CSG Systems International, Inc.

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 speaker's remarks, there will be a question and answer session. Please limit your question to one initial and one follow-up question. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star and one. And I will now turn the call over to John Ray, head of investor relations.

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 Shepherd, Chief Executive Officer, and Hai Tran, Chief Financial Officer. With that, I'd like to now turn the call over to Brian.

Thanks, John. Hi, everyone. We appreciate you joining the call as we begin on slide four. 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've 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. For 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 buy back 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 five, I will reiterate the 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're 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 fast or 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 for 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, in faster growth industry verticals like retail, government, financial services, healthcare, technology, and more. Moving to slide six, 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 six, we believe that 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 half a 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 seven, we wanted to highlight just how far we've 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 to $85 million in new organic revenue growth in this year alone, almost a 6x 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 eight, we had good successes through the first nine months of the year, and 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 US. 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 nine, 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 and 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 multi-channel, 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 nanosite 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, they 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. At CSG, AI starts with embracing the technology, encouraging experimentation, and building the foundation and framework that 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 allows 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're expanding these capabilities to take advantage of the new capability offered with generative models. A recent example of this is the exciting launch two weeks ago of CSG's BillExplainer.ai new product. One of the biggest drivers of calls into contact centers in many industry verticals is when customers see something on their bill that surprises them. BillShock 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 wow big customers all around the world. I'll wrap up on slide 11 before turning it over to Hyde. 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 healthcare, 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 are 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've always come to expect from CSG. With that, I will turn it over to Haim.

Thanks, Brian. Let's walk through our Q3 and nine-month year-to-date financial results, and then I'll wrap up with some conclusions. Starting on slide 13, we generated $817 million of revenue for the first nine months of 2023, which represents 9.0% year-to-year growth, all of which was organic. Additionally, we reported 5.0% year-to-year organic revenue growth in Q3. Our strong first nine-month revenue increase 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 uplifts we recognized in Q1 was related to the timing of certain license-oriented deals moving from Q4 of 2022 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 of 2% to 6%. Our first nine-month 2023 non-GAAP operating income was $142 million, or a non-GAAP adjusted operating margin of 17.5%, as compared to $124 million, or 16.6% in the prior year. Our 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 expand our operating leverage. Moving on, our non-GAAP adjusted EBITDA was $183 million for the first nine months of 2023. or 22.7 percent of revenue excluding transaction fees as compared to $166 million, or 22.3 percent in the first nine months of 2022. Lastly, our year-to-date 2023 non-GAAP EPS was $2.76, an identical result from the prior year period as increases in revenue and operating margins were offset by higher interest expense and foreign currency headwinds. Turning to slide 14, I'll 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 rates, putting up a revolver for future M&A, and giving our balance sheet a better mix of fixed and floating rate debt. Equity shareholders will experience no equity dilution until our share price reaches approximately $96.50. As a reminder, we raised $425 million in convertible debt with a 3.875% coupon, and we paid $275 million on our revolvers. Moving on, we ended the third quarter with $147 million of cash and cash equivalents. That, along with our outstanding debt at September 30th, 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 in 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 the page, we'll touch on guidance. As Brian mentioned, we are raising our non-GAAP EPS rates to $3.50 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 rates And with respect to our free cash flow guidance, we now expect to come in towards the lower end of our original $80 to $120 million target due to the timing of certain working capital movements. 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, CST will continue to relentlessly prioritize every investment we make and stay disciplined in the allocation of resources and the use of capital. Innovation, including how we leverage the 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 discipline value-added acquisitions. We believe this approach, combined with our consistent capital distribution, will serve our shareholders well. With that, I'll turn it over to the operator to facilitate the question-and-answer session.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star and then the number 1 on your telephone keypad. Please limit your question to one initial and one follow-up question. Your first question comes from the line of Maggie Nolan with William Blair. Your line is open.

