CSG Systems International - Earnings Call - Q4 2024

Executive Summary

• Record quarterly revenue of $316.7M (+6.5% YoY) and record non-GAAP EPS of $1.65; GAAP operating margin expanded to 13.4% and non-GAAP adjusted operating margin to 20.1%.
• Strong profitability and cash generation: Q4 adjusted EBITDA $71.9M (24.8% margin on revenue less transaction fees) and adjusted free cash flow $76.6M; FY24 adjusted FCF $113.3M (+9% YoY).
• Introduced FY2025 guidance: revenue $1.21–$1.25B, non-GAAP adjusted operating margin 18.1–18.5%, non-GAAP EPS $4.55–$4.80, adjusted EBITDA $256–$267M, adjusted FCF $110–$150M; dividend raised 7% to $0.32 (12th consecutive increase).
• Strategic wins and diversification: Comcast 6-year renewal through 2030, multiple Ascendon cloud wins; “other verticals” ~30% of revenue, underpinning mix shift to higher-margin SaaS/CX businesses.

What Went Well and What Went Wrong

What Went Well

• Record Q4 revenue and EPS: “setting a new CSG record for quarterly revenue of $317 million… EPS topped all the metrics… $1.65 EPS in the quarter”.
• Margin expansion and cost discipline: non-GAAP adjusted operating margin reached 20.1% in Q4; management reiterated pathway to 18–20% long-term margins via mix shift and efficiency actions.
• Strategic contracts and pipeline: Comcast renewal to 2030; new Ascendon cloud wins (Gamma, MTN South Africa, Mobily, M1 Singapore) and cross-vertical CX/payments traction.

What Went Wrong

• Organic growth backdrop remains modest: management guides FY2025 organic growth 2–4% given tough competition and customer belt-tightening.
• Tax benefit non-repeatable: Q4 non-GAAP EPS benefited by ~$0.20 from a lower non-GAAP tax rate that is not expected to recur in 2025, tempering carry-forward EPS.
• APAC volatility and services timing: small APAC base leads to swings; services revenue recognition timing on large global telco deployments creates quarter-to-quarter variability.

Transcript

Operator (participant)

Thank you for standing by. My name is Jessica, and I'll be your conference operator today. At this time, I would like to welcome everyone to CSG's Q4 and Full Year 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you would like to withdraw your question, simply press star one again. At this time, I would like to turn the call over to John Rea, Senior Vice President of Finance. John, you may begin.

John Rea (SVP of Finance)

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 (CEO)

Thanks, John. Hi, everyone. Welcome to the call as we begin on slide four. Team CSG closed a challenging 2024 with record-setting results that built good momentum for revenue, profit expansion, and adjusted free cash flow growth heading into 2025. On the revenue side, we grew Q4 year-over-year organic revenue 5%, with 7% total revenue growth setting a new CSG record for quarterly revenue of $317 million for the quarter. A giant thank you to CSG employees around the world for the strong sales and revenue results in Q4. On the profitability, adjusted free cash flow and EPS fronts, our non-GAAP adjusted Q4 results were even better, as our operating efficiency and gross margin expansion contributed to fantastic results. CSG grew operating income 32% year-over-year in Q4 to 20.1% of revenue for the quarter. Q4 year-over-year adjusted EBITDA grew 21%, reaching close to a CSG high of 24.8% margin.

And EPS topped all the metrics with 79% year-over-year Q4 growth, also setting a new CSG record of $1.65 EPS in the quarter. Our strong profit performance contributed nicely to free cash flow with $113 million, or 9% year-over-year growth in 2024, setting the foundation for what we anticipate will be sustained strong double-digit adjusted free cash flow growth in 2025 and 2026. On the dividend front, CSG will be increasing our dividend by approximately 7% to $1.28 per year, paid in quarterly increments. This marks our 12th consecutive annual increase and underpins our dedication to a friendly shareholder return policy. On the sales, renewal, and new logo wins front, CSG also had a very good 2024, which I will share more on briefly. Slide five highlights the three key value creation commitments that the CSG leadership team and board of directors will hold ourselves accountable to deliver.

First, CSG aspires to deliver 2%-6% pure organic revenue growth and to diversify revenue from bigger, faster-growing new industry verticals to greater than 35% of total CSG revenue by 2026. It was great to close Q4 at the upper end of our range with 5% organic revenue growth in Q4. Second, we have committed to expanding non-GAAP operating margin to our new long-term range of 18%-20%, which we plan to achieve without impeding our ability to deliver mid-single-digit annual organic revenue growth most quarters and years. We also have a goal to become more asset-light to help us deliver strong double-digit adjusted free cash flow growth in 2025 and 2026, with our 2025 guidance range of $110 million-$150 million in adjusted free cash flow.

Third, we will continue to return significant capital to shareholders, as we've committed to over $100 million in share repurchases and dividends combined in 2025. As a reminder, we have returned nearly $540 million to shareholders in dividends and buybacks since 2020. On slide six, you can see the success we've had increasing our organic revenue growth since 2021 and diversifying our industry vertical revenue since 2017. CSG targets industry verticals that have highly recurring customer relationships powered by complex subscription and consumption-based business models. Across these verticals, CSG helps brands simplify their complex customer engagements with our industry-leading technology. Our platforms help customers reduce their cost to serve while they're customers and be more profitable, which is why the vast majority of our customers stay with CSG for decades.

