CSG Systems International, Inc. (NASDAQ:CSGS) Q4 2022 Earnings Call Transcript

CSG Systems International, Inc. (NASDAQ:CSGS) Q4 2022 Earnings Call Transcript February 1, 2023

Operator: Good morning. My name is Devon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q4 2022 CSG Systems International Inc. Earnings Conference 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. Thank you for your patience. Head of Investor Relations, Mr. John Rea, you may begin the conference.

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 appreciate you joining the call today as we get started on Slide 4. With a choppy macroeconomic environment as a backdrop, 2022 showcased the strengths of CSG and our recurring revenue business model. We delivered 4.1% year-over-year revenue growth, a fantastic result, especially when factoring in the discount headwinds from two of our top three customers coming from long-term renewals that we signed in late 2021. Historically, CSG's revenue has been flat to down in the year following a top three customer renewal, let alone two customer renewals. Team CSG also proved the agile and resilient manner with which we will continue to run our business. After facing some inflationary cost pressures in Q2, we took timely action on our margin improvement plan that led to good profitability in both Q3 and Q4.

As a result, we finished 2022 with adjusted operating margin of 16.6%, up from 15.7% in H1 2022. In addition, as a result of this increased profitability, favorable foreign currency movements and increased share repurchases, we delivered $3.61 of non-GAAP EPS, a 7.8% year-over-year increase. As we have said many times, over the medium to long run, we aim to have the bottom-line growing as fast or faster than our top-line and that is exactly what we accomplished in 2022. At the end of the day, our revenue growth success is fueled by exciting ongoing market demand for CSG's industry-leading SaaS products and our impressive sales results. We continue to win and wow big new customers in a wide variety of faster growth industry verticals. Team CSG grew annual contract value sales bookings a strong double-digit year-over-year in both Q4 and full year 2022.

These sales wins bode well for CSG's continued revenue growth into 2023. Our 2023 guidance should prove that we see our strong business momentum continuing into the new year. I will go into more details on our 2023 guidance, but we are expecting organic revenue growth above the midpoint of our long-term 2% to 6%, with a revenue range between $1.13 billion and $1.17 billion this year. Put differently, the midpoint of this guidance represents year-over-year revenue organic growth of approximately 5.5%. Further, we foresee profitability, as measured by our adjusted operating margin percentage, remaining strong at a range of 16.5% to 17%. And tied to 2022 success and 2023 outlook, we are pleased to announce we are raising our dividend by 6% with a quarterly payout of $0.28 per share.

We're also proud to announce that this will be our tenth consecutive year of increasing our dividend payout. At the heart of our success is what CSGers all over the globe are doing on a daily basis. Because of their dedication and innovation, we are taking CSG to heights unseen in our company's rich 40-year history. Thank you, Team CSG, for delivering fantastic 2022 results for our customers and for CSG. We will continue investing in our people, our products, and our customer to grow faster and to wow leading brands all around the world. As we do this, we will also demand a higher and more disciplined return on every dollar we invest. This combination is what will enable CSG to expand our operating leverage and accelerate our profitable revenue growth in the years to come.

During Q4, we had several exciting customer wins and success stories. By year-end, we had successfully migrated substantially all the Charter subscribers we won in our November 2021 contract renewal and extension off a competitor's billing system. Globally, we expanded our relationship with a leading UK connectivity provider and landed sizable new deals with large telecom providers in Asia Pacific and West Africa. And on the customer engagement front, we won our first global CSG Xponent customer with Standard Life, the UK's largest long-term savings and retirement business. I'll provide more color on these wins in a few moments. Turning to Slide 5, I want to reiterate our four strategic objectives that will help CSG create more 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 combined with highly disciplined accretive and strategic inorganic growth. We aim to add operating scale and expand our operating leverage by growing top and bottom-line to $1.5 billion in revenue by year-end 2025. We strive to be the number one SaaS provider of choice for global communication service providers by providing the most value-adding technology platforms and by being easier to do business with than our competitors. And finally, we plan to diversify 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, healthcare technology, and more.

