CSG Systems International, Inc.

Q2 2024 Earnings Conference Call

8/7/2024

spk06: Thank you for standing by. My name is Eric and I'll 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 speakers 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 Wray, head of investor relations and treasury. Please go ahead.
spk04: 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 client's 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 10K and 10Q, 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.
spk02: 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 Hai will cover in more detail during his financial update. Overall, we really like what we see in our business, so we wanna 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 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 cashflow 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 smallish near-term headwinds. Third, we will continue to return significant capital to shareholders as our board of directors authorize 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 JP Morgan 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 a 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, Telonor 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 fast 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 and 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 gardeners integrated revenue and customer management category. And CSG is also ranked in the leaders quadrant in foresters 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 and 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, not withstanding 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 touch points, enhanced omni-channel 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 Mascom Botswana, a leading telecom operator in Africa. Specifically, our solutions will help manage their prepaid and postpaid charging and billing for subscribers to allow Mascom to focus on their -to-day business operations while CSG handles the complex backend billing processes for their customers. Another exciting telecom win during the quarter was with Zane Sudan, part of the Zane Group and the leading wireless operator in the Middle East and North Africa. After a recent data center outage, Zane 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 to the 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 Kelsra, a 20-plus year customer of ours. Kelsra chose CSG to help transform its enterprise, wholesale and international businesses. This multi-year deal extends a long-standing relationship where CSG and Compass Solutions Suite will help Kelsra 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 long-standing customer extending 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 -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 will announce an exciting mutually beneficial long-term renewal next year if Comcast decide 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 health care experience management firms, supporting over half the health care systems in the US. 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 the good sales win we had in the payments arena with a leading regional bank in the US selecting CSG to power their payments needs. Specifically, CSG's payment solutions allow 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
spk06: won't
spk02: 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 .6% in 2022 to .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 a creative M&A. Today, our board authorized a new $100 million share repurchase program that demonstrates CSG's commitment to discipline 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 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 a creative 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 creative 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 at 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 in our financial highlights and updated guidance ranges.
spk03: Thanks, Brian. Let's walk through our Q2 2024 financial results. And then I'll wrap up with some key conclusions. Starting on slide 11, we generated $290 million of revenue in Q2 versus $286 million in the same prior year period. The increase in revenue can be attributed to the continued growth of our cloud revenue in addition to revenue generated from the acquired businesses, which offset lower software and services revenue for the quarter. Our Q2 2024 non-GAAP operating income was $46 million or non-GAAP adjusted operating margin of 17.3%, as compared to $43 million or .2% in the prior year. We are very pleased with this approximately 110 basis point -over-year improvement in our Q2 non-GAAP adjusted operating income. Similarly, our non-GAAP adjusted EBITDA was $60 million for Q2 2024, or .6% of revenue excluding transaction fees, as compared to $57 million or .4% in Q2 2023. Looking ahead, we expect our proper BUDDY metrics to further improve as we took significant cost efficiency actions in the first half of 2024 to optimize our capacity and better align CSU resources to areas of our business that have higher growth profiles. Lastly, our Q2 2024 non-GAAP EPS grew almost 28% -over-year to $1.02, as compared to $0.80 in Q2 2023. This big increase in non-GAAP EPS is mainly due to higher operating income and the benefit from our share repurchase activity over the last 12 months. Turning to slide 12, I will go through the balance sheet, our cash flow performance and shareholder returns. We had non-GAAP free cash flow of $39 million in Q2 2024, as compared to $5 million of non-GAAP free cash flow in Q2 2023. Our strong Q2 2024 cash flow performance was better than anticipated due to the timing of certain working capital items, including