This is also why we've expanded so quickly beyond our traditional telecom and cable broadband customer base into exciting industry verticals like media, financial services, healthcare, pharmacy retail, technology, government, and more. Our sticky, mission-critical technology helps great brands like Walgreens, JPMorgan Chase, NRC Health, and Formula 1 solve similar customer engagement and monetization business challenges, just like we help Comcast, Charter, MTN, and Telstra in these same areas. While the industries are different, the customer pain points and business needs are surprisingly similar. Turning to slide seven, we want to highlight some of the exciting new logo wins and deal expansions in Q4 and remind investors of the new sales wins in the year. Starting with big wins in Q4, we won a fantastic new logo with Gamma, a leading provider of technology-based communication services across Europe.

Gamma selected CSG's Configure Price Quote solution running in the cloud to help them adapt more quickly to market needs, offer personalized solutions, and enable a more seamless self-service user experience. This win highlights the great momentum we are seeing with our industry-leading quote-and-order product. Team CSG also strengthened a 20-plus-year relationship with MTN South Africa by securing an exciting multi-year managed services extension. MTN is one of South Africa's largest operators, serving 39 million subscribers. CSG will optimize their billing and provisioning operations and enable MTN to further monetize their relationship with their consumer, SME, and enterprise customers. We also had a fantastic multi-year managed services extension with Mobily, one of Saudi Arabia's largest telecom providers, to continue supporting them on their journey to becoming a fully integrated operator.

Team CSG became Mobily's digital transformation partner in 2021, and we are thrilled to continue to help Mobily create exceptional experiences for their customers. CSG won a contract extension with M1, a market-leading communication service provider in Singapore. Since successfully launching CSG Ascendon and Digital Wholesale to support the monetization of M1's enterprise business in 2024, we're excited to expand our relationship with a great managed service contract to continue to support M1 in their digital transformation journey. Another big highlight was the fantastic six-year contract renewal with Comcast to extend our 35-plus-year partnership. CSG will continue to provide broad mission-critical support for Comcast triple-play broadband subscribers and other areas of Comcast business. This giant deal was in addition to a meaningful new standalone billing deal at Comcast in another part of their business that was also won in early Q3.

We were also excited to land fantastic renewals with two of the largest global technology companies in the world. For a decade, CSG has provided interactive voice response messaging on behalf of these companies to enable them to securely and effectively communicate with their end customers through their mobile device. CSG is powering a secure two-factor authentication experience and providing tailored IVR for more personalized customer engagement. Another Q4 win outside of telecom was with the Oklahoma Turnpike Authority, one of the largest turnpike authorities in the U.S. OTA selected CSG to provide data-driven customer experience solutions to streamline transactional communication with drivers and optimize their revenue collection. This win further diversifies CSG's presence in exciting new verticals like tolling and transportation. In payments, we won a great new logo with Dealer-Owned Warranty Company, a fast-growing leader in the insurance and vehicle service contract industry.

DOWC had been working with multiple payment providers, leading to complexity in how they manage their payment transactions. They selected CSG's cloud payment platform to consolidate ACH, cards, and digital wallets into a single system to centralize payment processing and improve their end-to-end customer experience. Moving to exciting sales wins across 2024 in global telecom, we announced several fantastic new Ascendon wins, including Telenor Denmark, Lyse in Norway, and Claro in Brazil. These wins highlight an important inflection point that we're seeing in the telecom market as more leading wireless operators are willing to run their core billing and monetization engines in the cloud, a trend that bodes very well for our revenue growth with our AWS cloud-native Ascendon platform.

Other exciting new logo sales wins and extensions in the telecom space in 2024 included One New Zealand, formerly Vodafone New Zealand, Mascom Botswana, a leading telecom operator in Botswana, Telstra, 20-plus-year customer of CSG's, and Cellusys. In the media vertical, another 2024 Ascendon sales highlight was the excellent multi-year contract extension with the iconic brand Formula 1, the world's most prestigious motor racing series. In the financial services market, we announced a fantastic deal extension and expansion with JPMorgan Chase, where we're deploying our CSG Xponent suite of solutions to create an enhanced fraud alert notification experience for Chase cardholders. In the pharmacy retail vertical, Walgreens has been a CSG customer and partner for nearly 15 years through a third-party relationship. In 2024, we successfully executed a direct contract with Walgreens to provide CSG's Smart Communications platform with real-time customer notifications to Walgreens' prescription customers.

CSG is executing real-time prescription refill reminders and a prescription status messaging to drive higher drug adherence, a critical KPI for Walgreens' success. In the healthcare vertical, CSG expanded our relationship with NRC Health, one of the nation's largest healthcare experience management firms, supporting over half the healthcare systems in the U.S. We are partnering with NRC to execute a digital multi-channel customer engagement strategy in a streamlined, cost-effective, and scalable manner. Moving to slide eight, we'd like to remind our investors of the very good progress that Team CSG has made to consistently expand our profitability and adjusted free cash flow. A meaningful highlight of 2024 is the high confidence we have in CSG to continue to significantly expand our profitability and operating leverage in the quarters and years ahead.

We've shown continuous improvement in our non-GAAP adjusted operating margin from 16.6% in 2022 to 17.2% in 2023 to 18.1% in 2024. Looking ahead, we absolutely believe there is a clear pathway for CSG to consistently achieve 18%-20% non-GAAP adjusted operating margin in 2025 and beyond. The midpoint of our 2025 non-GAAP operating margin guidance is 18.3%, with an aspiration to operate in the 19% range by 2026, and we have every intention for this better profitability to convert nicely into strong double-digit non-GAAP adjusted free cash flow growth in both 2025 and 2026, as we strive to become a more asset-light company that generates significantly greater adjusted free cash flow from every dollar that we invest. Turning to slide nine, CSG committed to returning over $100 million to shareholders via share buybacks and dividends in 2025.

