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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

OR

For the transition period from                      to                      

Commission file number 0-27512

CSG SYSTEMS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

6175 S. Willow Drive, 10^th 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:

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.

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 April 30, 2021, there were 32,889,346 shares of the registrant’s common stock outstanding.

CSG SYSTEMS INTERNATIONAL, INC.

FORM 10-Q for the Quarter Ended March 31, 2021

INDEX

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED

(in thousands, except per share amounts)  

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

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CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED

(in thousands, except per share amounts)

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

4

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - UNAUDITED

(in thousands)

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

5

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY - UNAUDITED

(in thousands)

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

6

CSG SYSTEMS INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(in thousands)

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

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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 March 31, 2021 and December 31, 2020, and for the quarters ended March 31, 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 ended March 31, 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.  

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 March 31, 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 80% 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 first quarters of 2021 and 2020 was as follows (in thousands):

We use the location of the customer as the basis of attributing revenue to geographic regions.  Revenue by geographic region for the first quarters of 2021 and 2020, as a percentage of our total revenue, was as follows:

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

Deferred revenue recognized for the first quarters of 2021and 2020 was $20.1 million and $17.7 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 March 31, 2021 and December 31, 2020, our cash equivalents consist primarily of institutional money market funds, commercial paper, and time deposits held at major banks.

As of March 31, 2021 and December 31, 2020, we had $1.9 million and $1.7 million, respectively, of restricted cash that serves to collateralize outstanding letters of credit.  This restricted cash is included in cash and cash equivalents in our Condensed Consolidated Balance Sheets (“Balance Sheets” or “Balance Sheet”).  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.

Short-term Investments and Other Financial Instruments.  Our financial instruments as of March 31, 2021 and December 31, 2020 include cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and debt.  Due to their short maturities, the carrying amounts of cash equivalents, 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 March 31, 2021 and December 31, 2020 have contractual maturities of less than two years from the time of acquisition.  Our short-term investments as of March 31, 2021 and December 31, 2020 consisted almost entirely of fixed income securities.  Proceeds from the sale/maturity of short-term investments for the first quarters of March 31, 2021 and 2020 were $29.3 million and $18.7 million, respectively.

Our short-term investments as of March 31, 2021 and December 31, 2020 were $54.5 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):

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.

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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):

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.

Equity Method Investment.  We held a 15% noncontrolling interest in a payment technology and services company with a carrying value of approximately $8 million as of March 31, 2021 and December 31, 2020, included in other non-current assets in our Balance Sheets.

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 timing, method of adoption, and overall impact of this standard on our Financial Statements.

3.  LONG-LIVED ASSETS

Goodwill. The changes in the carrying amount of goodwill for the first quarter of 2021 were as follows (in thousands):

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

The total amortization expense related to other intangible assets for the first quarters of 2021 and 2020 were $5.6 million and $6.3 million, respectively.  Based on the March 31, 2021 net carrying value of our other intangible assets, the estimated total amortization expense for each of the five succeeding fiscal years ending December 31 are: 2021 – $20.5 million; 2022 – $14.7 million; 2023 – $10.8 million; 2024 – $7.4 million; and 2025 – $6.5 million. 

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Customer Contract Costs.  As of March 31, 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):

The total amortization expense related to customer contract costs for the first quarters of 2021 and 2020 were $4.7 million and $4.0 million, respectively. 

4.  DEBT

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

2018 Credit Agreement.  During the quarter ended March 31, 2021, we made $2.8 million of principal repayments on our $150 million aggregate principal five-year term loan (the “2018 Term Loan”).  As of March 31, 2021, our interest rate on the 2018 Term Loan is 1.70% (adjusted LIBOR plus 1.50% per annum), effective through June 2021, and our commitment fee on the unused $200 million aggregate principal five-year revolving loan facility (the “2018 Revolver”) is 0.20%.  As of March 31, 2021, we had no borrowings outstanding on our 2018 Revolver and had the entire $200.0 million available to us.  

The interest rates under the 2018 Credit Agreement are based upon our choice of an adjusted LIBOR rate plus an applicable margin of 1.50% – 2.50%, or an alternate base rate plus an applicable margin of 0.50% – 1.50%, with the applicable margin, depending on our then-net secured total leverage ratio.  We will pay a commitment fee of 0.200% – 0.375% of the average daily unused amount of the 2018 Revolver, with the commitment fee rate also dependent upon our then-net secured total leverage ratio.  If the LIBOR rate is no longer available, then our interest rate under the Credit Agreement will be determined by the alternate base rate plus an applicable margin as discussed above.  

