CSG Systems International, Inc. (CSGS) Earnings Call Transcript & Summary

All right. Great. Welcome, everybody. I'm Andrew Dahle with JPMorgan. With me today is Brian Shepherd, the CEO of CSG Systems. We're privileged to have him here with us. Brian, you took over as CEO officially January 1, but you were technically announced CEO a little bit before that in 2020. Since then, CSG stock is actually up a little over 30%. Meanwhile, the NASDAQ is actually flat. So you guys have clearly outperformed and done some things very, very well since then. But maybe if you sort of step back and think about the opportunity you saw as you step into the new role at the helm of the company, what got me excited about the company going forward, what you kind of had in terms of ambitions and goals and then maybe just a quick recap on the assessment of some of the highlights since then.

Yes. No, thanks, Andrew. So first, what excited me is CSG has always had a great culture, always had great people. We always had disruptive technology, but we kind of lost our boldness and our competitiveness in the market, and we really believe we've earned the right to be more aggressive around growth organically, really expanding the solution and the offering. And so for those that don't know the stock as much, CSG is a purpose-driven SaaS platform company. We help great brands all around the world. deliver and monetize great customer experience. And if you look at what's going on, it doesn't matter the macroeconomic headwinds. Every brand in every industry, everywhere in the world, needs to differentiate and compete on CX and they need to be able to monetize those relationships. And so we're taking advantage of those trends. We've never been healthier. We've never been faster growing. We've never had a better balance sheet to execute our strategy. And what we really think about first in the global cable and telecom space, we have an opportunity to turbocharge growth become the technology provider of choice and win meaningful market share. And that part of our business is performing extremely well. Secondly, on the digital engagement and CX side, we've diversified our revenue were 7% of our revenue in 2017, has grown now to 27% of our revenue coming from high-growth industry verticals outside of cable and telecom, retail, health care, technology, government and more. And so we love what our SaaS technology is doing in these high-growth multi-verticals. And then we also moved into the digital payments -- Integrated payments for large merchants and small and midsize. We now serve 88,000 merchants, helping them monetize their relationship. So the macroeconomic headwinds for us, we've enabled us to still grow. We have no exposure to Ukraine, no exposure to Russia. I would say the thing that we're most proud of is we can accelerate organic growth. And as valuations to come down, we think it gives us very attractive buying opportunities to execute our inorganic strategy.

I definitely want to come back to M&A in a bit. But let's first look a little bit at the performance you guys put up in 2021, very strong. I think it was the best organic growth that you guys have put up in over a decade. And then certainly, a few weeks ago, you actually posted a very strong Q1, when you reiterate your 2022 guidance. Can you give us a little more detail on what's power performance recently? I think about some of the recent wins you guys have had.

Yes. No. The first in the core cable and telecom market, we've never been faster growing on the cable side. We locked up all of our big customers. So we've now got a 3- to 5-year runway with those customers locked up. And as we have renewed those customers, we've actually expanded the offering, the services and the footprint we have with each of those. So as we've diversified our revenue, our core cable business has never been stronger or faster growing. On the global telecom, iwe usually had strategy that we put in place going back in 2015, 2016, where we realized Global Telecom was 4x the addressable market of the cable business. And we believe that the market trends were moving in our favor. Basically, the commoditization of voice and data, the growth in enterprise business really played to our strength to be able to offer more agile platform-based platforms that derisk and lower the cost to serve of the telecom operators, and that's why we're growing extremely quickly in those -- in that market space, which also then created this focus on revenue diversification. We started out helping with transactional customer engagement to help brands compete and serve both consumer and enterprise customers. And we realized we weren't limited with our SaaS platforms to just serving telecom players. We could actually serve retail, health care, technology, any vertical and we started to have a lot of success in growth. And now we're just taking advantage of that and really both accelerating the direct sales as well as the channel-driven sales through that.

Yes. I want to double click on charter for a second here because I think from the last couple of quarters, that was probably the big news, if you will, the renewal and the contract extension you had. Any sort of color you can give us around the dynamics behind the renewal? And then also you announced that you're actually going to be converting more subscribers over to Charter to your BSS system, I believe, from Charter. Anything you can talk about on the progress of those conversions?