Discipline, capital allocation, and a dedication to returning capital to our shareholders is a cornerstone of our shareholder return strategy. We believe that CSG's stock price represents an excellent buy for both investors and for CSG, so we will stay balanced, disciplined, and focused on any strategic or financial move that the board of directors and management team believe will deliver the greatest value for our shareholders. With respect to M&A, we are very pleased with the two smaller, highly accretive acquisitions that we closed in 2024. We were able to acquire both companies at highly accretive multiples. Both small-tuck-in deals add highly profitable recurring revenue for CSG. And with respect to integration, both deals remain well on track to deliver the value we expected in our M&A business cases. We will continue to actively search for, vet, and potentially close more value-creating M&A deals in 2025.

As I wrap up my opening remarks, I want to share an observation that I don't believe is visible yet to those outside of CSG. Something extremely positive is starting to change across this good company of ours. We see traditional CSG humility and high integrity getting amplified with a ferocious resolve to consistently deliver better and faster business results. Leaders across every level of CSG are building an operating discipline and an agility that is just beginning to generate the big breakthroughs that we absolutely believe are possible and likely in the quarters and years ahead. To every CSGer listening, it is up to each of us to prove this with better and better operating results quarter in, quarter out. If we expect to be the best of the best, then we have to prove it with the quality of our results, not the boldness of our words.

Thank you for making Q4 a fantastic exclamation point on 2024 as we now focus on building momentum for an even better 2025. With that, I will turn it over to Hai.

Hai Tran (CFO)

Thanks, Brian. Let's walk through our Q4 and full year 2024 financial results, and then I'll wrap up with some key conclusions. Starting on slide 11, I'm pleased to share that we delivered strong financial results in the fourth quarter. We generated $317 million of revenue in Q4, which represents 7% year-over-year growth. The increase in revenue can be attributed to the growth of our SaaS and related solutions revenue, in addition to the approximately $6 million of revenue generated from the acquired businesses. Also, as it relates to our top two customers, Comcast and Charter, we reported a 3% year-over-year increase in Q4 revenue.

Our Q4 2024 non-GAAP operating income was $58 million, or a non-GAAP adjusted operating margin of 20.1%, as compared to $44 million, or 16.1%, in the prior year period. Similarly, our non-GAAP adjusted EBITDA was $72 million for the fourth quarter, or 24.8% of revenue excluding transaction fees, as compared to $59 million, or 21.7%, in the prior year period. Our profitability results are among the strongest in the history of CSG and are a testament to our continued commitment to maintaining cost discipline. This discipline is a key driver of why we were able to grow Q4 non-GAAP adjusted operating income and non-GAAP adjusted EBITDA at 32% and 21%, respectively, against the prior year period.

Looking ahead, we expect our profitability metrics to further improve as we have taken significant cost efficiency actions to optimize our capacity and better align CSG's resources to areas of our business that will deliver faster growth and higher operating profit in the quarters and years ahead. I'll share more on 2025 guidance targets momentarily. Lastly, our Q4 2024 non-GAAP EPS grew 79% year-over-year to $1.65, as compared to $0.92 in the prior year period. The increases in non-GAAP EPS are mainly due to the higher non-GAAP operating income, a lower non-GAAP effective income tax rate, and the benefit of our share repurchases over the last 12 months. With respect to the lower income tax rate, we had approximately $0.20 per share benefit in Q4 of 2024 that we do not expect to recur in 2025.

Turning to slide 12, I will go through the balance sheet, our cash flow performance, and shareholder returns. We had non-GAAP adjusted free cash flow of $113 million in 2024, as compared to $104 million of non-GAAP adjusted free cash flow in the prior year. This represents a 9% year-over-year improvement and showcases our internal initiative to ensure our enhanced profitability is accompanied by increasing free cash flow. We expect continued improvements in free cash flow in years to come, in line with our focus on driving improved profitability over a multi-year period. Moving on, we ended 2024 with $162 million of cash and cash equivalents. That, along with our outstanding debt at December 31, 2024, results in $389 million of net debt, and our net debt leverage ratio sits at 1.5 times adjusted EBITDA. Further, we have $612 million in liquidity as of the end of 2024.

Turning the page, I will lay out our 2025 guidance. Starting with the top line, we expect our organic revenues before the impact of any future acquisitions to range from $1.21 billion-$1.25 billion, and transaction fees to range from $106 million-$111 million. We are currently forecasting our first half 2024 revenue to make up approximately 48% of our full year revenue, while we expect 52% of our revenue to be generated in the second half. We also expect our non-GAAP adjusted operating margin percentage to range between 18.1%-18.5%. We believe this non-GAAP adjusted operating margin guidance range demonstrates Team CSG's commitment to consistently expanding on our operating leverage with improved profitability.

On the next metric, we anticipate our non-GAAP EPS to range between $4.55-$4.80, based on a non-GAAP tax rate of approximately 28%, and a share count of approximately 28 million shares for the year. Moving on, non-GAAP adjusted EBITDA is expected to range between $256 million-$267 million. On cash flow, we expect our non-GAAP adjusted free cash flow to range between $110 million-$150 million, with a guidance range midpoint of $130 million. Additionally, we expect capital expenditures to come in between $20 million-$30 million, and with respect to the quarterly trends in 2025, and consistent with prior years, we expect Q1 to be the lowest quarter of the year for most metrics, including revenue, profitability, and cash flow, with revenue growth and profitability continuing to grow each of the remaining quarters of 2025.

Wrapping up, we love what we see in our business that are powered by our operating discipline, R&D innovation, and ongoing sales wins. CSG will continue to relentlessly prioritize every investment we make and stay very disciplined in the allocation of resources and the use of capital. Innovation, including how we leverage the transformative power of AI across CSG, and an adherence to a risk-reward framework with continuous learning, are key cornerstones of how we have and will continue to grow top and bottom results even faster. CSG is well-positioned with a strong sales pipeline and a high-quality recurring revenue customer base. We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating disciplined value-adding acquisitions. We believe this approach, combined with our consistent capital distribution, will serve our shareholders well.

