CSG SYSTEMS INTERNATIONAL INC - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2021


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

For the transition period from to

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware	47-0783182
(State or other 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, including zip code)

(303) 200-2000

(Registrant’s telephone number, including area code)

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

Title of each class

Trading

Symbol(s)

Name of each exchange on which registered

Common Stock, Par Value $0.01 Per Share

CSGS

NASDAQ Stock Market LLC

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

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

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

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

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

As of October 29, 2021, there were 32,645,848 shares of the registrant’s common stock outstanding.

CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q for the Quarter Ended September 30, 2021

INDEX


		Page No.

Part I - FINANCIAL INFORMATION

Item 1.	Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (Unaudited)	3

	Condensed Consolidated Statements of Income for the Quarters and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income for the Quarters and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Equity for the Quarters and Nine Months Ended September 30, 2021 and 2020 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30

Item 4.	Controls and Procedures	31

Part II - OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 6.	Exhibits	32

	Index to Exhibits	33

	Signatures	34

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands)


	September 30,			December 31,
	2021			2020
ASSETS
Current assets:
Cash and cash equivalents	$	195,365		$	188,699
Short-term investments		29,175			51,598
Total cash, cash equivalents and short-term investments		224,540			240,297
Settlement and merchant reserve assets		158,925			166,031
Trade accounts receivable:
Billed, net of allowance of $3,157 and $3,628		243,160			226,623
Unbilled		38,099			37,785
Income taxes receivable		3,889			2,167
Other current assets		53,104			41,688
Total current assets		721,717			714,591
Non-current assets:
Property and equipment, net of depreciation of $110,862 and $105,073		76,725			81,759
Operating lease right-of-use assets		96,101			110,756
Software, net of amortization of $148,667 and $139,836		28,696			26,453
Goodwill		313,246			272,322
Acquired customer contracts, net of amortization of $111,602 and $105,778		55,032			48,012
Customer contract costs, net of amortization of $50,700 and $39,893		47,249			47,238
Deferred income taxes		9,156			10,205
Other assets		16,834			20,664
Total non-current assets		643,039			617,409
Total assets	$	1,364,756		$	1,332,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt, net of unamortized discounts of $930 and zero	$	236,570		$	14,063
Operating lease liabilities		23,609			22,651
Customer deposits		32,232			39,992
Trade accounts payable		32,080			29,834
Accrued employee compensation		93,125			86,289
Settlement and merchant reserve liabilities		157,308			165,064
Deferred revenue		64,252			52,357
Income taxes payable		2,192			6,627
Other current liabilities		21,873			19,383
Total current liabilities		663,241			436,260
Non-current liabilities:
Long-term debt, net of unamortized discounts of $3,595 and $5,346		138,905			337,154
Operating lease liabilities		80,373			95,926
Deferred revenue		14,006			17,275
Income taxes payable		2,445			2,436
Deferred income taxes		6,700			5,109
Other non-current liabilities		15,462			15,445
Total non-current liabilities		257,891			473,345
Total liabilities		921,132			909,605
Stockholders' equity:
Preferred stock, par value $.01 per share; 10,000 shares authorized; zero shares issued and outstanding		-			-
Common stock, par value $.01 per share; 100,000 shares authorized; 32,687 and 32,713 shares outstanding		704			700
Additional paid-in capital		482,387			470,557
Treasury stock, at cost; 36,418 and 35,980 shares		(914,274	)		(894,126	)
Accumulated other comprehensive income (loss):
Unrealized gains on short-term investments, net of tax		3			13
Cumulative foreign currency translation adjustments		(35,786	)		(31,151	)
Accumulated earnings		906,955			876,402
Total CSG stockholders' equity		439,989			422,395
Noncontrolling interest		3,635			-
Total stockholders' equity		443,624			422,395
Total liabilities and stockholders' equity	$	1,364,756		$	1,332,000

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(in thousands, except per share amounts)


	Quarter Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Revenue	$	263,209		$	244,108		$	771,462		$	730,046

Cost of revenue (exclusive of depreciation, shown separately below)		134,705			131,073			401,185			400,432
Other operating expenses:
Research and development		34,384			30,425			99,350			90,025
Selling, general and administrative		54,923			47,032			152,988			136,415
Depreciation		6,225			5,817			18,604			17,016
Restructuring and reorganization charges		209			814			3,029			4,277
Total operating expenses		230,446			215,161			675,156			648,165
Operating income		32,763			28,947			96,306			81,881
Other income (expense):
Interest expense		(3,636	)		(3,641	)		(10,861	)		(11,894	)
Amortization of original issue discount		(794	)		(751	)		(2,350	)		(2,221	)
Interest and investment income, net		78			254			286			1,086
Other, net		(5,875	)		(2,067	)		(6,530	)		(3,184	)
Total other		(10,227	)		(6,205	)		(19,455	)		(16,213	)
Income before income taxes		22,536			22,742			76,851			65,668
Income tax provision		(6,406	)		(9,176	)		(21,769	)		(20,222	)
Net income	$	16,130		$	13,566		$	55,082		$	45,446

Weighted-average shares outstanding:
Basic		31,756			32,115			31,825			32,070
Diluted		31,960			32,273			32,033			32,296

Earnings per common share:
Basic	$	0.51		$	0.42		$	1.73		$	1.42
Diluted		0.50			0.42			1.72			1.41

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(in thousands)



	Quarter Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Net income	$	16,130		$	13,566		$	55,082		$	45,446
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(6,492	)		7,667			(4,635	)		(4,746	)
Unrealized holding gains (losses) on short-term investments arising during period		3			(14	)		(10	)		14
Other comprehensive income (loss), net of tax		(6,489	)		7,653			(4,645	)		(4,732	)
Total comprehensive income, net of tax	$	9,641		$	21,219		$	50,437		$	40,714

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

(in thousands)


	Shares of Common Stock Outstanding			Common Stock			Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Accumulated Earnings			Noncontrolling Interest		Total Stockholders' Equity
For the Nine Months Ended September 30, 2021
BALANCE, January 1, 2021		32,713		$	700		$	470,557		$	(894,126	)	$	(31,138	)	$	876,402		$	-	$	422,395
Comprehensive income:
Net income		-			-			-			-			-			19,631			-
Unrealized gain on short-term investments, net of tax		-			-			-			-			(6	)		-			-
Foreign currency translation adjustments		-			-			-			-			(355	)		-			-
Total comprehensive income																						19,270
Repurchase of common stock		(252	)		(1	)		(5,202	)		(6,518	)		-			-			-		(11,721	)
Issuance of common stock pursuant to employee stock purchase plan		16			-			619			-			-			-			-		619
Issuance of restricted common stock pursuant to stock-based compensation plans		487			5			(5	)		-			-			-			-		-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(1	)		-			-			-			-			-			-		-
Stock-based compensation expense		-			-			5,395			-			-			-			-		5,395
Dividends		-			-			-			-			-			(8,243	)		-		(8,243	)
BALANCE, March 31, 2021		32,963			704			471,364			(900,644	)		(31,499	)		887,790			-		427,715
Comprehensive income:
Net income		-			-			-			-			-			19,321			-
Unrealized gain on short-term investments, net of tax		-			-			-			-			(7	)		-			-
Foreign currency translation adjustments		-			-			-			-			2,212			-			-
Total comprehensive income																						21,526
Repurchase of common stock		(156	)		-			(92	)		(6,957	)		-			-			-		(7,049	)
Issuance of common stock pursuant to employee stock purchase plan		19			-			716			-			-			-			-		716
Issuance of restricted common stock pursuant to stock-based compensation plans		6			-			-			-			-			-			-		-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(35	)		-			-			-			-			-			-		-
Stock-based compensation expense		-			-			5,022			-			-			-			-		5,022
Dividends		-			-			-			-			-			(8,150	)		-		(8,150	)
BALANCE, June 30, 2021		32,797			704			477,010			(907,601	)		(29,294	)		898,961			-		439,780
Comprehensive income:
Net income		-			-			-			-			-			16,130			-
Unrealized gain on short-term investments, net of tax		-			-			-			-			3			-			-
Foreign currency translation adjustments		-			-			-			-			(6,492	)		-			-
Total comprehensive income																						9,641
Repurchase of common stock		(145	)		-			(101	)		(6,673	)		-			-			-		(6,774	)
Issuance of common stock pursuant to employee stock purchase plan		15			-			591			-			-			-			-		591
Issuance of restricted common stock pursuant to stock-based compensation plans		56			-			-			-			-			-			-		-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(36	)		-			-			-			-			-			-		-
Stock-based compensation expense		-			-			4,887			-			-			-			-		4,887
Dividends		-			-			-			-			-			(8,136	)		-		(8,136	)
Noncontrolling interest related to business combination		-			-			-			-			-			-			3,635		3,635
BALANCE, September 30, 2021		32,687		$	704		$	482,387		$	(914,274	)	$	(35,783	)	$	906,955		$	3,635	$	443,624


	Shares of Common Stock Outstanding			Common Stock			Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Accumulated Earnings			Noncontrolling Interest		Total Stockholders' Equity
For the Nine Months Ended September 30, 2020
BALANCE, January 1, 2020		32,891		$	696		$	454,663		$	(867,817	)	$	(39,503	)	$	848,623		$	-	$	396,662
Comprehensive income:
Net income		-			-			-			-			-			21,514			-
Unrealized gain on short-term investments, net of tax		-			-			-			-			(24	)		-			-
Foreign currency translation adjustments		-			-			-			-			(15,084	)		-			-
Total comprehensive income																						6,406
Repurchase of common stock		(299	)		(2	)		(7,555	)		(6,408	)		-			-			-		(13,965	)
Issuance of common stock pursuant to employee stock purchase plan		14			-			564			-			-			-			-		564
Issuance of restricted common stock pursuant to stock-based compensation plans		476			5			(5	)		-			-			-			-		-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(7	)		-			-			-			-			-			-		-
Stock-based compensation expense		-			-			4,857			-			-			-			-		4,857
Dividends		-			-			-			-			-			(7,693	)		-		(7,693	)
BALANCE, March 31, 2020		33,075			699			452,524			(874,225	)		(54,611	)		862,444			-		386,831
Comprehensive income:
Net income		-			-			-			-			-			10,366			-
Unrealized gain on short-term investments, net of tax		-			-			-			-			52			-			-
Foreign currency translation adjustments		-			-			-			-			2,671			-			-
Total comprehensive income																						13,089
Repurchase of common stock		(11	)		-			(100	)		(367	)		-			-			-		(467	)
Issuance of common stock pursuant to employee stock purchase plan		18			-			683			-			-			-			-		683
Issuance of restricted common stock pursuant to stock-based compensation plans		12			-			-			-			-			-			-		-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(14	)		-			-			-			-			-			-		-
Stock-based compensation expense		-			-			5,255			-			-			-			-		5,255
Dividends		-			-			-			-			-			(7,769	)		-		(7,769	)
BALANCE, June 30, 2020		33,080			699			458,362			(874,592	)		(51,888	)		865,041			-		397,622
Comprehensive income:
Net income		-			-			-			-			-			13,566			-
Unrealized gain on short-term investments, net of tax		-			-			-			-			(14	)		-			-
Foreign currency translation adjustments		-			-			-			-			7,667			-			-
Total comprehensive income																						21,219
Repurchase of common stock		(143	)		-			(152	)		(5,570	)		-			-			-		(5,722	)
Issuance of common stock pursuant to employee stock purchase plan		16			-			591			-			-			-			-		591
Issuance of restricted common stock pursuant to stock-based compensation plans		183			2			(2	)		-			-			-			-		-
Cancellation of restricted common stock issued pursuant to stock-based compensation plans		(11	)		-			-			-			-			-			-		-
Stock-based compensation expense		-			-			3,976			-			-			-			-		3,976
Dividends		-			-			-			-			-			(7,759	)				(7,759	)
BALANCE, September 30, 2020		33,125		$	701		$	462,775		$	(880,162	)	$	(44,235	)	$	870,848		$	-	$	409,927

