CSG Systems International, Inc. (NASDAQ:CSGS) Q3 2023 Earnings Call Transcript

CSG Systems International, Inc. (NASDAQ:CSGS) Q3 2023 Earnings Call Transcript November 1, 2023

CSG Systems International, Inc. beats earnings expectations. Reported EPS is $0.92, expectations were $0.82.

Operator: Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2023 CSG Systems International Inc., Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ prepared remarks, there will be a question-and-answer session. [Operator Instructions] And I will now turn the call over to John Rea, Head of Investor Relations.

John Rea: Thank you, operator, and thanks to everyone for joining us. Like last quarter, we will be working from a slide deck, which can be found on the Investor Relations section of our website. Please take a moment to locate these slides. Today’s discussion will contain a number of forward-looking statements. These include, but are not limited to, statements regarding our projected financial results, our ability to meet our clients’ needs through our products, services and performance, and our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic operating and financial goals. While these risks reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially.

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Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new or future events. In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today’s press release as well as our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our website. Also, we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures, when reviewed in conjunction with our GAAP financial measures provide investors with greater transparency to the information used by our management team in our financial and operational decision-making.

For more information regarding our use of non-GAAP financial measures, we refer you to today’s earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me today on the phone are Brian Shepherd, Chief Executive Officer and Hai Tran, Chief Financial Officer. With that, I would like to now turn the call over to Brian.

Brian Shepherd: Thanks, John. Hi, everyone. We appreciate you joining the call as we begin on Slide 4. Team CSG delivered fantastic results in both Q3 and the first nine-months of the year. We posted 9% year-over-year revenue growth through the first nine-months of 2023, all coming from organic growth. Our performance through the first nine-months was the best results we posted in nearly two decades. Our year-to-date non-GAAP adjusted operating margin was 17.5%, which is a significant improvement over the 16.6% we reported through the first nine-months of 2022. Proving our ability and our commitment to consistently expand CSG’s operating leverage with disciplined execution. During the quarter, we took a big step in optimizing our balance sheet.

In September, we completed a successful $425 million convertible debt raise. This transaction had many benefits, including lowering our interest rate to 3.875% on the majority of our debt, freeing up our revolver for future M&A and giving our capital structure a more balanced mix of fixed and floating rate debt. Plus shareholders will experience no equity dilution until our share price exceeds approximately $96.50 as a result of the derivative we simultaneously put in place with the convert. On the share buybacks, last quarter, we announced a $100 million repurchase plan. We are excited to announce that this program is complete as we have repurchased $107 million worth of CSG stock during Q3. On historical context, this was our largest quarterly share repurchase quarter since Q3 of 2007.

Looking forward, we will continue to opportunistically repurchase shares through the end of 2024 with the expectation that we will buy back shares to offset employee stock compensation at a minimum with the opportunity to buyback more than this when we believe it will create greater shareholder value. From a guidance perspective, we are pleased to raise our non-GAAP EPS guidance and reiterate all other financial guidance target ranges for fiscal year 2023. At the end of the day, our faster revenue growth is fueled by strong ongoing market demand for CSG’s industry leading SaaS products and good sales performance. CSG’s sales pipeline is large and healthy as we win and wow big new customers in a wide variety of faster growth industry verticals.

Turning to Slide 5, I will reiterate four strategic objectives that will help CSG create more shareholder value and allow followers of our story to track our progress. As I just shared, CSG aspires to deliver long-term organic revenue growth in the 2% to 6% range, striving to consistently be at or above the midpoint of this range. That is why we are so pleased to see the midpoint of our 2023 revenue guidance sitting above the top end of this range at approximately 6.7%. We aimed at operating scale and expand our operating leverage by growing revenue to $1.5 billion by year-end 2025 with bottom line growing as faster, faster than top line revenue growth. This scale will come from a combination of good organic revenue and sales growth combined with disciplined inorganic moves.

Further, we strive to be the number one SaaS provider of choice our global communication service providers by providing the most value adding technology platforms and by being easier to do business with than our competitors. And finally, we plan to diversify revenue even more as we win big and faster growth industry verticals like retail, government, financial services, healthcare, technology and more. Moving to Slide 6, you can see that we delivered against all four objectives with our excellent results through the first nine-months of 2023. On strategic revenue growth, we reported $872 million worth of revenue through the first nine-months of 2023, resulting in 9% year-over-year growth. Our best year-to-date nine-month result in nearly 20-years.