Moving to Slide 6. You can see that 2022 was a great year in delivering against all four objectives. On strategic revenue growth, we reported $1.09 billion of revenue during the full year 2022, resulting in 4.1% year-over-year 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 a safe attractive harbor in the midst of macroeconomic uncertainty. By 2025, we aspire to gain scale in the markets where we compete and generate greater than $1.5 billion in annual revenue, which implies that CSG will add over $400 million in profitable recurring revenue by 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 exactly as we did in 2022 even with the margin pressure we faced in the first half of the year.

On the last point, I will continually reinforce a key principle for the CSG Board of Directors and management team. Investors can be assured that Team CSG is laser-focused on creating shareholder value and growing profitable revenue, not building empires nor adding them calories. We will maintain a disciplined and high return on invested capital mindset as we explore a wide range of strategic moves to create more value. Turning to Slide 7. We had good success in 2022 on our goal to be the number one technology provider of choice for communication service providers globally. And our continued success with both North American and global CSPs proved that we are executing well against this strategic priority. It's great to see that CSG grew revenue year-over-year combined in our two largest North American cable broadband customers in Q4 2022 despite the approximate 5% discount headwinds at Charter following our long-term renewal in late 2021.

With respect to Charter, the migrations of subscribers from a competitor's billing system are largely complete as we successfully migrated another pool of Charter customers to our platform in November. And during the quarter, we closed a new deal with one of the six largest cable providers in the United States to help them streamline and modernize their operations. Specifically, we are deploying our field service management tools as well as certain components of our customer engagement portfolio. And we also won more business in the global telecom market. During Q4, we expanded our relationship with a leading UK connectivity provider to digitally transform their BSS stack. The CSG solution will simplify their architecture by consolidating CRM, collections, payments management, product catalog and billing into a single CSG-hosted and managed solution.

The new stack will reduce their time to market significantly and enable them to increase competitiveness in the UK connectivity market. We also signed a new deal with a leading telecommunications operator in the Asia Pacific region to digitize the revenue management and digital monetization efforts. This new customer has operations in six Pacific Island nations with approximately 4 million subscribers. Specifically, we were able to provide solutions that will help this customer bring new services to market quickly, gain better insights into their customer base to enhance customer satisfaction and provide improved business resilience through a fully supported BSS platform. And finally, we are pleased to announce that we won a significant deal with Moov Africa Malitel, the leading converged operator in Mali, West Africa.

Malitel has selected CSG to improve its time to market and to provide new service offerings with an easier-to-use and more modern-tooled application. Turning to Slide 8. Since 2017, CSG has grown revenue from exciting new industry verticals, from 7% of total 2017 CSG revenue to 26% in 2022. Being a partner of choice for big brands in higher growth industry verticals where we help them digitize and modernize their customer engagement and integrated payments continues to be a game changer for CSG and for our customers. Last fall, we launched CSG Xponent Ignite, which brings over 100 pre-packaged customer experience journey templates, connectors, and reports that will turbocharge unforgettable outcomes for communication service providers, financial services, retail, healthcare and life sciences.

This leading SaaS platform leads to quantifiably better business results with improved customer conversion, engagement and loyalty across the brand's digital channels. What does this mean for brands and a wide range of industry verticals? Low entry points, rapid launch in 90 days or less, turning customer data into powerful insights and faster return on investment. It was fantastic to see Team CSG win our first CSG Xponent deal outside of North America, Standard Life, the UK's largest long-term savings and retirement business. Standard Life will use our customer journey orchestration tool to operate dynamic, contextual and more personalized customer experiences across all channels. Also, we signed a CSG Xponent deal with one of the world's leading government contractors.

This customer will use our Xponent smart notifications, so that they can simplify and digitize their communications with Medicaid enrollees for one of the largest states in the US. In the payments market, our growth is a testament to our industry-leading SaaS integrated payments platform. CSG Forte provides award-winning payment platforms to approximately 98,000 active merchants and ISV partners 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. Looking ahead, we've built an exciting sales pipeline in our payments business that we believe will continue strong double-digit organic revenue growth in 2023 and beyond.