improvement in accounts receivables and unbilled revenue. Moving on, we ended the second quarter of 2024 with $110 million of cash and cash equivalents. That, along with our outstanding debt at June 30, 2024, results in $444 million of net debt, and our net debt leverage ratio sits at 1.9 times adjusted to keep it down. Further, we have $558 million in liquidity as of the end of the quarter. And on the bottom right of the slide, you can see we have returned $46 million in dividends and share repurchases to shareholders in the first half of 2024. Turning the page, I'll revisit our 2024 guidance targets. As Brian highlighted, we are pleased to be increasing certain 2024 guidance targets, including non-GAAP adjusted operating margins, non-GAAP adjusted EBITDA, and non-GAAP EPS. We are also excited to reiterate all other guidance targets for full year 2024. Specifically, on our enhanced non-GAAP profitability targets, we continue to take disciplined cost reduction actions that will optimize and streamline our business while still investing in higher growth activities that we believe will enable us to get back to mid-single digit, non-GAAP adjusted operating profit in the quarters ahead. We believe these cost efficiency moves will not only boost CSG's profitability in 2024, but will also create a meaningful tailwind to steadily improve our profitability next year and beyond. With that said, the cost reduction steps we have and continue to take will result in some short-term impacts to our cash flows in 2024 due to restructuring expenses related to these initiatives. At this point, the cash impact from our restructuring activities in the first half of 2024 has been approximately $14 million. And with respect to our original 1.2 to 1.24 billion revenue guidance range, as Brian mentioned, we are reiterating our original guidance range. But we will likely end up towards the low end of the range, as the amount of revenue we expect to generate from our acquired assets in 2024 is anticipated to be more than offset by lower revenue expectations in our core business when compared to our original guidance expectations in February. Some of the main drivers of this include, one, we are seeing a little belt tightening with our current and prospective customers. Two, we are experiencing smallish headwinds in the North American broadband market. And three, there are some services-based revenue recognition timing-related headwinds surrounding a couple of the larger global telecommunication deployments as we continue to implement these important projects. Because of this, we expect our 2024 organic revenue growth to be towards the low end of our 2 to 6% range. Wrapping up, CSG will continue to relentlessly prioritize every investment we make and stay very disciplined in the allocation of resources and the use of capital. Innovation, including how we leverage the transformative power of AI across CSG, and adherence to a risk-reward framework with continuous learning are key cornerstones of how we have and will continue to manage our business. CSG is extremely well positioned with a strong sales pipeline and a high-quality recurring revenue customer base that we believe will enable us to return closer to the approximately 5% -over-year organic growth that we achieved from 2021 through 2023 once we work through some of the smallest headwinds to grow in the next several quarters. We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating discipline, value-adding acquisition in the quarters ahead. We believe this approach, combined with our consistent capital contribution, will serve our shareholders well. With that, I will turn it over to the operator to facilitate the question and answer session.
spk06: At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from the line of Maggie Nolan with William Blair. Please go ahead.
spk01: Hi, thank you. I had a question about the near-term headwinds that you called out. In particular, on some of your top client accounts, have those headwinds gotten incrementally worse than you expected last quarter? What is the impact to Q2 versus what you're expecting maybe in Q3 or Q4? How long do you expect these headwinds to persist?
spk02: Hey, Maggie. Thanks for joining the call today. When we look at this, I wouldn't say it's gotten worse in terms of some of those headwinds. If anything, what we saw coming from the North American cable space was some of the broadband numbers they reported this quarter. It was actually better than we anticipated. So I'd say relative to where we were a quarter ago, probably about the same. What we see if you look at our long-term guidance for this year and being at the lower end, call it the low twos to low threes, that actually implies a Q3 and Q4 that would actually be midpoint or higher of our 4% or higher range. So we actually love the sales booking wins. We closed in the last couple months. Gives us a lot of excitement and confidence that we have a strong second half of the year coming. And we just have to continue to kind of work through, I think, what the choppiness that a lot of providers are facing in the market right now. But it's not worse than what we saw a quarter ago. But it's something that we just have to sell through as we get back to that 5% or higher that we've delivered for a few years in a row now.
spk01: Got it. Thank you. And then as you think about your near-term aspiration of getting to an 18% to 20% margin, is there additional investment in cost savings programs or optimization that needs to happen in the near term before you start to see some benefit that would get you to that level? Or how are you thinking about the main levers to get you there over a maybe two-year period?
