CSG Systems International Inc (CSGS) 2022 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the CSG Systems International First Quarter 2022 Earnings Call. (Operator Instructions) John Rea, Head of Investor Relations, you may begin your conference.

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. Good afternoon, everyone. For those using slides today, please join us on Slide 4. I'm pleased to share that CSG's business momentum continued in Q1 2022 as Team CSG delivered another strong quarter of growth on top line revenue and bottom line EPS, even as we absorbed the discounts associated with the exciting renewals of Charter Communications and DISH that we signed and announced in Q4 of last year. It is a testament to the strength of our recurring revenue SaaS business model and the continued success of our sales performance, which is as robust as ever, to grow revenue and EPS in the quarters following 2 of our top 3 customer renewals.

Equally important for us, as proud and as committed as every CSG employee is to deliver excellent results every single quarter, the elevation and transformation of CSG is much more profound and longer term in nature than any given quarterly results. At CSG, we aspire to be a $2 billion and beyond, purpose-driven SaaS platform company who envisions, invents and shapes a better, more future-ready world. We will hold ourselves accountable to change the lives of our employees and the customers we are honored to serve for the better. We will redefine the industries we are proud to lead.

We will make a lasting impact in the communities and the world in which we operate, across the wider environmental, social and governmental spectrum. While we still have much important work to do, we are very proud that leading organizations are beginning to recognize the meaningful commitment CSG has and will continue to make on the ESG and DE&I front. To this point, I'm delighted to announce that we were recently honored to receive our first Prime ESG rating from Institutional Shareholder Services, ISS for short, one of the leading ESG rating agencies in the world. This designation is based on an analysis of more than 100 sector-specific ESG factors, and those receiving high scores within their respective industry are awarded a Prime distinction. And with this designation, our stock now qualifies as a responsible investment in the eyes of ISS, which is truly an honor.

And on the back of our good Q1 start, we are pleased to confirm all 2022 financial guidance targets. Based on the continued confidence we have in our near-term and longer-term business outlook, we have also increased our share repurchase activity by buying back over $45 million in stock over the last 12 months with $16 million spent on share buybacks in Q1.

From a product perspective, we launched CSG Encompass, an open API product platform that enables global communication service providers to unlock the potential of 5G by simplifying the complexity of multifaceted, digital ecosystems and easily deliver next generation digital services and extraordinary customer experiences. I'll provide more detail on this exciting new product in a few moments.

And we continue to win big in the North American cable market where we signed a multiyear contract renewal and expansion with a Top 6 broadband cable provider in the U.S. And with respect to Charter Communications, who we signed a $1.5 billion 6-year contract expansion in November of 2021, the subscriber conversion plan from a competitor's billing system is continuing as expected with the remaining approximately 10 million subscribers planned to be converted over the next 12 months. Our good Q1 growth proves that CSG is a strong, healthy and resilient company, especially with the backdrop of today's turbulent global economic environment.

Turning to Slide 5, I will revisit our 5 strategic objectives that form the foundation of CSG's long-term future success. These themes should be familiar to everyone who has been following our big progress.

CSG aspires to deliver long-term organic growth in the 2% to 6% growth range, which we proudly achieved at the upper end in 2021. We aim to add operating scale and expand our operating leverage by growing to at least $1.5 billion in revenue by year end 2025, with a stretch goal of $2 billion in revenue. We strive to be the #1 SaaS provider of choice for global CSPs by providing the most value-adding technology solutions and by being easier to do business with than our competitors. We plan to diversify our revenue even more as we expand in big, faster-growth industry verticals with more direct sales and channel partner success in retail, government, financial services, health care, technology and more. And finally, we will complement our accelerated organic growth with disciplined, value-enhancing M&A to turbo charge the value we bring our customers and our shareowners.

Moving to Slide 6, you can see that we performed well in Q1 against all 5 strategic objectives. First, with respect to revenue growth, we reported $264 million in total Q1 revenue, resulting in 4.5% year-over-year growth. We're also proud that EPS growth grew even faster at 4.9% year over year. On the right side of Slide 6, we believe that the current economic environment benefits CSG's high recurring revenue SaaS business model, and our strong healthy balance sheet creates attractive organic and inorganic market opportunities on the march to $2 billion and beyond.