With that, I will turn it over to the operator to facilitate the question and answer session.

Operator (participant)

Thank you. And at this time, I would just like to remind everyone, in order to ask a question, press star one on your telephone keypad to get your question into queue. Our first question comes from the line of Dan Bergstrom with RBC Capital Markets. Dan, your line is open.

Dan Bergstrom (Sofware Analyst)

Yeah, thanks for taking my question. Hi, maybe I'll just start where you ended there. You mentioned a strong pipeline to end your remarks. Could you talk about the pipeline you see here to start calendar year 2025? And then is there a way that you can maybe compare it to what you saw maybe a year ago at this time?

Brian Shepherd (CEO)

Yeah, hi, Dan. Appreciate you joining the call.

I mean, what we've talked about kind of quarter in, quarter out is that the size of our pipeline has been as healthy as ever. We continue to convert, and what's really driving that is, first, we see customers really being sharp on what's going to enable them to get a return that helps them on the revenue side or to operate more efficiently, so what we do is we see a lot of win potential, both in our payments and our customer experience business that's a data-driven platform. These are smaller proof points. We can get deployed quickly. We can ring the cash register for our customers, and there's a quick payback.

What we've also seen in both our North American cable business, cable broadband, and the global telco is we see operators needing to deploy and simplify their customer engagement and make it easier for them to do business with. So we also see meaningful transformations on a larger scale of their full customer engagement stack, including their billing and monetization. Those tend to kind of work through a slightly longer sales cycle. And we've announced as many wins, I think, in 2024 on the bigger transformation front, including with our Ascendon cloud that we ever have. And so it's still a tough market out there, but we've continued to be pleased with the performance on the sales side. Hai, do you want to talk about kind of how you've seen it, where it is today entering 2025, maybe compare that to what you saw entering 2024?

Hai Tran (CFO)

Yeah, I mean, I think in terms of the size of the pipeline, I think it has grown, but I think more importantly, I think it's a healthier pipeline. We don't have big opportunities in the pipeline, really skewing the pipeline. So when I say it's more evenly distributed, that speaks to me to the job well done by our go-to-market team. So we drive lots of opportunities across lots of different prospects.

Dan Bergstrom (Sofware Analyst)

That's great. And then maybe just on that dynamics of the quarter, anything to call out as far as linearity or any deals moving into the quarter, out of the quarter? Did you see anything around a year-end budget flush? Is that something you typically see? Just anything on the dynamics of the quarter?

Hai Tran (CFO)

I'd say nothing out of the ordinary, right? Because a lot of these opportunities can be large and sizable. They're complex in nature.

The pursuits sometimes cross over into 12-18 months. And so there are always going to be opportunities that we hope or try to target within a quarter that might delay for a variety of reasons. But that's pretty normal as we look at our opportunities. I don't think there was anything out of the ordinary.

Brian Shepherd (CEO)

Yeah, the only thing I would add is with our high recurring revenue, we tend to enter with a very high backlog. If anything, going into 2025, and even with the guidance we gave, I would say our backlog is a little higher even than what it was starting 2024. That gives us confidence. But what we've talked about the last couple of quarters is right now, we still see notwithstanding great sales wins, we see it's a tough competition in the market.

Therefore, with our guidance, we're looking at more in the 2%-4% organic growth as we look at 2025 full year. That's kind of reflected in that guidance in the midpoint. And we're focused on getting off to a strong start in Q1 and Q2 to see if we can perform at the upper end of that and get back to midpoint or higher. But so that's kind of what we're seeing at this stage.

Dan Bergstrom (Sofware Analyst)

That's great. Thank you.

Brian Shepherd (CEO)

Thanks, Dan.

Operator (participant)

Your next question comes from the line of Maggie Nolan with William Blair. Maggie, your line is now open.

Maggie Nolan (Research Analyst of Technology, Media, and Communications)

Hi, thank you. Your operating margin expansion that you expect in 2025, there's still expansion, but it's sort of modest in the context of what you said for 2026, which is maybe aiming for the 19% range. So can you help us bridge the gap to 2026?

Are there additional investments or cost adjustments you need to make over the course of 2025 to set yourself up for that?

Hai Tran (CFO)

Yeah, hey, Maggie. It's a good question. I think the answer is a couple of things, right? As we mentioned, you'll see some of the expansion, for example, in our gross margin percentage. And that expansion, we expect to continue, right? And that's a result of a combination of mix of business, as we talked about in the past. Our SaaS-like businesses are just growing at a faster clip than the rest of our business, and therefore positively impacting our gross margin percentage, which will then flow all the way down from our operating leverage down to our operating income and our EBITDA margins. And then the second is, as we've talked about, we continually evaluate opportunities to drive further efficiencies. We've taken some actions this past year.

We're going to garner the full year impact of those actions as we enter into 2025. Plus, we'll continuously evaluate opportunities to drive further operating leverage. And then one of the things that we do count on as we look to 2026, for example, is truly operating leverage, right? As we continue to scale, our operating expenses shouldn't scale at the same pace, right? So that the marginal revenue dollar should have a much greater impact to our operating and EBITDA margins.

Brian Shepherd (CEO)

Yeah, maybe, Maggie, the only thing I would add is on the investment question, we're going to continue these small quarterly turns of the wrench constantly drive operating efficiency in the business, as Hai has been talking about. But we are seeing an inflection point in the market with more SaaS, more cloud all around Ascendon, our Xponent suite around data-driven customer journey analytics solutions.

