from Charter was $209 million and $195 million, respectively, representing approximately 21% and 20% of our total revenue.  Our agreement with Charter runs through December 31, 2021, with an option to extend the agreement for an additional one-year term.  We are currently engaged in discussions with Charter regarding contract renewal terms.

 

A copy of the Charter agreement and related amendments, with confidential information redacted, is included in the exhibits to our periodic filings with the SEC.

Stock-Based Compensation Expense

Stock-based compensation expense is included in the following (in thousands):

 

 

 

2020

 

 

2019

 

 

2018

 

Cost of revenues

 

$

4,947

 

 

$

4,584

 

 

$

4,536

 

Research and development

 

 

2,745

 

 

 

2,657

 

 

 

2,483

 

Selling, general and administrative (1)

 

 

12,070

 

 

 

13,655

 

 

 

12,631

 

Restructuring

 

 

(215

)

 

 

(977

)

 

 

(292

)

Total stock-based compensation expense

 

$

19,547

 

 

$

19,919

 

 

$

19,358

 

 

(1)

SG&A stock-based compensation in the table above excludes the $5.7 million of executive transition costs in 2020.

 

See Notes 2 and 13 to our Financial Statements for additional discussion of our stock-based compensation expense.

Critical Accounting Policies

The preparation of our Financial Statements in conformity with accounting principles generally accepted in the U.S. 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.  These critical accounting policies were determined by considering our accounting policies that involve the most complex or subjective decisions or assessments.  Our most critical accounting policies identified relate to:  (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 disclosed in the notes to our Financial Statements.

27


 

Revenue Recognition.  In accordance with ASC 606, revenue is recognized upon conclusion that a contract with a customer exists. Such conclusion is made by us when the contract is legally enforceable and certain criteria, including collectability, are met.  In making our determination of collectability, we consider a number of factors depending upon the specific aspects of an arrangement, which may include, but is not limited to, the following items: (i) an assessment of the customer’s specific credit worthiness, evidenced by its current financial position and/or recent operating results, credit ratings, and/or a bankruptcy filing status (as applicable); (ii) the customer’s current accounts receivable status and/or its historical payment patterns with us (as applicable); (iii) the economic condition of the industry in which the customer conducts the majority of its business; and/or (iv) the economic conditions and/or political stability of the country or region in which the customer is domiciled and/or conducts the majority of its business.  The evaluation of these factors, and the ultimate determination of collectability, requires significant judgments to be made by us.  Our judgments could have a significant effect to the amount and timing of revenue recognized in any period.

Our contracts with customers include cloud-based revenue management solution arrangements, managed services arrangements, cloud-based payment processing transaction services, software license and service arrangements, professional services arrangements, and bundled service arrangements.  The revenue recognition policies that involve the most complex and subjective decisions or assessments that may have a material impact on our operations relate to the accounting for cloud-based revenue management solution arrangements, software license and service arrangements, and bundled service arrangements.

Our cloud-based revenue management solution arrangements are complex agreements that typically include multiple performance obligations.  Key factors considered in accounting for cloud-based revenue management solution arrangements include the following criteria:  (i) identification of performance obligations within the contract; (ii) determination of the transaction price given the variable nature of the consideration and significance of the consideration; (iii) determination of stand-alone selling price for each performance obligation and the allocation of value between the performance obligations; and (iv) calculation of revenue recognized in each period. The evaluation of these factors and ultimate revenue recognition decision requires significant judgements to be made by us.  Depending on the significance of variable consideration, number of solutions/services, complex pricing structures and long-term nature of these types of contracts, our judgements and estimates made in this area could have a significant effect on the amount and timing of revenue recognized in any period.  In addition, certain solutions and arrangements require us to assess whether we are a principal to the transaction (gross revenue) or an agent to the transaction (net revenue). Such assessments can have a significant effect on the amount of total revenue recognized.

