CSG Systems International, Inc.

Thank you for standing by. My name is Eric and I will be your conference operator today. At this time, I would like to welcome everyone to the CSG's second 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to John Ray, Head of Investor Relations and Treasury. 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. Welcome to the call today as we begin on slide four. We are excited to share that based on the strength of our Q2 performance, we are raising both profitability and non-GAAP EPS guidance targets for 2024. The exciting new logo sales wins and deal expansions closed in the quarter also give us confidence that we will continue to deliver organic revenue growth for the full year in line with our 2% to 6% long-term target range. Albeit, we are likely to come in at the lower end of the organic revenue growth range for full year 2024, which High will cover in more detail during his financial updates. Overall, we really like what we see in our business, so we want to simplify for every investor the three key value creation commitments that the CSG leadership team and board of directors will hold ourselves accountable to deliver over the next several years. First, even as we grow through some smallish near-term headwinds on organic revenue growth, we aspire to consistently deliver 2% to 6% pure organic revenue growth, and to diversify revenue from exciting new industry verticals to greater than 35% of total CSG revenue. As a reminder, since January 1, 2021, CSG has added nearly $160 million worth of new organic revenue through Q2 2024. Second, we aspire to expand non-GAAP operating margin from our previous long-term range of 16% to 18% to our new long-term range of 18% to 20% with free cash flow growing faster than revenue growth and to achieve this higher operating profit without impeding our ability to get back to the 5% or higher annual organic revenue growth that we achieved from 2021 through 2023 once we get past some of the smallest near-term headwinds. Third, we will continue to return significant capital to shareholders as our board of directors authorized an additional $100 million share buyback program this month. This enhanced share repurchase program is in addition to our inorganic growth strategy that will be focused on highly disciplined value creation for our shareholders. This new $100 million buyback authorization is on top of the approximately 76 million in buybacks remaining on the previous Board authorization. As a reminder, the combined $176 million in remaining authorized buybacks is on top of the nearly $480 million that CSG has returned to shareholders in dividends and buybacks since 2020. We are now in our 11th consecutive year of increasing our dividend, a key tenant of the CSG investment thesis. Turning to slide five, since we have a number of new investors to our story, we wanted to connect the dots on how Team CSG is setting ourselves apart in the market as a leading provider of mission critical enterprise SaaS solutions to global brands in a wide variety of industry verticals. With the record setting revenue diversification results we keep reporting each quarter, Many investors ask us how we determine which industry verticals that we target. The answer is simple. We target industry verticals that have highly recurring relationships with their end customers powered by complex subscription and consumption-based business models. This is why we've expanded so quickly beyond our traditional telecom and cable broadband customer base into exciting industry verticals like media, financial services, healthcare, pharmacy retail, technology, government, and more. We help great brands like JPMorgan Chase, NRC Health, and Formula One solve similar customer engagement and monetization business challenges, just like we help Comcast, Charter, MTN, and Telstra in these same areas. While the industries are different, the customer pain points and business needs are surprisingly similar. This explains why we've been able to sell our industry-leading cloud-native SaaS system and platform to one of the largest banks in Australia, and why Formula One and other big content providers have selected Ascendant to monetize their media and digital content businesses. And it's also why leading global telecom operators like Clara Brazil, M1 in Singapore, Telenor Denmark, and Lise in Norway have all selected Ascendant in the wireless and telecom industry vertical. These common business needs across industry verticals also explain why we've been able to sell our data-driven CX and payment SaaS solutions to so many big customers in faster growing industry verticals. Many investors also ask us about our value proposition and what business problems we solve for customers in different industry verticals. The answer to this question also explains why CSG has been able to grow organic revenue over 5% on a compound annual growth rate basis since 2021. Every large customer in all these bigger, faster-growing recurring revenue verticals have similar business challenges related to their post-acquisition or post-purchase customer engagement. They all need to lower the cost and effort to activate, onboard, and educate new customers. They all need to give their customers the power and flexibility to upgrade and downgrade their services more seamlessly through digital self-serve channels. They all need to harness their data to more proactively upsell, cross-sell, and retain their most valuable customers with real-time data-driven promotional offers. And they all need to make it easier to bill, collect, and resolve payment disputes on a timely basis. An important point that is often misunderstood by investors is that CSG is not just a billing company. Our comprehensive workflow engines are foundational to how our customers holistically serve their end customers and make money. Our investors also routinely ask us why we win against bigger competitors. The answer is because we relentlessly focus and prioritize our R&D, sales and marketing, and disciplined inorganic M&A to constantly strengthen our industry-leading, future-ready SaaS portfolio so we can grow faster and simultaneously expand our operating margins and profitability. As