CSG SYSTEMS INTERNATIONAL INC Q1 FY2024 earnings call

• Strategic objectives: Aspire to 2%-6% long-term organic revenue growth, reach $1.5 billion revenue by year-end 2025, be #1 SaaS provider for global communication service providers, and further diversify revenue. - Revenue diversification: For the first time, 30% of revenue came from non-CSP verticals in Q1 2024. - Shareholder returns: Increased dividend by 7% in February, repurchased $10 million in stock in Q1, and returned over $160 million to shareholders over the last 12 months. - Corporate responsibility: Issued second annual global impact report and carbon footprint report, achieving nearly 40% reduction in Scope 1 and 2 emissions since 2019. - M&A: Closed first acquisition in 2 years in April, acquiring a customer engagement company serving multiple verticals including insurance, with more accretive deals expected in 2024. - Market wins: Secured deals with Comcast, Charter, Formula One, JPMorgan Chase, and global telecom operators in Latin America, Africa, and Asia Pacific.

In Q1 2024, CSG generated $295 million in revenue. 30% of revenue came from industry verticals outside the communication service provider space. The non-GAAP adjusted operating margin was 16.6% and non-GAAP EPS was $1.01. The payments business saw a 17% year-over-year growth in active merchants, with 119,000 active merchants in Q1 2024 compared to 102,000 in Q1 2023.

• Reaffirmed all 2024 guidance targets. - Anticipate first half 2024 revenue to make up approximately 48% of full year revenue, with 52% in the second half, and Q2 being the low point quarterly. - Expect free cash flow to improve through the year, building on the strong Q4 2023 free cash flow performance, with Q1 timing-related items not impacting the ability to meet full year free cash flow guidance. - Confident in achieving organic revenue growth and leveraging acquisitions to support growth.

• Uncertainties in meeting projected financial results due to risks and uncertainties that could cause actual results to differ materially from forward-looking statements. - Integration challenges of acquired businesses. - Headwinds from North American cable broadband subscribers, which have impacted revenue growth slightly. - Economic and market uncertainties affecting the performance of various segments.

Q: Can you elaborate more on the acquisition last month, the offerings, size of the business, and where you are in the process of likely closing several more deals in 2024?

A: The acquisition is in the customer engagement space, serving multiple verticals with insurance being the largest. It's a company worked with for years, adding to customer engagement business and expertise in insurance. There's an active pipeline for inorganic moves, and they anticipate closing more deals in 2024 while staying disciplined.

Q: Any variations in margin across different verticals? And do you have the structure in place to continue growing that?

A: Margin differences are more dependent on solutions than industry verticals. SaaS-like solutions have higher margins. They have the scale and infrastructure to handle growth, and have invested in a channel-driven approach for multi-industry verticals to accelerate organic growth.

Q: Unbilled receivables were up sequentially, what's driving that and when might it step down?

A: Unbilled receivables are tied to milestones in large wins on the global telco side. As they reach those milestones, they'll convert to invoices and accounts receivable. It's expected to moderate in the back half of the year into next year.

Q: Stock comp expense stepped up sequentially, is $18 million the right level going forward?

A: Executive-based compensation equity has averaged around $35 million on a dilution basis, and they expect to offset dilution. There's no big step change in compensation, and they can dig into it post-call if needed.

Q: Headwinds at North American cable operators?

A: Facing smallish headwinds with some subscriber losses on the broadband side. Anticipated to continue into Q2 and Q3, but longer-term, there's likely a competitive response with homes passed by Comcast and Charter.

Q: CEF and Payments business growth in Q1?

A: The combined CEF and Payments business had strong double-digit organic growth in Q1, excluding the $10 million nonrecurring software licenses from the prior year.

Q: Breakout on growth between existing and new customers in CX, and how AI benefits fraud business?

A: Most growth in CX is from land and expand with existing customers. They've invested in a channel partner-led approach for new logo sales. AI is used in fraud detect in payment and telecom sides, helping reduce fraud risk and improve merchant experience.

Q: Confidence in full year free cash flow target despite Q1 being light?

A: Expect a normal year with profitability and revenue growing throughout, working capital elements reverting, and Q4 2023's strong free cash flow performance as a reference. Q1 is a low point, and it's expected to improve through the year.

Q: Details on the small acquisition in CX with insurance, purchasing vertical expertise or CX capability?

A: The acquisition brought a great customer base, industry expertise, and was at a good financial price. It was more about adding a customer base and expertise rather than a strategic capability to move the ball forward immediately.

Q: Potential spending on acquisitions to hit $1.5 billion revenue by 2025?

A: It depends on the type of assets available. They have liquidity, and acquisitions need to be accretive. Roughly $250 million in revenue acquisition is needed, with considerations based on the mix of verticals and valuation multiples.

Q: Seasonality of the business and dynamics driving other revenue line item mix?

A: Seasonality in payments business due to tax payments hitting in Q4 and Q1. The reiteration of guidance incorporates acquisitions, but their impact is nominal. Organic growth is expected to contribute to revenue, with headwinds from North American cable broadband factored into the plan.