Hi, 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 kind of non-repeatable items, you're still at the high end of your growth range. So 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.

Yeah. Hi, Maggie.

Thanks a lot for joining the call and appreciate the question. We absolutely do believe we can continue to execute on an accelerated organic growth. As we've said, two to six percent is our range. We fully expect good performance to be at the midpoint or higher, so we absolutely do believe that accelerated faster growth is sustainable. There's a couple of things that's going on. First, the diversification in the new industry verticals. In the AI-driven digital CF, we're having 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 SAS model, then that stays above the cut 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 volume growing. And both those two on diversification are big contributors. To 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 configuration less customized solutions, lower cost, be more agile, leverage a product business model is resonating all around the world. And so we'd love to grow as we can continue to see in the global telecom business. And I think if we come all the way back into our American cable business, you know, there's been questions about, you know, slowing broadband net ads in that space. First, we see significant growth of 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's positioned to win in a consolidating block play U.S. market, we think our big two customers in the longer term have a lot of potential, including with the homes passed and what they're doing to invest in their networks. So we do absolutely expect to continue this accelerating momentum we've had.

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. So 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?

Yeah, I'll maybe take the first, and then Heidi can talk about the outcome-based. So, we do expect in our digital CX business and in our payments business to be able to see strong double-digit or gain, and potentially to layer on discipline value creating acquisition as we just add to our product portfolio and string. One of the strengths on the payment side is our ability to have our SaaS platform to be able to quickly onboard merchants, handle not just credit card transactions, which is the bigger percentage, but also we're one of the best in the industry at ACH, which is a more efficient payment channel, and we can do S&B or large enterprise. And so kind of that modular approach where we can sell direct, or through channel partners and 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'll see us stick more with the model we're using, but I have any thoughts on how we might use different approaches in this space.

Yeah, I think that generally speaking, in this type of economic environment, there are a lot of financial pressures on our customers across multiple different geographies and industries. ROI-based selling approach is something that we're hyper-focused on, and so it's very much outcome-based, whereby it's very quantifiable, right? That differentiates us, enables us to really speak directly to the customers around some of their real challenges and how we can deliver quantified.

Thank you.

Thanks, Megan.

Your next question comes from the line of Matthew Harrigan with Benchmark. Your line is open.

Thank you. Congratulations on the results, clearly. I was curious if you could elaborate on what you're 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. I mean, do you think pricing is getting saner? in the SaaS market? And are you seeing opportunities that really fit like a glove with what you're trying to do, particularly given your capacity to leverage AI? Thank you.

Thanks, Matt. Hope you're 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've hopefully demonstrated with the results of the deals we've done, is yes on both. So first, what we see on the acquisitions, we can 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's how we've been able to unlock value with the acquisitions that we've 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 that would sell the whole company. 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've 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 digit, adding CPQ and order management. So in In all the areas, we expect and are constantly looking at dozens of deals and being very disappointed to make sure it comes into the strike zone of what a good deal looks like. The one area that I think we are seeing valuations come in is more in the AI space. And so what we see right now is, A, we have strong AI capabilities inside our four walls, and we're leveraging that for internal efficiencies as well as improved and expanded the offering and the value we bring customers. but you're seeing us take a more partner-driven approach to partnership with Microsoft. There's big players in the space, and there's a lot of the smaller players that have what we might consider over-inflated valuations. We think there's going to be a lot of shakeout at the low end of this, so we don't think that's a great, highly disciplined approach on the AI side specifically, but we're not ruling any of those out, again.

Beautiful. Thanks, Brian. Thanks so much.

Your next question comes from the line of Timothy Horan with Oppenheimer. Your line is open.

Hi, guys. Congratulations on moving so rapidly on AI. Just wanted to focus on that, if you don't mind. Do you own the labeled data to train the models? And can you give us a little bit more color on what model you're using? And how long do you think it will take to have a material impact on your financials, you know, either to reduce expenses or drive new revenue growth? And do you have a lot of, you know, new products in mind that can leverage AI? Thanks.