We talk a lot about some of the wins in our quote and order solution. We are continuing to invest on the SaaS cloud data-driven side. That's not going to prevent us from driving good margin expansion. We expect to operate 2026 at 19 or above. Let's see how 2025 comes out. We have good expectations in terms of our ability to both innovate and drive margin expansion.

Maggie Nolan (Research Analyst of Technology, Media, and Communications)

Thank you. The 35% revenue diversification that you cited, the other vertical is becoming fairly substantial. Can you help us understand the composition of that vertical buckets and what the drivers are to get you up to that greater than 35% you're calling for? Maybe the time frame there as well.

Brian Shepherd (CEO)

Yeah. Yeah, I mean, the revenue diversification, first, I'll just make a statement. CSG is not a holding company.

We're focused with our portfolio in terms of where we are around helping great brands in lots of verticals simplify their complex customer engagement with data-driven monetization solutions. And we're resonating more and more around that. And so we see the exciting part is it's not just one or two verticals. We've announced wins in financial services, in insurance, in healthcare, in pharmacy retail, in tech, kind of across the board. And what we're seeing is kind of what we've talked about in our journey analytics CX business. We can go in at a price point of between $500,000, sometimes a little less, up to $2 million. And we can solve a very targeted business problem around onboarding, customer education or notification, dealing with an engagement issue or a customer dissatisfier.

It can give a payback in terms of reduced cost to serve or revenue uplift because it could also be revenue stimulation. We get in at a low price point, and then we can upsell to lots of other use cases, and that's driving huge growth for us. We also see some of the Ascendon wins in cloud that is driving new transformations in telecom. We also sold it to a large financial services provider in Australia. We've sold it to large media companies like MediaOne and others. Another example in these other verticals is the tolling win. In that case, tolling that are dealt with by some of our customers, they deal with a license plate that's got to get attached to a customer ID that then has to figure out how to engage and collect the money.

And so we're helping them with customer engagement solutions. So it really is the kind of broad portfolio, including our payments. And we can get in with those price points in an upsell and cross-sell. And so they're just going to grow faster, even though we're still growing in our North American broadband and global telco. We just see those other verticals growing at a much faster clip, usually double-digit organic revenue growth.

Maggie Nolan (Research Analyst of Technology, Media, and Communications)

Thanks, Brian. Thanks, Hai.

Brian Shepherd (CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Matthew Harrigan with Benchmark Company. Matthew, your line is now open.

Matthew Harrigan (Equity Research Analyst of Communications Services and Media)

Thank you. I think when you look at AI with respect to some of the forecasts and consultancies and academic institutions on economic growth, you can argue people are really starting to look more for where the pony is.

I mean, you can argue there's so much debt in the system that economic growth numbers would be worse if it wasn't for AI. You had a number of interesting white papers, particularly early last year, I know, relating more to enterprise AI and orchestrating the customer journey and that. But what have you really seen just over the last two or so quarters that makes you more or less confident in terms of the benefits for CSG and even more broadly for the economy? Thank you.

Brian Shepherd (CEO)

Yeah, hi, Matt. I'll take the first part and maybe talk about the revenue side of where we're selling and using AI embedded into our products. Maybe Hai can talk about it on the efficiency side. So first, CSG tends not to take the approach of some of our competitors that really go for the hype cycle.

We really talk about how can we get very specific and agile with innovation? How can we build the capabilities, whether it's cloud or AI and data capabilities, to really ring the cash register for our customers? And so what we've really focused on our side is not the hype, but things like Bill Explainer.ai. Two of the biggest use case problems in telecom and cable is promo rolloff, where you come off a discounted price package, and then you're going to go to the higher package. Customers then get bill-shocked. They're surprised. They call the call center. It's expensive to our customers, and it might create a churn event.

So we've actually built on what used to be kind of more machine learning now with a Generative AI to actually come out with a very targeted use case to say, "Dip into the billing system, pull data, explain when there's likely to be a change that's going to cause a negative reaction of a customer, and get out in front of that." And we've seen customer deployments have really good success. We've also seen a lot where you can use AI and the natural language processing capabilities to actually prevent needing a call or getting to the right agent in real time to try to avoid the length of call or a second call to get more of a first-help success. We built in AI into some of these cross-sell upsell that just become easier to engage and upsell a new promotional package and drive revenue.

And so what we've tried to do with it, we do think it's significant, but we think it's also going to become table stakes to drive more real-time proactive engagement to deal with a dissatisfier or to uplift revenue. And we think it's kind of table stakes, and you just build it in as opposed to the hype cycle side. Maybe Hai, you could talk either something around how we're seeing it on efficiency at a real level. I don't know either of us could drive the economic what's driving economic GDP. I'll probably leave that one to other people.

Hai Tran (CFO)

Yeah, I think CSG is no different than any other company. We're all trying to experiment with AI, right, to try to figure out where we can drive the biggest return. I think for us, we're taking a very pragmatic approach, right?

We're not looking to necessarily develop our own AI tools internally. We're leveraging a lot of our partners to help us do that. And to that extent, what that means for us is as AI becomes less expensive, it's only helpful to us. So even the recent disruption in the market to us, it just means that there's opportunities for our partners to continue to evolve their solutions and make them visible to us around things like Agentic AI, right? As Agentic AI becomes even more commoditized and more available for us, we can deploy kind of bite-sized solutions that are very targeted around how do we drive automation. And what that means is it will just accelerate our continued path towards improving our profit margins and cash flow over time.

Matthew Harrigan (Equity Research Analyst of Communications Services and Media)

And actually, secondly, quickly, do you have any concerns relating to DOGE as far as your governmental business and also the heightened FX volatility we're seeing, given that you're not in frontier markets, but you're in some interesting international markets nonetheless?