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)


	Nine Months Ended
	September 30, 2021			September 30, 2020
Cash flows from operating activities:
Net income	$	55,082		$	45,446
Adjustments to reconcile net income to net cash provided by operating activities-
Depreciation		18,604			17,016
Amortization		34,314			32,998
Amortization of original issue discount		2,350			2,221
Asset impairment		415			10,438
(Gain)/loss on short-term investments		51			(120	)
Loss on extinguishment of debt		132			-
Loss on acquisition of controlling interest		6,180			-
Deferred income taxes		2,188			3,844
Stock-based compensation		15,304			14,088
Changes in operating assets and liabilities, net of acquired amounts:
Trade accounts receivable, net		(11,960	)		13,322
Other current and non-current assets and liabilities		(13,912	)		(8,784	)
Income taxes payable/receivable		(6,111	)		1,542
Trade accounts payable and accrued liabilities		(18,329	)		(24,618	)
Deferred revenue		4,001			8,736
Net cash provided by operating activities		88,309			116,129

Cash flows from investing activities:
Purchases of software, property and equipment		(22,531	)		(24,201	)
Purchases of short-term investments		(57,734	)		(49,100	)
Proceeds from sale/maturity of short-term investments		80,092			37,743
Acquisition of and investments in business, net of cash acquired		(51,111	)		(11,491	)
Net cash used in investing activities		(51,284	)		(47,049	)

Cash flows from financing activities:
Proceeds from issuance of common stock		1,926			1,838
Payment of cash dividends		(24,653	)		(23,441	)
Repurchase of common stock		(25,568	)		(19,926	)
Proceeds from long-term debt		150,000			-
Payments on long-term debt		(126,563	)		(7,500	)
Payments of deferred financing costs		(3,000	)		-
Settlement and merchant reserve activity		(7,735	)		(47,602	)
Net cash used in financing activities		(35,593	)		(96,631	)
Effect of exchange rate fluctuations on cash, cash equivalents and restricted cash		(1,872	)		(1,653	)

Net decrease in cash, cash equivalents and restricted cash		(440	)		(29,204	)

Cash, cash equivalents and restricted cash, beginning of period		354,730			337,654
Cash, cash equivalents and restricted cash, end of period	$	354,290		$	308,450

Supplemental disclosures of cash flow information:
Cash paid during the period for-
Interest	$	11,947		$	12,941
Income taxes		25,688			14,756

Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents	$	195,365		$	174,489
Settlement and merchant reserve assets		158,925			133,961
Total cash, cash equivalents and restricted cash	$	354,290		$	308,450

The accompanying notes are an integral part of these condensed consolidated financial statements.

CSG SYSTEMS INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. GENERAL

We have prepared the accompanying unaudited condensed consolidated financial statements as of September 30, 2021 and December 31, 2020, and for the quarters and nine months ended September 30, 2021 and 2020, in accordance with accounting principles generally accepted in the United States of America (“U.S.”) (“GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position and operating results have been included. The unaudited Condensed Consolidated Financial Statements (the “Financial Statements”) should be read in conjunction with the Consolidated Financial Statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), contained in our Annual Report on Form 10-K for the year ended December 31, 2020 (our “2020 10-K”), filed with the SEC. The results of operations for the quarter and nine months ended September 30, 2021 are not necessarily indicative of the expected results for the entire year ending December 31, 2021.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our Financial Statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Reclassifications. Certain amounts for the prior period have been reclassified to conform to the September 30, 2021 presentation.

Beginning with the second quarter of 2021, we determined that settlement and merchant reserve assets consist of restricted cash and are now included with cash, cash equivalents and restricted cash when reconciling the beginning-of-period and end-of-period total amounts shown on the condensed consolidated statements of cash flows (the “Statements of Cash Flows”). Historically, we presented the change in settlement and merchant reserve assets and liabilities as part of the changes in operating assets and liabilities on the Statements of Cash Flows. Additionally, cash flows related to our settlement and merchant reserve liabilities have been reclassified from cash flows from operating activities to cash flows from financing activities.

Prior period amounts have been reclassified to conform to the current period presentation. These changes have no impact on our previously reported consolidated net income, total assets, including cash and cash equivalents, liabilities, and equity. In addition, these changes have no material impact on our previously reported cash flows from operating activities.

Revenue. The majority of our future revenue is related to our revenue management solution customer contracts that include variable consideration dependent upon a series of monthly volumes and/or daily usage of services and have contractual terms ending from 2021 through 2028. Our customer contracts may include guaranteed minimums and fixed monthly or annual fees. As of September 30, 2021, our aggregate amount of the transaction price allocated to the remaining performance obligations is approximately $900 million, which is made up of fixed fee consideration and guaranteed minimums expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied). We expect to recognize approximately 75% of this amount by the end of 2023, with the remaining amount recognized by the end of 2028. We have excluded from this amount variable consideration expected to be recognized in the future related to performance obligations that are unsatisfied.

The nature, amount, timing, and uncertainty of our revenue and how revenue and cash flows are affected by economic factors is most appropriately depicted by revenue type, geographic region, and customer vertical.

Revenue by type for the quarters and nine months ended September 30, 2021 and 2020 were as follows (in thousands):


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Cloud and related solutions	$	231,418	$	217,527	$	686,685	$	654,027
Software and services		19,518		15,260		49,330		43,502
Maintenance		12,273		11,321		35,447		32,517
Total revenue	$	263,209	$	244,108	$	771,462	$	730,046

We use the location of the customer as the basis of attributing revenue to geographic regions. Revenue by geographic region for the quarters and nine months ended September 30, 2021 and 2020, as a percentage of our total revenue, were as follows:


	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Americas (principally the U.S.)		85	%		86	%		85	%		87	%
Europe, Middle East, and Africa		12	%		10	%		11	%		9	%
Asia Pacific		3	%		4	%		4	%		4	%
Total revenue		100	%		100	%		100	%		100	%

We generate our revenue primarily from the global communications markets; however, we serve an expanding group of customers in other industry markets including financial services, healthcare, media and entertainment companies, and government entities. Revenue by customer vertical for the quarters and nine months ended September 30, 2021 and 2020, as a percentage of our total revenue, were as follows:


	Quarter Ended						Nine Months Ended
	September 30,						September 30,
	2021			2020			2021			2020
Broadband/Cable/Satellite		56	%		59	%		57	%		59	%
Telecommunications		20	%		18	%		19	%		18	%
Other		24	%		23	%		24	%		23	%
Total revenue		100	%		100	%		100	%		100	%

Deferred revenue recognized during the quarters ended September 30, 2021 and 2020 was $9.9 million and $6.1 million, respectively, and during the nine months ended September 30, 2021 and 2020 was $41.9 million and $33.4 million, respectively.

Cash and Cash Equivalents. We consider all highly liquid investments with original maturities of three months or less at the date of the purchase to be cash equivalents. As of September 30, 2021 and December 31, 2020, our cash equivalents consist primarily of institutional money market funds, commercial paper, and time deposits held at major banks. For the cash and cash equivalents denominated in foreign currencies and/or located outside the U.S., we do not anticipate any material amounts being unavailable for use in running our business, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls and potential negative economic consequences.

Restricted Cash. Restricted cash includes cash that is legally or contractually restricted, as well as our settlement and merchant reserve assets. As of September 30, 2021 and December 31, 2020, we had $1.4 million and $1.7 million, respectively, of restricted cash that serves to collateralize outstanding letters of credit included in cash and cash equivalents in our Condensed Consolidated Balance Sheets (“Balance Sheets” or “Balance Sheet”).

Settlement and Merchant Reserve Assets and Liabilities. Settlement assets and liabilities represent cash collected on behalf of customers via payment processing services which is held for an established holding period until settlement with the customer. The holding period is generally one to four business days depending on the payment model, risk profile, and contractual terms with the customer. During the holding period, cash is held in trust with various major financial institutions and a corresponding liability is recorded for the amounts owed to the merchant. At any given time, there may be differences between the cash held in trust and the corresponding liability due to the timing of operating-related cash transfers.

Merchant reserves represent deposits collected from customers to mitigate our risk of loss due to nonperformance of settlement obligations initiated by our customers using our payment processing services, or non-payment by customers for services rendered by us. We perform a credit risk evaluation on each customer based on multiple criteria, which provide the basis for the deposit amount required for each customer. For the duration of our relationship with each customer, we hold their reserve deposits with major financial institutions. We hold these funds in separate accounts and are fully offset by corresponding liabilities.

The following table summarizes our settlement and merchant reserve assets and liabilities as of the indicated periods (in thousands):


	September 30, 2021				December 31, 2020
	Assets		Liabilities		Assets		Liabilities
Settlement assets/liabilities	$	141,957	$	140,340	$	149,785	$	148,818
Merchant reserve assets/liabilities		16,968		16,968		16,246		16,246
Total	$	158,925	$	157,308	$	166,031	$	165,064

Financial Instruments. Our financial instruments as of September 30, 2021 and December 31, 2020 include cash and cash equivalents, short-term investments, settlement and merchant reserve assets and liabilities, accounts receivable, accounts payable, and debt. Due to their short maturities, the carrying amounts of cash equivalents, settlement and merchant reserve assets and liabilities, accounts receivable, and accounts payable approximate their fair value.

Our short-term investments and certain of our cash equivalents are considered “available-for-sale” and are reported at fair value in our Balance Sheets, with unrealized gains and losses, net of the related income tax effect, excluded from earnings and reported in a separate component of stockholders’ equity. Realized and unrealized gains and losses were not material in any period presented.

