CSG Systems International, Inc.

Ladies and gentlemen, thank you for standing by, and welcome to the CSG Systems International first quarter 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. John Ray, head of investor relations, You may begin your conference.

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. 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 8K. With me today on the phone are Brian Shepard, Chief Executive Officer, and Hai Tran, Chief Financial Officer. With that, I'd like to now turn the call over to Brian.

Thanks, John. Good afternoon, everyone. For those using slides today, please join us on slide 4. I'm pleased to share that CSG's business momentum continued in Q1 2022 as Team CSG delivered another strong quarter of growth on top-line revenue and bottom-line EPS, even as we absorbed the discounts associated with the exciting renewals of Charter Communications and DISH that we signed and announced in Q4 of last year. It is a testament to the strength of our recurring revenue SaaS business model and the continued success of our sales performance, which is as robust as ever to grow revenue and DPS in the quarters following two of our top three customer renewals. Equally important for us, as proud and as committed as every CSG employee is to deliver excellent results every single quarter, The elevation and transformation of CSG is much more profound and longer-term in nature than any given quarterly results. At CSG, we aspire to be a $2 billion and beyond purpose-driven SaaS platform company who envisions, invents, and shapes a better, more future-ready world. We will hold ourselves accountable to change the lives of our employees and the customers we are honored to serve for the better. We will redefine the industries we are proud to lead. We will make a lasting impact in the communities and the world in which we operate across the wider environmental, social, and governmental spectrum. While we still have much important work to do, we are very proud that leading organizations are beginning to recognize the meaningful commitment CSG has and will continue to make on the ESG and D&I fronts. To this point, I'm delighted to announce that we were recently honored to receive our first prime ESG rating from Institutional Shareholder Services, ISS for short, one of the leading ESG rating agencies in the world. This designation is based on an analysis of more than 100 sector-specific ESG factors, and those receiving high scores within their respective industry are awarded a prime distinction. And with this designation, our stock now qualifies as a responsible investment in the eyes of ISS, which is truly an honor. And on the back of our good Q1 start, we are pleased to confirm all 2022 financial guidance targets. Based on the continued confidence we have in our near-term and longer-term business outlook, we have also increased our share repurchase activity by buying back over $45 million in stock over the last 12 months with $16 million spent on share buybacks in Q1. From a product perspective, we launched CSG Encompass, an open API product platform that enables global communication service providers to unlock the potential of 5G by simplifying the complexity of multifaceted digital ecosystems that easily deliver next generation digital services and extraordinary customer experiences. I'll provide more detail on this exciting new product in a few moments. And we continue to win big in the North American cable market where we signed a multi-year contract renewal and expansion with a top six broadband cable provider in the U.S. And with respect to Charter Communications, who we signed a $1.5 billion six-year contract expansion in November of 2021, the subscriber conversion plan from a competitor's billing system is continuing as expected, with the remaining approximately 10 million subscribers planned to be converted over the next 12 months. Our good Q1 growth proves that CSG is a strong, healthy, and resilient company especially with the backdrop of today's turbulent global economic environment. Turning to slide five, I will revisit our five strategic objectives that form the foundation of CSG's long-term future success. These themes should be familiar to everyone who has been following our big progress. CSG aspires to deliver long-term organic growth in the 2% to 6% growth range, which we proudly achieved at the upper end in 2021. We aim to add operating scale and expand our operating leverage by growing to at least $1.5 billion in revenue by year-end 2025 with a stretch goal of $2 billion in revenue. We strive to be the number one SaaS provider of choice for global TSPs by providing the most value-adding technology solutions and by being easier to do business with than our competitors. We plan to diversify our revenue even more as we expand in big, faster-growth industry verticals with more direct sales and channel partner success in retail, government, financial services, healthcare, technology, and more. And finally, we will complement our accelerated organic growth with disciplined, value-enhancing M&A to turbocharge the value we bring our customers and our shareholders. Moving to slide six, you can see that we performed well in Q1 against all five strategic objectives. First, with respect to revenue growth, we reported $264 million in total Q1 revenue, resulting in 4.5% year-over-year growth. We're also proud that EPS growth grew even faster at 4.9% year-over-year. On the right side of slide six, we believe that the current economic environment benefits CSG's high recurring revenue SAS business model, and our strong healthy balance sheet creates attractive organic and inorganic market opportunities on the march to $2 billion and beyond. As a reminder, by 2025, we aspire to gain scale in the markets where we compete to exceed $1.5 billion to $2 billion in annual revenue. We aspire to expand CSG's operating leverage and use our strong, healthy balance sheet to deliver EPS growth that outpaces revenue growth. We aspire to consistently deliver better and better business results so that our shareholders are rewarded with the trading multiples that they deserve when they invest in a purpose-driven, faster growth, multi-industry vertical SaaS platform company like CSG. In our base case, we aspire to exceed $1.5 billion in revenue which means even if we come up short against our stretch case ambitions, CSG will still grow revenue by over 50% and add over $500 million in profitable recurring revenue by 2025. To reach the $2 billion stretch case revenue aspiration by 2025, we will continue to allocate capital to its most value-added use and to eventually close bigger-scale acquisitions to become even more transformational for CSG and the industry. On this last point, I will continue to reinforce a key point shared on almost every analyst and investor call. This management team is laser focused on creating shareholder value, not building empires. We will hold ourselves accountable to adding scale, accelerating growth, expanding our operating leverage, and deploying capital to its highest and most productive use, all with a focus on rewarding our investors, just like we work hard every day to delight our customers and our employees. Turning to slide seven, we had good success in Q1 2020, and our goal to be the number one technology provider of choice for communication service providers globally. And our continued sales success with both North American and global CSPs proves that we are executing well against this strategic priority. Our revolutionary new product, CSG Encompass, enabled us to launch a more holistic and end-to-end solution to solve the most complicated problems for CSPs around the world. Encompass is a SaaS-based open, integrated, and modular solution that significantly simplifies the complexity of multi-sided B2B2X ecosystems and business models