Hey, Jim. Thanks. Really good questions and timely questions. First, AI, you know, the way we describe it is, We don't think we're bleeding edge, but we do think we're bleeding edge in terms of how we're deploying and using. On the data side specifically, I would say that the majority of the data is actually not ours. There is some data in some of our solutions and some of our businesses where we actually have access to and can leverage more directly. But I would say the bigger is it would actually be customer's data, and they would be needing to opt in and work with us on that as many of them are and looking at different opportunities. specifically on kind of the balance between revenue growth and accelerating and contributing to being at the upper end or above the upper end of our long-range targets. You've seen us launch three products, and there's more in the works around that. And we just think it's kind of core to the capability, and it's an extension of what we've already been doing on machine learning and others. So we're really excited by the BillExplainer.ai launch. to address bill shock, that's a huge opportunity and a big driver in cable, global telecom, but also in lots of other industries, whether that be insurance, utilities, other enterprise businesses that serve consumer on that side. So, we do expect to be doing more launches around it. And on the model side, you'll see us, we have data scientists inside our four walls who will also leverage some of our bigger partners and some of our smaller partners that have targeted large language models around that. Maybe you want to talk about the efficiency side. Our long-term range is 16% to 18%. We've shown we can solidly operate this company in the 17%. We'd love to get to the upper end. How do you think about AI on the margin side?

Yeah, I think it increases the pace of rate with which we can get to the upper end of our target. We are clearly trying to take full advantage of the new and emerging technology. And we're democratizing that across the organization, as we see, right? As you can see in the chart that Brian shared, right, just every department across the organization are now starting to explore unique and interesting opportunities. And that's where I think, you know, we really unlock a lot of the efficiencies in the model.

And then just maybe two financial questions. Broadband has been, revenue has been relatively stable now in the last three, four quarters. Would you expect that to accelerate and, you know, what's it going to take there? It sounds like you have some, you know, basically new products, maybe it's related to AI to kind of get that going again.

Yeah, on the cable side, I think there's a couple things. One, I think one of the biggest maybe misunderstood aspects of our story and our company is is video cord cutting in our core big cable customers does not hurt CSG. It's about the customer relationship. And what we focus on is even though we have a high market share in North American cable, we have huge headroom for growth. They do a lot on internal IT development. There's still meaningful parts that we don't serve today that we could displace vendors. They also, we think, will grow through some of the current challenges they have. So we absolutely expect and think that our big two and our North American table in general can grow year in, year out at or above the rate of the company growth. And any given quarter may not be that way exactly. That's on us. So what do we do in that? We've got to bring in more value. We've got to constantly have the best operational uptake of any vendor they use, because usually when bigger customers feel pressure, they tend to try and give more to those partners and vendors that are serving them best. So ours is we don't take it for granted. We try to go earn that respect and value every day. We absolutely think we can continue to do it nicely, even with some short-term headwinds or even intermediate headwinds that any of our customers may face. Thank you.

Your next question comes from Gregory Bunz, Sadoitian Company. Your line is open.

Good afternoon. Why are margins projected to be down sequentially in the fourth quarter? And then looking beyond the fourth quarter, obviously, you're driving steady, consistent organic growth, driving that scale. Do you see upside to your operating margin targets? I know in the past, historically, you've kind of operated at certain points at higher levels of profitability? Is there potential there for margins to expand from here?