As a reminder, by 2025, we aspire to gain scale in the markets where we compete to exceed $1.5 billion to $2 billion in annual revenue. We aspire to expand CSG's operating leverage and use our strong, healthy balance sheet to deliver EPS growth that outpaces revenue growth. We aspire to consistently deliver better and better business results so that our shareholders are rewarded with the trading multiples that they deserve when they invest in a purpose-driven, faster-growth, multi-industry vertical SaaS platform company like CSG.

In our base case, we aspire to exceed $1.5 billion in revenue, which means even if we come up short against our stretch case ambitions, CSG will still grow revenue by over 50% and add over $500 million in profitable recurring revenue by 2025. To reach the $2 billion stretch case revenue aspiration by 2025, we will continue to allocate capital to its most value-added use and to eventually close bigger scale acquisitions to become even more transformational for CSG and the industry.

On this last point, I will continue to reinforce a key point shared on almost every analyst and investor call. This management, we will hold ourselves accountable to adding scale, accelerating growth, expanding our operating leverage and deploying capital to its highest and most productive use, all with the focus on rewarding our investors, just like we work hard every day to delight our customers and our employees.

Turning to Slide 7, we had good success in Q1 on our goal to be the #1 technology provider of choice for communication service providers globally, and our continued sales success with both North American and global CSPs prove that we are executing well against this strategic priority. Our revolutionary new period, CSG Encompass, enabled us to launch a more holistic end-to-end solution to solve the most complicated problems for CSPs around the world. Encompass is a SaaS-based open, integrated and modular solution that significantly simplifies the complexity of multi-sided, B2B2X ecosystems and business models for our global telecom customers.

At its core, Encompass brings together CSG's cutting edge revenue management and digital monetization products with 2 of our acquisitions from last year, Tango Telecom and DGIT. As a reminder, DGIT technology provides a configure, price, quote, CPQ for short, order management platform that has a strong presence and adoption in the global telecom market, while Tango Telecom's technology arms CSG with real-time dynamic policy and call control management, both of which are absolutely crucial to global CSPs in a 5G world.

We are excited to announce some early Q1 wins on the new Encompass platform, including our deal with VicTrack, the state-owned enterprise that manages public transport infrastructure in Victoria, Australia. We deployed Encompass's CPQ and order management solution to support the digital transformation and automation of its telecommunications network. With CSG's industry-leading platform, VicTrack's exciting network and processes now deliver more efficient and cost effective solutions to their end transport government and wholesale customers.

In the cable market, we have long-term guaranteed contracts to be the BSS provider of choice for all 65 million combined Comcast and Charter subscribers, the 2 largest cable providers, with CSG having migrated tens of millions of subscribers off both Amdocs and Netcracker over the last 6 years. We plan to build on this market share success in the years ahead.

Working hand in hand with Charter, CSG successfully migrated over 5 million subscribers in the Ohio, Wisconsin and Kansas City markets in 2021, including completing over 4 million migrations in the second half of last year. While the timing could still vary a little, we are on track with the existing conversion plan to migrate the remaining 10 million Charter customers over the next 12 months. Additionally, we signed a multiyear renewal and expansion with a Top 6 U.S. cable company with over 1.6 million homes passed. With this deal, we expanded our standing as this customer's billing provider of choice, and we'll continue to support the cutting edge customer with additional services like our field service management platform.

And CSG's success is not limited to North America. In the global telecom market, we continue to grow with new wins and contract extensions with leading telecom operators all around the world. During the quarter, we closed a fantastic deal with Optus, the second largest wireless company in Australia with over 10 million customers. This win positions CSG as the strategic rating and revenue management provider of choice for Optus wholesale. What was so special about this win is that we were able to unseat not 1, but 2 incumbent service providers, further proving that CSG has the right products and industry experts to unseat and beat incumbent providers.

Further, we signed a multiyear deal with Axiata Sri Lanka. This deal, our digital wholesale SaaS solution, replaces one of our key competitors. We look forward to further helping Axiata, who is one of APAC's largest telecoms group, with 6 operating companies to solve their most pressing business challenges.

Turning to Slide 8, since 2017, CSG has grown revenue from exciting new industry verticals like retail, government, financial services and health care from 7% of total 2017 CSG revenue to over 24% of total revenue at year end 2021. And while this metric can vary a little bit from quarter to quarter, it is extremely encouraging to see 27% of our Q1 revenue came from new industry verticals.