Hai Tran (CFO)

Yeah, we don't have much exposure to kind of DOGE from a U.S. government perspective. We don't really have any sort of exposure to kind of government-related contracts per se. So directly, no. What that means indirectly over time, it's tough to say, Matt, at this point.

Brian Shepherd (CEO)

I would just say we have no concerns about our revenue guidance for 2025 as it relates to any of that, Matt.

Matthew Harrigan (Equity Research Analyst of Communications Services and Media)

Thanks, Brian. Thanks, Hai.

Hai Tran (CFO)

Thank you.

Operator (participant)

Your next question comes from the line of George Notter with Jefferies. George, your line is now open.

Hey, guys. This is Taron on for George.

I just wanted to talk about or ask about traction in CX and payments. Are we still tracking on the Rule of 40? And how do we see outlook for those two segments going into 2025 and 2026? Thanks.

Hai Tran (CFO)

Yeah, I mean, I think what we're seeing is that we're still seeing fairly robust growth on both of those businesses. I think combined, we're talking about kind of Rule of 30-ish, right? Not quite Rule of 40, but still pretty healthy performance on both businesses.

Brian Shepherd (CEO)

Yeah, we expect over the near term and the medium to longer term, both those businesses have the ability to grow double-digit organic. Every now and then, we might see a quarter where we saw in 2024 where payments might dip down into the mid to high single digits for a quarter, some timing, and get back.

But we see good double-digit growth over some sustained period. And we like those prospects going forward as well.

Great. And then just a quick follow-up. Tell me if I'm interpreting this wrong. I'm just wondering if I see that the Asia-Pacific revenue ticked up in December. I know it was down last quarter, but is that a sign of any projects playing out there or anything you can tell on that?

Hai Tran (CFO)

No, I mean, one, it's a lot of small numbers, right? Because you've got the numbers in the APAC region, that's probably our smallest region. So kind of small wins or go-lives in some of our deployments will impact that number meaningfully. So I wouldn't read into that too much.

Great. Thank you.

Operator (participant)

Your next question comes from the line of Nehal Choksi with Northland Capital Markets. Nehal, your line is now open.

Nehal Chokshi (Managing Director)

Yeah, thank you.

Congrats on those great results. Hai, can you give a little more color as far as how much is increasing SaaS mix driving the gross margin increase on the Q2 and year-over-year basis?

Hai Tran (CFO)

Yeah, we haven't really broken that out. Let's just say it's a meaningful number. It's really just two factors, like I said. It's the mix of revenue combined with efficiency around the rest of our businesses, right? So as we highlighted last year, in 2024, we took actions several times throughout the year to drive some meaningful efficiency. There were very difficult decisions on our part. They were the right decisions for us to really continue to drive improved profitability and cash flow, right? And you see that manifest in our improving gross profit numbers.

And at the same time, you can probably assume that if we're continuing to grow our payments, our CX business, which are higher margin businesses, right, at double-digit organic growth relative to the rest of our business, that's the mix contribution.

Nehal Chokshi (Managing Director)

It sounds like mix is less than a 50% contributor to the increases in gross margin you've been seeing, though, on a year-over-year basis at least. Would that be fair?

Hai Tran (CFO)

I think it depends on the quarter and the timing.

Nehal Chokshi (Managing Director)

Okay. And then, Brian, you mentioned big wins, definitely big wins from my perspective of Claro Brazil, Telenor Denmark, and Lyse. Could you give us some detail as far as who are the incumbents here? And a follow-on to that would be, are you seeing any difference in frequency of success against Netcracker and Amdocs over the past year?

Brian Shepherd (CEO)

Yeah, what we try not to do today, and I hope you're doing well, is talk about our customer's business. I'll let them talk about who we're displacing in. But obviously, all three of those wins were meaningful. And you can assume we were competing against everybody and their brother and sister as part of those wins. The market continues. It's any deal that we're selling, we're going up against the top competitors. And then if it's a billing deal, yeah, we'll always go up against an Amdocs, an Oracle, a Netcracker, and some of the smaller players. That's just the nature of winning the kind of deals we are. So I haven't seen any. I've been in the space now since 2002. And so I don't see anything changing in terms of the competitive intensity. They're always tough wins to get, and we're always proud when we do it.

I think the one thing that I've commented on that I do think is different is I think there is an inflection point where the telecom market, and it's also true of what we're seeing in North American broadband, needs to take out significant complexity in their they're not starting with their technology, but their business process. And so that's why we invested in an AWS cloud-native Ascendon. That's why we developed and acquired part of the stack with this analytics-driven digital CX platform Xponent, and why we also built out our quote and order to be able to integrate those three products and operate in the cloud and help them simplify their business process and with a goal of reducing their cost to serve by 40% or 50%. We do think that is a big competitive advantage that we have against some of our players that they don't have.

They'll say they do, but they don't. And so we're trying to leverage that across the board. And there's still intense competitions with my friends over at Amdocs and at Netcracker.

Nehal Chokshi (Managing Director)

Great. Thank you. Congratulations.

Brian Shepherd (CEO)

Thank you so much.

Operator (participant)

Your next question comes from the line of Shlomo Rosenbaum with Stifel. And Shlomo, your line is now open.

Shlomo Rosenbaum (Managing Director)

Hi, thank you very much. Brian, can you just talk a little bit about market conditions and how they've been trending? Have they been getting better, staying the same, getting worse? I guess what I'm hearing is I'm hearing you more enthusiastic over the last few quarters. It doesn't sound like the market's getting better. It feels like you are. I'm not sure if there's more manufactured wins just from you guys maybe grinding it out better, hitting the right places better. I'm just trying to put this all together.

And then, in the context of kind of the 2%-4% revenue growth, given the enthusiasm that you have, does it seem likely that we could see that growth moving up over the course of the year?