Yeah, thanks, Greg. First, you know, we thought about that in terms of the guidance for the remainder of the year. And so first, we always come into every quarter expecting and believing we have a chance to be at the upper end, not the lower end. That is absolutely our expectation to be able to drive that from a revenue growth, but we know we've got to execute well in Q4, and we're already a month into the quarter, so we don't expect necessarily to have any step down, but let's see how Q4 comes in. We've got some work to do with two months left in the year. Now, specifically on the margin side of that, it was great to see where we actually last quarter increased our non-GAAP adjusted out margin range up to 16.75 to 17.1. You see us now through three quarters of the business at 17.5, which is just shy of 100 basis points improvement over last year. It's well within our 16 to 18 percent. And what we like to say is, we like 17 better than 16. Now that we're operating solidly at the 17, we're not giving guidance yet for next year. we don't expect to take a step back, Greg. And we talk a lot about just operational discipline, and that's more small terms of the wrench, constantly looking at how do we redirect our objects to better sales, better value and performance for customers, and accelerated growth. And that's what we're doing. We expect to continually expand operating leverage and have bottom line grows faster and faster than top line. Year in, year out, there may be some quarter that's a little better or a little lower than the others, but we like that this one we're seeing across our business. We thank our global industry leaders for finding a way to do that in a tough, exciting market.

Okay, and what is the share count now? I guess, where do you expect the share count to be in the fourth quarter?

In the fourth quarter, Hold on. Let me get back to you on that, Greg. I'll give you a very specific number.

Okay, great. Thanks.

What we've said now, just as I start pulling that out, what we've said on the share buyback is first after the big three, where we bought back $107 million worth of stock, you'd see us do a little, it is the third leg of our capital allocation stool. First is hands-off glass on dividends. Secondly, focus on strategic value-creating acquisitions. And then third, have buybacks and a minimum offset share dilution. I think you'll see, at least at this stage, share buybacks focus more on a steady approach. It is more along the lines of offsetting dilution after the big Q3 and the big prior year we'll get on buybacks. And, Greg, you can see from Molly's book, it's about 30 minutes.

Okay. All right, great. Thank you. Thanks so much, Brian.

Your next question comes from Shalom Rosenbaum with Stifle. Your line is open.

Hi. Thank you for taking my questions. I thought we would just first question just a little bit of just kind of the sequential gyrations, this big step up in telecom revenue. And I know that's an area of focus for you, Brian. Maybe you could talk about that and compare that with the two large clients had a little bit of a step down and Are there just, like, projects that are rolling in and off on that, maybe just a little bit more color on that, and then I have a follow-up.

That's great, Shlomo. Thanks so much for the questions. Yes, on telecom, I mean, I guess what I would say is we've been talking a while about the giant wins we've had in global telecom, and we're gaining a lot of traction in that part of that business. And so when we deploy a big win in telecom, there's both recurring revenue maintenance, recurring license, other fees that we get. And then there's also implementation that would come on. So the big deployments in Saudi with Mobiley, the second largest. We've got big global customers in South Africa, in South Pacific, in Australia. And then we talked about the big one in the Caribbean. So that's just part of the growth and the momentum building that's going on in global telecom. And then you'll see that evolve some, including with the implementations revenue that gets recognized in a given quarter. So just a lot of traction in that part of the business. In our big two, you've actually seen really strong growth prior to this quarter, strong growth over the last couple of years in the combined big two. And this quarter, it was more flattish. And I would say we get an evolution of some of its services. The majority of it is recurring revenue. So you'll just get some fluctuations around that in a given quarter. But kind of our overall message, like we commented on a couple of the earlier questions, we absolutely do believe that our big cable customers can grow consistently in the 2% to 6% range, and in some quarters can be at the midpoint or higher, and you'll see some deviation on that quarter in, quarter out.

Okay, great. Thank you. And then just pointing to the lower end of the free cash flow guidance range, are you seeing your customers – kind of extending the payment, I don't know if I'd call it terms, but maybe just paying late in the current environment, or is that really just kind of a timing of milestones for various implementations and things like that?

Yeah, it is primarily timing of milestones. You know, I think that our customers have still been fairly good about making the payments. Our age AR is not kind of – hasn't aged, you know, or looked materially different than it has in the past. It is more about the unbilled balance growing, and so I review that as a timing issue, particularly around some of the larger transformative global telco projects that we're doing.