Our software license and related services arrangements include multiple performance obligations which may be complex and require considerable judgement.  Key factors considered in accounting for our software license and related service arrangements include the following criteria:  (i) identification of performance obligations within the contract; (ii) assessment of whether services included in the arrangement represent significant production, modification or customization of the software (as applicable), such that the delivery of the software license and related services required to implement the software represent one combined performance obligation; (iii) determination of the transaction price for the contract as these types of arrangements may include both fixed and variable consideration; (iv) determination of stand-alone selling price for each performance obligation including the allocation of value between performance obligations; and (v) estimates to measure progress for delivery.  The evaluation of these factors and ultimate revenue recognition decision requires significant judgements to be made by us.  We generally determine stand-alone selling prices using pricing calculations (which include regional market factors) for our software license fees and maintenance, and cost-plus margins for services.  The pricing calculations can be complex and require estimates based on volumes. Additionally, our use of an hours-based method of accounting for software license and other professional services performance obligations that are satisfied over time requires estimates of total project revenue and costs, along with the expected hours necessary to complete a project.  Changes in estimates as a result of additional information as work progresses on a project are inherent characteristics of this method of revenue recognition as we are exposed to business risks in completing these types of performance obligations.  The estimation process to support our hours-based recognition method is more difficult for projects of greater length and/or complexity. Our judgments and estimates could:  (i) have a significant effect on revenue recognized in any period by changing the amount and/or the timing of the revenue recognized; and/or (ii) impact the expected profitability of a project, including whether an overall loss on an arrangement has occurred.

Our contracts are subject to modification via amendment, change requests, and/or statement of works.  Such modifications may occur frequently.  The accounting for contract modifications under ASC 606 is complex and requires significant judgements to be made by us as to whether the contract modification is treated as either a separate contract or part of the existing contract.  Our judgements could have a significant effect on the revenue recognized in any period by changing the amount and/or timing of the revenue recognized.

Our contracts typically include service level agreements or other incentives which may result in refunds or credits to our customers.  Under ASC 606, failure to meet service level standards under the terms of the contract represent adjustments to the overall consideration (reductions in revenue) and may need to be estimated at the outset of the arrangement as part of the overall variable consideration.  Such estimates require significant judgement by us and may impact the amount and/or timing of the revenue recognized.

28


 

Impairment Assessments of Long-Lived Assets.  Long-lived assets relate primarily to property and equipment, software, acquired customer contracts, and customer contract costs.  These assets are required to be evaluated for possible impairment as events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.  A long-lived asset (or group of long-lived assets) is impaired if estimated future undiscounted cash flows associated with that asset, without consideration of interest, are insufficient to recover the carrying amount of the long-lived asset.  Once deemed impaired, even if by $1, the long-lived asset is written down to its fair value which could be considerably less than the carrying amount or future undiscounted cash flows.  The determination of estimated future cash flows and, if required, the determination of the fair value of a long-lived asset, are by their nature, highly subjective judgments.  Changes to one or more of the assumptions utilized in such an analysis could materially affect our impairment conclusions for long-lived assets.

Income Taxes. We are required to estimate our income tax liability in each jurisdiction in which we operate, including U.S. federal, state, and foreign income taxes.

Various judgments are required in evaluating our income tax positions and determining our provisions for income taxes.  We regularly assess the likelihood of the future realization of our deferred income tax assets.  To the extent we believe that it is not more likely than not that a deferred income tax asset will be realized, a valuation allowance is established.  During the ordinary course of our business, there are certain transactions and calculations for which the ultimate income tax determination may be uncertain.  In addition, we may be subject to examination of our income tax returns by various tax authorities which could result in adverse outcomes.  For these reasons, we establish a liability associated with unrecognized tax benefits based on estimates of whether additional taxes and interest may be due.  We adjust this liability based upon changing facts and circumstances, such as the closing of a tax audit, the closing of a tax year upon the expiration of a statute of limitations, or the refinement of an estimate. Should any of the factors considered in determining the adequacy of this liability change significantly, an adjustment to the liability may be necessary. Due to the potential significance of these issues, such an adjustment could be material.

One of the more complex items within our income tax expense is the determination of our annual research and experimentation income tax credit (“R&D tax credit”).  We have incurred approximately $120 - $130 million annually in R&D expense over the last three years.  The calculation of the R&D tax credit involves the identification of qualifying projects, as well as an estimation of the qualifying costs for such projects.  Due to the size, nature, and the number of projects worked on in any given year, the calculation can become complex and certain judgments are necessary in determining the amount of the R&D tax credits claimed.