Primarily all short-term investments held by us as of September 30, 2021 and December 31, 2020 have contractual maturities of less than two years from the time of acquisition. Our short-term investments as of September 30, 2021 and December 31, 2020 consisted almost entirely of fixed income securities. Proceeds from the sale/maturity of short-term investments for the nine months ended September 30, 2021 and 2020 were $80.1 million and $37.7 million, respectively, and purchases of short-term investments for the nine months ended September 30, 2021 and 2020 were $57.7 million and $49.1 million, respectively.

Our short-term investments as of September 30, 2021 and December 31, 2020 were $29.2 million and $51.6 million, respectively.

The following table represents the fair value hierarchy based upon three levels of inputs, of which Levels 1 and 2 are considered observable and Level 3 is unobservable, for our financial assets measured at fair value (in thousands):


	September 30, 2021						December 31, 2020
	Level 1		Level 2		Total		Level 1		Level 2		Total
Cash equivalents:
Money market funds	$	29,170	$	—	$	29,170	$	33,535	$	—	$	33,535
Commercial paper		—		—		—		—		15,746		15,746
Corporate debt securities				—		—				1,351		1,351
Short-term investments:
Corporate debt securities		—		24,565		24,565		—		38,672		38,672
U.S. government agency bonds		—		—		—		—		4,642		4,642
Asset-backed securities		—		4,610		4,610		—		8,284		8,284
Total	$	29,170	$	29,175	$	58,345	$	33,535	$	68,695	$	102,230

Valuation inputs used to measure the fair values of our money market funds were derived from quoted market prices. The fair values of all other financial instruments are based upon pricing provided by third-party pricing services. These prices were derived from observable market inputs.

We have chosen not to record our debt at fair value, with changes recognized in earnings each reporting period. The following table indicates the carrying value (par value for convertible debt) and estimated fair value of our debt as of the indicated periods (in thousands):


	September 30, 2021				December 31, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
2018 Credit Agreement (carrying value including current maturities)	$	-	$	-	$	126,563	$	126,563
2021 Credit Agreement (carrying value including current maturities)		150,000		150,000		—		—
2016 Convertible debt (par value)		230,000		237,763		230,000		244,663

The fair value for our credit agreement was estimated using a discounted cash flow methodology, while the fair value for our convertible debt was estimated based upon quoted market prices or recent sales activity, both of which are considered Level 2 inputs.

Accounting Pronouncement Issued But Not Yet Effective. In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. ASU 2020-06 also amends the related Earnings Per Share guidance. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, and can be adopted on either a fully retrospective or modified retrospective basis. We are currently evaluating the method of adoption and overall impact of this standard on our Financial Statements.

3. GOODWILL AND INTANGIBLE ASSETS

Goodwill. The changes in the carrying amount of goodwill for the nine months ended September 30, 2021 were as follows (in thousands):



January 1, 2021 balance	$	272,322
Goodwill acquired during period		42,417
Adjustments related to prior acquisitions		(45	)
Effects of changes in foreign currency exchange rates		(1,448	)
September 30, 2021 balance	$	313,246

Goodwill acquired during the period primarily relates to the acquisition of Tango Telecom Limited and Kitewheel, LLC, as well as the additional investment in MobileCard Holdings, LLC. See Note 5 for discussion regarding these acquisitions.

Other Intangible Assets. Our other intangible assets subject to ongoing amortization consist primarily of acquired customer contracts and software. As of September 30, 2021 and December 31, 2020, the carrying values of these assets were as follows (in thousands):


	September 30, 2021							December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Amount		Gross Carrying Amount		Accumulated Amortization			Net Amount
Acquired customer contracts	$	166,634	$	(111,602	)	$	55,032	$	153,790	$	(105,778	)	$	48,012
Software		177,363		(148,667	)		28,696		166,289		(139,836	)		26,453
Total intangible assets	$	343,997	$	(260,269	)	$	83,728	$	320,079	$	(245,614	)	$	74,465

Other intangible assets as of September 30, 2021 include assets acquired in the Tango Telecom Limited and Kitewheel LLC business acquisitions (see Note 5).

The total amortization expense related to other intangible assets for the third quarters of 2021 and 2020 were $6.5 million and $6.3 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $18.0 million and $18.9 million, respectively. Based on the September 30, 2021 net carrying value of our intangible assets, the estimated total amortization expense for each of the five succeeding fiscal years ending December 31 are: 2021 - $24.4 million; 2022 - $21.0 million; 2023 - $16.7 million; 2024 - $11.1 million; and 2025 - $9.3 million.

Customer Contract Costs. As of September 30, 2021 and December 31, 2020, the carrying values of our customer contract cost assets, related to those contracts with a contractual term greater than one year, were as follows (in thousands):


	September 30, 2021							December 31, 2020
	Gross Carrying Amount		Accumulated Amortization			Net Amount		Gross Carrying Amount		Accumulated Amortization			Net Amount
Customer contract costs	$	97,949	$	(50,700	)	$	47,249	$	87,131	$	(39,893	)	$	47,238

During the second quarter of 2020, we recorded an impairment charge of $10.3 million for the write-off of capitalized customer contract costs related to a discontinued project implementation. This non-cash impairment charge is included primarily in the cost of revenue in our Condensed Consolidated Statements of Income ("Income Statement").

The total amortization expense related to customer contract costs for the third quarters of 2021 and 2020 were $5.3 million and $4.2 million, respectively, and for the nine months ended September 30, 2021 and 2020 were $15.0 million and $12.8 million, respectively.

4. DEBT

Our long-term debt, as of September 30, 2021 and December 31, 2020, was as follows (in thousands):


	September 30,			December 31,
	2021			2020
2021 Credit Agreement:
Term loan, due September 2026, interest at adjusted LIBOR plus 1.375% (combined rate of 1.51% at September 30, 2021)	$	150,000		$	-
Less – deferred financing costs		(3,595	)		—
2021 Term Loan, net of unamortized discounts		146,405			—
$450 million revolving loan facility, due September 2026, interest at adjusted LIBOR plus applicable margin		—			—
2018 Credit Agreement:
Term loan, due March 2023, interest at adjusted LIBOR plus 1.5% (combined rate of 1.75% at December 31, 2020)		—			126,563
Less – deferred financing costs		—			(1,155	)
2018 Term Loan, net of unamortized discounts		—			125,408
$200 million revolving loan facility, due March 2023, interest at adjusted LIBOR plus applicable margin		—			—
2016 Convertible Notes:
Convertible Notes – Senior convertible notes; due March 15, 2036; cash interest at 4.25%		230,000			230,000
Less – unamortized original issue discount		(671	)		(3,021	)
Less – deferred financing costs		(259	)		(1,170	)
2016 Convertible Notes, net of unamortized discounts		229,070			225,809
Total debt, net of unamortized discounts		375,475			351,217
Current portion of long-term debt, net of unamortized discounts		(236,570	)		(14,063	)
Long-term debt, net of unamortized discounts	$	138,905		$	337,154

2021 Credit Agreement. On September 13, 2021, we entered into a new $600 million credit agreement (the “2021 Credit Agreement”) with a consortium of banks to replace our $350 million credit agreement (“2018 Credit Agreement”).

The 2021 Credit Agreement provides borrowings in the form of: (i) a $150 million aggregate principal five-year term loan (the “2021 Term Loan”); and (ii) a $450 million aggregate principal five-year revolving loan facility (the “2021 Revolver”). With the $150 million proceeds from the 2021 Term Loan, we repaid the outstanding $120 million balance of the term loan under the 2018 Credit Agreement, resulting in a net increase of available cash by $30 million, a portion of which we used to pay certain fees and expenses in connection with the refinancing, and the remainder of which will be used for general corporate purposes.

The interest rates under the 2021 Credit Agreement are based upon our choice of an adjusted LIBOR rate plus an applicable margin of 1.375% - 2.125%, or an alternate base rate (“ABR”) plus an applicable margin of 0.375% - 1.125%, with the applicable margin, depending on our then-net secured total leverage ratio. We will pay a commitment fee of 0.150% - 0.325% of the average daily unused amount of the 2021 Revolver, with the commitment fee rate also dependent upon our then-net secured total leverage ratio. The 2021 Credit Agreement includes LIBOR transition language in which we can elect an ABR, a Eurodollar rate, an alternate currency term rate, or an alternate currency daily rate.

The 2021 Credit Agreement contains customary affirmative covenants. In addition, the 2021 Credit Agreement has customary negative covenants that places limits on our ability to: (i) incur additional indebtedness; (ii) create liens on its property; (iii) make investments; (iv) enter into mergers and consolidations; (v) sell assets; (vi) declare dividends or repurchase shares; (vii) engage in certain transactions with affiliates; and (viii) prepay certain indebtedness; and (ix) issue capital stock of subsidiaries. We must also meet certain financial covenants to include: (i) a maximum total leverage ratio; (ii) a maximum first-lien leverage ratio; and (iii) a minimum interest coverage ratio. In conjunction with the 2021 Credit Agreement, we entered into a security agreement in favor of Bank of America N.A, as collateral agent (the “Security Agreement”). Under the Security Agreement and 2021 Credit Agreement, certain of our domestic subsidiaries have guaranteed its obligations, and have pledged substantially all of our assets to secure the obligations under the 2021 Credit Agreement and such guarantees.

During the nine months ended September 30, 2021, we made $6.6 million of principal repayments on our 2018 Term Loan. As of September 30, 2021, our interest rate on the 2021 Term Loan is 1.51% (adjusted LIBOR plus 1.375% per annum), effective through December 31 2021, and our commitment fee on the 2021 Revolver is 0.15%. As of September 30, 2021, we had no borrowing outstanding on our 2021 Revolver and had the entire $450.0 million available to us.

In conjunction with the closing of the 2021 Credit Agreement, we incurred financing costs of $3.0 million. When combined with the remaining deferred financing costs of the 2018 Credit Agreement, financing costs of $3.7 million have been deferred and are being amortized to interest expense using the effective interest method over the related term of the 2021 Credit Agreement. Additionally, as certain lenders from the 2018 Credit Agreement chose not to participate in the 2021 Credit Agreement syndication group, we wrote-off $0.1 million of unamortized debt issuance costs and recognized a loss on extinguishment of that debt.

2016 Convertible Notes. We will settle conversions of the 2016 Convertible Notes by paying or delivering, as the case may be, cash, shares of our common stock, or a combination thereof, at our election. It is our current intent and policy to settle our conversion obligations as follows: (i) pay cash for 100% of the par value of the 2016 Convertible Notes that are converted; and (ii) to the extent the value of our conversion obligation exceeds the par value, we can satisfy the remaining conversion obligation in our common stock, cash, or a combination thereof.

The 2016 Convertible Notes will be convertible at the option of the note holders upon the satisfaction of specified conditions and during certain periods. During the period from, and including, December 15, 2021 to the close of business on the business day immediately preceding March 15, 2022 and on or after December 15, 2035, holders may convert all or any portion of their 2016 Convertible Notes at the conversion rate then in effect at any time regardless of these conditions. For the 2016 Convertible Notes presented during this time frame, the settlement amount will be equal to the sum of the daily settlement amounts for each of the following 40 consecutive trading days during the related observation period.