for our global telecom customers. At its core, Encompass brings together CSG's cutting-edge revenue management and digital monetization products with two of our acquisitions from last year, Tango Telecom and Digit. As a reminder, Digit technology provides a configure price quote CPQ for short, order management platform that has a strong presence and adoption in the global telecom market, while Tango Telecom's technology arms CSG with real-time dynamic policy and call control management, both of which are absolutely crucial to global CSPs in a 5G world. We are excited to announce some early Q1 wins on the new Encompass platform, including our deal with Victrack, the state-owned enterprise that manages public transport infrastructure in Victoria, Australia. We deployed Encompass's CPQ and order management solution to support the digital transformation and automation of its telecommunications network. With CSG's industry-leading platform, VicTracks' exciting network and processes now deliver more efficient and cost-effective solutions to their in-transport government and wholesale customers. In the cable market, we have long-term guaranteed contracts to be the BSS provider of choice for all 65 million combined Comcast and Charter subscribers. the two largest cable providers, with CSG having migrated tens of millions of subscribers off both Amdocs and Netcracker over the last six years. We plan to build on this market share success in the years ahead, working hand in hand with Charter CFG successfully migrated over 5 million subscribers in the Ohio, Wisconsin, and Kansas City markets in 2021, including completing over 4 million migrations in the second half of last year. While the timing could still vary a little, we are on track with the existing conversion plan to migrate the remaining 10 million charter customers over the next 12 months. Additionally, we signed a multi-year renewal and expansion with the top six U.S. cable company with over 1.6 million homes passed. With this deal, we expanded our standing as this customer's billing provider of choice and will continue to support the cutting-edge customer with additional services like our field service management platform. And CSG's success is not limited to North America. In the global telecom market, we continue to grow with new wins and contract extensions with leading telecom operators all around the world. During the quarter, we closed a fantastic deal with Optus, the second largest wireless company in Australia with over 10 million customers. This win positioned CSG as the strategic rating and revenue management provider of choice for Optus Wholesale. What was so special about this win is that we were able to unseat not one, but two incumbent service providers, further proving that CSG has the right products and industry experts to unseat and beat incumbent providers. Further, we signed a multi-year deal with Axiata Sri Lanka. This deal, our digital wholesale SaaS solution, replaces one of our key competitors, we look forward to further helping axiata who is one of apac's largest telecoms group with six operating companies to solve their most pressing business challenges turning to slide eight since 2017 csg has grown revenue from exciting new industry verticals like retail government financial services and healthcare from 7% of total 2017 CSG revenue to over 24% of total revenue at year-end 2021. And while this metric can vary a little bit from quarter to quarter, it is extremely encouraging to see 27% of our Q1 revenue came from new industry verticals. Being a partner of choice for some of the biggest brands in higher growth industry verticals where CSG helps them digitize and modernize their customer engagement and cloud payments continues to be a big game changer for CSG. Last year we won and later expanded deals with two of the largest drugstore chains in the US and one of the largest retailers in the world who all selected CSG software to power their retail and clinic customer engagements. Our solution is increasingly important to all three of these large customers, given the unprecedented number of inbound requests that healthcare providers, retail pharmacies, and government agencies are getting related to vaccinations, appointments, and prescriptions. And I'm pleased to report that during Q1, we continued to win new business into space as we further expanded our relationship with and closed meaningful new business with one of the largest drugstore chains in the U.S., as part of a new digital engagement deal that we signed in the quarter. Further, a couple years ago, we signed a very good deal with Formula One to manage its direct-to-fan OTT experience, where we've managed user subscriptions, payments, entitlements, and devices. I'm proud to announce that we signed a multi-year contract with them during the quarter. We are extremely excited and proud to continue serving Formula One as the global popularity of this racing series continues to explode and grow all around the world. In the payments market, we returned to meaningful revenue growth in the quarter with good double-digit growth in the last two months of Q1 coming from our strong industry vertical sales results propelled by our industry-leading Recurring Revenue SAS integrated payment platform. CSG Forte provides award-winning full payback short for payment facilitation capabilities to 88,000 active merchants and ISV partners, which was a robust 7,000 merchant increase in Q1 who need ACH credit, payment gateway, and payment processing capabilities serving a wide range of recurring revenue industry verticals. As a leader in ACH processing, we continue to add scale by signing ISV partners in fast-growing industry verticals like property management. In March, we announced a strategic partner with Filosofo, which is the only provider of no-code cloud-native technology connectors. This partnership enables government agencies to easily connect and augment their technology stacks with enterprise resource planning software vendors via a single processing partner. Looking ahead, we've built an exciting sales pipeline in our payments business across multiple verticals that are contributing to our improved revenue growth which bodes well for our ability to sustain the good double digital organic growth in the payments market. Moving to the right-hand side of slide eight, we continue to execute against our disciplined value creation M&A playbook. We expanded our offering in the digital customer engagement market with the purchase of Kitewheel, a SaaS-based recurring revenue company that supports real-time interaction management through omni-channel journey orchestration and analytics. And this transaction formed the foundation of CSG Exponent Launch, our bold and innovative multi-vertical market offering in the digital engagement space. Plus, as I mentioned earlier, the acquisition of Tanger Telecom and Digit enabled us to launch CSG Encompass, which I spoke about earlier. As we look ahead, we will remain laser focused on winning and closing more and bigger organic and inorganic deals in these exciting new arenas and unlocking even greater value from existing and new acquisitions that will help CSG grow and elevate even more. As I wrap up on slide nine, across all five strategic priorities, the results speak for themselves. CSG is building meaningful momentum and elevating every aspect of our business that we fully expect will fuel our continued long-term growth and transformation. We hope you see the same thing we do when we analyze our business. CSG's purpose is bold, inspiring, and growth-oriented. Our strategic vision and daily execution are focused and disciplined. We are elevating our culture, our diversity, and our global talent. And now, I will turn it over to Hyde to provide more detail on Q1 results and our outlook for fiscal year 2022. Hyde Hyde- Thanks, Brian.

