CSG Systems International, Inc. (NASDAQ:CSGS) Q1 2024 Earnings Call Transcript May 3, 2024
CSG Systems International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning. My name is Lee, and I will be your conference operator today. At this time, I would like to welcome everyone to the CSG’s First 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. [Operator Instructions] I would now like to turn the call over to John Rea, Treasurer and Head of Investor Relations. Please go ahead.
John Rea: 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.
Brian Shepherd: Thanks, John. Hi, everyone. We are glad to join today’s call as we begin on Slide 4. 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 SaaS suite of solutions into exciting industry verticals like financial services, healthcare, 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-time 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 Hai 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 SaaS 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 1 and 2 emissions since 2019. This shows the excellent progress CSG is making with the goal of reaching carbon neutrality in Scope 1 and 2 emissions by 2035. Turning to Slide 5, 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 4% year-over-year organic growth rate even as we faced 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 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 6, 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 6, 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 $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 we’ll close in 2024. Turning to Slide 7, we have 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 to 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 and 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 Ascendon 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 Banglalink, 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 Banglalink deal also underlines 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 Ascendon 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 8. 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 are deploying our CSG Xponent 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 cardholders try to identify and recover from fraud, including digitally requesting a replacement credit or debit card. Another highlight of Q1 was the excellent multiyear contract extension with Formula One, the world’s most prestigious motor racing series. Since 2018, our cloud-native multichannel Ascendon 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 Ascendon 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 9. Simply put, CSG continues to execute well on our strategic vision, even as we helped 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 CSG-ers 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, Hai will provide more detail on our financial highlights.
Hai Tran: Thanks, Brian. Let’s walk through our Q1 2024 financial results, and then I’ll wrap it up with some key conclusions. Starting on Slide 11, we generated $295 million of revenue versus the $299 million we generated last year. The decrease in revenue was primarily related to the timing of approximately $10 million in high-margin revenue licensing deals signed in Q1 of 2023, which was highlighted throughout last year and temporarily distorts our revenue and profitability comparisons for the first quarter on a year-over-year basis. Our Q1 2024 non-GAAP operating income was $45 million or a non-GAAP adjusted operating margin of 16.6% as compared to $54 million or 19.3% in the prior year. Similarly, our non-GAAP adjusted EBITDA was $58 million for Q1 of 2024 or 21.5% of revenue, excluding transaction fees, as compared to $67 million or 24.3% in Q1 of 2023.
As was the case with our year-over-year revenue performance, our Q1 2023 non-GAAP operating income, non-GAAP adjusted operating margin and non-GAAP adjusted EBITDA were all positively impacted by the high-margin licensing revenue deal we closed, thus distorting the Q1 2024 comparison. Excluding the impact of the $10 million in licensing deals, our non-GAAP adjusted operating income and adjusted EBITDA margin percentages would have been broadly similar to Q1 of 2023. Lastly, our Q1 2024 non-GAAP EPS was $1.01 as compared to $1.04 in the prior Q1. The decrease in non-GAAP EPS is mainly due to lower operating income, partially offset by positive foreign currency movements and share repurchases over the last 12 months. Turning to Slide 12, I’ll go through the balance sheet, our cash flow performance and shareholder returns.
Our Q1 2024 cash used in operations was $29 million as compared to cash flow from operations of $15 million in Q1 of the prior year. And importantly, cash flow generated from operations before changes in working capital in Q1 of 2024 was $52 million compared to $50 million in Q1 of 2023. Further, we had non-GAAP free cash flow of $34 million in Q1 of 2024 as compared to $7 million of non-GAAP free cash flow generated in Q1 of 2023. The primary drivers of the year-over-year decrease in non-GAAP free cash flow were primarily timing-related working capital movements and include: one, unfavorable changes from the Q1 2023 bonus accrual being significantly higher than the bonus accrual in both Q1 2022 and Q1 2024; and two, the timing of converting certain trade receivables into cash.
As a reminder, historically, our non-GAAP Q1 free cash flow performance tends to be the low point for the year. Further, over the last five years, the vast majority of our annual non-GAAP free cash flow has been generated in the second half of the year. Moving on, we ended the first quarter of 2024 for the $121 million of cash and cash equivalents. That, along with our outstanding debt at March 31, 2024, results in $435 million of net debt. And our net debt leverage ratio stood at 1.9 times of adjusted EBITDA. Further, we have approximately $570 million of liquidity as of the end of the quarter. Moving to the bottom right of the slide, we declared $9 million in dividend during Q1 of 2024. In addition, we repurchased $10 million in stock during Q1 under our stock repurchase program.
Turning the page, I’ll revisit our 2024 guidance target. In summary, we are reiterating all 2024 targets. Further, we are currently forecasting our first half 2024 revenue to make up approximately 48% of our full year revenue, while we expect 52% of our revenue to be generated in the second half. As has been the case for the past two years, we currently anticipate our Q2 revenue being the low point of the year from a quarterly phasing perspective. We continue to see strong demand for our solutions, and we intend to capitalize on those opportunities to realize both near-term and longer-term growth with timing being our biggest challenge and not underlying demand. Additionally, we remain focused on generating improved profitability and actively pursuing opportunities to deliver enhanced efficiencies and operating leverage.
Wrapping it up, CSG 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 disciplined, value-adding 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.
Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] And your first question comes from the line of Maggie Nolan from William Blair. Please go ahead.
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