As the 2016 Convertible Notes can be converted at the holder's option beginning December 15, 2021 and ending March 15, 2022, subject to an observation holding period of 40 days, the net carrying value of the 2016 Convertible Notes of $229.1 million has been classified as a current liability in our Balance Sheet as of September 30, 2021.

As a result of our quarterly dividend in September 2021 (see Note 8), the previous conversion rate for the 2016 Convertible Notes of 17.7159 shares of our common stock per $1,000 principal amount of the 2016 Convertible Notes, which is equivalent to an initial conversion price of $56.45 per share of our common stock, has been adjusted to 17.7403 shares of our common stock per $1,000 principal amount of the 2016 Convertible Notes, which is equivalent to an initial conversion price of $56.37 per share of our common stock. Holders may require us to repurchase the 2016 Convertible Notes for cash on each of March 15, 2022, March 15, 2026, and March 15, 2031, or upon the occurrence of a fundamental change (as defined in the 2016 Convertible Notes Indenture) in each case at a purchase price equal to the principal amount thereof plus accrued and unpaid interest.

We may redeem for cash all or part of the 2016 Convertible Notes if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption. On or after March 15, 2022, we may redeem for cash all or part of the 2016 Convertible Notes regardless of the sales price condition described in the preceding sentence. In each case, the redemption price will equal the principal amount of the 2016 Convertible Notes to be redeemed, plus accrued and unpaid interest.

As of September 30, 2021, none of the conversion features have been achieved, and thus, the 2016 Convertible Notes are not convertible by the holders.

5. ACQUISITIONS

Forte Payment Systems, Inc. In 2018, we acquired Forte Payment Systems, Inc. (“Forte”). The purchase agreement included provisions for $18.8 million of potential future earn-out payments. In the second quarter of 2021, a recipient notified us they would be voluntarily resigning later this year. Under the terms of the earn-out provisions, the entire earn-out will terminate upon exit of the recipient. As a result, in the second quarter of 2021, we reversed $2.4 million that had been accrued related to the potential earn-out payments. In the third quarter of 2021, the recipient ended their employment, and the earn-out was terminated.

Tango Telecom Limited. On May 5, 2021, we acquired Tango Telecom Limited (“Tango”), a leading supplier of convergent policy control and messaging solutions headquartered in Limerick, Ireland. We acquired 100% of the equity of Tango for a purchase price of approximately $13 million, or approximately $11 million, net of cash acquired. This acquisition will allow us to deliver digital monetization solutions to our customers and allow our customers to more effectively manage voice and data transactions. Coupled with our charging and digital monetization capabilities, we possess an end-to-end solution for converged voice and data services across 3G, 4G, and 5G networks.

The preliminary estimated fair values of assets acquired primarily include acquired customer contracts of $7.0 million, acquired trade accounts receivable of $3.4 million, acquired software of $2.0 million, and goodwill of $0.9 million and liabilities assumed primarily include deferred revenue of $1.7 million. The estimated fair values are considered provisional and are based on the information that was available as of the acquisition date. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. We expect to finalize the valuation and complete the purchase price allocation as soon as practicable but not later than one year from the acquisition date.

Kitewheel, LLC. On July 1, 2021, we acquired Kitewheel, the leading provider for customer journey orchestration and analytics, headquartered in Boston, Massachusetts. We acquired 100% of the equity of Kitewheel for a purchase price of $40.0 million, with $34.0 million paid upon close and the remaining $6 million to be paid in equal annual amounts over the next three years. This acquisition will allow us to expand our customer engagement business, providing real-time, meaningful end-to-end customer experiences for leading brands.

The preliminary estimated fair values of assets acquired primarily include goodwill of $30.8 million, acquired customer contracts of $6.6 million, acquired trade accounts receivable of $3.1 million, and acquired software of $3.2 million, and liabilities assumed primarily include deferred revenue of $3.5 million. The estimated fair values are considered provisional and are based on the information that was available as of the acquisition date. Thus, the provisional measurements of fair value set forth above are subject to change. Such changes are not expected to be significant. We expect to finalize the valuation and complete the purchase price allocation as soon as practicable but not later than one year from the acquisition date.

MobileCard Holdings, LLC. In 2018, we invested in MobileCard Holdings, LLC (“MobileCard”), a mobile money fintech payment company that enables omni-channel digital payments and financial inclusion in Latin America. As of June 30, 2021, we held a 15% noncontrolling equity interest with a carrying value of approximately $8 million included in other non-current assets in our Balance Sheet. In July 2021, we purchased additional LLC units from a third-party for approximately $4 million and contributed cash of approximately $2 million. As a result of these transactions, we have a 64% controlling interest in the company. Beginning in the third quarter of 2021, the results of MobileCard are consolidated in our results of operations. We preliminarily recorded goodwill of $9.6 million and are in the process of reviewing the valuation analysis and calculations necessary to finalize the required purchase price allocations.

Upon obtaining control of MobileCard, the fair value of our pre-exiting equity investment was remeasured resulting in a $6.2 million non-cash loss as of the acquisition date, which is reflected in other income (expense) on our Income Statement. The fair value was based upon transaction price as it best represented what a market participant would be willing to pay for the LLC units. The non-controlling interest of $3.6 million is recorded in total stockholders' equity. We will record 100% of the profits and losses until the cumulative losses have been recovered. Profits will then be allocated based on equity sharing ratios.

Keydok, LLC. On September 14, 2021, we acquired Keydok LLC (“Keydok”), a digital identity and document management platform provider, headquartered in Mexico. We acquired 100% of the equity of Keydok for a purchase price of $1.0 million, which includes provisions for up to $18.0 million of potential future earn-out payments. The earn-out payments are tied to performance-based goals and a defined service period by the eligible recipients and are accounted for as post-acquisition compensation or acquisition costs, as applicable. The earn-out period is through September 30, 2025. The results of Keydok are included in our results of operations from the acquisition date. We preliminarily recorded goodwill of $1.0 million, however, have not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations.

DGIT Systems Pty Ltd. On October 4, 2021, we acquired DGIT Systems, a provider of configure, price and quote (CPQ) and order management solutions for the telecommunications industry. We acquired 100% of the equity of DGIT Systems for a purchase price of AUD 21.3 million (approximately $16 million), which includes provisions for up to AUD 18.0 million (approximately $13.0 million) of potential future earn-out payments. The earn-out payments are tied to performance-based goals and a defined service period by the eligible recipients and are accounted for as post-acquisition compensation, as applicable. The earn-out period is through September 30, 2025. The results of DGIT Systems will be included in our results of operations from the acquisition date. We have not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations.

6. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Guarantees. In the ordinary course of business, we may provide guarantees in the form of bid bonds, performance bonds, or standby letters of credit. At September 30, 2021, we had $2.4 million of restricted assets used to collateralize these guarantees, with $1.4 million included in cash and cash equivalents and $1.0 million included in other non-current assets. We have bid bonds and performance guarantees in the form of surety bonds issued through a third-party of $3.9 million that were not required to be recorded on our Balance Sheet. We are ultimately liable for claims that may occur against these guarantees. We have no history of material claims or are aware of circumstances that would require us to pay under any of these arrangements. We also believe that the resolution of any claim that may arise in the future, either individually or in the aggregate, would not be material to our Financial Statements.

Additionally, we have money transmitter bonds issued through a third-party for the benefit of various states to comply with the states’ financial requirements and industry regulations for money transmitter licenses. At September 30, 2021, we had total aggregate money transmitter bonds of approximately $16 million outstanding.

Warranties. We generally warrant that our solutions and related offerings will conform to published specifications, or to specifications provided in an individual customer arrangement, as applicable. The typical warranty period is 90 days from the date of acceptance of the solution or offering. For certain service offerings we provide a warranty for the duration of the services provided. We generally warrant that those services will be performed in a professional and workmanlike manner. The typical remedy for breach of warranty is to correct or replace any defective deliverable, and if not possible or practical, we will accept the return of the defective deliverable and refund the amount paid under the customer arrangement that is allocable to the defective deliverable. Our contracts also generally contain limitation of damages provisions in an effort to reduce our exposure to monetary damages arising from breach of warranty claims. Historically, we have incurred minimal warranty costs, and as a result, do not maintain a warranty reserve.

Solution and Services Indemnifications. Our arrangements with our customers generally include an indemnification provision that will indemnify and defend a customer in actions brought against the customer that claim our products and/or services infringe upon a copyright, trade secret, or valid patent. Historically, we have not incurred any significant costs related to such indemnification claims, and as a result, do not maintain a reserve for such exposure.

Claims for Company Non-performance. Our arrangements with our customers typically limit our liability for breach to a specified amount of the direct damages incurred by the customer resulting from the breach. From time-to-time, these arrangements may also include provisions for possible liquidated damages or other financial remedies for our non-performance, or in the case of certain of our outsourced customer care and billing solutions, provisions for damages related to service level performance requirements. The service level performance requirements typically relate to system availability and timeliness of service delivery. As of September 30, 2021, we believe we have adequate reserves, based on our historical experience, to cover any reasonably anticipated exposure as a result of our nonperformance for any past or current arrangements with our customers.

Indemnifications Related to Officers and the Board of Directors. We have agreed to indemnify members of our Board of Directors (the “Board”) and certain of our officers if they are named or threatened to be named as a party to any proceeding by reason of the fact that they acted in such capacity. We maintain directors’ and officers’ (D&O) insurance coverage to protect against such losses. We have not historically incurred any losses related to these types of indemnifications, and are not aware of any pending or threatened actions or claims against any officer or member of our Board. As a result, we have not recorded any liabilities related to such indemnifications as of September 30, 2021. In addition, as a result of the insurance policy coverage, we believe these indemnification agreements are not significant to our results of operations.

Legal Proceedings. From time-to-time, we are involved in litigation relating to claims arising out of our operations in the normal course of business.

7. EARNINGS PER COMMON SHARE

Basic and diluted earnings per common share (“EPS”) amounts are presented on the face of the accompanying Income Statements.

No reconciliation of the basic and diluted EPS numerators is necessary as net income is used as the numerators for all periods presented. The reconciliation of the basic and diluted EPS denominators related to the common shares is included in the following table (in thousands):


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Basic weighted-average common shares		31,756		32,115		31,825		32,070
Dilutive effect of restricted common stock		204		158		208	226
Diluted weighted-average common shares		31,960		32,273		32,033		32,296

The Convertible Notes have a dilutive effect only in those quarterly periods in which our average stock price exceeds the current effective conversion price (see Note 4).

The stock warrants have a dilutive effect only in those quarterly periods in which our average stock price exceeds the exercise price of $26.68 per warrant (under the treasury stock method), and are not subject to performance vesting conditions (see Note 8). Potentially dilutive common shares related to non-participating unvested restricted stock excluded from the computation of diluted EPS, as the effect was antidilutive, were not material in any period presented.

8. STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION PLANS

Stock Repurchase Program. We currently have a stock repurchase program, approved by our Board, authorizing us to repurchase our common stock from time-to-time as market and business conditions warrant (the “Stock Repurchase Program”). During the third quarters of 2021 and 2020 we repurchased approximately 143,000 shares of our common stock for $6.7 million (weighted-average price of $46.66 per share) and approximately 139,000 shares of our common stock for $5.5 million (weighted-average price of $39.93 per share), respectively, and during the nine months ended September 30, 2021 and 2020 we repurchased approximately 438,000 shares of our common stock for $20.1 million (weighted-average price of $46.04 per share), and approximately 290,000 shares of our common stock for $12.3 million (weighted-average price of $42.55 per share), respectively, under a SEC Rule 10b5-1 Plan.

As of September 30, 2021, the total remaining number of shares available for repurchase under the Stock Repurchase Program totaled 3.9 million shares.

Stock Repurchases for Tax Withholdings. In addition to the above-mentioned stock repurchases, during the third quarters of 2021 and 2020 we repurchased and then cancelled approximately 2,000 shares of common stock for $0.1 million and approximately 4,000 shares of common stock for $0.1 million, respectively, and during the nine months ended September 30, 2021 and 2020 we repurchased and then cancelled approximately 115,000 shares of common stock for $5.5 million and approximately 163,000 shares of common stock for $7.8 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

Cash Dividends. During the third quarter of 2021, the Board approved a quarterly cash dividend of $0.25 per share of common stock, totaling $8.1 million. During the third quarter of 2020, the Board approved a quarterly cash dividend of $0.235 per share of common stock, totaling $7.8 million. Dividends declared for the nine months ended September 30, 2021 and 2020 totaled $24.5 million and $23.2 million, respectively.

Warrants. In 2014, in conjunction with the execution of an amendment to our current agreement with Comcast Corporation (“Comcast”), we issued stock warrants (the “Warrant Agreement”) for the right to purchase up to 2.9 million shares of our common stock (the “Stock Warrants”) as an additional incentive for Comcast to convert customer accounts onto our Advanced Convergent Platform (“ACP”) based on various milestones. The Stock Warrants have a ten-year term and an exercise price of $26.68 per warrant.

As of September 30, 2021, 1.0 million Stock Warrants remain issued, none of which were vested. The remaining unvested Stock Warrants will be accounted for as a customer contract cost asset once the performance conditions necessary for vesting are considered probable.

Stock-Based Awards. A summary of our unvested restricted common stock activity during the quarter and nine months ended September 30, 2021 is as follows (shares in thousands):


	Quarter Ended					Nine Months Ended
	September 30, 2021					September 30, 2021
	Shares			Weighted- Average Grant Date Fair Value		Shares			Weighted- Average Grant Date Fair Value
Unvested awards, beginning		1,167		$	43.95		1,041		$	41.31
Awards granted		58			46.78		577			47.75
Awards forfeited/cancelled		(40	)		44.76		(79	)		43.37
Awards vested		(44	)		39.02		(398	)		41.40
Unvested awards, ending		1,141		$	44.26		1,141		$	44.26

Included in the awards granted during the nine months ended September 30, 2021 are performance-based awards for 0.1 million restricted common stock shares issued to members of executive management and certain key employees, which vest in the first quarter of 2023 upon meeting certain pre-established financial performance objectives over a two-year performance period. Certain of these awards become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment.

The other restricted common stock shares granted during the nine months ended September 30, 2021 are primarily time-based awards, which vest annually over four years with no restrictions other than the passage of time. Certain shares of the restricted common stock become fully vested upon a change in control, as defined, and the subsequent involuntary termination of employment, or death.

We recorded stock-based compensation expense for the third quarters of 2021 and 2020 of $4.9 million and $4.0 million, respectively, and for the nine months ended September 30, 2021 and 2020 of $15.3 million and $14.1 million, respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The information contained in this MD&A should be read in conjunction with the Financial Statements and Notes thereto included in this Form 10-Q and the audited consolidated financial statements and notes thereto in our 2020 10-K.

Forward-Looking Statements

This report contains a number of forward-looking statements relative to our future plans and our expectations concerning our business and the industries we serve. These forward-looking statements are based on assumptions about a number of important factors, and involve risks and uncertainties that could cause actual results to differ materially from estimates contained in the forward-looking statements. Some of the risks that are foreseen by management are outlined within Part I Item 1A. Risk Factors of our 2020 10-K. Readers are strongly encouraged to review that section closely in conjunction with MD&A.

Company Overview

We are one of the world’s leading providers of revenue management, customer engagement, 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 nearly 40 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 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.

We offer solutions for every stage of the customer lifecycle so our customers can deliver an outstanding customer experience that adapts to their customers’ rapidly changing demands. Our 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.

We focus our research and development (“R&D”) and acquisition investments on expanding our offerings in a timely and efficient manner to address the complex, transformative needs of our customers in a wide variety of industries. Our scalable, modular, and flexible solutions combined with our domain expertise and our ability to effectively migrate customers to our solutions, provide the industry with proven solutions to improve their profitability and consumers’ experiences. We have specifically architected our solutions to offer a phased, incremental approach to transforming our customers' businesses, thereby reducing the business interruption risk associated with this evolution.

As discussed in Note 2 to our Financial Statements, we generate a majority of our revenue from the global communications markets; however, we serve an expanding group of customers in other markets including financial services, healthcare, media and entertainment companies, and government entities.

We are a member of the S&P Small Cap 600 and Russell 2000 indices.

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. 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. While we have taken measures to protect our employees, to include a remote working environment for those employees who are able to conduct business from home and reduced travel, we are still conducting business as usual and are working with our customers to minimize any potential disruption. Additionally, we have begun to roll out our workplace of the future philosophy that supports work-life integration and employees' diverse needs, providing flexibility and personal choice so employees can do their best work from anywhere. We do not believe that our workplace philosophy 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. As we continue to manage our business in this uncertain environment, our priorities 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 a result of COVID-19 related supply chain issues, our capital expenditures may increase in the short-term as we forward purchase IT related hardware and other supplies. As of September 30, 2021, we had approximately $225 million in cash, cash equivalents and short-term investments, and an additional $450 million available to borrow under our revolving credit facility.

See our Risk Factors in our 2020 Form 10-K for additional details.

Management Overview of Quarterly Results

Third Quarter Highlights. A summary of our results of operations for the third quarter of 2021, when compared to the third quarter of 2020, is as follows (in thousands, except per share amounts and percentages):


	Quarter Ended
	September 30, 2021			September 30, 2020
Revenue	$	263,209		$	244,108
Transaction fees (1)		16,240			16,413
Operating Results:
Operating income	$	32,763		$	28,947
Operating income margin		12.4	%		11.9	%
Diluted EPS	$	0.50		$	0.42
Supplemental Data:
Restructuring and reorganization charges	$	209		$	814
Executive transition costs (2)		-			1,786
Acquisition-related costs:
Amortization of acquired intangible assets		3,213			3,051
Transaction-related costs		435			15
Stock-based compensation (2)		4,945			4,500
Amortization of OID		794			751
Loss on acquisition of controlling interest (3)		6,180			-

(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 excludes amounts that have been recorded in restructuring and reorganization charges and executive transition costs.

(3)

During the third quarter of 2021, we acquired a controlling interest in MobileCard (see Note 5 to our Financial Statements). Upon acquisition, we recognized a non-cash loss in other income (expense) related to the fair value remeasurement of the previously held equity investment interest.

Revenue. Revenue for the third quarter of 2021 was $263.2 million, a 7.8% increase when compared to revenue of $244.1 million for the third quarter of 2020. This year-over-year increase can be primarily attributed to the continued growth of our revenue management solutions.

Operating Results. Operating income for the third quarter of 2021 was $32.8 million, or a 12.4% operating margin percentage, compared to $28.9 million, or an 11.9% operating margin percentage for the third quarter of 2020. The increase in operating income can be primarily attributed to the revenue growth in 2021.

Diluted EPS. Diluted EPS for the third quarter of 2021 was $0.50 compared to $0.42 for the third quarter of 2020, with the increase primarily due to the increase in our operating results, discussed above. EPS for the third quarter of 2021 was impacted by a $6.2 million non-cash loss recorded on obtaining a controlling interest in a pre-existing investment.

Cash and Cash Flows. As of September 30, 2021, we had cash, cash equivalents and short-term investments of $224.5 million, as compared to $212.1 million as of June 30, 2021 and $240.3 million as of December 31, 2020. Our cash flows from operating activities for the quarter ended September 30, 2021 were $48.1 million. See the Liquidity section below for further discussion of our cash flows.

Significant Customer Relationships

Customer Concentration. A large percentage of our historical revenue has been generated from our two largest customers, which are Charter Corporation Inc. (“Charter”) and Comcast.

Revenue from these customers for the indicated periods was as follows (in thousands, except percentages):


	Quarter Ended
	September 30, 2021					June 30, 2021					September 30, 2020
	Amount		% of Revenue			Amount		% of Revenue			Amount		% of Revenue
Charter	$	55,332		21	%	$	55,102		22	%	$	53,202		22	%
Comcast		53,840		20	%		53,789		21	%		52,483		22	%

The percentages of net billed accounts receivable balances attributable to our largest customers as of the indicated dates were as follows:


	As of
	September 30,			June 30,			December 31,
	2021			2021			2020
Charter		22	%		24	%		20	%
Comcast		19	%		20	%		19	%

See our 2020 10-K for additional discussion of our business relationships and contractual terms with Charter and Comcast.

Charter. Charter is one of our significant customers representing approximately 21% of our revenue. On November 2, 2021, we entered into an amendment to our current agreement with Charter (the “Amended Agreement”). The Amended Agreement provides the framework for Charter to consolidate its residential and small and medium business internet, video, and landline voice customer accounts (“Customer Account(s)”) onto our Advanced Convergent Platform (“ACP”) solution. The key terms of the Amended Agreement are as follows:



The Amended Agreement is effective January 1, 2022, and extends our contractual relationship with Charter through December 31, 2027 (a six-year initial term). In addition, the Amended Agreement will automatically be extended for an additional one-year term, subject to Charter achieving certain conditional processing minimums on July 1, 2027, unless Charter provides us with written notice of non-renewal.



Consistent with the previous agreements, the fees to be generated under the Amended Agreement will be based primarily on monthly recurring charges for our revenue and customer management solutions and related services per Customer Account, and various other ancillary services based on actual usage. Certain of the per-unit fees include volume-based pricing tiers, and may be subject to annual price escalators.