Yes. I mean, what I'd say is, I mean, we're proud to serve Charter Communications, Comcast, 2 of our largest customers that we report on a broken out level. We were proud to both. What we think about it. If we serve them with mission-critical platforms that are always on, always up, help them monetize their relationship, they'll give us more. Most brands we see are wanting to use fewer vendors, not more for those that perform. And so signing and secure contract extension, winning the entire footprint. So we became the BSS provider of choice to serve all of the residential and consumer business of Charter, and it's a meaningful opportunity for us to expand with this great customer. Every time they add a broadband subscriber, we make more money in the process with our subscription model of pricing. And then on in terms of the subscriber gains, as part of that, we've converted about 1/3 of the subscribers that weren't on the CSG system, and the remaining 2/3 will be converted over the next 6 to 12 months.

On top of Charter, there was actually DISH as well that you've locked. Can you remind us, are there any other big renewals on the horizon?

Now at this stage, all of our big customers are locked up. We did Comcast in 2019. We did Charter and DISH. We just announced in Q1 that we renewed the top 6 broadband provider, a cable provider in the U.S. market. We renewed our 2 largest telecom operators over the last 12 months. So at this stage, it's really about trying to bring them more value, sell them -- cross-sell, upsell more services and go win on the new logo win rate

Got it. I definitely want to go into where you guys have been expanding internationally. But maybe before we do that, just because I'm sure the question comes up quite a bit. Let's think about you and probably your largest competitor, Amdocs. What would you say?

I'm sorry, who is that? No. So for those that -- some of you know me, I was actually one of the few non-Israeli SEC officers at Amdocs. I was there for almost 8 years. They bought a previous company that I own. So a good company has good technology, good people, a very formidable competitor in the marketplace. And from our standpoint is I feel like coming from there, I learned a lot of the tactics and things that enable them to be successful. We try to apply. What we do at CSG, first and foremost, we try to obsess over our customers' success and bring them more value, be easier to do business with. Secondly, we try to differentiate with breakthrough future forward technology that meets their future needs. And then third, you got to serve their mission critical. And so from our standpoint, what we try to do is, first, earn the right to grow and win more business, and then secondly, use our customers and the strength of our customer relationships, most of which are 10, 20, 30 years in existence to become our best sales agents. Where if we serve them well, they then help us as references on the new wins. And this is what's propelled us in a big way. I'd say the other thing I might give a little color on is one of our competitors has more of a service-based business model. And if you look at where the industry is going, more agile, more cost-effective, simpler business processes is an opportunity. We're a platform-based provider, and that's what's enabled us to start to bring more value to global telecom operators and more innovation at a lower price point that still enables us to make a very attractive gross margin and operating margin from the business. And that's one of the things we try to take advantage of.

And when you think about cable, when you think about telco, satellite as well in there, how would you articulate the competitive dynamics within those or some of the key differences that you have to contemplate when chasing after those 2 markets?

I would say the cable business kind of grew up more accustomed to a multi-tenant solution. We've been SaaS before it was sexy, going back a couple of decades with multi-tenant solutions, and there was less competition in the cable industry because they tended to have geographic footprints and there was more sharing. And so from that standpoint, we kind of grew with that business. I would say, for us in the global telecom, what we see is more aggressiveness on the price plans, doing things in terms of new business launch. Enterprise business and segment is big and fast growing for both. But on the telecom side, what we had to do is really work with them to try to simplify the business model, simplify the technology stack, help them with new business models like B2B2X marketplaces and competing on a more global scale. And so that's one of the evolutions that CSG has done. We've really moved from a U.S. provider 10 years ago to much more of a global technology provider of choice. And that's -- and it's a mindset shift that we've had to adopt.

And certainly, in terms of 2 of the core focuses for the company overall, international expansion has been one and diversifying outside of cable and telco as well. You've done a great job on both, as you mentioned, about 25% of the business is now outside of cable and telco. Maybe can you talk to some of those wins that you've been having. What those products are? Kind of the competitive dynamics around those, both internationally as well as international or domestic, with just products outside of cable and telco in those end markets.