As Brian highlighted, we are off to a good start in 2022. Let's walk through first quarter financial results, and then I'll wrap it up with some key conclusions. Starting on slide 11, we generated $264 million of revenue and $246 million of non-GAAP adjusted revenue during the first quarter. These results represent 4.5% and 4.1% year-over-year growth, respectively. Approximately two-thirds of these increases were attributed to organic growth. The year-over-year increase in revenue and non-GAAP-adjusted revenue was driven primarily by the continued growth of our revenue management solution, where we serve many of the largest communication service providers in the world. In addition, we are seeing healthy growth in our customer engagement offering, where we serve customers in large, high-growth industry verticals such as healthcare, retail, financial services, and government. I would also like to note that this growth was in the face of 3% to 5% discount headwinds for two of our three largest customers. Our first quarter non-GAAP operating income was $40 million, or 16.3% of non-GAAP adjusted revenue, as compared to $40 million, or 17.0% in the same prior year period. This result is consistent with our long-term target range of 16% to 18% operating margins. Our non-GAAP adjusted EBITDA was $56 million for the first quarter, or 22.9% of non-GAAP adjusted revenue, as compared to $54 million, or 23.0% in the same prior year period. Moving to our first quarter non-GAAP EPS, we delivered 86 cents, a 4.9% year-over-year increase, as compared to 82 cents in the prior year period. we anticipate our bottom line EPS growing as fast or faster than our top line growth for the full year. It should be noted that like other companies, we continue to monitor and navigate the current uncertain macroeconomic, geopolitical, and inflationary environment. So turning to slide 12, I'll go through the balance sheet, our cash flow generation, and shareholder returns for the quarter. Our first quarter 2022 cash outflow used in operation was $6 million as compared to an outflow of $2 million in the prior year period. Further, we had non-GAAP-free cash flow of $16 million in Q1 2022 as compared to $10 million of outflow in Q1 of 2021. As a reminder, the first quarter of each fiscal year is generally lower than our other quarters due mainly to the payment of year-end accrued employee incentive compensation from the previous year. Our full-year cash flow generated from operations before working capital movement increased from $49 million in Q1 2021 to $50 million in Q1 of 2022. Due to the high visibility and recurring nature of our revenue and cash flow, we continue to expect robust cash flow generation in the remaining quarters of 2022. Moving on, we ended the first quarter with $188 million of cash and short-term investments. That, along with our outstanding debt as of March 31, 2022, results in $204 million of net debt. And our net debt leverage ratio remains under one times. Over the past eight months, we have completed a couple of financing transactions which have reshaped our balance sheet. In March of this year, we settled our outstanding convertible debt. This transaction followed the refinancing of our credit agreement last September, which had the benefit of extending the tenor of our term debt, lowering our borrowing costs, and increasing our revolvers to $450 million, of which $205 million remains undrawn. As we had mentioned before, we are currently reviewing ways to enhance our capital structure and look to execute a thoughtful plan in the coming quarters. Our balance sheet remains in great shape, and we have a lot of options for future opportunities. Moving to the bottom right of the slide, we declared $9 million in dividends during the quarter. In addition, we repurchased $16 million of common stock under our stock repurchase program. Looking ahead, we expect our 2022 share repurchases to offset the expected dilution from employee stock expenses. Moving to slide 13, we're pleased with our first quarter 2022 operating results. Taken together, the strong start for the first quarter and our outlook for the remainder of the year gives us the confidence to confirm our 2022 financial guidance that we laid out in February, which is outlined in the table on the right of the slide. We continue to believe our revenue will be weighted towards the second half of 2022 with approximately 51% of our full-year revenue realized in our third and fourth quarters. Additionally, as I mentioned before, we continue to monitor the current uncertain macroeconomic, geopolitical, and inflationary environment. And finally, I wanted to leave you with a few concluding thoughts. We believe that the momentum we are creating in the market, the results that we are generating, and the laser focus that this leadership team has on executing against our strategic priorities positions us well in the marketplace. TSG is committed to accelerating our revenue growth and diversifying our industry vertical revenue, including closing and integrating discipline, value-adding acquisitions. And we believe this investment in our future strategic growth, combined with our consistent capital contribution in the form of dividends and share buyback, will serve our shareholders well. With that, I'll turn it over to the operators to facilitate the question and answer session.