The Amended Agreement contains modified pricing and a minimum commitment associated with the number of Customer Accounts that are to be processed on ACP which encompasses all subscribers receiving services. However, if Charter fails to achieve the minimum commitment by December 31, 2027, Charter will be obligated to pay a minimum commitment true-up, to be invoiced in January 2028. In order for Charter to meet the minimum commitment, Charter will need to convert additional Customer Accounts onto ACP. As such, the Amended Agreement outlines the estimated conversion and go-live for the remaining Customer Accounts not already on ACP, and includes incentives for the conversion of those additional Customer Accounts onto ACP.



We maintain the exclusive right to provide print and mail services to all current and future Customer Accounts through the term of the Amended Agreement.



The Amended Agreement contains certain rights and obligations of both parties, including the following key items: (i) the termination of the Agreement under certain conditions; (ii) various service level commitments; and (iii) remedies and limitation on liabilities associated with specified breaches of contractual obligations.

During the second and third quarters of 2021, Charter migrated approximately 300,000 and 800,000 Charter Customer Accounts, respectively, onto our ACP solution. As outlined in the Amended Agreement, Charter currently plans to migrate their remaining Customer Accounts onto ACP over an estimated twelve to eighteen months. The Amended Agreement is not expected to have a material impact to our 2021 results of operations.

The anticipated revenue impact from the Amended Agreement in both the near and long terms may vary depending on the actual number of Customer Accounts converting, the timing of such conversion and the actual level of products and services consumed by Charter and actual results may vary depending upon a variety of factors. We undertake no duty to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Risk of Customer Concentration. We expect to continue to generate a significant percentage of our future revenue from our largest customers mentioned above. There are inherent risks whenever a large percentage of total revenue are concentrated with a limited number of customers. Should a significant customer: (i) terminate or fail to renew their contracts with us, in whole or in part, for any reason; (ii) significantly reduce the number of customer accounts processed on our solutions, the price paid for our services, or the scope of services that we provide; or (iii) experience significant financial or operating difficulties, it could have a material adverse effect on our financial condition and results of operations.

Critical Accounting Policies

The preparation of our Financial Statements in conformity with U.S. GAAP requires us to select appropriate accounting policies, and to make judgments and estimates affecting the application of those accounting policies. In applying our accounting policies, different business conditions or the use of different assumptions may result in materially different amounts reported in our Financial Statements.

We have identified the most critical accounting policies that affect our financial position and the results of our operations. Those critical accounting policies were determined by considering the accounting policies that involve the most complex or subjective decisions or assessments. The most critical accounting policies identified relate to the following items: (i) revenue recognition; (ii) impairment assessments of long-lived assets; (iii) income taxes; and (iv) loss contingencies. These critical accounting policies, as well as our other significant accounting policies, are discussed in our 2020 10-K.

Results of Operations

Revenue. Total revenue for the: (i) third quarter of 2021 was $263.2 million, a 7.8% increase when compared to $244.1 million for the third quarter of 2020; and (ii) nine months ended September 30, 2021 was $771.5 million, a 5.7% increase when compared to $730.0 million for the nine months ended September 30, 2020. These year-over-year increases can be primarily attributed to the continued growth of our revenue management solutions, and to a lesser degree, favorable foreign currency movements. Approximately 90% of the year-over-year increases in revenue can be attributed to organic growth resulting from increased professional services revenues related to implementation projects, increased utilization of our managed services and interactive messaging solutions, and conversions of customer accounts onto our solutions.

We use the location of the customer as the basis of attributing revenue to individual countries. Revenue by geographic regions for the third quarters and nine months ended September 30, 2021 and 2020 was as follows (in thousands):


	Quarter Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Americas (principally the U.S.)	$	223,057	$	210,864	$	658,064	$	637,787
Europe, Middle East, and Africa		30,770		23,429		82,995		66,595
Asia Pacific		9,382		9,815		30,403		25,664
Total revenue	$	263,209	$	244,108	$	771,462	$	730,046

Total Operating Expenses. Total operating expenses for the: (i) third quarter of 2021 were $230.4 million, a 7.1% increase when compared to $215.2 million for the third quarter of 2020; and (ii) nine months ended September 30, 2021 was $675.2 million, a 4.2% increase when compared to $648.2 million for the nine months ended September 30, 2020. These increases can be mainly attributed to employee-related costs as we continue to grow the business, to include the costs associated with the recently acquired businesses (see Note 5 to our Financial Statements), and to a lesser degree, unfavorable foreign currency movements. In addition, during the second quarter of 2020, we recorded an approximately $10 million impairment charge for the write-off of capitalized customer contract costs related to a discontinued project implementation project.

The components of total expenses are discussed in more detail below.

Cost of Revenue (Exclusive of Depreciation). The cost of revenue for the: (i) third quarter of 2021 was $134.7 million, a 2.8% increase when compared to $131.1 million for the third quarter of 2020; and (ii) nine months ended September 30, 2021 was $401.2 million, a 0.2% increase when compared to $400.4 million for the nine months ended September 30, 2020. The increases in cost of revenue between periods can be mainly attributed to higher employee-related costs, reflective of the growth of our business, to include our recent acquisition activity. As noted above, the nine months ended September 30, 2020 includes an approximately $10 million impairment charge incurred in the second quarter of 2020. Total cost of revenue as a percentage of revenue for the: (i) third quarters of 2021 and 2020 were 51.2% and 53.7%, respectively; and (ii) nine months ended September 30, 2021 and 2020 were 52.0% and 54.9%, respectively.

R&D Expense. R&D expense for the: (i) third quarter of 2021 was $34.4 million, a 13.0% increase when compared to $30.4 million for the third quarter of 2020; and (ii) nine months ended September 30, 2021 was $99.4 million, a 10.4% increase when compared to $90.0 million for the nine months ended September 30, 2020. These increases in R&D expense can be mainly attributed to increased employee-related costs, to include personnel and the related costs previously assigned to cost of revenue projects being reassigned to R&D projects, and the development personnel acquired with our recent acquisition activities. As a percentage of total revenue, R&D expense for the third quarters of 2021 and 2020 were 13.1% and 12.5%, respectively.

Our R&D efforts are focused on the continued evolution of our solutions that enable our customers worldwide to provide a more personalized experience while introducing new digital products and services. This includes the continued investment in our cloud-based solutions and integration of the recently acquired assets into our solutions.

SG&A Expense. SG&A expense for the: (i) third quarter of 2021 was $54.9 million, a 16.8% increase when compared to $47.0 million for the third quarter of 2020; and (ii) nine months ended September 30, 2021 was $153.0 million, a 12.1% increase when compared to $136.4 million for the nine months ended September 30, 2020. The increases in SG&A expense are mainly attributed to the increases in employee-related costs, and is reflective of our growth strategy, to include the SG&A costs associated with our recently acquired businesses, as we continue to pursue organic and inorganic growth opportunities. Our SG&A costs as a percentage of total revenue for the: (i) third quarters of 2021 and 2020 were 20.9% and 19.3%, respectively.

Depreciation. Depreciation expense for the: (i) third quarter of 2021 was $6.2 million, a 7.0% increase when compared to $5.8 million for the third quarter of 2020; and (ii) nine months ended September 30, 2021 was $18.6 million, a 9.3% increase when compared to $17.0 million for the nine months ended September 30, 2020. These increases can be primarily attributed to the expenditures on software, technology, and security infrastructure, which generally have shorter depreciable lives.

Operating Income. Operating income for the: (i) third quarter of 2021 was $32.8 million, or 12.4% of total revenue, compared to $28.9 million, or 11.9% of total revenue for the third quarter of 2020, and (ii) nine months ended September 30, 2021 was $96.3 million or 12.5% of total revenue, compared to $81.9 million or 11.2% of total revenue for the nine months ended September 30, 2020. The increases in operating income between periods can be primarily attributed to the revenue growth in 2021, discussed above.

Other, net. During the third quarter of 2021, we made an additional investment in MobileCard (see Note 5 to our Financial Statements), resulting in a controlling interest of the company. Upon obtaining control of MobileCard, the fair value of our pre-existing equity investment was remeasured resulting in a $6.2 million non-cash loss as of the acquisition date.

Income Tax Provision. The effective income tax rates for the third quarters and nine months ended September 30, 2021 and 2020 were as follows:


Quarter Ended						Nine Months Ended
September 30,						September 30,
2021			2020			2021			2020
	28	%		40	%		28	%		31	%

The third quarter of 2020 effective income tax rate reflects an adjustment for the income tax impact related to the Separation Agreement entered into during the quarter with our former President and CEO.

Our estimated full year 2021 effective income tax rate is approximately 28%.

Liquidity

Cash and Liquidity. As of September 30, 2021, our principal sources of liquidity included cash, cash equivalents and short-term investments of $224.5 million, as compared to $212.1 million as of June 30, 2021, and $240.3 million as of December 31, 2020. We generally invest our excess cash balances in low-risk, short-term investments to limit our exposure to market and credit risks.

During the third quarter of 2021, we refinanced our 2018 Credit Agreement which extended the term of the loan from March 2023 to September 2026. The 2021 Credit Agreement increased our liquidity and capital resources position by approximately $30 million. Additionally, as part of our 2021 Credit Agreement, we expanded our revolving loan facility, the 2021 Revolver, from $200 million to $450 million. As of September 30, 2021, there were no borrowings outstanding on the 2021 Revolver. The 2021 Credit Agreement contains customary affirmative covenants and financial covenants. As of September 30, 2021, and the date of this filing, we believe that we are in compliance with the provisions of the 2021 Credit Agreement.

Our cash, cash equivalents, and short-term investment balances as of the end of the indicated periods were located in the following geographical regions (in thousands):


	September 30,		December 31,
	2021		2020
Americas (principally the U.S.)	$	161,246	$	183,918
Europe, Middle East and Africa		37,431		47,513
Asia Pacific		25,863		8,866
Total cash, equivalents and short-term investments	$	224,540	$	240,297

We generally have ready access to substantially all of our cash, cash equivalents, and short-term investment balances, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls and potential negative economic consequences. As of September 30, 2021, we had $1.4 million of cash restricted as to use primarily to collateralize outstanding letters of credit included in our total cash, cash equivalents and short-term investments balance.

Additionally, as of September 30, 2021 and December 31, 2020, we have $158.9 million and $166.0 million, respectively of settlement and merchant reserve assets. These funds are held with major financial institutions and while not legally or contractually restricted, we do hold these funds in separate accounts, and classify them as restricted cash in the Statements of Cash Flows.

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. See our 2020 10-K for a description of the primary uses and sources of our cash flows from operating activities.