Before I turn it over to Hai, let me provide some high-level color on our 2023 guidance and a few closing thoughts. In fiscal year 2023, we expect organic revenue growth at or above the midpoint of our long-term 2% to 6% range as evidenced by our anticipated revenue range of $1.13 billion to $1.17 billion. This range translates into an expected year-over-year revenue growth range of 3.7% to 7.4%, with the midpoint equating to a 5.5% year-over-year growth rate. This revenue growth is 100% organic with any acquisitions we do in 2023 being added to the strong revenue growth. Put simply, CSG has built meaningful revenue growth acceleration heading into the new year. We expect good non-GAAP adjusted operating margin performance in 2023 with a range of 16.5% to 17%.

Hai will provide more details on all of our 2023 guidance. To wrap up on Slide 9, I hope you can see why Team CSG is excited by our outlook. We continue to turn today's challenges into tomorrow's breakthrough business results. 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 things we do when we analyze our business. We are attracting, retaining and developing the best and most diverse talent in the industry. We are helping transform the industries we serve, whether that be global CSPs, financial services, healthcare, retail or government customers. Our very strong sales win rate proves that the market wants more of what CSG has to offer.

Photo by Campaign Creators on Unsplash

And when any part of our business underperforms our lofty expectations, then you see CSG's operating intensity kick into high gear just like we did mid-year as we turned our disappointing first half 15.7% adjusted operating margin into a solid full-year result of 16.6% in 2022, and we built even faster revenue growth momentum heading into an exciting challenging and growth-oriented 2023. With that, I will turn it over to Hai to provide more detail on Q4, full year 2022 business results and 2023 guidance targets.

Hai Tran: Thanks, Brian. Let's walk through our 2020 financial results. And then, I'll wrap it up with some key conclusions. Starting on Slide 11. We generated $1.09 billion of revenue, which represents 4.1% year-over-year growth. For the year, the increase in revenue was mainly attributed to the continued growth of our revenue management solution, as the majority of the increase was attributed to organic growth. This growth was in the face of 3% to 5% discount headwinds for two of our three largest customers. Our 2022 non-GAAP operating income was $169 million or non-GAAP adjusted operating margin of 16.6%, as compared to $162 million or 16.5% in the prior year. The increase in non-GAAP operating income and non-GAAP adjusted operating income margin percentage can be mainly attributed to higher revenue along with the timely operating margin improvement initiatives we took in Q2 and the beginning of Q3.

Specifically, we have seen margin benefits from our decision to dissolve our controlling interest in a Latin American business, the continued streamlining of our office space footprint, a rationalization of our headcount and hiring practices, and the strengthening of the US dollar to most global currencies. Moving on, our non-GAAP adjusted EBITDA was $226 million for 2022, or 22.3% of revenue, excluding transaction fees, as compared to $221 million or 22.6% in the prior year. Lastly, our 2022 non-GAAP EPS was $3.61, a 7.8% year-over-year increase as compared to $3.35 in the prior year. The increase in non-GAAP EPS is mainly due to the higher operating income in 2022. Favorable foreign currency movements and share repurchase activity over the last 12 months, offset by higher tax rate and increase in interest expense due to increasing interest rates, as our debt is primarily floating rate in nature at this point in time.

Turning to Slide 12, I'll go through the balance sheet, our cash flow generation, and shareholder returns. Our 2022 cash flow from operations was $64 million as compared to cash flow from operations of $140 million in the prior year. Further, we had non-GAAP free cash flow of $27 million in 2022 as compared to $114 million of free cash flow generated in 2021. The main drivers of the year-over-year decrease in free cash flow are primarily timing-related, and include: unfavorable changes in working capital, resulting primarily from the accrual of our 2022 annual employee bonuses, which are significantly lower than the previous year; higher tax obligation of which the primary negative impact was from Section 174 of the 2017 Tax Cuts and Jobs Act which deals with the amortization of R&D spending beginning in 2022.