At this time, if you would like to ask a question, please press star followed by the number one on your telephone keypad. Your first question comes from the line of Maggie Nolan with William Blair. Your line is open.

Hi, thank you. I wanted to ask a little bit more about CSG and Compass and understand, is this an additive offering for your existing CSP customer base, or is this about kind of streamlining services and achieving that goal of being easier to do business with than your competitors. I guess any comments on the opportunity there and then early adoption or penetration would be helpful.

Yeah. Hi, Maggie. Thanks for the question. This is a new product launch. What we've seen in the market is enterprise is one of the fastest growing and most profitable segments for global telecom operators all around the world. And so we had an opportunity after the acquisitions of Tango Telecom and Digit to to fully integrate a modular open API structure where we could help enterprise telecom businesses both launch new marketplaces and allow them to bring on new partners that could really accelerate revenue and help them with a return on their 5G investment. So when you think about what they're trying to do all around the world, they're trying to make it easier to buy a broad range of goods and services. So it unifies the catalog. It provides configure price quote. It improves SLA response time. It deals with order orchestration. It really helps telecom businesses launch and monetize new services to gain that return.

Okay, that's helpful context. Thanks. And then on the acquisition pipeline, since that's an integral part of your strategy long term, can you just comment on how that's looking? Are target companies becoming more expensive? And is large-scale acquisition still a likely best use of capital in the near term here?