Loss Contingencies. In the ordinary course of business, we are subject to potential claims related to various items including but not limited to the following:  (i) legal and regulatory matters; (ii) vendor contracts; (iii) solution and service delivery matters; and (iv) labor matters.  Accounting and disclosure requirements for loss contingencies requires us to assess the likelihood of any adverse judgments in or range of potential outcomes for these matters. A determination of the amount of reserves for such contingencies, if any, is based on an analysis of the issues, often with the assistance of legal counsel.  The evaluation of such issues, and our ultimate accounting and disclosure decisions, are by their nature, subject to various estimates and highly subjective judgments. Should any of the factors considered in determining the adequacy of any required reserves change significantly, an adjustment to the reserves may be necessary.  Due to the potential significance of these issues, such an adjustment could be material.

Detailed Discussion of Results of Operations

The following discussion includes a comparison of our results of operations and liquidity for 2020 compared to 2019.  For a discussion of the 2019 compared to 2018, please refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 21, 2020.

Total Revenue. Total revenue for 2020 was $990.5 million, a 1% decrease when compared to $996.8 million for 2019.  The decrease in total revenue can be mainly attributed to pricing adjustments associated with the five-year Comcast extension effective January 1, 2020, as well as foreign currency headwinds, offset by the year-over-year growth in our revenue management solutions and strong professional services revenue, to include the revenue generated from the acquired Tekzenit business, discussed in Note 7 to the Financial Statements.

29


 

We use the location of the customer as the basis of attributing revenue to individual countries and corresponding geographic regions.  Revenue by geographic regions for 2020 and 2019 were as follows (in thousands):

 

 

 

2020

 

 

2019

 

Americas (principally the U.S.)

 

$

856,858

 

 

$

866,831

 

Europe, Middle East, and Africa

 

 

96,480

 

 

 

91,685

 

Asia Pacific

 

 

37,195

 

 

 

38,294

 

Total revenue

 

$

990,533

 

 

$

996,810

 

Total Operating Expenses.  Our operating expenses for 2020 increased 2% to $885.0 million, from $870.7 million for 2019.  The increase in operating expenses can be primarily attributed to:  (i) the approximately $13 million of executive transition costs, discussed above; and (ii) an approximately $10 million impairment charge recorded in the second quarter of 2020 for the write-off of capitalized customer contract costs related to a discontinued project implementation.  These costs were offset to a certain degree by lower employee-related costs and favorable foreign currency movements.

Cost of Revenue (Exclusive of Depreciation).  Our cost of revenue consist principally of the following:  (i) computing capacity and network communications costs; (ii) statement production costs (e.g., labor, paper, envelopes, equipment, equipment maintenance, etc.); (iii) transaction fees-interchange and other payment-related fees to third-party payment processors and financial institutions;  (iv) customer support organizations (e.g., our customer support call center, account management, etc.); (v) professional services organization (vi) various product delivery and support organizations (e.g., managed services delivery, product management, product maintenance, etc.); (vii) third-party software costs and/or royalties related to certain software products; (viii) facilities and infrastructure costs related to the statement production and support organizations; and (ix) amortization of acquired intangibles. The costs related to new solution development (including significant enhancements to existing solutions and services) are included in R&D expense.

The cost of revenue for 2020 increased 2% to $535.6 million, from $525.1 million for 2019.  This increase is mainly due to the approximately $10 million impairment charge, mentioned above.  Additionally, during 2020, we had more internal resources reassigned to cost of revenues projects that had previously been assigned to R&D projects, however this was offset by lower employee-related costs.  Total cost of revenue as a percentage of revenue for 2020 and 2019 was 54.1% and 52.7%, respectively.

R&D Expense (Exclusive of Depreciation).  R&D expense for 2020 was $122.8 million, a 4% decrease when compared to $128.0 million for 2019, with the decrease mainly attributed to lower employee-related costs, to include personnel and the related costs previously assigned to R&D projects being reassigned to cost of revenue projects, mentioned above.  

Our R&D efforts are focused on the continued evolution of our solutions that enable global service providers worldwide to provide a more personalized customer experience while introducing new digital products and services.  This includes the continued investment in our cloud-based solutions.

As a percentage of total revenue, R&D expense for 2020 and 2019 was 12.4% and 12.8%, respectively.  We anticipate the level of R&D investment in the near-term to be relatively consistent with 2020.