Being a partner of choice for some of the biggest brands in higher-growth industry verticals, where CSG helps them digitize and modernize their customer engagement and cloud payments, continues to be a big game changer for CSG. Last year, we won and later expanded deals with 2 of the largest drugstore chains in the U.S. and one of the largest retailers in the world, who all selected CSG software to power their retail and clinic customer engagements. Our solution is increasingly important to all 3 of these large customers, given the unprecedented number of inbound requests that healthcare providers, retail pharmacies and government agencies are getting related to COVID vaccinations, appointments and prescriptions.

And I'm pleased to report that during Q1, we continue to win new business in this space as we further expanded our relationship with and close meaningful new business with one of the largest drug store chains in the U.S. as part of the new digital engagement deal that we signed in the quarter. Further, a couple of years ago, we signed a very good deal with Formula 1 to manage its direct-to-fan OTT experience where we've managed user subscriptions, payments, entitlements and devices. I'm proud to announce that we signed a multiyear contract with them during the quarter. We are extremely excited and proud to continue serving Formula 1 as the global popularity of this racing series continues to explode and grow all around the world.

In the payments market, we returned to meaningful revenue growth in the quarter with good double digit growth in the last 2 months of Q1 coming from our strong industry vertical sales results, propelled by our industry-leading recurring revenue, SaaS-integrated payment platform. CSG Forte provides award winning full PayFac, short for payment facilitation, capabilities to 88,000 active merchants and ISV partners, which was a robust 7,000 merchant increase in Q1, who need ACH, credit, payment gateway and payment processing capabilities, serving a wide range of recurring revenue industry verticals.

As a leader in ACH processing, we continue to add scale by signing ISV partners in fast-growing industry verticals like property management. In March, we announced a strategic partner with Velosimo, which is the only provider of no-code cloud-native technology connectors. This partnership enables government agencies to easily connect and augment their technology stacks with enterprise resource planning software vendors via a single processing partner. Looking ahead, we built an exciting sales pipeline in our payments business across multiple verticals that are contributing to our improved revenue growth, which bodes well for our ability to sustain the good double digit organic growth in the payments market.

Moving to the right-hand side of Slide 8, we continued to execute against our disciplined value-creation M&A playbook. We expanded our offering in the digital customer engagement market with the purchase of Kitewheel, a SaaS-based recurring revenue company that supports real-time interaction management through omnichannel journey orchestration and analytics. And this transaction formed the foundation of CSG Xponent launch, our bold and innovative, multi-vertical market offering in the digital engagement space. Plus, as I mentioned earlier, the acquisition of Tango Telecom and DGIT enabled us to launch CSG Encompass, which I spoke about earlier.

As we look ahead, we will remain laser focused on winning and closing more and bigger organic and inorganic deals in these exciting new arenas and unlocking even greater value from existing and new acquisitions that will help CSG grow and elevate even more. As I wrap up on Slide 9, across all 5 strategic priorities, the results speak for themselves. CSG is building meaningful momentum and elevating every aspect of our business that we fully expect will fuel our continued long-term growth and transformation. We hope you see the same thing we do when we analyze our business. CSG's purpose is bold, inspiring and growth oriented. Our strategic vision and daily execution are focused and disciplined. We are elevating our culture, our diversity and our global talent.

And now I will turn it over to Hai to provide more detail on Q1 results and our outlook for fiscal year 2022.

Thanks, Brian. As Brian highlighted, we are off to a good start in 2022. Let's walk through first quarter financial results, and then I'll wrap it up with some key conclusions.

Starting on Slide 11, we generated $264 million of revenue and $246 million of non-GAAP adjusted revenue during the first quarter. These results represent 4.5% and 4.1% year-over-year growth, respectively. Approximately 2/3 of these increases were attributed to organic growth. The year-over-year increase in revenue and non-GAAP adjusted revenue was driven primarily by the continued growth of our revenue management solution, where we serve many of the largest communication service providers in the world. In addition, we are seeing healthy growth in our customer engagement offering where we serve customers in large, high-growth industry verticals such as health care, retail, financial services and government. I would also like to note that this growth was in the face of 3% to 5% discount headwinds for 2 of our 3 largest customers.

Our first quarter non-GAAP operating income was $40 million, or 16.3% of non-GAAP adjusted revenue, as compared to $40 million or 17.0% in the same prior year period. This result is consistent with our long-term target range of 16% to 18% operating margin. Our non-GAAP adjusted EBITDA was $56 million for the first quarter, or 22.9% of non-GAAP adjusted revenue, as compared to $54 million or 23.0% in the same prior year period.