Yes. I mean when we looked at the -- we went back and refreshed our telecom strategy back in 2016, we really saw a couple of things. One is a lot of the leading providers looked a lot more like American Movil, Vodafone or Orange that has operating companies in 15 to 25 countries, smaller in size, don't have 100 million subscribers on the platform, where they need more agility, more cost-effectiveness less change orders and really move the business and support the business in a different way. And so what we try to do is build our technology in a way to deliver that capability, help them compete in the market that can fund the 5G and bring more innovation. And so that's why we really start to make inroads. 1 MTN in South Africa started out on wholesale, expanded enterprise, one all of consumer. Same thing in the Australian market with Telstra on the enterprise side, and we just expanded from there. Wins that we've announced recently, Mobily in Saudi -- Saudi Arabia, the #2 provider, Optus is a big win for us in the Australian market. Same thing in South America and Southeast Asia, but EMEA has been a big focus for us. And so we love what we're seeing in the telecom market. The other side, you mentioned the revenue diversification going from 7% to 27% in Q1 of our revenue coming from high-growth other industry verticals didn't happen because we weren't growing in cable and telecom. We've never growing faster in those markets. It just means our growth is outpaced than the others. And that's largely been up till now a U.S. focus. And because we started with unlike a lot of SaaS companies, we didn't start with SMB. We started by winning JPMorgan Chase start out in fraud alert notification, then did journey orchestration to redesign the mortgage lending process online, performed well enough to extend down into the auto finance. One, 3 of the largest pharmacy retailers in the U.S. to help them improve their customer experience, transactional engagement around COVID deployment scheduling, vaccinations, prescription readiness. Same thing with big tech, same thing with big government. So if we can serve and prove the referenceability and the value we can bring to giant players like that, nothing stops us from rinsing and repeating and selling to hundreds of brands inside the U.S. as well as globally. It's now a big focus, expanding channel partner sales in those domains, expanding geographically with it to drive that global expansion of the business. We love the offering, we love where the business is. The macroeconomic situation actually plays to our strength, and we think it creates upside for us, not downside.

That's great. Let's talk a little bit about your revenue targets. You've been pretty ambitious here. You've pointed to sort of a 2025 target of somewhere between $1.5 billion and $2 billion of revenue. If you think about 2 parts to that, you kind of do a traditional maybe 5%, 6% growth rate that's in line with where you guys have been very recently, certainly above average levels historically, it kind of points to a significant M&A delta that you'll have to get to achieve those. One question is to be where some of that will come from? What are the pockets you're looking at ? And what areas of the market you're interested in. And then I think the other one is just really on that organic growth side. What is achievable?

So what we always do, we talk a lot about it. We're not chasing empty calories from revenue and a growth standpoint. We focus on earning the right to grow, first and foremost, with acceleration of our organic revenue growth. And so the other side we do is we do have high expectations of our acquisition capabilities and how we can drive differentiation and scale and revenue acceleration through acquisition, but it really comes with discipline. So first, we always plan our multiyear operating plans and strategies around the base, which is going from $1 billion to $1.5 billion and having EPS and EBITDA growing faster than our top line revenue growth. And so with that, what we see is about half will come from organic, half will come from smart disciplined acquisitions that really do 1 of 3 things: extend our strategic product capability to bring more value to big customers around the world; number two, enable us to expand into new addressable markets; and number 3 is to add operating scale and leverage. And so on all 3, you've seen us execute that strategy over the last 12 to 18 months. We're going to continue to do that as we get to $1.5 billion. Then what we believe the difference between base and stretch is as we compete and win more in the market, we believe with that with the macroeconomic headwinds, we'll actually bring price points and valuations of very attractive targets that will make them more actionable. Over the last 18 months, it's not that we're just focusing on small and midsized acquisitions. We are actually looking at midsize and larger. But it might have been a good strategic fit, it might have been a great culture, it might have been good technology but the best way to screw up a good acquisition is overpay. And we have a very disciplined strike zone that we look for in every acquisition. If it meets our strikes zone, we'll do the deal. And we expect that to be accretive, add to our SaaS capabilities and actually accelerate our top and bottom line performance. If it doesn't, then we'll wait and be disciplined.