On the right hand side of Slide 6, we believe the CSG’s high recurring revenue SaaS business model and our strong healthy balance sheet make us an attractive investment. By 2025, we aspire to gain scale in the markets, where we compete and generate $1.5 billion in annual revenue, which implies that CSG will have added over $0.5 billion in profitable recurring revenue from 2020 to 2025. Over the medium to long-term, we aspire to expand CSG’s operating leverage and use our strong balance sheet to deliver non-GAAP EPS growth that meets or exceeds revenue growth. On this last point, I want to reinforce a key principle for the CSG Board of Directors and management team. Investors can be assured that team CSG is laser focused on creating shareholder value and earning the right to grow profitable revenue faster, not adding empty calorie revenue.

We will maintain a disciplined high return on invested capital mindset as we explore a wide range of strategic moves to create greater shareholder value. Moving to Slide 7, we wanted to highlight just how far we have come in a short period of time with respect to accelerating our organic revenue growth. From 2016 through 2020, CSG averaged about 1.8% year-over-year organic revenue growth, growing organic revenue by $14 million on average over that period of time. Around three years ago, we introduced our new organic revenue growth targets stating that we wanted to take our historical 1% to 3% organic revenue growth range and double it to 2% to 6% and we are proud to share that team CSG has delivered on this commitment, averaging over 5% organic revenue growth from 2021 to year-end 2023, as implied by our current year revenue guidance targets.

Focusing on the bar chart on the far right, the low end of our current revenue guidance would see us achieving approximately 5.5% year-over-year organic revenue growth in 2023, while the high end of our 2023 guidance would see us deliver approximately 7.8% year-over-year organic growth. This means that team CSG is on track to add $60 million to $85 million in new organic revenue growth in this year alone, almost a 6-times increase at the high-end compared to our 2016 to 2020 historical performance. At the end of the day, we are laser focused on maintaining this momentum in the coming years. Turning to Slide 8, we had good successes through the first nine-months of the year on our goal to be the number one technology provider of choice for communication service providers globally, and our continued success with both North American and global CSPs proved that we are executing well against this strategic priority.

Earlier this year, we completed our conversion of 14 million customers from a competitor’s platform at Charter. We have long-term contracts with both Charter and Comcast that run through Q1 2028 and year-end 2025, respectively. And as a reminder, CSG’s relationship with Comcast and Charter is on a per customer basis. While video subscriber losses have gotten a lot of headlines over the past week, Comcast and Charter’s residential and SMB customer base stayed broadly flat during Q3. This may seem like a minor nuance, but it is a very important one. On new logo wins, we extended and expanded our 10 plus year relationship with one of the leading cable broadband providers in the U.S. CSG was selected to digitally transform their BSS stack to simplify their business processes with our agile and cutting edge solutions.

And we continue to win more business in the wireless telecom market. We won a great new logo with M1, one of the leading mobile carriers in Singapore. CSG was selected to modernize their B2B BSS stack. And importantly, this deal highlights the strength of CSG’s solutions as we are replacing our main competitor. Turning to Slide 9. Since 2017, we have diversified our revenue coming from exciting new industry verticals from 7% of total 2017 CSG revenue to 27% of our Q3 2023 revenue, a fantastic accomplishment in a relatively short amount of time. We are a partner of choice for big brands at higher growth industry verticals, where we help our customers digitize and modernize their customer experience and provide them with cutting edge integrated payment solutions.

And during the first nine-months of 2023, both solutions delivered good double digit organic revenue growth and continue to be game changers for CSG and our customers. During the quarter, we expanded our customer experience business with one of the world’s leading technology firms. We are deploying our AI powered digital CX solution to provide their customer self-service capabilities in the voice channel. You may remember that we announced a similar U.S. focused win with this customer earlier this year. We are delighted to share that we have expanded our solutions to every country where this company operates. Globally, these solutions will help reduce the number of contact center calls, lower the number of agent-to-agent phone transfers, and limit the number of repeat customer call center contacts.

This is an excellent example of how CSG’s AI driven digital CX SaaS platforms help big exciting brands, improve customer experience and save operating costs. And in a moment, we will share a slide that provides more details into how CSG is integrating AI into every aspect of our business. In the payments market, our continued double digit revenue growth is a testament to our industry leading SaaS integrated payments platform. We now provide award winning payment solutions to 110,000 active merchants and ISV partners who need ACH, credit card, payment gateway, and payment processing capabilities serving a wide range of recurring revenue industry verticals. In September, we launched CSG Forte Engage, which is a multichannel no code payment solution that puts the power of our suite of payment solutions into the hands of our customers.

