CSG Systems International, Inc.

Good morning. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the CSG first quarter 2024 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 this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. I would now like to turn the call over to John Ray, Treasurer and Head of Investor Relations. Please go ahead.

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 8-K. 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 are glad you joined today's call as we begin on slide four. Team CSG got off to a good start in the first quarter of 2024, broadly in line with our expectations for the quarter. For the first time in CSG's history, 30% of our revenue came from industry verticals outside the communication service provider space. This is a testament to our multi-year revenue diversification strategy of selling our SAS suite of solutions into exciting industry verticals like financial services, health care, retail, technology, and insurance. As we continue to deliver double-digit organic revenue growth in our smaller but faster growing solutions, we fully expect that our revenue diversification will expand well above this level in the quarters and years ahead. With respect to shareholder returns, we continue to reward shareholders in the form of dividends and buybacks. In February, we announced a 7% annual increase in our dividend and returned $9 million in dividends to shareholders in March. Additionally, we repurchased $10 million worth of stock during the quarter. Over the last 12 months, we have returned over $160 million to shareholders. Looking forward, we will continue to opportunistically repurchase shares through the end of 2024 with the expectation that, at a minimum, we will buy back enough shares to offset employee stock compensation, with the opportunity to buy back more than this when we believe it will create greater shareholder value. From a financial perspective, in Q1, we delivered $295 million in revenue, generated a 16.6% non-GAAP adjusted operating margin, and reported $1.01 in non-GAAP EPS. As we have mentioned on previous earnings calls, our Q1 2023 financial results included approximately $10 million in highly profitable one-times license revenue, which distorts the Q1 year-over-year growth comparison. We knew this would be the case when we issued 2024 guidance. If you normalize out the impact of this one-time license revenue from last year, our Q1 2024 organic revenue would have grown year over year. Also, free cash flow in Q1 was slightly softer than anticipated due to several timing-related items that I will discuss momentarily. We continue to place a big focus on generating good free cash flow and believe the Q1 timing-related items will not impact our ability to meet our original free cash flow guidance for 2024. Just as we saw in 2022 and 2023, the majority of our free cash flow being generated in the second half of the year, we expect a similar trend this year. With Q1 results broadly in line with our expectations, we are pleased to confirm all full-year 2024 guidance targets. Our confidence in reaffirming guidance comes from the strong ongoing market demand for CSG's industry-leading SAS products and good sales performance across all areas of our business. CSG's sales pipeline is as large and healthy as ever, and we continue to win and deliver exciting new deals all around the world, thanks to our over 6,000 talented and dedicated CSG employees. We also wanted to share two meaningful updates on our corporate responsibility journey. We were proud to issue our second annual Global Impact Report in March, which highlights what Team CSG is doing around the world to create a more sustainable future by reducing our environmental impact, supporting our communities, and fostering a culture of inclusion and belonging. Additionally, we issued our latest carbon footprint greenhouse gas emissions report, and we are proud to have already achieved a nearly 40% reduction in our scope one and two emissions since 2019. This shows the excellent progress CSG is making with the goal of reaching carbon neutrality in scope one and two emissions, by 2035. Turning to slide five, we want to reiterate the four strategic objectives that will help CSG create greater shareholder value and allow followers of our story to track our progress. 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. The midpoint of our 2024 revenue guidance implies an approximately four percent year-over-year organic growth rate even as we face some slight headwinds at several of our north american cable broadband customers we aim to add operating scale and expand our operating leverage by growing revenue to 1.5 billion dollars by year-end 2025 with bottom line growing as faster faster than top line growth this scale will come from a combination of good organic growth combined with disciplined inorganic moves Our third strategic imperative is to be the number one SaaS provider of choice for global communication service providers by providing the most value-adding technology platforms and by helping our customers make more money in the digital world. And finally, we plan to significantly diversify our revenue even more as CSG wins big in high-growth industry verticals like retail, government, financial services, healthcare, technology, and more. Moving to slide six, you can see that we are delivering against all four objectives. On strategic revenue growth, in 2023, we reported a record-setting $1.169 billion of revenue, resulting in 7.3% year-over-year growth, our best full-year result in nearly 20 years. Taking the midpoint of our 2024 revenue guidance implies that CSG will have consistently delivered approximately 5% annual revenue growth between 2021 and 2024, with the vast majority of this being pure organic revenue growth. On the right-hand side of slide six, we believe the CSG's high recurring revenue SAS 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 the CSG will have added over $500 million 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. As it relates to capital deployment, Team CSG will add strategic scale with disciplined M&A that puts a premium on accelerating our organic growth, expanding our operating margins and cash generation, and creating greater shareholder value by paying the right price and extracting the expected M&A synergies inherent in the investment thesis for each acquisition that we close. On the M&A front, we're happy to share that we closed our first transaction in two years in April, as we acquired a small customer engagement company that serves multiple industry verticals, including insurance. While small, this accretive deal will expand CSG's offering and customer base in the insurance sector which is a high priority vertical for us going forward. We believe that this M&A deal will be the first of several good accretive M&A transactions that will close in 2024. Turning to slide seven, we had good success in our goal to be the number one technology provider of choice for communication service providers globally. 