Yes. Maybe a good chance to talk a little bit about some of the historical deals you actually have done. You've been pretty active, 3 or 4 acquisitions actually in the past, call it, a year or so of Tango, Kitewheel, Digit. Maybe give a little bit of color on those 3 acquisitions, the pockets they sort of played in and how the integration has been going so far?

Yes. I mean one of the things we look at is it's all about the value we bring these big global brands. And so that innovation can come from multiple sources. One of the strengths of CSG is our culture, very partner friendly, very focused on culture because we think people and culture is what enables you to execute strategy with great execution. And so what we found is on the Kitewheel side, we love some of our capabilities around digital CX, but we felt like we needed more around journey orchestration, journey analytics to round out the value we would bring to our customers. We closed an acquisition of a Forrester Wave leading company at a great attractive price. Three months after the acquisition, we actually launched a new product platform called CSG Xponent that can be sold into any of these multi-industry vertical brands all around the world. It's what's powered our success in retail health care, in financial services, in government and big tech, and we love what we're doing around it. But it's all about finding, it's not about acquiring growth. It's about adding strategic capability that SaaS that accelerates our organic sales win rate, and we're driving. You think about the competition in the cable and global telecom. We then saw enterprise has always been one of the strengths of CSG and winning in that space. One of the most profitable, one of the fastest growing in the marketplace, we thought we saw an opportunity to expand it. So we acquired a company called Digit. There was an open API, SaaS-based platform won 11 or 12 awards from the industry TM Forum. And we took that together with our revenue management BSS solutions, combined with another acquisition, Tango Telecom. And we have launched a new product called CSG Encompass, 3 to 4 months after that acquisition. That's really focused on one of the biggest trends in global telecom, which is most large telecom operators and they want to offer a marketplace where they can enable lots and lots of but dozens and hundreds of other partners to sell their goods and services through their marketplace. To do that, you need easy on board with the product catalog, configure price quote, order management and the SLA capabilities, we can now help launch in weeks to that. And I think you'll see some of our other competitors trying to leverage some of the strength of our product launch with similar marketing initiatives, but we think we are ahead, but we've got to prove it. Big addressable market. We've closed one deal VicTrack we already announced at the end of Q1. And now what we've got to do is turn that pipeline into a giant win rate that continues the growth in the global telecom space.

Yes, I definitely wanted to drill down and to Encompass. That is a very exciting new product you guys have been talking a lot about. And I was sort of curious what you saw out there in the market from a competitive perspective, that existed today or where you saw this new opportunity and how far ahead you guys could get on others? But also just thinking about the timing of that, you certainly had a lot of these big wins behind you. This product is still a big opportunity ahead of you. When you think about not the revenue opportunity, it's probably too early to call attention to that. But just the traction you're getting and maybe even the inbound. How has the receptivity been from customers so far in Encompass?

The vast majority of global telecom need exactly what this offering enables. And the cool part is the world is going more open API, modular gives them the flexibility to deploy it for a fast success rate at a low price point. And then if they want over time, modernize their entire back office revenue management platform and suite they can, but they don't have to. So they can deploy the configure price quote capability. They can onboard customers with the catalog. They can interface it to their legacy BSS revenue management system or they can replace it all simultaneously. So we love the modular open API approach and we think that's where the industry is going. And we're seeing a lot more adoption of global telecom operators around the world and we love what we're seeing now. We have to execute in the field with an improved sales win rate.

Maybe we touch on one of the topics that I'm sure you get a lot of questions about just cord cutting overall and where the shift is to over-the-top services. How does that impacts CSG?

Yes. This is probably one of the big misnomers that people misunderstood going back a couple of years ago. It has no impact on us, it actually can help us. The way we price on a subscription basis, if every cable customer that we serve in the world has zero video subscribers, but they had a ton of broadband, we make just as much money because it's all on a per subscriber basis. It doesn't matter which lines of business. On top of that, we actually built from scratch a cloud-native SaaS platform running on AWS that can support OTT business models, and we've had a lot of success with it. TalkTalk, Formula 1 are 2 great examples. And so the whole over-the-top trend and what's going on now actually is a revenue uplift for us, not a headwind in any way.