With CSG Forte Engage, organizations can leverage Nanosight Technology to create customized secure statements and send them to customers for payment via SMS, email, two-way interactive voice response or the contact center. By making it easy for organizations to send branded and personalized statements that can securely accept payment in real time, remove their exposure to sensitive data, and modernize the customer experience. Of note, CSG Forte Engage helped one of our customers reduce uncollected payments by 85% and another merchant to increase customer engagement by 660%, leading to $8 million in incremental revenue. Turning to Slide 10, we wanted to explain how CSG is integrating AI into the fabric of our business. As CSG AI starts with embracing the technology, encouraging experimentation and building the foundation and framework to set our employees and customers up for success.

I’m proud of the work that the team has done to build the foundational elements that allow CSG to realize the big benefits of generative AI, while protecting our employees and customers. We have established CSG’s corporate AI policy, created an AI community practice that shares community learnings across our approximately 6,000 employees and implemented a reusable framework, tool sets and infrastructure that are shaping and guiding our ethical use of AI globally. One of the main value creation drivers is how CSG is beginning to use AI to drive internal efficiencies and productivity by encouraging the use and adoption inside our four walls. CSG teams in almost every functional unit, including sales, customer service, R&D, compliance, legal, cybersecurity, HR, financial planning, accounting and more are innovating to help CSG grow revenue and profit even faster and to be easier to do business with for our customers and our employees.

A second major value creation lever is how we build generative AI into CSG’s products and solutions to bring more value to customers and to help CSG grow even faster. As a reminder, leveraging and embedding data driven capabilities into our products is not new for us. CSG products are industry leading in part because we have used advanced machine learning and predictive analytics for well over a decade, and now we are expanding these capabilities to take advantage of the new capability offered with generative models. A recent example of that is the exciting launch two weeks ago of CSG’s billexplainer.ai new product. One of the biggest drivers of calls in the contact centers in many industry verticals is when customers see something on their bill that surprises them.

Bill Shock is one of the single biggest drivers of cost and customer dissatisfaction. Leveraging the power of AI, CSG is now taking the value we bring to customers globally to the next level. We have partnered with Microsoft and the Azure OpenAI framework. We are allowing consumers to interact with our new AI models to have personalized interaction with their bills to drive down costs and further increase customer satisfaction. I’m excited about how the team has embraced AI, the progress team CSG is making to quickly launch tangible new use cases to allow big customers all around the world. I will wrap up on Slide 11 before turning it over to Hai. CSG has delivered excellent results through the first nine-months of 2023. We are raising our full year non-GAAP EPS guidance and reiterating all other financial guidance targets.

We continue to win fantastic new customer logos quarter in, quarter out. We continue to diversify our business with over 27% of revenue coming from big, faster growing industry verticals like health care, financial services, retail, tech, and government. And we continue to demonstrate our commitment to run our business more efficiently with non-GAAP adjusted operating margins in the mid 17% range through the first nine-months of the year. So our messages to our three key stakeholders are clear. To our employees, CSG’s best days and biggest breakthroughs are still ahead of us. We will keep dreaming big and demanding even more from our collective global talent as we do whatever it takes to turn our giant dreams into reality. To our customers, CSG is here for you.

We have dedicated to being easier to do business with than any of our competitors, while serving your toughest business and technology related challenges. We thank you for your continued trust in us. To our shareholders, CSG’s transformation is just getting started. Faster recurring revenue growth, improved operating leverage and exciting industry vertical diversification of what this management team and our Board of Directors will hold ourselves accountable to, and we will do it with a high integrity, focused execution, and good governance that you have always come to expect from CSG. With that, I will turn it over to Hai.

Hai Tran: Thanks, Brian. Let’s walk through our Q3 and nine-month year to date financial results, and then I will wrap up with some conclusions. Starting on Slide 13, we generated $817 million of revenue for the first nine-months of 2023, results, which represent 9.0% year-over-year growth, all of which was organic. Additionally, we reported 5.0% year-over-year organic revenue growth in Q3. Our strong first nine-month revenue increase growth was primarily attributed to the continued growth of CSG’s revenue management solutions, including the conversions of customer accounts into CSG solutions, strong year-over-year growth in our digital CX solutions and increased payment volumes. As we mentioned on our Q1 earnings call, some of the revenue uplift we recognized in Q1 was related to the timing of certain license oriented deals moving from Q4 of 2022 growth into Q1 of 2023 and the growth we get in 2023 from converting certain subscribers off of a competitor at Charter over the last 12-months.