spk03: Yeah, I think it's less about investments, but it's the restructuring charges that we called out. Because obviously, as we're making some of those difficult choices that are in the near term that will yield some meaningful benefits in the longer term, that's where you'll see the impact to the business. The investments that we're looking to make to drive improved processes, greater automation, improved tooling, that's all going to be based into our guidance and how we prioritize and allocate our resources.
spk02: Hey, Maggie, the only thing I would add on top of that is it's not going to take us two years to get to the 18% to 20% range. We absolutely expect that we'll operate 2025. We're not giving next year's guidance yet, but I can tell you with this discipline, focus on margin improvement that we've been driving these quarter terms of the wrench that we often talk about. We absolutely do expect that the business will operate above 18% starting next year.
spk01: That's helpful. Thank you both.
spk06: Thanks, Maggie. Thanks, Paul. The next question comes from the line of George Nodder with Jeffries. Please go ahead.
spk09: Hi, guys. This is Teran on for George. Just a quick question regarding M&A. Any changes relative to last quarter in terms of the environment or plans and how you plan to push that?
spk02: No, thanks for the question. I think it's pretty similar to what we talked about last quarter and what we talked about in the script. We expect to be highly disciplined. We're constantly evaluating lots of opportunities. We've closed two small tuck-ins. We love those deals and what we're seeing even though they're on the smaller side. We're continuing to look at a range of deals. But as we talked, with a higher cost of capital, with a higher hurdle rate, with our stock being on the lower end, we're being even more disciplined. Therefore, that balance of strong capital return, the new $100 million share buyback that was authorized by the board, we expect to continue to return a lot of capital to shareholders. When there's a great M&A that comes at the right price, the right strategic fit that can unlock a lot of value and we know we can execute and deliver on the investment memo in a way that will be great for shareholders, you'll also hear us announce and execute those M&A deals as well.
spk09: Awesome. Great. Thank you.
spk06: Thank you. Your next question comes from the line of Dan Bergstrom with RBC Capital Markets. Please go ahead. Your next question comes from the line of Schlomo Rosenbaum with Stiefel. Please go ahead.
spk11: Hi. Thank you very much for taking my questions. I do have two questions really. One, the margin expansion is going pretty well and faster than planned and you have that target. I just want to follow up back on the question that was started off with, which is, what is driving the margin expansion and can you point out some, maybe more some specific examples of how you're going to get to that 18 to 20? It's a nice target. It's decently above where you've been only several years ago and you're not, you know, the leverage, you know, you should get some operating leverage but it sounds like there's a lot more of an efficiency focus and maybe you could just give us some examples so that we can understand exactly what's going on.
spk03: Yeah. Hey, Schlomo. Thanks for being with us today. Great question. I think for us, like most of our initiatives, it isn't single-digit multi-pronged in nature. Obviously, you hit on one of them, which is just driving greater efficiency. And so we're taking a hard look at kind of all of our businesses, our processes, and try to figure out what's going to yield the best return on capital and then making, you know, some difficult decisions to drive those efficiencies. I think the second thing is to look at mix of revenue. One of the things that you saw on our announcement and in the prepared remarks was kind of the great new logo wins we've had. As you noticed, many of those actually related to our SaaS platform products, right? And so as we think about our growth in the future periods, you're going to see a shifting of the mix of revenue to a higher margin SaaS revenue that's going to help us expand our gross margins even further. And then the third is operating leverage, right? You know, it's just managing our expenses. So as we continue to grow the business from revenue perspective, our operating expenses are growing at a much lower pace. So those are the three things that we focus on internally and gives us great confidence in terms of tailwinds to margin expansion over a multi-year period.
spk11: Okay, great. Thanks. Then the domestic business in terms of revenue geographically continue to do well. The NEO revenue declined, you know, a pretty decent amount sequentially. Maybe you could give us a little bit of detail as to what's going on in the NEO.