Our 2021 and 2020 net cash flows from operating activities, broken out between operations and changes in operating assets and liabilities, for the indicated quarterly periods are as follows (in thousands):


						Net Cash
			Changes in			Provided by
			Operating			(Used In) Operating
			Assets and			Activities –
	Operations		Liabilities			Totals
Cash Flows from Operating Activities:
2021:
March 31	$	49,273	$	(51,497	)	$	(2,224	)
June 30		42,930		1,523			44,453
September 30		42,417		3,663			46,080
Total	$	134,620	$	(46,311	)	$	88,309

2020:
March 31	$	52,938	$	(59,900	)	$	(6,962	)
June 30		41,022		16,800			57,822
September 30		31,971		33,298			65,269
Total	$	125,931	$	(9,802	)	$	116,129

Cash flows from operating activities for the first quarter of 2021 and the first and second quarters 2020 were negatively impacted by the timing of certain recurring key customer payments that were delayed and received subsequent to quarter-end, of approximately $26 million for the first quarter of 2021, and $33 million and $26 million for the first and second quarters of 2020.

Additionally, cash flows from operating activities for the first quarters of 2021 and 2020 reflect the impacts of the payment of the 2020 and 2019 year-end accrued employee incentive compensation in the first quarter subsequent to the year-end accrual for these items.

We believe the above table illustrates our ability to generate recurring quarterly cash flows from our operations, and the importance of managing our working capital items. Variations in our net cash provided by operating activities are generally related to the changes in our operating assets and liabilities (related mostly to fluctuations in timing at quarter-end of customer payments and changes in accrued expenses), and generally over longer periods of time, do not significantly impact our cash flows from operations.

Significant fluctuations in key operating assets and liabilities between 2021 and 2020 that impacted our cash flows from operating activities are as follows:

Billed Trade Accounts Receivable

Management of our billed accounts receivable is one of the primary factors in maintaining strong cash flows from operating activities. Our billed trade accounts receivable balance includes significant billings for several non-revenue items (primarily postage, sales tax, and deferred revenue items). As a result, we evaluate our performance in collecting our accounts receivable through our calculation of days billings outstanding (“DBO”) rather than a typical days sales outstanding (“DSO”) calculation.

Our gross and net billed trade accounts receivable and related allowance for doubtful accounts receivable (“Allowance”) as of the end of the indicated quarterly periods, and the related DBOs for the quarters then ended, are as follows (in thousands, except DBOs):


Quarter Ended	Gross		Allowance			Net Billed		DBOs
2021:
March 31	$	250,743	$	(3,718	)	$	247,025		70
June 30		226,774		(3,546	)		223,228		68
September 30		246,317		(3,157	)		243,160		65
2020:
March 31	$	264,601	$	(3,888	)	$	260,713		72
June 30		248,470		(4,057	)		244,413		73
September 30		228,847		(3,730	)		225,117		68

As of September 30, 2021 and 2020, approximately 97% and 95%, respectively, of our billed accounts receivable balance were less than 60 days past due.

The DBO metric for the first quarter of 2021 and the first and second quarters of 2020 were negatively impacted by the delays of certain recurring key customer payments, as noted above. We may experience future adverse impacts to our DBOs if and when these payment delays occur. However, these recurring monthly payments that cross a reporting period-end do not raise any collectability concerns, as payment is generally received subsequent to quarter-end. All other changes in our gross and net billed accounts receivable reflect the normal fluctuations in the timing of customer payments at quarter-end, as evidenced by our relatively consistent DBO metric.

As a global provider of software and professional services, a portion of our accounts receivable balance relates to international customers. This diversity in the geographic composition of our customer base may adversely impact our DBOs as longer billing cycles (i.e., billing terms and cash collection cycles) are an inherent characteristic of international software and professional services transactions. For example, our ability to invoice and collect arrangement fees may be dependent upon, among other things: (i) the completion of various customer administrative matters, local country billing protocols and processes (including local cultural differences), and non-customer administrative matters; (ii) meeting certain contractual invoicing milestones; (iii) the overall project status in certain situations in which we act as a subcontractor to another vendor on a project; or (iv) due to currency controls in certain foreign jurisdictions.

Accrued Employee Compensation

Accrued employee compensation increased $6.8 million to $93.1 million as of September 30, 2021, from $86.3 million as of December 31, 2020, due primarily to accruals for 2021 employee incentive compensation and wages, offset by the payment of the 2020 employee incentive compensation that was fully accrued at December 31, 2020.

Income Taxes Payable/Receivable

Net income taxes payable/receivable (current and non-current) at September 30, 2021 was a net income taxes payable balance of $0.7 million, compared to a net income taxes payable balance of $6.9 million at December 31, 2020. This net of $6.2 million change is primarily due to the timing of our estimated Federal and state income tax payments.

Cash Flows from Investing Activities. Our typical investing activities consist of purchases/sales of short-term investments and purchases of software, property and equipment, which are discussed below. During the nine months ended September 30, 2021, we made the following cash payments for acquisitions: (i) Tango for approximately $11 million, net of cash acquired; (ii) Kitewheel for approximately $34 million; and (iii) Keydok for approximately $1 million. We also made an investment in MobileCard of approximately $6 million. During the nine months ended September 30, 2020, we acquired Tekzenit, Inc. for approximately $10 million and made investments in MobileCard of $1.5 million. This activity is included in our cash flows from investing activities.

Purchases/Sales of Short-Term Investments

For the nine months ended September 30, 2021 and 2020, we purchased $57.7 million and $49.1 million, respectively, and sold (or had mature) $80.1 million and $37.7 million, respectively, of short-term investments. We continually evaluate the appropriate mix of our investment of excess cash balances between cash equivalents and short-term investments in order to maximize our investment returns and liquidity.

Software, Property and Equipment

Our capital expenditures for the nine months ended September 30, 2021 and 2020 for software, property and equipment were $22.5 million and $24.2 million, respectively, and consisted principally of investments in computer software, hardware, and related equipment and statement production equipment.

Cash Flows from Financing Activities. Our financing activities typically consist of activities associated with our common stock, long-term debt, and settlement and merchant reserve activity.

Cash Dividends Paid on Common Stock

During the nine months ended September 30, 2021 and 2020, the Board approved dividends totaling $24.5 million and $23.2 million, respectively, and made dividend payments of $24.7 million and $23.4 million, respectively, through September 30, 2021 and 2020, with the differences attributed to dividends on unvested incentive shares that are paid upon vesting of those shares.

Repurchase of Common Stock

During the nine months ended September 30, 2021 and 2020, we repurchased approximately 438,000 and 290,000 shares of our common stock, respectively, under the guidelines of our Stock Repurchase Program for $20.1 million and $12.3 million, respectively, and paid $20.2 million and $12.1 million, respectively, through September 30, 2021 and 2020, with the differences attributed to the timing of share settlement.

Outside of our Stock Repurchase Program, during the nine months ended September 30, 2021 and 2020, we repurchased from our employees and then cancelled approximately 115,000 and 163,000 shares of our common stock, respectively, for $5.4 million and $7.8 million, respectively, in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.

Long-term Debt

In September 2021, we refinanced our 2018 Credit Agreement and as a result, we repaid the outstanding principal balance of $120.0 million and borrowed $150.0 million under the 2021 Credit Agreement, resulting in a net increase of available cash of $30.0 million. As part of the refinancing, we paid $3.0 million of deferred financing costs.

Additionally, during the nine months ended September 30, 2021 and 2020, we made principal repayments of $126.6 million and $7.5 million, respectively.

See Note 4 to our Financial Statements for additional discussion of our long-term debt.

Settlement and Merchant Reserve Activity

During the nine months ended September 30, 2021 and 2020, we had net settlement and merchant reserve activity of $7.7 million and $47.6 million, respectively, related to the cash collected, held on behalf, and paid to our customers related to our payment processing services and the net change in deposits held on behalf of our customers.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements are mainly limited to money transmitter bonds, bid bonds, and performance bonds. These arrangements do not have a material impact and are not reasonably likely to have a material future impact to our financial condition, results of operation, liquidity, capital expenditures, or capital resources. See Note 6 to our Financial Statements for additional information on these guarantees.

Capital Resources

The following are the key items to consider in assessing our sources and uses of capital resources:

Current Sources of Capital Resources. Below are the key items to consider in assessing our current sources of capital resources:



Cash, Cash Equivalents and Short-term Investments. As of September 30, 2021, we had cash, cash equivalents, and short-term investments of $224.5 million, of which approximately 68% is in U.S. dollars and held in the U.S. Included in cash and cash equivalents is $1.4 million of restricted cash, used primarily to collateralize outstanding letters of credit. For the remainder of the monies denominated in foreign currencies and/or located outside the U.S., we do not anticipate any material amounts being unavailable for use in funding our business, but may face limitations on moving cash out of certain foreign jurisdictions due to currency controls and potential negative economic consequences.



Operating Cash Flows. As described in the Liquidity section above, we believe we have the ability to generate strong cash flows to fund our operating activities and act as a source of funds for our capital resource needs.



Revolving Credit Facility. In September 2021, we refinanced our 2018 Credit Agreement, which includes a $450 million revolving loan facility, our 2021 Revolver. As of September 30, 2021, we had no borrowing outstanding on our 2021 Revolver and had the entire $450 million available to us. Our long-term debt obligations are discussed in more detail in Note 4 to our Financial Statements.

Uses/Potential Uses of Capital Resources. Below are the key items to consider in assessing our uses/potential uses of capital resources:



Common Stock Repurchases. We have made repurchases of our common stock in the past under our Stock Repurchase Program. As of September 30, 2021, we had 3.9 million shares authorized for repurchase remaining under our Stock Repurchase Program. Our 2021 Credit Agreement may place certain limitations on our ability to repurchase our common stock.

Under our Stock Repurchase Program, we may repurchase shares in the open market or in privately negotiated transactions, including through an accelerated stock repurchase plan or under a SEC Rule 10b5-1 plan. The actual timing and amount of share repurchases are dependent on the current market conditions and other business-related factors. Our common stock repurchases are discussed in more detail in Note 8 to our Financial Statements.

During the nine months ended September 30, 2021, we repurchased approximately 438,000 shares of our common stock for $20.1 million (weighted-average price of $46.04 per share).

Outside of our Stock Repurchase Program, during the nine months ended September 30, 2021, we repurchased from our employees and then cancelled approximately 115,000 shares of our common stock for $5.4 million in connection with minimum tax withholding requirements resulting from the vesting of restricted common stock under our stock incentive plans.



Executive Transition. In August 2020, we entered into a Separation Agreement with our former President and CEO which includes a commitment to pay additional compensation of approximately $7 million, for which approximately $5 million will be paid in the fourth quarter of 2021 and approximately $2 million will be paid in 2022.



Cash Dividends. During the nine months ended September 30, 2021, the Board declared dividends totaling $24.5 million. Going forward, we expect to pay cash dividends each year in March, June, September, and December, with the amount and timing subject to the Board’s approval.



Acquisitions. The 2020 Tekzenit acquisition includes provisions for additional purchase price payments in the form of earn-out and qualified sales payments for up to $10 million over a measurement period through March 31, 2023. As of September 30, 2021, we have made no earn-out or qualified sales payments for this acquisition.

In May 2021, we acquired Tango, a leading supplier of convergent policy control and messaging solutions, for a purchase price of approximately $13 million, or approximately $11 million, net of cash acquired.