Brian Shepherd (CEO)

Yeah. No, hi, Shlomo. It's a great question. I mean, first, we're not pleased at all with 2024, right? Organic growth, that's sub-2%. We loved Q4. We saw it coming. We saw the sales wins and the onboarding, which got us to the 5% organic in Q4. We weren't pleased with 2024. We got to do better heading into 2025. And as we said, we're entering the year with better backlog, with better visibility than we had 12 months ago. We still see a tough market, which is why we tend to call balls and strikes pretty straight down the middle.

That's why we're saying right now it's still a tough market condition, notwithstanding the great sales wins. That's why we're guiding more to a 2%-4% organic, with the chance if we get a good start to the year that we could come in at the upper end of that. But let's see what happens. But so it's a combination. Yes, we're entering this year with more optimism than we entered 2024, but it's still a tough market condition. We just got to keep executing quarter in, quarter out. Probably have a little more flavor and insights after we close Q1.

Shlomo Rosenbaum (Managing Director)

Okay, great. And then this one is for Hai. The free cash flow was very good in the quarter, and we saw the receivables go down. And I'm just wondering, particularly in the unbilled, were there milestones that were hit for payments?

Has that been more of a focus for your team in general? Just checking into that in particular in the context of the company expecting a lot better free cash flow going forward for the next few years.

Hai Tran (CFO)

Yeah. Hey, Shlomo. I mean, I think that each year will bring kind of different challenges to us in terms of continuing to drive up our free cash flow performance. I think this year what we did do, and we talked about it in the past, which is we did implement a lot of intensity around improving our free cash flow. And so we put in place kind of a high-intensity process to really drive improvements on our network and capital. Now, when you first put it in at the beginning of the year, it takes a little time for it to really have an impact.

But we really started to see that impact, particularly in the second half of the year. And that's what you're really seeing here at the end of the day. There were some improvements in the unbilled, but I would say that wasn't really what was driving the bulk of the free cash flow improvement. The bulk of the free cash flow improvement was, one, just a growth in our operating income as well as the improvement in our net working capital. As we enter next year and as we look to enter this year as we look into 2026, yes, we do have confidence that we're going to continue to drive those working capital numbers. We have confidence that we're going to continue to drive up our profitability.

And we do believe we're going to start to make a bigger dent in our unbilled as well, right, as we hit those project milestones and then convert the unbilled to receivables.

Shlomo Rosenbaum (Managing Director)

Okay, great. Thank you very much.

Brian Shepherd (CEO)

Thanks, Shlomo.

Operator (participant)

Your next question comes from the line of Timothy Horan with Oppenheimer & Co. Timothy, your line is now open.

Timothy Horan (Managing Director)

Thanks, guys. I know you don't disclose it exactly, but do you think your cloud SaaS revenues are in line with your industry peers or enterprise migration to the cloud? Would it be kind of above or below those trends? And can you give us a sense of where you think that ultimately ends up as a percentage of revenue? And I guess related to this, what's the gross margin for this business versus legacy?

Brian Shepherd (CEO)

Yeah, there's a couple of aspects to that.

Let me maybe start to peel that onion and then Hai can add some more color, Tim. Appreciate you joining. First, from a SaaS standpoint, we have quite a few solutions that would be either AWS or a cloud-native solution. For those businesses, we expect like any cloud. We expect net retention well above 100. We expect gross margins to be above 70. We expect to be able to drive those kind of economics where you could get to 75 or 80 on the gross margin. So on that side, that is our expectation. Doesn't mean every one of the businesses are there because some of them are smaller in the early stages, and we're really starting to get scale around that. But that is our expectation and kind of what we see around cloud.

I think in terms of when you look at the BSS side and kind of compare, some of our competitors have more of a managed service offer. So they may be doing a lot that we would call cloud, but a lot of times it might be moving a large telecom operator from an on-premise iron, their own data center, to more of a services-based project to go to an Azure or one of the hyperscalers. They'll call that cloud, but that's very different than having a true cloud-native platform that can drive the kind of economics and revenue and mix shift that Hai is talking about. That's why we do think we're on to something with our Ascendon. In the digital CX space, again, that is a cloud solution, just like our AWS cloud payments.

In payments, you see a little more. Probably more of our competitors do also have a true cloud-native. Same would also be true in the CX. So I think that competition question differs by industry vertical. But Hai, anything else you'd talk about on the financial side of that?

Hai Tran (CFO)

No, I mean, I think, Brian, you touched upon it, which is we're no different than any other business, right? So the relative difference you see in the industry around gross margins associated with a SaaS platform versus gross margin associated with services. Even within a quote-unquote SaaS company, they'll have deployment revenue associated with services, and they're much lower margin relative to the platform margin. We're no different than that, and it's about the next two weeks.

Timothy Horan (Managing Director)

But Hai, can you give us a sense of the revenues?

I mean, some metric, is it above or below 10% or above and below 20%? Not looking for exact numbers, but it's obviously a major driver of the business, and we're kind of flying blind here.

Hai Tran (CFO)

Yeah. No, look, something we've talked about, right, is that we're not at a point where we're prepared to kind of break that out, right? We don't have segment reporting. That's not what we do. But we're constantly evaluating, Tim. And I appreciate the challenge, but at the end of the day, we're in the early stages. We think there's a long runway here for growth. At some point when it becomes meaningful enough, it is something we'll look to break out. But suffice it to say, like I said, we're currently looking at a Rule of 40 for our payments and our CX businesses or a Rule of 40 somewhere between 30 and 40, right?

That's the way we think of it.

Timothy Horan (Managing Director)

Great. And Brian, how do you think about industry consolidation? Do you think you can create more value by buying smaller companies over time and accelerating your growth rate there? Or do you think it would make more sense for you to roll up into a larger company where they can do something similar in terms of synergies over time? How do you think the industry evolves?