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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 $226.9 million has been classified as a current liability in our Balance Sheet as of March 31, 2021.

As a result of our quarterly dividend in March 2021 (see Note 7), the previous conversion rate for the 2016 Convertible Notes of 17.6656 shares of our common stock per $1,000 principal amount of the 2016 Convertible Notes, which is equivalent to an initial conversion price of $56.61 per share of our common stock, has been adjusted to 17.6898 shares of our common stock per $1,000 principal amount of the 2016 Convertible Notes, which is equivalent to an initial conversion price of $56.53 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 March 31, 2021, none of the conversion features have been achieved, and thus, the 2016 Convertible Notes are not convertible by the holders.

5.  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 March 31, 2021, we had $2.9 million of restricted assets used to collateralize these guarantees, with $1.9 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 form of surety bonds issued through a third-party of $4.4 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 March 31, 2021, we had total aggregate money transmitter bonds of approximately $15 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 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

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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 March 31, 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 March 31, 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.  

6.  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):

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 7).  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.

7.  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 first quarters of 2021 and 2020 we repurchased approximately 142,000 shares of our common stock for $6.5 million (weighted-average price of $45.94 per share) and approximately 142,000 shares of our common stock for $6.4 million (weighted-average price of $45.26 per share), respectively,  under a SEC Rule 10b5-1 Plan.  

As of March 31, 2021, the total remaining number of shares available for repurchase under the Stock Repurchase Program totaled 4.2 million shares.

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Stock Repurchases for Tax Withholdings. In addition to the above-mentioned stock repurchases, during the first quarters of 2021 and 2020 we repurchased and then cancelled approximately 110,000 shares of common stock for $5.2 million and approximately 157,000 shares of common stock for $7.6 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 first quarter of 2021, the Board approved a quarterly cash dividend of $0.25 per share of common stock, totaling $8.2 million.  During the first quarter of 2020, the Board approved a quarterly cash dividend of $0.235 per share of common stock, totaling $7.7 million. 

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 March 31, 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 first quarter of 2021 is as follows (shares in thousands):

Included in the awards granted during the first quarter of 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 first quarter of 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 first quarters of 2021 and 2020 of $5.4 million and $4.9 million, respectively. 

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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 more than 35 years of experience to deliver innovative customer engagement solutions that help our customers solve their toughest challenges, helping them make ordinary customer experiences extraordinary.  Our 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 service providers 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 service providers.  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 service providers a phased, incremental approach to transforming their businesses, thereby reducing the business interruption risk associated with this evolution.

As discussed in Note 2 to our Financial Statements, we generate our revenue primarily 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 significantly reduced travel, we are still conducting business as usual and are working with our customers to minimize any potential disruption. For those locations that remain open, such as our statement production centers, we require daily temperature checks and self-assessments. We will continue to provide work from home options through December 31, 2021, or such later date as conditions warrant. At this time, we do not believe that our work from home options and limited staffing in select office locations have 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 will remain the health and safety of our employees, providing our customers with world-class services and solutions, and prudently managing our liquidity to ensure our continued financial strength.  As of March 31, 2021, we had approximately $205 million in cash, cash equivalents and short-term investments, and an additional $200 million available to borrow under our revolving credit facility.  

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

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Management Overview of Quarterly Results

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

Revenue.  Revenue for the first quarter of 2021 was $253.1 million, a 3.1% increase when compared to revenue of $245.6 million for the first quarter of 2020, with the increase mainly attributed to continued growth in our revenue management solutions along with a strong quarter of professional services revenue.

Operating Results.  Operating income for the first quarter of 2021 was $31.4 million, or a 12.4% operating margin percentage, compared to $33.2 million, or a 13.5% operating margin percentage for the first quarter of 2020, with the decrease mainly attributed to increased employee-related costs.  The first quarter of 2020 operating income benefited from a mark-to-market reduction in a compensation liability that resulted from the unexpected and steep decline in the stock market that quarter.  

Diluted EPS.  Diluted EPS for the first quarter of 2021 was $0.61 compared to $0.66 for the first quarter of 2020, with the decrease mainly due the lower operating income, as discussed above.

Cash and Cash Flows.  As of March 31, 2021, we had cash, cash equivalents and short-term investments of $205.1 million, as compared to $240.3 million as of December 31, 2020.  Our cash flows from operating activities for the quarter ended March 31, 2021 were $(2.8) million due to the timing of a key recurring customer payment due before quarter-end which was received just after quarter-end, and the payment of the 2020 year-end accrued employee incentive compensation.  See the Liquidity section below for further discussion of our cash flows.