Moving to our first quarter non-GAAP EPS. We delivered $0.86, a 4.9% year-over-year increase as compared to $0.82 in the prior year period. We anticipate our bottom line EPS growing as fast or faster than our top line growth for the full year. It should be noted that like other companies, we continue to monitor and navigate the current uncertain macroeconomic, geopolitical and inflationary environment.

So turning to Slide 12, I'll go through the balance sheet, our cash flow generation and shareholder returns for the quarter. Our first quarter 2022 cash outflow used in operations was $6 million as compared to an outflow of $2 million in the prior year period. Further, we had non-GAAP free cash flow of $16 million in Q1 2022 as compared to $10 million of outflows in Q1 of 2021. As a reminder, the first quarter of each fiscal year is generally lower than our other quarters, due mainly to the payment of year-end accrued employee incentive compensation from the previous year. And our full year cash flow generated from operations before working capital movement increased from $49 million in Q1 2021 to $50 million in Q1 of 2022. Due to the high visibility and recurring nature of our revenue and cash flow, we continue to expect robust cash flow generation in the remaining quarters of 2022.

Moving on, we ended the first quarter with $188 million of cash and short-term investments. That, along with our outstanding debt as of March 31, 2022, results in $204 million of net debt. And our net debt leverage ratio remains under 1x.

Over the past 8 months, we have completed a couple of financing transactions which have reshaped our balance sheet. In March of this year, we settled our outstanding convertible debt. This transaction followed the refinancing of our credit agreement last September, which had the benefit of extending the tenor of our term debt, lowering our borrowing costs and increasing our revolver to $450 million of which $205 million remains undrawn. As we had mentioned before, we are currently reviewing ways to enhance our capital structure and look to execute a thoughtful plan in the coming quarters. Our balance sheet remains in great shape, and we have a lot of options for future opportunities.

Moving to the bottom right of the slide, we declared $9 million in dividends during the quarter. In addition, we repurchased $16 million of common stock under our stock repurchase program. Looking ahead, we expect our 2022 share repurchases to offset the expected dilution from employee stock expense.

Moving to Slide 13, we are pleased with our first quarter 2022 operating results. Taken together, the strong start to the first quarter and our outlook for the remainder of the year gives us the confidence to confirm our 2022 financial guidance that we laid out in February, which is outlined in the table on the right of the slide. We continue to believe our revenue to be weighted towards the second half of 2022 with approximately 51% of our full year revenue realized in our third and fourth quarters. Additionally, as I mentioned before, we continue to monitor the current uncertain macroeconomic, geopolitical and inflationary environment.

And finally, I wanted to leave you with a few concluding thoughts. We believe that the momentum we are creating in the market, the results that we are generating and the laser focus that this leadership team has been executing against our strategic priority positions us well in the marketplace. CSG is committed to accelerating our revenue growth and diversifying our industry vertical revenue, including closing and integrating disciplined, value-adding acquisitions. And we believe this investment in our future strategic growth, combined with our consistent capital contribution in the form of dividends and share buybacks, will serve our shareholders well. With that, I'll turn it over to the operator to facilitate the question-and-answer session.

(Operator Instructions) Your first question comes from the line of Maggie Nolan with William Blair.

I wanted to ask a little bit more about CSG Encompass and understand, is this an additive offering for your existing CSP customer base, or is this about kind of streamlining services and achieving that goal of being easier to do business with than your competitors? I guess any comments on the opportunity there and then early adoption or penetration would be helpful.

Yes. Maggie, thanks for the question. This is a new product launch. What we've seen in the market is enterprise is one of the fastest growing and most profitable segments for global telecom operators all around the world. And so we had an opportunity after the acquisitions of Tango Telecom and DGIT to fully integrate a modular open API structure where we could help enterprise telecom businesses both launch new marketplaces and allow them to bring on new partners that could really accelerate revenue and help them with a return on their 5G investment. So when you think about what they're trying to do all around the world, they're trying to make it easier to buy a broad range of goods and services. So it unifies the catalog. It provides configure, price, quote. It improves SLA response time. It deals with order orchestration that really helps telecom businesses launch and monetize new services to gain that return.

Okay. That's helpful context. And then on the acquisition pipeline, since that's an integral part of your strategy long term, can you just comment on how that's looking? Are target companies becoming more expensive? And is large scale acquisition still a likely best use of capital in the near term here?