spk02: Yeah, it's really related more to the global telco. As Heiss talked about in the past and we have these big implementation programs, typically multi-year in nature. And so that drives more services revenue to get those implementations deployed. So you will see then on the telco side that kind of moved more quarter to quarter and over time. That's one of the things that we were so excited about with the now kind of third quarter in a row. Large exciting new extended wins in the cloud and SaaS platforms. Those tend to be much less services heavy, much higher gross margin. So that's a trend that we're seeing. If we go back two or three years ago, a lot of the telecom companies were not willing to run their core in the cloud. And we're seeing that fundamentally shift with the six-day biggest send-in wins that we've announced and two more this quarter with the cross-sell with exponent. It's super exciting to see, but it really is driven by that services revenue with the more on-prem telco solutions that we've sold in prior years.
spk11: Got it. Thank you.
spk06: Thanks, Lema. Your next question comes from the line of Dan Bergstrom with RBC Capital Markets. Please go ahead.
spk07: Hey, thanks for taking my question. So it's nice to see the new industry verticals at 31% of revenue versus 30% last quarter. You mentioned aspiring to 35% at the start of the preparatory marks. Any thoughts around timing of that 30% target? It seems like the percentage is moving up about 100 bips a quarter. Is that a realistic way to think around timing and progression to that 35% number?
spk02: Yes. Hi, Dan. Thanks for joining. I think that's a good way to look at it. If you just kind of model what it's been the last four or five quarters, it's kind of been that steady step up. And what we see in our CX and our payments business through the first half of the year, each of those businesses has continued to grow revenue on an organic basis, strong double digit. And so that combined with some of the smaller acquisitions, both will be additive. So we think it is linear. It may not be 100%. You may see a little bit of movement up or not quite that same 100 basis points. But I think that's a good trend. That's why we felt good saying that that 35% should be achievable in the next two-year planning cycle, if not sooner in that period.
spk07: That's great. Then sticking with the verticals, any update around channel partners and those additional verticals? I think we're about a year into investments there. How's the new logo pipeline looking for partners?
spk02: Yeah, no, we love the channel approach. And I'd say with both our payments, our Ascendant and our CX business, it'll continue to be a combination of channel driven as well as direct sales. And in many cases, we're actually seeing the benefit of cross selling into our Telco base, which is exciting with a couple of those big cross sales of exponent at Telenor Denmark and in Lise. But yeah, we like what we're seeing on the channel side. We're signing up good partnerships. The pipelines are expanding in there. And that's one that really hasn't even started to bear fruit yet. We think that's going to be part of this growth acceleration in Q3 and Q4 and into next year, back closer to the 3%, 4%, 5% that we anticipate. That's going to come from some of those that investment we've made in channel, which I think is a big one. Even as we've gotten to this margin expansion, it's not coming because we've cut sales and marketing. We're continuing to invest both in differentiated SaaS product R&D, and we're continuing to invest in sales and marketing and channel partner sales. And that's going to continue. And that's why we really feel good about our ability over the medium to longer term to be a mid single digit organic growth company or higher.
spk11: That's great. Thank you.
spk06: Thanks so much. Your next question comes from the line of Nahal Choksi with Northland Capital Market. Please go ahead.
spk08: Thank you. Big news on the operating margin raise. That's great. How you mentioned that the mixed shift to SaaS is a driver to the counter 25 margin expansion being discussed. What is the mature operating margin of your SaaS business?
spk03: Yeah, I mean, I think generally look at SaaS businesses in general, right? They, you know, most of them have gross margins in the 70 to 80%. I think that's something that we're looking to drive with scale as well.
spk08: What about the operating margin portion?
spk03: I think the operating margin, I think it depends, right? What I mean by that is, you know, I think it depends on what phase of the growth expansion that we're in. Obviously, a lot of SaaS businesses over invest in sales and marketing and R&D, you know, as they're gaining traction and growing. But I can imagine a scenario at maturity, we're talking about EBITDA that's approaching kind of mid 20 to low 30.
spk08: Okay, so in that context, then, you know, 18 to 20%. This is more of a milepost as opposed to the long term expectation. Is that fair?
spk03: Yeah, I think it always comes down to make revenue mix at the end of the day, right? A big chunk of our businesses are still very services oriented from a revenue perspective and likely will remain so because there are geographies that we serve, whereby an on-prem solution will remain kind of the better solution for those customers. So I think that you'll always have a chunk of revenue that will be lower margin, strategically important for us, but lower margin in nature.