a reminder, CSG is ranked in the leaders' quadrant in the gardener's integrated revenue and customer management category. And CSG is also ranked in the leaders' quadrant in Forrester's customer journey orchestration category ahead of almost all other competitors and csg also routinely wins industry leadership awards in the payment space we never take our customer relationships for granted and we constantly push ourselves to be more future ready more innovative and easier to do business with than our competitors is doing all this easy no it isn't being as mission critical as it gets for giant customers all around the world in a wide variety of industry verticals is never easy and yet Being a critical provider to help our customers lower their costs, retain and upsell their most valuable end customers, grow revenue faster and make more money is precisely why our customer relationships are so sticky, often lasting three decades or longer. And it also explains why we've continued to grow organic revenue and close exciting new sales wins, even in tough economic conditions, because our SaaS workflow solutions deliver faster ROI paybacks. On slide six, you can see the success we have had in increasing our organic revenue growth since 2021 and the industry vertical revenue diversification success we've had since 2017. The truly exciting part for us, notwithstanding some near-term market choppiness, is that even as we grow 2024 organic revenue in line with the lower end of our 2% to 6%, organic growth range for the near-term quarters, CSG's profitability will continue to expand at its fastest clip in many years. This exciting business momentum is powered by the fact that CSG continues to close big, exciting new sales wins quarter in, quarter out, like many Q2 wins they will talk about momentarily. One positive highlight in Q2 was the revenue growth we saw in our top two customers, Charter and Comcast, even as their businesses face slight broadband subscriber headwinds. We grew Q2 revenue from Comcast and Charter combined by over 1%, both sequentially and year over year. This growth is coming from several areas, including our expansion into new areas of their businesses that we have historically not served, like Team CSG being selected and signing a new standalone contract with Comcast to power a new strategic growth area for them. Turning to slide seven, we wanted to provide more detail on the many exciting new logo sales wins and deal expansions we have delivered over the last few months. These wins are underpinned by our strong global sales teams that continue to perform well and deliver meaningful new wins like clockwork. First, we want a fantastic new telecom logo at Telenor Denmark, the second largest mobile operator in Denmark. We will be deploying both our cloud native SaaS Ascendant and CSG Exponent Solutions. This win highlights our ability to cross-sell our cutting-edge digital customer experience suite of solutions together with our cloud monetization offerings. With CSG's help, Telenor Denmark will deliver enhanced digital experiences across all touchpoints, enhance omnichannel support for all business segments, and win new revenue-generating opportunities. Second, we expanded our relationship with One New Zealand formerly Vodafone New Zealand. Specifically, we are deploying our CSG quote and order suite of catalog-driven solutions to provide a seamless experience between the quoting of new products and the monetization of their offers. Our solution provides a consolidated BSS stack that will modernize the digital quotation experience and help the One New Zealand sales team shrink the launch and selling of new product offers while improving the overall customer experience. We also want another fantastic CSG Ascendant and Exponent joint cross-sell new logo deal with Lise, a leading telecom and utility provider in Norway. Lise selected CSG for a full digital BSS transformation. Specifically, this customer will leverage our cloud-based Ascendant billing solution and our digital wholesale product to manage and monetize their subscriber relationships. Additionally, Lise also selected CSG's Exponent solution to automate and personalize the post-acquisition customer journey for their subscribers. This excellent deal highlights the power that our customers get when they buy both our digital monetization and data-rich CX solutions together. Team CSG had a great digital BSS transformation win with Mastcom Botswana, a leading telecom operator in Africa. Specifically, our solutions will help manage their prepaid and postpaid charging and billing for subscribers to allow Mastcom to focus on their day-to-day business operations while CSG handles the complex back-end billing processes for their customers. Another exciting telecom win during the quarter was with Zane Sudan, part of the Zane Group and a leading wireless operator in the Middle East and North Africa. After a recent data center outage, Zain Sudan trusted CSG to drive the disaster recovery of its wireless business and keep the people of Sudan connected while preserving its market leadership. Through a CSG-powered gateway rebuild, this customer quickly relaunched essential services so that customers across the country could regain their wireless connectivity. We are also pleased to announce that we signed a fantastic deal extension and expansion with Telstra a 20-plus-year customer of ours. Telstra chose CSG to help transform its enterprise, wholesale, and international businesses. This multi-year deal extends a longstanding relationship where CSG and Compass Solutions Suite will help Telstra explore new business models and expand into new verticals as we manage their most complex enterprise B2B customers. This is another great example of a longstanding customer-extending relationship their relationship with us. And on the North American broadband front, we are thrilled to have won a meaningful new standalone billing deal in a new growth area for Comcast, which should reinforce to our investors the positive position we're in with our second largest customer. On a related note, many investors and analysts routinely ask us how the bigger renewal with Comcast is going. What we can share