Yes. No, there's a couple of good questions on that that we could give some insights. First, on the ones we've done, we're really focused on continuing to create and extract value. So you saw us launch CSG Xponent in the latter part of last year. It really is a customer experience, customer engagement platform that helps big brands in lots of verticals. That's what's contributing to some of the sales success that we're seeing in the markets that we can win big in those new verticals. Same thing now with the launch of CSG Encompass. Specifically on the macroeconomic side, we do believe that some of the turbulence that we're seeing more globally actually can create attractive, disciplined buying opportunities for CSG as we continue to execute the M&A strategy. So we're focused in several of those areas, and we try to be very disciplined with a pretty tight sweet spot on what we believe an attractive mid-size or larger acquisition is. And we think the economic environment might make it even more attractive as we continue to pursue those opportunities on the strategic side.

Your next question comes from the line of Greg Burns with Sidoti & Company.

Just following up on the M&A line of questioning. When you look at opportunities in terms of maybe new verticals or technology, what are your focuses or what are you looking at in terms of expanding your platform maybe from a tuck-in technology or vertical perspective? And then if you do something more transformative, is there any particular market that you'd be looking at, whether it's something you're already in or a new -- a completely new industry?

Yes. Greg, thanks for the question. It really covers a couple different avenues. One, we're not -- we stay very flexible and open. Whether the deals and the acquisitions would be larger, mid-sized and smaller, it really depends on the SaaS technology, the contribution it could bring to accelerated revenue growth and how it could help us package our solutions and technology together to be more relevant to those big brands. So a couple of key areas that we focus on that kind of vary by industry vertical. One, we look for solutions that are SaaS-based that can help us in monetization, customer experience, customer engagement. And in digital payments, we really focus on those areas.

We think that there's an opportunity to expand scale. So if it's more of a scale acquisition, then it needs to be able to have sticky revenue, be accretive, have great cost synergies as well as contribute to the revenue growth. If it's more on the higher growth SaaS end of that, then we're looking for it to be highly complementary, where we can easily integrate into our existing suite, still provide a modular approach that will enable us to expand either the geographic global reach of our solutions to expand our addressable market and our growth rate and to be more value-adding and relevant to the customers. So we really look at M&A opportunities across that entire landscape with that focus area.

Okay. And then in terms of Charter, the decline in revenue year-over-year and sequentially, is that strictly a function of the price resetting. Is that fully baked into the numbers now? And do you expect revenue to grow from here?

Greg, the answer is yes and yes. Because I think part of the renewal here enables us to transition about 15 million subs, of which we've already moved over about 5 million subs thus far. So there's still more room for us to grow with Charter over time.

And maybe the only thing I would add to that, Greg, I think we gave a little bit of color late last year that we expected the renewal to be in the plus or minus 5% range. We saw that come in. The other aspect besides just the renewal discount that factored in, we had some revenue that was spread over the term. And so when we saw the term late last year only be 3 months left, some of that revenue was getting spread over a shorter period of time. As we then renewed to a 6-year period, some revenue from an accounting standpoint, that got spread over a longer horizon. So it was really several different factors in addition to what I commented on that we haven't seen all the subscribers come on board yet.

Okay. And lastly, on the payment side, it looks like you're back to pre-pandemic levels, but maybe you could just confirm whether or not that's the case. And what's the pipeline of opportunities look like for that business?

We love what we're seeing in the payments business. We started to see the performance in our sales, in our new customer account revenue activation, and our ISV channel partners really start to bear fruit and start to grow in the second half of last year. And I think we've been signaling that for 3 or 4 months now, and we saw that really transpire. We saw January be a little bit better, but not back to normal levels. We saw very, very strong results back to pre-pandemic levels, and then some, in the latter part of Q1, and we have high confidence that will continue. From a sales performance, we've outperformed in the payment space, both in direct sales and in our ISV channel partners. We've improved in the activation of new customers to basically reduce the time to onboard in revenue recognition and revenue acceleration, and we love what we're seeing in the payments business.

There are no further questions at this time. I'll turn the call back to CEO, Brian Shepherd, for closing remarks.

Thanks so much. We appreciate everybody joining. We are laser focused on what we're doing to accelerate top and bottom line growth, bring more value to fantastic brands all around the world. We are super grateful to all 5,200 and beyond CSG employees for making a difference, elevating our culture. We look forward to doing bigger and better things every single quarter. Thank you for the time.

This concludes today's conference call. Thank you for joining. You may now disconnect.