spk02: Yeah, I think, Nehal, we appreciate you joining. I think the only thing I would add to that is we'll give more color for 2025. And I think a little more on this 18 to 20% next quarter and the following. But we kind of see that as a two to three year horizon in terms of how we at least think about and see the business. And to your point, as we continue to shift mix, we have a higher percentage of our revenue coming from faster growing SaaS and we benefit at higher scale. You're exactly right. There's no reason that 18 to 20% would be our medium to longer term cap, not by any stretch. I think you're exactly right.
spk08: Okay, great. And then I do have another question. With the incremental buyback capacity that you've announced, but you did have plenty of capacity left on existing buyback, are you trying to signal that your projected pace of sharebacks are going to materially hasten here?
spk03: Yeah, I mean, I think that what we're trying to say is that we are committed to delivering value back to our shareholders. We understand that at these levels, that is a good use of our capital. And that's really what we're trying to signal at the end of the day, right? Because we speak a lot of times about organic growth, about inorganic growth. And sometimes as investors have a certain perspective that somehow that inorganic growth is going to trump the value of the back shareholds. And what you heard Brian say is we're going to be extremely disciplined and continue to be committed to delivering value back to our shareholders through buybacks.
spk02: Yeah, and I think data historical performance is a great indicator. We've returned $480 million to shareholders since 2020. We've done well over $100 million each of the last two years. We've returned a lot of capital and there's additional authorization for us to do more in the coming quarters.
spk08: Okay, thank you. Thanks, Nathan.
spk06: The next question comes from the line of Matthew Harrigan with Benchmark Company. Please go ahead.
spk10: Thank you. Part of the beauty of the ex-sons in this environment is you can really show, I think, fairly readily to existing customers and maybe new customers as someone lesser than really what the quantifiable impacts are on customer retention and cost efficiency on the journey and all that. And given that that's a priority, I mean, is this a sort of natural inertia on your corporate clients to spending any money even though you can demonstrate that the ROI is really high and is that something you think will be able to work out over a period of time? But what are the real hurdles on the selling process for ex-sonas and new customers and then are there any more capabilities for existing customers? Thank you.
spk02: Yeah, no, hi, Matt. Thanks. I mean, what we're seeing on the CX exponent side is almost identical to what you said. We can rank the cash register quickly with a very fast payback for lots of brands and lots of verticals on a wide number of fronts. We see some use cases getting deployed around our bill explainer.ai where they want to reduce the number of calls into their call center and reduce churn during a promotional period. We've got other customers that want to deal with fraud alert notifications and that's the entry point to get a quick sale. We have other customers that are trying to actually grow revenue faster and they use it to do proactive offers, try to upsell or cross-sell and it's more of a revenue driver. And often what we find on speed is it's use case driven and then once they deploy for one or two use cases, they realize the power in that platform can actually be used for dozens of use cases. So occasionally we'll sell it more as a pure platform play and a Swiss army knife to solve any other needs. But often in this, I'd say higher hurdle rate payback period, often it's just ring the cash and let your search solve a near-term problem and then move on. So we have traditional SaaS economic pricing that you would expect with that. Could it become more performance based over time? Always open to that. It just has to work for us and for our customers. But we're always flexible to just different approaches over time. But we love what we're saying and one of the real breakthroughs this quarter, quarter on CX, was that cross-selling to telco that we saw with Telonor, Denmark and Lise getting sold with our authorization SaaS platform as well. That was super exciting for us and we think we can do a lot more of that.
spk10: And then you had a question on M&A earlier and you also went into it in your commentary and certainly I understand the relative hurdle rates compared to buying back your own stock. But are you seeing any loosening of multiples? Are you seeing likelihood of more force selling and part of some smaller entrepreneurial companies who might not have had the access to capital that they had even 12 or 18 months ago?