Even when excluding both of these items, our first nine-months of revenue growth rate would have been at the top end of our long-term organic revenue growth range outlook of 2% to 6%. Our first nine-month 2023 non-GAAP operating income was $142 million non GAAP adjusted operating margin of 17.5%, as compared to $124 million or 16.6% in the prior year. Q3 non-GAAP adjusted operating margin of 17.0% contributed to the excellent year-to-date results. The good growth in non-GAAP operating income and non GAAP adjusted operating income margin percentage for the year-to-date period were driven by a combination of the margin improvement and efficiency we have implemented over the last four quarters and the faster revenue growth, which is enabling us to further strength and our operating leverage.

Moving on, our non-GAAP adjusted EBITDA was $183 million results for the first nine-months of 2023, or 22.7% of revenue, excluding transaction fees, as compared to $166 million or 22.3% in the first nine-months of 2022. Lastly, year-to-date 2023 non-GAAP EPS was $2.76, an identical result from the prior year period as increases in revenue and operating margin were offset by higher interest expense and foreign currency headwinds. Turning to Slide 14, I will go through the balance sheet, our cash flow generation, and shareholder returns. Our nine-month 2023 cash flow from operations was $52 million as compared to $10 million in the prior year period. Further, we had non-GAAP free cash flow of $29 million in the first nine-months of 2023, as compared to a negative $22 million in the same period in 2022.

The primary driver of this increased cash flow performance was favorable working capital changes driven by accrued employee compensation and deferred revenue. With respect to our balance sheet, during the quarter we executed a very successful convertible debt deal. This deal delivered multiple benefits including lowering our interest rate, freeing up our revolver for future M&A, and giving our balance sheet a better mix of fixed and floating rate debt. Plus, equity shareholders will experience no equity dilution until our share price reaches approximately $96.50. As a reminder, we raised $425 million of convertible debt with a 3.875% coupon, and we paid $275 million on our revolver. Moving on, we ended the third quarter with $147 million cash and cash equivalents.

That along with our outstanding debt at September 30, 2023, results in $428 million of net debt, and our net debt leverage ratio sits at 1.8 times of adjusted EBITDA. Moving to the bottom right of the slide, we declared $26 million of dividends during the first nine-months of 2023. In addition, we repurchased $107 million in stock during Q3, the majority of which was tied to repurchasing the delta head shares associated with our convertible debt rate. Turning to page, we will touch on guidance. As Brian mentioned, we are raising our non-GAAP EPS range to $3.60 set to $3.70, as a result of our good operating performance and our share repurchase activity in Q3 of 2023. We are reiterating all other financial guidance ranges, and with respect to our free cash flow guidance, we now expect to determine towards the lower end of our original $80 million to $120 million target due to the timing of certain working capital movement.

These movements include the timing of collection for certain trade receivables around quarter end, including those related to the deployment of certain large global telecommunications projects. Wrapping up, CSG will continue to relentlessly prioritize every investment we make and say discipline and allocation of resources and the use of capital. Innovation including high levels of transformative power of AI across CSG and an adherence to a risk reward framework with continuous learning are key cornerstones of how we manage the business. CSG is well positioned with a strong sales pipeline and a high-quality recurring revenue customer base. We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating disciplined value-added acquisitions.

We believe this approach, combined with our consistent capital distribution will serve our shareholders well. With that, I will turn it over to the operator to facilitate the question-and-answer session.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Maggie Nolan with William Blair.

Margaret Nolan: Thank you and congrats on the results. Thinking about some of the commentary about the revenue growth rate and even when you back out some of those kinds of non-repeatable items, you are still at the high end of your growth range. I’m wondering if you can kind of distill for us what really drove this and what sort of factors we should be looking for to determine whether this level of growth is on the table for next year or years ahead.

Brian Shepherd: Thanks a lot for joining the call and I appreciate the question. We absolutely do believe we can continue to execute on an accelerated organic growth. As we have said, 2% to 6% is our range. We fully expect a good performance to be at the midpoint or higher, so we absolutely do believe that accelerated faster growth is sustainable. There is a couple of things that is going on. First, the diversification in the new industry verticals. In the AI-driven Digital CX, we are adding big new wins. Our pipeline is strong. We continue to deliver value. And as we know in this environment, if you can deliver cost savings, improve CX, and do it using their data in a SaaS model, then that space of undercut line even in terms of a tough environment.