Yes. Maybe thinking about another M&A transaction you did a few years ago, Forte payments shift into the payments. Can you give us a little bit of perspective as to the rationale for the acquisition to begin with, but also how that business is done and the sort of opportunities that's opened up for you as you think about going deeper into the vertical integration of software and payments?

Yes. What we always try to do is we think about a near adjacency model. So we love the opportunity to cross-sell, upsell and keep expanding the value we bring our customers. The way we got into the payments business to begin with. Some of our big cable customers were coming to us frustrated with some of the capabilities or opportunities they had in payment gateway, payment management the footprint of their business and ask us if we could help. So we built our own payment manager solution that we sold it, had success. And then they started asking us for a broader range of service. We went out in the market 5,6 years ago, identified a best-in-class provider, partnered, sold it on our paper, had success. Got to know a company called Forte, ended up acquiring the business in 2018 with a focus that we could uplift the technology, we could accelerate the sales, we could broaden out the capabilities and perform. We love the business and we cross-sell it into our existing base. We also serve 88,000 merchants with a payment gateway, payment processing capability. Our growth kind of went from double digits stalled during some of COVID, and we love what we're seeing with our sales win rates in the second half of last year. And we announced in Q1 that it's gotten back fully to double-digit organic growth and continue to expand the capabilities, full ACH, card not present integrated payment capabilities.

So maybe shifting gears a little bit to the balance sheet and thinking about capital returns for you. So first of all, the balance sheet is obviously in great shape. You recently called your convertible debt. I believe, late last year, you actually made some changes to your credit facility, you have plenty of capacity there. At the same time, you guys have been very disciplined about capital returns, share repurchases. You pay a dividend, you're actually on track to be one of these special companies that's known as a dividend aristocrat, if you will, having raised your dividend consecutively for, I think, close to 10 years or so.

9 years going on 10. So -- and don't expect me to break that trend.

So how do you think about -- how do you -- how does the Board think about deploying capital today? Certainly, there's M&A opportunities. You guys have been disciplined on share buybacks and dividends. But what's your mind frame around capital returns and the opportunity you have right now, given the flexibility in the balance sheet?

Yes, what I would say first, our lens is always around value creation, value that we create for our customers with more solutions and more capabilities, value would create with shareholders, of which I'm one. I have -- I've been here now going on 6.5 years, having sold a share of stock and I believe in the upside in the business. But around the value creation, what we do is, first and foremost, it's going to go into strategic growth. And we always think about how do we expand the SaaS technology platforms that make us more relevant to big brands all around the world that can accelerate our organic growth rate. That's number one. But we always do it with the lens of what will create value and what will be creative as we do that accretive to the overall business and how we drive. Number two, though is, it is about the return for the shareholders. So from a dividend, we're 9 straight years of every year, we increased the dividend 6%, hands-off glass. We let it run like clockwork. We are going to get to the tenth year and be a dividend aristocrat in terms of that and we love continuing to drive it. I'd say third is we think about as an important lever, but I would say a secondary lever is EPS is going to grow faster at CSG than top line revenue growth. We're committed to that. That's something we're on record of stating. So we believe that share repurchase can be used as an effective tool. In Q1, we returned $25 million of capital to shareholders, $16 million in terms of share buyback. I think it was around $9 million of dividends in Q1, and we expect to continue to execute. But the primary is about accelerating the growth on that path to $2 billion and beyond.

Yes. That's fantastic. I want to just pause for a second noting at the time we have left, any questions from audience members of those online.

You -- just wanted to touch about -- touch on 2 products that had come up in the conversation. One, encompassing some of the CPQ angles there and then also the payments products. What opportunities do you see to transition some of those to some of the non-telecom customers that you either have or can target through the pipeline?