spk02: Yeah, I think that there's a couple interesting dynamics on the M&A, but also it relates to a couple other -M&A related portions. Periods like this actually tend to play to the favor of stronger, larger providers. And we've seen periods like this where customers have made decisions to maybe break some of their hard-held, long-held beliefs and open up new buying opportunities for CSG. And that's true on the M&A side as well. In tougher periods, sometimes weaker performers sometimes reevaluate whether they should still be in the business or not in various areas and it can create opportunities where we can just win more sales organically from them and go take shit market share. And in some cases, it may create a fantastic opportunity to buy at an extremely attractive price on a multiple of revenue and EBITDA pre-cost synergies that could create opportunities. And so even though I think the macroeconomic environment right now, we'd love it to have a few less single digit, one to two percent headwinds to growth, but we think it's actually to be a gift in the longer and medium term for CSG both on the organic side of our business and potentially on the M&A. And what we just try to do, we just try to stay extremely disciplined, although we know would unlock a ton of value for our shareholders. And if it comes in, if a good M&A, small, mid or larger comes in and it fits the criteria, we have the flexible balance sheet to be able to act on that in a way that could be very attractive for our shareholders. If it doesn't come in, no problem. We'll just keep working and keep driving the organic part of our business. That's how we think about it.
spk10: We still have all those Nutcracker engineers sitting in Dubai now presumably. OK, great. Thanks, Brian.
spk08: Thanks so much,
spk06: Matt. The next question comes from the line of Michael Berg with Wells Fargo Securities. Please go ahead.
spk05: Hey, thanks for taking my question. I want to double click on the dynamics happening within Comcast and Charter. Those are both healthy points in the quarter. You mentioned specifically expansion in new areas of business and that the Comcast renewal may get pulled forward here. So maybe if you just help us understand some more nuance of those new areas of business, what areas of business are still left to capture at both Comcast and Charter, and any more details you can share on the Comcast renewal. Thank you.
spk02: No, thanks so much, Mike. Appreciate you joining. Yeah, as we've talked, I mean, we have high confidence that Comcast, Charter are extremely strong brands, industry-leading companies. We believe they will mount a strong, formidable, competitive response to some of the things they see going on in the market. We love what they're doing in the business. We love our -decade-plus relationship with both, and we have significant opportunities to expand if they decide that that's good for their business. And so first, we serve over 63 million subscribers at Comcast and Charter combined, all of their triple-place subscribers on both. As a reminder, we moved 11 million subscribers off of Amdocs to us a few years ago, and we moved 14 million off of Netcracker a couple years ago as well. And so we continue to serve them well. It was very exciting to see 1% growth, and it was exciting to sign a good new billing contract with Comcast in a new growth area for them, unrelated to the 63 million triple-place subscribers we already serve with our long-term contracts. So love what we're seeing. We could have opportunities to grow in the CX space if they chose to use us in those areas. We could grow in the wireless space. Right now, both of them in their wireless growth are on an Amdocs platform. We could also just help them in other areas of the business where they might decide to rely on some of our proven technology. And so what we try to is just always be on and resilient, always be future-ready with our platforms, and just constantly bring them ideas that can help them mount a more formidable response. And so that's why we gave the additional color on the Comcast renewal. We've never been better positioned at Comcast, and yet we never take it for granted. And so as you can imagine, with about 18 months left on that contract, we're in active discussions. Maybe something gets signed sooner this year. Maybe Comcast decides to sign the renewal sometime next year. There is going to be a good win-win renewal that brings a lot of value for Comcast and fantastic value for CSG. We're highly confident it's coming, whether it's next quarter, the quarter after, or in 2025. Stay tuned, but we love rural position.
spk06: I'll now turn the call back over to Brian Sheppard for closing remarks. Please go ahead.
spk02: Thanks for joining everyone. We were super excited about the great sales wins we saw in Q2. This gives us confidence that we'll see improved organic revenue growth in Q3 and Q4. We are going to consistently improve our non-GAAP adjusted operating margin in our EPS, and that is here to stay. And we're going to continue to execute on that, like those quarter turns of the wrench. Super grateful to all the CSGers around the world for making this happen. Before talking next quarter, we've got some work to do to deliver fantastic results in Q3. Thank you all.
spk06: Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.
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