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 contractual relationship with Comcast and Charter is on a per customer basis, which is an important distinction for us because this pricing model combined with the tiered pricing inherent in our big customer contracts means that any subscriber losses at our big customers have a relatively small impact on CSG's overall revenue. Given the concerns about broadband subscriber losses in the cable industry, It is worth reiterating that we serve nearly 64 million combined subscribers at Comcast and Charter and nearly 80 million subscribers across all of North America cable broadband customers. So small changes in subscriber counts do not have a meaningful impact on our business results and growth. It should also be noted that our two largest customers recently dropped to less than 40% of our total revenue for the first time. CSG's improving revenue diversification and 5% consistent annual revenue growth since 2021 is a testament to our success in consistently winning big, exciting new sales deals. Also during the first quarter, we completed a good digital CX implementation with one of the largest North American broadband providers. Specifically, we helped this customer capture significant cost savings by redesigning their monthly bill improving their digital customer payment capabilities, and reducing billing and payment-related calls into their contact center. This good cross-sell win with an exciting broadband customer reinforces the benefit of our strategic product expansion beyond billing and monetization, which positions CSG Well to help thousands of enterprise customers in many industry verticals make more money with extraordinary data-driven customer experience and integrated real-time payment solutions. Outside of North America, we continue to win more business with leading telecom companies. A great highlight of the quarter was CSG closing a fantastic new sales win in Latin America with one of the largest telecommunication operators in Brazil. Specifically, CSG will enable their digital evolution to better serve the wireless MVNO market in the largest country in South America, with our highly scalable cloud native Ascendant platform. We also signed a good business expansion with MTN, Africa's largest mobile network operator. Specifically, CSG will provide managed services support in selected divisions within MTN South Africa, including their MVNO business. This project will enable MTN to speed time to market for new products and services. CSG also won a good new contract with Bangla Link, a leading telecom operator in Bangladesh. Team CSG was selected to help this customer optimize its wireless business by providing our modular wholesale billing and settlement solutions. Drawing on previous wins in 2023 in Airtel Africa, M1, and PLDT, the Bangla Link deal also underlies CSG's increasing leadership in Asia Pacific as telecom and wireless leaders continue to embrace customer-first digital transformation. Finally, we signed a nice new deal with one of the leading global MVNO enablers. Specifically, CSG is implementing our cloud-native Ascendant product to enable this customer to on and off board new MVNO partners quickly and seamlessly. We are confident that our strong sales pipeline in the global telecom market will position CSG Well to announce more exciting new logo sales wins in 2024. Turning to slide eight, since 2017, we have diversified revenue coming from exciting new industry verticals from 7% of total 2017 CSG revenue to 30% of our Q1 2024 revenue, a fantastic accomplishment in a relatively short period of time. As mentioned, Q1 marks the first quarter where over 30% of our revenue came from industry verticals outside of CSPs. During the quarter, we announced a fantastic deal extension and expansion with JPMorgan Chase. Specifically, we're deploying our CSG Exponent suite of data-driven CX solutions to create a better fraud alert notification experience. Our enhanced solution eliminates the need for expensive contact center calls and creates an improved digital customer experience during an often stressful time as car holders try to identify and recover from fraud, including digitally requesting a replacement credit or debit card. Another highlight of Q1 was the excellent multi-year contract extension with Formula One, the world's most prestigious motor racing series. Since 2018, our cloud-native multi-channel ascendant solution has enabled Formula One to quickly launch new live and on-demand OTT subscription services for racing fans who want to connect with Formula One's content. This is another great example of how CSG Ascendant can help grow and retain a customer's digital subscriber base. In the payments market, we now provide award-winning payment solutions to 119,000 active merchants and ISV partners. which represents a 17,000 increase or 17% year-over-year growth from the 102,000 active merchants we served in Q1 2023. Our solutions are critical to customers who need ACH, credit card, payment gateway, and payment processing capabilities, serving a wide range of recurring revenue industry verticals. We continue to see a big growth runway for CSG's payments business. and we like our chances to accelerate our organic and inorganic revenue growth even faster through 2024 and beyond. Wrapping up on slide nine, simply put, CSG continues to execute well in our strategic vision, even as we help several of our biggest customers overcome some near-term headwinds. We continue to win fantastic new customer logos quarter in, quarter out, We continue to innovate with industry-leading, AI-driven SaaS solutions that big brands all around the world are buying to solve some of their most pressing business challenges. We continue to progress our revenue diversification strategy, and we continue to demonstrate our determination and commitment to run our business more efficiently with consistently expanding profitability and free cash flow generation. We hope you see why we absolutely believe that CSG's best days and biggest breakthroughs are still ahead of us. This is also why CSGers all around the world stay hungry and customer obsessed every single day, because we know this relentless focus is what is required to create significant shareholder value in the quarters and years ahead, regardless of any near-term challenge standing in the way of Team CSG. With that, I will provide more detail on our financial highlights.