As a result of this, we will not get the previously anticipated amount of the tax deduction benefit related to our R&D investment in 2022. We had previously expected this legislation to be repealed. But because the legislation would not repealed, we now anticipate higher cash taxes going forward. Over a five-year period, we believe this tax change will be neutral to our free cash flow generation. Further, we experienced higher taxation related to our profit mix in some of our global locations, which caused our tax rate to marginally increase. Slightly elongated cash conversion cycle from a couple of our recently signed large global telecom new logo wins that will result in good long-term profitable revenue as we continue to gain market share from competitors.

The negative cash impact of our operating margin improvement plan that we initiated in Q2 that included increased restructuring charges, continued streamlining of our office space footprint, headcount reductions and enhanced scrutiny regarding new hires. Cash flow generated from operations before changes in working capital in 2022 was $160 million compared to $179 million in 2021. Importantly, absent the aforementioned impact from Section 174, we would have shown slight growth in cash flow from operations before changes in working capital during 2022 on a year-over-year basis. And as we communicated on our last earnings call, our Q4 free cash flow of $49 million in 2022 was slightly better than our 2021 result of $48 million. Moving on, we ended the fourth quarter with a $150 million of cash and short-term investments.

That, along with our outstanding debt at December 31, 2022, results in $265 million of net debt, and our net debt leverage ratio sits at 1.1 times. Moving to the bottom right of the slide, we declared $34 million in dividends during 2022. In addition, we repurchased $88 million of common stock under our stock repurchase program. In total, we returned $122 million to our shareholders in 2022. Turning the page, let me layout our 2023 guidance. Starting with the top-line. We expect our revenue range -- to range from $1.13 billion to $1.17 billion and transaction fees to range from $78 million to $82 million. We are currently forecasting our first and second half 2023 revenue to be split relatively equal. Further, we anticipate Q1 revenue to be the strongest of the year due to the timing of a few opportunities which moved out of Q4 and that we anticipate to close in Q1.

Similar to 2022, we also expect our non-GAAP adjusted operating margin percentage to range between 16.5% to 17.0%, well within our long-term target range of 16% to 18%. Consistent with the revenue trend above, we also expect Q1 to be our strongest quarter in terms of our non-GAAP adjusted operating margin. Further, we anticipate Q2 being the low point of the year on this metric as our annual merit increases begin to have an impact. On the next metric, we anticipate our non-GAAP EPS to range between $3.35 to $3.65 based on a non-GAAP tax rate of approximately 28.5% and a share count of 31 million shares for the year. The midpoint of our non-GAAP EPS range is below our 2022 performance of $3.61, primarily due to the projected higher effective tax rate, and increase in the borrowing cost of our debt in 2023 versus what we incurred in 2022, as a result of the full-year impact of higher interest rates.

As a reminder, we currently have a predominantly floating rate capital structure, but continue to explore potential ways to maximize our balance sheet efficiency. Moving on non-GAAP adjusted EBITDA is expected to range between $231 million to $242 million. And finally, we expect a range of free cash flow to be between $80 million to $120 million with capital expenditures expected to come in between $22 million to $28 million. Going forward, the current challenging inflationary environment means we must relentlessly prioritize every investment we make and be discipline in the allocation of resources. Innovation and adherence to a risk-reward framework with continuous learning are two cornerstones of how we run our business. We remain devoted to a disciplined approach to managing our capital.

In closing, our business is well-positioned with a strong sales pipeline, robust sales bookings momentum, a high-quality customer base and visibility into 90%-plus of our expected 2023 revenue. We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating disciplined value-adding acquisitions. Additionally, we are pleased with the results of our operating margin improvement initiatives in 2022, and we'll continue to be very careful stewards of our capital, especially in this uncertain environment. We believe this approach, combined with our consistent capital distribution, will serve our shareholders well. With that, I will turn it over to the operator to facilitate the question-and-answer session.

See also 13 Biggest Eyewear Companies in the World and 12 Most Undervalued Pharma Stocks To Buy.

To continue reading the Q&A session, please click here.