Thank you.

The final question will come from Brett Neblanche with Cantor Fitzgerald. Your line is open.

Hi, guys. Thanks for taking my question, and congrats on the quarter. Maybe just one on gross margin. I think it's, you know, kind of stepped down, you know, a couple hundred basis points year over year, all this year kind of sequentially declined. What's driving that, and what should we expect on gross margin on the go-forward range or go-forward basis?

The majority of any movement on gross margin will be around mix of business, right, today, right? And in our business, we have obviously a combination of services, revenue, and license revenue, SaaS revenue, all of which have a very different profile. So the mix of business will drive some of that. Now, with that said, you know, in particular, if we look at our non-telco business, right? I'm fascinated by the business on payments and CX. They're totally SaaS business. So as those ramp up, that's going to improve the mix. As we drive greater efficiencies across the board in our other lines of business, that's going to drive opportunities for margin expansion on the gross margin side as well. So our expectation, as Brian said, I love the phrase, a turn of the wrench.

that will continue to kind of have a steady march towards margin improvement you know mix or something perfect understood and then um just on the ai front um talked about a lot of using it internally to make your employees more productive um do you think this could be a potential driver for um maybe you guys to reduce head count as this becomes more intertwined in your organization

I think that there's a lot of things that I think a lot of companies are looking at. To be more efficient, absolutely. And the question is, though, if we can continue like we expect to do to continually accelerate organic revenue growth, that means it's going to potentially lead to the growth in headcount over time. And so what you may see is more of a headcount avoidance as opposed to a specific headcount cut because of the amount of growth we're having. Overall, do we expect it to drive improved customer service, more efficient customer service, more efficient sales and G&A, and more efficiency in our R&D capabilities? Absolutely across the board. And we're already seeing that with some of the just innovation that our teams are unleashing in all parts of the business. Will it lead specifically to headcount cuts? I'd say more headcount avoidance at this stage. But that's something where we could watch and update on future quarters.

Perfect. Thanks, guys. Really appreciate it. Thanks so much, Brett.

And the next question comes from Nihal Chokshi with Northland Capital Markets. Your line is open.

Yeah, thank you. And nice strong quarter here. Given that it was a nice strong quarter, why not raise calendar 23 guidance?

Hey, all. Hope you're doing well.

Yeah, no, it's a good question. Like we said, we talked about the guidance. We love the performance, the momentum that we're building in the business. And we decided to keep the guidance the same and focus on just seeing how we can perform to get to the top end or above in Q4. And so we do fully expect to happen. I think when we shared some maybe color at the end of Q1, we said this was going to be a little different shaped year. We said Q1 with the giant would look a lot, Q4 would look a lot like Q1. We said Q3 would look a lot like Q2. So what you saw just announced was Q3 actually came in a million dollars ahead of Q2. We delivered a giant Q4 last year and Q1. Now what we're going to do is rinse and repeat and have Q4 beat both last Q4 and material aid and the strong Q1 we had. But I would say we just decided we wanted to have our results be better than our predictions, and we just wanted to make sure that we're overachieving with what we see.

Okay, great. Thanks for that explanation. Thanks, Daniel.

And there are no further questions at this time.

I will hand it back to Brian Shepard, CEO, for closing remarks.

Oh, great. Thanks, everyone, for joining. I guess what we would say in closing is hopefully the results we've been putting out quarter in, quarter out so far this year prove two main things. We absolutely intend to execute against a amid single-digit organic growth like clockwork. That's up to us to prove with results, not words. That absolutely is what we believe we can and will continue to deliver. There's no reason our bottom line shouldn't grow as fast or faster than top line with great disciplined execution. And we look forward to just continuing to create more value. And we're super grateful to every CSG-er everywhere around the world that continues to just dream bigger and deliver bigger and better results. More to come in Q4. Thanks for the time.

This concludes today's conference call. You may now disconnect.