Same thing in payments. SaaS-driven platform, good growth with a number of merchants, we see transaction volumes growing. And both those 2 on diversification are big contributors. You kind of come back to the core of BSS and revenue management. Global Telecom, we continue to win big deals and consistently execute both on the sales and the delivery side. And what we see with global telecom commoditization of voice and data, the need for less customized solutions, lower cost, be more agile, leverage of product business model, is resonating all around the world. We love the growth we continue to see in the global telecom business. Then if we come all the way back into our American cable business, there is been questions about slowing broadband net adds in that space.

First, we see significant growth potential even in our big two cable customers. Opportunity to expand land mass, opportunity to take on more new areas if we just continue to serve them well. And notwithstanding some of the maybe current short-term challenges, when we look at who is positioned to win in a consolidating plot play U.S. market, we think our big two customers in the longer term have a lot of potential, including with the homes past and what they are doing to invest in their networks. We do absolutely expect to continue this accelerating momentum we have had.

Margaret Nolan: Thanks for that, Brian. And then you gave the example of the different outcomes you were able to achieve through CSG Forte Engage, and you talked about reduced uncollected payments and increased customer engagement and a few other metrics. Are solutions and offerings like this additive to the margin profile of the business? And when you think about those different outcomes that you outlined, is there a way to kind of monetize this in a different way, like outcome-based or gain share type of arrangement?

Brian Shepherd: I will maybe take the first and Hai, you can talk about the outcome-based. We do expect in our Digital CX business and in our Payments business be able to gain strong double-digit organic growth and potentially to layer on disciplined value-creating acquisitions as we just add to our product portfolio and strength. One of the strengths on the payment side is our ability to have our SaaS platform to be able to quickly onboard merchants. And not just credit card transactions, which is the bigger percentage, but also we are one of the best in the industry at ACH, which is a more efficient payment channel, and we can do SMB or launch enterprise. And so kind of that modular approach where we can sell direct or through channel partners, ISVs who can onboard and sell on our behalf as they onboard more merchants, are two of our bigger initiatives.

As far as the business model, I think you will see us stick more with the model we are using. But Hai, do you have any thoughts on how we might use different approaches in this space?

Hai Tran: Yes, I will take that. Generally speaking, in this type of economic environment there are a lot of financial pressures on our customers across multiple different geographies in the industry. Our ROI-based selling approach is something that we are hyper focused on. It is very much outcomes-based, whereby it is very quantifiable. That differentiates us to be able to really speak directly to customers around some of their real challenges and how we can be able to quantify.

Operator: Your next question comes from the line of Matthew Harrigan with Benchmark.

Matthew Harrigan: Thank you. Congratulations on the results, clearly. I was curious if you could elaborate on what you are seeing on the M&A side as you target that $1.5 billion in top line, particularly given the latitude you now have with your balance sheet and that you think pricing is getting saner in the SaaS market. Are you seeing opportunities that really fit like a glove with what you are trying to do, particularly given your capacity to leverage AI? Thank you.

Brian Shepherd: Thanks, Matt. Hope you are doing well. Absolutely, M&A is part of our strategy. The two questions we probably get the most from investors, one, can you still get to $1.5 billion by 2025? And two, are you going to do that with discipline to deploy capital? The answer that we have hopefully demonstrated with the results of the deals we have done is yes on both. First, what we see on the acquisitions, we continue to look for strategic product capability that can be added to what we do and bring more value to our end customers. And if we do that with good integration of culture and people, then that is how we have been able to unlock value with the acquisitions that we have done. And we like our track record. And as we do that, the second thing we like, we see valuations on various companies, either they might want to divest certain assets or on companies who would sell the whole company, valuation to come down closer to what we would see as a good value-creating strike zone.

Because we think the best way you can mess up a good acquisition is to overpay, and so we do think valuation continues to say there will be good actionable deals in the coming period of time. Now, specifically on the discipline, and hopefully we have seen with the deal we did with Kitewheel, it was an AI-driven data-driven platform that became a centerpiece of our Exponent launch in Digital CX. We see the results on double-digit organic growth and profit contribution coming from that. We see Tango Telecom, where we added capability in to our global telco offer. Really strong performance. Same thing on DGIT, adding CPQ and order management. In all the areas, we expect and are constantly looking at dozens of deals and being very disciplined to make sure it comes into the strike zone of what a good deal looks like.