is that we are as well positioned as CSG has been with Comcast for nearly three decades, and we are highly confident that we will sign an exciting new long-term agreement when Comcast is ready to sign that renewal. We don't say this because we take this renewal for granted. In fact, the exact opposite is the case. The reason we are extremely well positioned with Comcast and our other biggest customers is because we never, ever take their businesses for granted. We know how mission critical our end-to-end workflow platforms are to all aspects of how they operate well beyond just billing. So we constantly push our solutions to be more resilient, more value adding, and more future forward so that CSG always brings them greater value and is easier to do business with than any of our competitors. Is it possible that Comcast could sign an excellent renewal with CSG that is great for both companies this year? Yes, it is possible we'll be in a position to announce an exciting Comcast renewal sometime in 2024. Is it also possible that Comcast and CSG announce an exciting, mutually beneficial long-term renewal next year if Comcast decides that is better timing for them? The answer is also yes. It is possible that a great renewal would be signed next year. But regardless of whatever timing Comcast decides is best for them, Team CSG will stay fixated on delivering fantastic value as we continue to help Comcast solve their toughest business challenges. Moving on to other TQ2 sales wins outside of the communication service provider space, we expanded our relationship with NRC Health, one of the nation's largest healthcare experience management firms, supporting over half the healthcare systems in the U.S. We are partnering with NRC to execute a digital multi-channel communication strategy in a streamlined, effective, and scalable manner. And finally, I will wrap up with a good sales win we had in the payments arena with a leading regional bank in the U.S. selecting CSG to power their payments needs. Specifically, CSG's payment solutions allowed this bank to reduce transactional costs and modernize their online payment portal with our bill pay product. We believe there are many domestic banks that could benefit by similarly leveraging our solutions for their payments needs. And while most of these great sales wins signed over the last few months won't immediately impact our revenue in 2024, we expect them to contribute to good organic revenue growth in 2025 and beyond, which is exactly why over the medium to longer term, We fully expect that CSG will be able to grow revenue at the midpoint or higher of our 2% to 6% range. Moving to slide eight, we would like to provide more color on our second value creation priority, our commitment to consistently expand CSG's profitability. One of the most meaningful Q2 highlights is the high confidence we have in CSG's ability to continue to significantly expand our profitability and operating leverage in the quarters and years ahead. We have shown very good continuous improvement in our non-GAAP adjusted operating margin as it grew from 16.6% in 2022 to 17.2% in 2023. And as our enhanced profitability guidance targets announced today indicate, we believe that 2024 will continue this trend. Looking ahead, we absolutely believe there is a clear pathway for CSG to consistently achieve 18% to 20% non-GAAP adjusted operating income in 2025 and beyond. And it's important to note that this enhanced profitability is not coming at the expense of slower revenue growth in the medium to longer term. We continue to expect our business to generate 2% to 6% organic revenue growth with an aspiration to be at the midpoint or higher in most years. Our continuously expanding profitability stems from our improved operating leverage at scale, ongoing cost efficiencies unrelated to sales and marketing, and growing higher gross margin SAS revenue faster than the rest of CSG. And as we generate higher non-GAAP operating margin in the quarters and years ahead, this should also result in free cash flow growing faster than revenue growth. Turning to slide nine, we will touch on our third value creation priority. our commitment to shareholder returns, and our ability to execute very value-creating accretive M&A. Today, our board authorized a new $100 million share repurchase program that demonstrates CSG's commitment to disciplined capital allocation and a dedication to returning capital to our shareholders. Regarding our $1.5 billion revenue ambitions by year-end 2025, It is possible that this goal may take us a little longer to achieve, depending on the size of excellent and extremely value-creating M&A deals that we find in the market over the next four to six quarters. We believe that CSG's stock price represents an excellent value-creating buy for investors and for us, so we will stay balanced, disciplined, and focused on any strategic or financial move that the Board of Directors and management believe will deliver the most value for our shareholders. When we set the $1.5 billion goal in 2020, we knew about half of the revenue expansion would need to come from disciplined and accretive M&A. While we continue to assess qualified M&A opportunities, when our share price trades lower, the hurdle rate for good M&A deals gets that much higher. We are very pleased with the two smaller, highly accretive acquisitions that we've closed so far in 2024. We were able to acquire both companies at highly attractive multiples. Both of these small tuck-in deals add very sticky, highly profitable revenue for CSG. And with respect to integration, both deals remain well on track to deliver the value we expected in our M&A business cases. And on the organic revenue growth side, we have delivered on our commitment of approximately 5% annual organic revenue growth from 2021 to 2023, with significantly expanding profitability at the corporate level. Given all this exciting business momentum, I 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, because we know this relentless focus is what is required to lead the industries where we operate. And it is also essential to creating 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 and updated guidance ranges.