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Significant Customer Relationships

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

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

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

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

Charter.  Charter is one of our significant customers representing approximately 21% of our revenue.  Our agreement with Charter runs through December 31, 2021, with an option to extend the agreement for an additional one-year term. We are currently engaged in discussions with Charter regarding contract renewal terms.

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.

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Results of Operations

Revenue.  Total revenue for the first quarter of 2021 was $253.1 million, a 3.1% increase when compared to $245.6 million for the first quarter of 2020.  This increase can be attributed to the year-over-year growth in our revenue management solutions along with a strong quarter of professional services revenue.  

We use the location of the customer as the basis of attributing revenue to individual countries.  Revenue by geographic regions for the first quarters of 2021 and 2020 was as follows (in thousands):

Total Operating Expenses.  Total operating expenses for the first quarter of 2021 were $221.7 million, a 4.4% increase when compared to $212.5 million for the first quarter of 2020,   resulting from a year-over-year increase in employee-related costs as we continue to grow the business.  In addition, the first quarter of 2020 reflects a benefit due to a mark-to-market reduction in a compensation liability that resulted from the unexpected and steep decline in the stock market.

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

Cost of Revenue (Exclusive of Depreciation).  The cost of revenue for the first quarter of 2021 was $133.5 million, a 1.8% increase when compared to $131.2 million for the first quarter of 2020.  The increase in cost of revenue between quarters is reflective of the year-over-year revenue growth, as discussed above.  Total cost of revenue as a percentage of revenue for the first quarters of 2021 and 2020 was 52.8% and 53.4%, respectively. 

R&D Expense.  R&D expense for the first quarter of 2021 was $32.2 million, a 6.2% increase when compared to $30.3 million for the first quarter of 2020.  This increase in R&D expense is 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.  As a percentage of total revenue, R&D expense for the first quarters of 2021 and 2020 was 12.7% and 12.4%, respectively.

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

SG&A Expense.  SG&A expense for the first quarter of 2021 was $48.8 million, a 10.0% increase when compared to $44.4 million for the first quarter of 2020.  The increase in SG&A expense is mainly attributed to the increase in employee-related costs, discussed above, and is reflective of our accelerated growth strategy, as we continue to pursue organic and inorganic growth opportunities.  Our SG&A costs as a percentage of total revenue for the first quarters of 2021 and 2020 were 19.3% and 18.1%, respectively.

Depreciation.  Depreciation expense for the first quarter of 2021 was $6.1 million, a 9.8% increase when compared to $5.6 million for the first quarter of 2020.  This increase can be primarily attributed to the increased level of capital expenditures on items such as technology, security, infrastructure, and modernization of equipment.

Operating Income. Operating income for the first quarter of 2021 was $31.4 million, or 12.4% of total revenue, compared to $33.2 million, or 13.5% of total revenue for the first quarter of 2020, with the decrease mainly attributed to increased employee-related costs.  The first quarter of 2020 operating income benefited from a mark-to-market reduction in a compensation liability that resulted from the unexpected and steep decline in the stock market that quarter.    

  Income Tax Provision. The effective income tax rates for the first quarters of 2021 and 2020 were as follows:

Our estimated full year 2021 effective income tax rate is approximately 27%.

18

Liquidity

Cash and Liquidity.  As of March 31, 2021, our principal sources of liquidity included cash, cash equivalents and short-term investments of $205.1 million, as compared to $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.  

As part of our 2018 Credit Agreement, we have a $200 million senior secured revolving loan facility with a syndicate of financial institutions that expires in March 2023.  As of March 31, 2021, there were no borrowings outstanding on the 2018 Revolver.  The 2018 Credit Agreement contains customary affirmative covenants and financial covenants.  As of March 31, 2021, and the date of this filing, we believe that we are in compliance with the provisions of the 2018 Credit Agreement.  

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

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 March 31, 2021, we had $1.9 million of cash restricted as to use primarily to collateralize outstanding letters of credit.

Cash Flows from Operating Activities.  We calculate our cash flows from operating activities beginning with net income, adding back the impact of non-cash items or non-operating activity (e.g., depreciation, amortization, amortization of OID, impairments, gain/loss from debt extinguishments, deferred income taxes, stock-based compensation, etc.), and then factoring in the impact of changes in operating assets and liabilities.  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):