Yeah, no, there's a couple good questions on that that we could give some insights. First, on the ones we've done, we're really focused on continuing to create and extract value. So you saw us launch CSG Exponent in the latter part of last year. for that really is a customer experience, customer engagement platform that helps big brands and lots of verticals. That's what's contributing to some of the sales success that we're seeing in the market so we can win big in those new verticals. Same thing now with the launch of CSG and Compass. Specifically on the macroeconomic side, We do believe that some of the turbulence that we're seeing more globally actually can create attractive, disciplined buying opportunities for CSG as we continue to execute the M&A strategy. So we're focused in several of those areas. We try to be very disciplined with a pretty tight sweet spot on what we believe an attractive midsize or larger acquisition is, and we think the economic environment might make it even more attractive as we continue to pursue those opportunities on the strategic side.

Thank you.

Your next question comes from the line of Greg Burns with Sudodian Company. Your line is open.

Just following up on the M&A line of questioning, when you look at opportunities in terms of maybe new verticals or technology, what are your focuses or what are you looking at in terms of expanding your platform maybe from a tuck-in technology or vertical perspective? And then if you use something more transformative, is there any particular – market that you'd be looking at, whether it's something you're already in or a completely new industry?

Yeah. Hi, Greg. Thanks for the question. It really covers a couple different avenues. We stay very flexible and open whether the deals and the acquisitions would be larger, midsize, and smaller. It really depends on the SaaS technology, the contribution it could bring to accelerated revenue growth, and how it could help us package our solutions and technology together to be more relevant to those big brands. So a couple of key areas that we focus on that kind of vary by industry vertical. One, we look for solutions that are SaaS-based that can help us in monetization, customer experience, customer engagement, and in digital payments. We really focus on those areas. We think that there's an opportunity to expand scale. So if it's more of a scale acquisition, then it needs to be able to have sticky revenue, be accretive, have great cost synergies, as well as contribute to the revenue growth. If it's more on the higher growth SaaS end of that, then we're looking for it to be highly complementary, where we can easily integrate into our existing suite, still provide a modular approach that will enable us to expand either the geographic global reach of our solutions to expand our addressable market and our growth rate, and to be more value-adding and relevant to the customer. So we really look at M&A opportunities across that entire landscape with that focus area.

Okay. And then in terms of charter, the decline in revenue year over year and sequentially, is that strictly a function of the price resetting? Is that fully baked into the numbers now? And do you expect revenue to grow from here? Greg, the answer is yes, and yes, right? Because I think part of the renewal here enables us to transition about 15 million subs, of which we've already moved over about 5 million subs thus far. So there's still more room for us to grow with Charter over time.

And maybe the only thing I would add to that, Greg, I think we gave a little bit of color late last year. We expected the renewal to be in the plus or minus 5% range. We saw that come in. The other aspect besides just the renewal discount that factored in, we had some revenue that was spread over the term. And so when we saw the term late last year only be three months left, some of that revenue was getting spread over a shorter period of time as we then renewed to a six-year period some revenue from the accounting standpoint that got just spread over a longer horizon. So it was really several different factors in addition to what I commented on that we haven't seen all the subscribers come on board yet.

Okay, thanks. And lastly, on the payment side, it looks like you're back to pre-pandemic levels, but maybe you can just confirm whether or not that's the case and what's the pipeline of opportunities look like for that business?

We love what we're seeing in the payments business. We started to see the performance in our sales, in our new customer account revenue activation, and our ISV channel partners really start to bear fruit and start to grow. In the second half of last year, and I think we've been signaling that for three or four months now, and we saw that really transpire. We saw January be a little bit better, but not back to normal levels. We saw very, very strong results back to pre-pandemic levels and then some. in the latter part of Q1, and we have high confidence that will continue. From a sales performance, we've outperformed in the payment space, both in direct sales and in our ISV channel partners. We've improved in the activation of new customers to basically reduce the time to onboard and revenue recognition and revenue acceleration, and we love what we're seeing in the payments business.

Great. Thank you.

There are no further questions at this time. I'll turn the call back to CEO Brian Shepard for closing remarks.

No, thanks so much. We appreciate everybody joining. We are laser focused on what we're doing to accelerate top and bottom line growth, bring more value to fantastic brands all around the world. We are super grateful to all 5,200 and beyond CSG employees for making a difference, elevating our culture. We look forward to doing bigger and better things every single quarter. Thank you for the time.

This concludes today's conference call. Thank you for joining. You may now disconnect.