Yes. No, I appreciate the question. I'll first go to the first. On CSG Encompass, we're really pretty laser-focused, doesn't mean CPQ couldn't be applied to other industry verticals, and we have a few smaller ones already on the platform. But encompass is we have such a huge opportunity in the global telecom market. It really is more focused around providing that capability. And I would say if we move outside of Global Telecom, it would probably be through some of our channel partner which is a big part of the strategic focus we have to gain operating leverage and scale, to bring other great partners in, to have domain expertise maybe more brand credibility than we do to expand it that way. But Encompass is, first and foremost, going to drive a truck through the massive opportunity in Global Telecom. On payments, it is predominantly I'll say, well over 90% of our revenue and payments comes from multiple verticals outside of cable and telecom. So that is a huge focus for those 88,000 merchants that we serve. We sell direct, but we also sell through ISV channel partners and get great pull-through from those. And we typically, in our payments, we started with more strength in ACH and then expand it into card. And so it tends to be in the more recurring nature industry verticals that we've had a lot of success. And our payments platform is very modular. It can be a one-stop shop where ISVs can use us for anything or they can use us for which parts of the option. And that's part of the way we always try to design our technology is with that modular kind of approach.

Maybe one [around] for me quickly. ISVs, you bring them up and you talk about the partnership you've had on the payment side with them. It sort of just feels like there's much more of a growth mentality and a talk around growth in the past few quarters for CSG, especially for those who've known CSG over the years. Maybe if you could give us some commentary around on how things were impacted internally by COVID. I think that changed the dynamic for a lot of teams, a lot of companies. But two, what your mentality is and how you're approaching the team, the environment, the approach towards growth or organic initiatives? Is it just a totally different mindset that the team has right now?

Yes. I would say it's a partially different mindset. First, one of the strengths going back multiple decades at CSG, great people, great culture with a real obsession around just lighting and serving our customers. That hasn't changed. In fact, we want to amplify that. Being easier to do business with our customers, we think is one of our biggest competitive advantages. I would say the thing that we have tried to add back though was much more of a mindset of grower die. And we believe every company is either moving forward, they're thriving, they're reinventing their technology, they're building skill set and capability and they're growing or they're not. And part of that is, if we're not being future forward and how we think about market trends, evolving our technology and solving our customers not just today's problem, but their problem 1 year out, 3 years, 5 years out, somebody else is going to do it. And it is that level of, I'd say, innovation and competitiveness that we've been adding back to the culture, which says, but it all starts from a -- not the words we say, it starts with earning the right to do more. And I think as long as we execute, stay true to our culture and we remember that we're an innovative technology company, then that's what's fueling this elevation of every part of our company. I love what I'm seeing inside our 4 walls. I think we're just beginning to scratch the surface on that.

Perfect. Speaking of one new team member that recently joined you, new CFO, Hai Tran. Any commentary you'd give us around what you thought made him a great addition to the team? How you guys look at him as a good fit for the company?

Yes. It's simple. Purpose-driven SaaS technologies in multiple industry verticals that are growing highs in tire, everything he stands for his great around culture people first. He fit CSG to a core. Secondly, he came from health care. He didn't come from cable and telecom. We want innovative ideas that think first and foremost about SaaS, upsell, cross-sell, accelerating growth rate, which means we also need to rethink the -- how we share financial information. If we talk about being a SaaS company, we should -- you should hear us over time, talk more about gross margin, customer retention, acceleration of growth rate and rethinking how we think about the business. And I would say last is, to do the journey and the elevation that we're on with CSG, we needed a CFO that was conceptual strategic in the business every day, making an impact on the business. I love what he's bringing. I look forward to the coming years of what he can help us achieve.

Maybe one final one, just sort of looking out, fantastic run so far as CEO. What are you most excited about over the next 1, 2, 3 years?

Yes. I still go back to you haven't seen anything yet. For us, it's all about what we deliver quarter in, quarter out year-over-year. And we are relentless on getting to our base case of $1.5 billion, growing our revenue and our EBITDA by 50%. And the cool part is, as we do that what it really means bigger and bigger brands all around the world and all these high-growth industry verticals are going to rely on CSG to solve their toughest problems, help them compete and win and monetize all around customer engagement. And as we do that, our biggest customers will become our best sales advocates and customer references. And it all comes because we have great people and we have a great culture. And that's one of the things we're most focused on as we elevate aspiration, elevate strategy, elevate growth rate, do more with disruptive technology. We put a premium on doing it in a way that builds our culture and builds our people up. And if we do that, I like what I see out the front windshield.

Well, if no questions from anyone else, congrats on all the success so far. Certainly, thank you for being here, and I look forward to following the success ahead.

Thanks so much, everyone. Appreciate it, Andrew.