SG&A Expense (Exclusive of Depreciation).  SG&A expense for 2020 increased 4% to $198.3 million, from $191.3 million for 2019. The increase in SG&A expense between 2020 and 2019 is primarily due to the $13.0 million of executive transition costs, discussed above, offset to a certain degree by lower employee-related costs.  As a percentage of total revenue, SG&A expense for 2020 and 2019 was 20.0% and 19.2%, respectively.

Depreciation Expense.  Depreciation expense for all property and equipment is reflected separately from cost of revenue or the other components of operating expenses.  Depreciation expense for 2020 was $22.9 million, a 7% increase from $21.4 million for 2019.  The increase can be primarily attributed to our increased level of capital expenditures on items such as technology, security, infrastructure, and modernization of equipment.

Restructuring and Reorganization Charges. In 2020 and 2019, we implemented cost reduction and efficiency initiatives that resulted in restructuring and reorganization charges of $5.3 million and $4.8 million, respectively.  These initiatives were primarily made up of organizational changes made to pursue global opportunities and efficiencies.

See Note 8 to our Financial Statements for additional information regarding these initiatives.

30


 

Operating Income.  Operating income and operating income margin for 2020 was $105.6 million, or 10.7% of total revenue, compared to $126.1 million, or 12.7% of total revenue for 2019.  Operating income for 2020 was negatively impacted by the $13.0 million of executive transition costs and the $10 million impairment charge, discussed above, and the lower revenue generated in 2020, which were offset to a certain extent by the benefit of the lower employee-related costs.

Interest Expense and Amortization of Original Issue Discount (“OID”).  Our interest expense relates primarily to our 2016 Convertible Notes and our 2018 Credit Agreement. See Note 5 to our Financial Statements for additional discussion of our long-term debt, to include the non-cash interest expense related to the amortization of the convertible debt OID.

 Income Tax Provision.  Our effective income tax rates for 2020 and 2019 were as follows:

 

2020 (1)

 

 

2019 (2)

 

 

31

%

 

 

22

%

 

(1)

The 2020 effective income tax rate reflects an adjustment for the income tax impact related to the executive transition costs, discussed above (see Note 9 to our Financial Statements).

 

(2)

As a result of Comcast’s exercise of their remaining 0.4 million of vested stock warrants in December 2019 (see Note 12 to our Financial Statements), we received an additional income tax benefit of approximately $4 million (see Note 9 to our Financial Statements) due to the stock warrants appreciating in value since the grant date.

Liquidity

Cash and Liquidity.  As of December 31, 2020, our principal sources of liquidity included cash, cash equivalents, and short-term investments of $240.3 million, compared to $182.7 million as of December 31, 2019. 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 2018 Credit Agreement, we have a $200 million senior secured revolving loan facility with a syndicate of financial institutions that expires in March 2023.  As of December 31, 2020, there were no borrowings outstanding on the 2018 Revolver.  The 2018 Credit Agreement contains customary affirmative covenants and financial covenants. As of December 31, 2020, and the date of this filing, we believe we are in compliance with the provisions of the 2018 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):

 

 

 

December 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Americas (principally the U.S.)

 

$

183,918

 

 

$

125,309

 

Europe, Middle East and Africa

 

 

47,513

 

 

 

50,477

 

Asia Pacific

 

 

8,866

 

 

 

6,871

 

Total cash, equivalents and short-term investments

 

$

240,297

 

 

$

182,657

 

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 December 31, 2020, we had $1.7 million of cash restricted as to use to collateralize guarantees and outstanding letters of credit.

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, amortization of OID, impairments, gain/loss from debt extinguishments, deferred income taxes, stock-based compensation, etc.), and then factoring in the impact of changes in operating assets and liabilities.

Our primary source of cash is from our operating activities. Our current business model consists of a significant amount of recurring revenue sources related to our long-term cloud-based and managed services arrangements (primarily billed monthly), payment process transaction services (primarily billed monthly), and software maintenance agreements (which may be billed monthly, quarterly, or annually). This recurring revenue base provides us with a reliable and predictable source of cash. In addition, software license fees and professional services revenue are sources of cash, but the payment streams for these items are less predictable.