On July 1, 2021, we acquired Kitewheel, a leading provider of customer journey orchestration and analytics for a purchase price of $40 million, of which $34 million was paid upon close and the remaining $6 million to be paid in annual payments over the next three years.

In July 2021, we made an additional investment of $6.1 million in MobileCard. After this investment, we now hold a 64% controlling interest in the company.

On September 14, 2021, we acquired Keydok, a digital identity and document management platform provider, headquartered in Mexico. We acquired 100% of the equity of Keydok for a purchase price of $1.0 million, which includes provisions for up to $18.0 million of potential future earn-out payments.

On October 4, 2021, we acquired DGIT Systems, a provider of configure, price, and quote (CPQ) and order management solutions for the telecoms industry. We acquired 100% of the equity of DGIT Systems for a purchase price of AUD 21.3 million (approximately $16 million), which includes provisions for up to AUD 18.0 million (approximately $13.0 million) of potential future earn-out payments. The earn-out period is through September 30, 2025.

These acquisitions were funded from currently available cash. Our acquisitions are discussed in more detail in Note 5 to our Financial Statements. As part of our growth strategy, we are continually evaluating potential business and/or asset acquisitions and investments in market share expansion with our existing and potential new customers and expansion into verticals outside the global communications market.



Capital Expenditures. During the nine months ended September 30, 2021, we spent $22.5 million on capital expenditures. As of September 30, 2021, we had committed to purchase $1.2 million of equipment.



Stock Warrants. We have issued Stock Warrants with an exercise price of $26.68 per warrant to Comcast as an incentive for Comcast to convert new customer accounts to ACP. Once vested, Comcast may exercise the Stock Warrants and elect either physical delivery of common shares or net share settlement (cashless exercise). Alternatively, the exercise of the Stock Warrants may be settled with cash based solely on our approval, or if Comcast were to beneficially own or control in excess of 19.99% of the common stock or voting of the Company. As of September 30, 2021, approximately 1.0 million Stock Warrants remain issued, none of which are vested.

The Stock Warrants are discussed in more detail in Note 8 to our Financial Statements.



Long-Term Debt. As of September 30, 2021, our long-term debt consisted of the following: (i) 2016 Convertible Notes with a par value of $230.0 million; and (ii) 2021 Credit Agreement with term loan borrowings of $150.0 million.

2016 Convertible Notes

Our 2016 Convertible Notes will be convertible at the option of the note holders during the period from December 15, 2021 to the close of business on the day immediately preceding March 15, 2022, subject to an observation holding period of 40 days. For notes presented during this time frame, the settlement amount will be equal to the sum of the daily settlement amounts for each of the following 40 consecutive trading days during the related observation period. As a result, we have reclassified our 2016 Convertible Notes as a current liability in our Balance Sheet. If none of the notes are converted, called, or put, our debt interest cash outlay during the next twelve months for the 2016 Convertible Notes will be $9.8 million of interest payments.

2021 Credit Agreement

Our 2021 Credit Agreement mandatory repayments and the cash interest expense (based upon current interest rates) for the next twelve months is $7.5 million, and $2.2 million, respectively. We have the ability to make prepayments on our 2021 Credit Agreement without penalty.

Our long-term debt obligations are discussed in more detail in Note 4 to our Financial Statements.

In summary, we expect to continue to have material needs for capital resources going forward, as noted above. We believe that our current cash, cash equivalents and short-term investments balances and our 2021 Revolver, together with cash expected to be generated in the future from our current operating activities, will be sufficient to meet our anticipated capital resource requirements for at least the next twelve months. We also believe we could obtain additional capital through other debt sources which may be available to us if deemed appropriate.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the potential loss arising from adverse changes in market rates and prices. As of September 30, 2021, we are exposed to various market risks, including changes in interest rates, fluctuations and changes in the market value of our cash equivalents and short-term investments, and changes in foreign currency exchange rates. We have not historically entered into derivatives or other financial instruments for trading or speculative purposes.

Interest Rate Risk

Long-Term Debt. The interest rate on our 2016 Convertible Notes is fixed, and thus, as it relates to our convertible debt borrowings, we are not exposed to changes in interest rates.

The interest rates on our 2021 Credit Agreement are based upon an adjusted LIBOR rate plus an applicable margin, or an alternate base rate plus an applicable margin. See Note 4 to our Financial Statements for further details of our long-term debt.

A hypothetical adverse change of 10% in the September 30, 2021 adjusted LIBOR rate would not have had a material impact upon our results of operations.

Market Risk

Cash Equivalents and Short-term Investments. Our cash and cash equivalents as of September 30, 2021 and December 31, 2020 were $195.4 million and $188.7 million, respectively. Certain of our cash balances are “swept” into overnight money market accounts on a daily basis, and at times, any excess funds are invested in low-risk, somewhat longer term, cash equivalent instruments and short-term investments. Our cash equivalents are invested primarily in institutional money market funds, commercial paper, and time deposits held at major banks. We have minimal market risk for our cash and cash equivalents due to the relatively short maturities of the instruments.

Our short-term investments as of September 30, 2021 and December 31, 2020 were $29.2 million and $51.6 million, respectively. Currently, we utilize short-term investments as a means to invest our excess cash only in the U.S. The day-to-day management of our short-term investments is performed by a large financial institution in the U.S., using strict and formal investment guidelines approved by our Board. Under these guidelines, short-term investments are limited to certain acceptable investments with: (i) a maximum maturity; (ii) a maximum concentration and diversification; and (iii) a minimum acceptable credit quality. At this time, we believe we have minimal liquidity risk associated with the short-term investments included in our portfolio.

Settlement and Merchant Reserve Assets. We are exposed to market risk associated with cash held on behalf of our customers related to our payment processing services. As of September 30, 2021 and December 31, 2020, we had $158.9 million and $166.0 million, respectively, of cash collected on behalf of our customers. The cash is held in accounts with various major financial institutions in the U.S. and Canada in an amount equal to at least 100% of the aggregate amount owed to our customers. These balances can significantly fluctuate between periods due to activity at the end of the period and the day in which the period ends.

Long-Term Debt. The fair value of our convertible debt is exposed to market risk. We do not carry our convertible debt at fair value but present the fair value for disclosure purposes (see Note 2 to our Financial Statements). Generally, the fair value of our convertible debt is impacted by changes in interest rates and changes in the price and volatility of our common stock. As of September 30, 2021, the fair value of the 2016 Convertible Notes was estimated at $237.8 million, using quoted market prices.

Foreign Currency Exchange Rate Risk

Due to foreign operations around the world, our balance sheet and income statement are exposed to foreign currency exchange risk due to the fluctuations in the value of currencies in which we conduct business. While we attempt to maximize natural hedges by incurring expenses in the same currency in which we contract revenue, the related expenses for that revenue could be in one or more differing currencies than the revenue stream.

During the nine months ended September 30, 2021, we generated approximately 87% of our revenue in U.S. dollars. We expect that, in the foreseeable future, we will continue to generate a very large percentage of our revenue in U.S. dollars.

As of September 30, 2021 and December 31, 2020, the carrying amounts of our monetary assets and monetary liabilities on the books of our non-U.S. subsidiaries in currencies denominated in a currency other than the functional currency of those non-U.S. subsidiaries are as follows (in thousands, in U.S. dollar equivalents):


	September 30, 2021					December 31, 2020
	Monetary			Monetary		Monetary			Monetary
	Liabilities			Assets		Liabilities			Assets
Pounds sterling	$	(6	)	$	1,597	$	(148	)	$	1,673
Euro		(234	)		5,057		(288	)		7,734
U.S. Dollar		(458	)		40,230		(292	)		24,445
South African Rand		(164	)		6,803		-			4,809
Other		(45	)		600		(6	)		1,071
Totals	$	(907	)	$	54,287	$	(734	)	$	39,732

A hypothetical adverse change of 10% in the September 30, 2021 exchange rates would not have had a material impact upon our results of operations based on the monetary assets and liabilities as of September 30, 2021.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures

As required by Rule 13a-15(b), our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), conducted an evaluation as of the end of the period covered by this report of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) Internal Control Over Financial Reporting

As required by Rule 13a-15(d), our management, including the CEO and CFO, also conducted an evaluation of our internal control over financial reporting, as defined by Rule 13a-15(f), to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, the CEO and CFO concluded that there has been no such change during the quarter covered by this report.

CSG SYSTEMS INTERNATIONAL, INC.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time-to-time, we are involved in litigation relating to claims arising out of our operations in the normal course of business. We are not presently a party to any material pending or threatened legal proceedings.

Item 1A. Risk Factors

A discussion of our risk factors can be found in Item 1A. Risk Factors in our 2020 Form 10-K. There were no material changes to the risk factors disclosed in our 2020 Form 10-K during the third quarter of 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table presents information with respect to purchases of our common stock made during the third quarter of 2021 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)
July 1 - July 31		54,840	$	45.89		54,700		3,987,817
August 1 - August 31		46,955		46.52		44,900		3,942,917
September 1 - September 30		43,400		47.86		43,400		3,899,517
Total		145,195	$	46.68		143,000

(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 8 to our Financial Statements for additional information regarding our share repurchases.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

The Exhibits filed or incorporated by reference herewith are as specified in the Exhibit Index.

CSG SYSTEMS INTERNATIONAL, INC.

INDEX TO EXHIBITS


Exhibit Number		Description

4.60		$600.0 million Amended and Restated Credit Agreement dated September 13, 2021, among CSG Systems International, Inc., as Borrower, the Subsidiary Guarantors Party Hereto, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swingline Lender and an Issuing Bank, Wells Fargo Bank, National Association, as Syndication Agent, BBVA, USA and U.S. Bank National Association, as Co-Documentation Agents, the Lenders Party Hereto, and the Other Issuing Banks Party Hereto BofA Securities, Inc. and Wells Fargo Securities, LLC, as Joint Lead Arrangers and Joint Bookrunners
10.26AV*		Fifty-Fifth Amendment to Consolidated CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Charter Communications Operating, LLC
10.27I*		Seventh Amendment to the CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Comcast Cable Communications Management, LLC
10.27J*		Ninth Amendment to the CSG Master Subscriber Management System Agreement between CSG Systems, Inc. and Comcast Cable Communications Management, LLC
31.01		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.01		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH		Inline XBRL Taxonomy Extension Schema Document
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document
104		Cover Page Interactive Data File (embedded within the Inline XBRL document)

* Portions of the exhibit have been omitted pursuant to SEC rules regarding confidential information.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 4, 2021

CSG SYSTEMS INTERNATIONAL, INC.

/s/ Brian A. Shepherd

Brian A. Shepherd

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Rolland B. Johns

Rolland B. Johns

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

/s/ David N. Schaaf

David N. Schaaf

Chief Accounting Officer

(Principal Accounting Officer)