Brian Shepherd (CEO)

Yeah, maybe I'll answer it from two angles. On the M&A, it's pretty much the same. Highly disciplined. We think price points have come down, but we constantly look at small, mid, and larger. Obviously, to get into the mid and larger, it means that the diligence goes up 3X, the discipline goes up 3X because you got to get those 100% right. And we think our track record speaks for itself on that.

And we do expect to be able to announce and close deals in the coming quarter and in 2025. Stay tuned on which size spectrum those fall into. On broader market speculation, maybe just that there was a report that went out. We don't comment on it specifically, but we're pretty straight shooters. I'll just share what I've talked to our customers and our global employees about on maybe some of the bigger industry scale rumors that are out there. First, we just believe with the results we're putting out, you put out better and better results, people are going to take notice, and you're going to get talked about more. So we think being more relevant is a good thing, not a bad thing.

Second, what I remind our teams about around this bigger scale consolidation, our customers are in the news every day about who's going to buy who and what do they do at the exec level. They keep their head down. They know that's noise, and they know the best thing they can do is just kick out better and better results kind of every quarter. That's what we just try to get our teams to focus on. From an industry logic, if you kind of step back as an analyst, the reality is somebody like an NEC, a large network equipment provider that has acquired both an OSS and a BSS that looks a lot like our company, probably a similar size, is there industrial strategic logic of what could be unlocked by putting assets like that together? Of course, there's large strategic industrial logic.

And kind of what we're focused on is just perform and deliver results like we put up in Q4, and it'll take care of itself. And of course, our board, I'd put our board up against any board out there. If something moved from rumor mill to actually a compelling offer that looked like it could be actionable, of course, our board would do right by shareholders with the right thorough process. So is industry consolidation in telecom, has it happened consistently over two decades? Yes. Is it likely to continue to happen? Yes. What do we do? Just perform quarter in, quarter out.

Timothy Horan (Managing Director)

Sorry, last question before you monopolize. Palantir had a quote on their call two days ago that they want a very large pharmaceutical contract, $67 million contract value. They're automatically load balancing, prescription fulfillment, and orchestrating patient outreach.

Are you partnering with them or competing with Palantir on their AI? And obviously, they're talking about 80%-90% kind of productivity improvements with using their AI. Do you see them at all? Or yeah, and I guess are you partnering or competing?

Brian Shepherd (CEO)

Yeah. No, we have never. Doesn't mean we won't. We've never competed directly because what our solution is, is not an AI in and of itself solution. It's really how do you actually ingest data from customers, put it in a format that then you can turn into real-time actionable insights on a targeted use case, and then actually deliver that through different channels so that you can optimize it in a very low-cost fashion. We've never, to my knowledge, competed against Palantir as a pure standalone AI solution. Doesn't mean we might not, I guess, but that hasn't been one we've ever come across.

And we know them fairly well.

Timothy Horan (Managing Director)

Thank you.

Brian Shepherd (CEO)

Thanks so much.

Operator (participant)

Your next question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Brett, your line is now open.

Thomas Shinske (Equity Research Associate of Crypto and Blockchain and AI/HPC Infrastructure)

Hi, guys. This is Thomas Shinske on for Brett Knoblock. Just one for me. I wanted to ask about the solid revenue growth outside of Comcast and Charter, which grew around 8.5% year over year, referring to comments made on the call about inorganic and organic growth. Does it sound accurate that approximately $4.5 million of that growth came from inorganic contributions, leaving about 6% as organic growth in the business outside of Comcast and Charter? And then could you maybe also provide additional insights into what drove the remaining growth, excluding the inorganic contributions?

Hai Tran (CFO)

Yeah.

I mean, I'll let Brian talk about kind of the drivers of growth, but mathematically, you're directionally correct on the math that you're doing in terms of the difference between organic and inorganic, right? So it's been a pretty, like I said, it was a great quarter for us, a very strong quarter. And it really illustrated the power, the value that we're bringing to the table for many of our customers existing or through our recently acquired business.

Brian Shepherd (CEO)

Yeah. And on the organic side, I think the main drivers in 2024 were our strong sales performance and revenue performance in our customer engagement analytics CX business. And we just had fantastic both expansions of existing customers and good wins in that space. Payments grew nicely in 2024, although we know we can do better in payments in 2025.

And we had that really nice deal with Comcast where we had an adjunct billing solution for another part of the business outside of their triple play that also contributed nicely. Those would probably be some of the bigger ones. Notwithstanding good wins in telco, but I think you'll see some of that revenue coming online as those big programs get implemented.

Thomas Shinske (Equity Research Associate of Crypto and Blockchain and AI/HPC Infrastructure)

Awesome. Thanks, guys.

Brian Shepherd (CEO)

Thanks so much.

Operator (participant)

And your final question comes from the line of Michael Berg with Wells Fargo. Michael, your line is now open.

Hey, this is [Vernon] on for Michael. Just a quick question on the other vertical segment. You said that number, it's hovering around 30. Could you talk about the dynamics of your diversification journey and when we should expect that number to start accelerating?

Brian Shepherd (CEO)

Yeah.

I mean, first, I think I'll let Hai close off on the back end of that on the numbers. But first, we're not in a diversification for diversification's sake. CSG's laser focus on how do we help great brands simplify their complex customer engagement and monetization and deliver better results. And so all the wins come from a unified simple strategy that brings about integrated technology that just does that better than any of our competitors. So that's what we're seeing around that is just a better performance that's actually driving then better growth as a result of that in those other verticals. Tolling was a great win. We talked about stuff in media. We talked about financial services, big technology, some of the pharmacy retailers. And small price points, quick ROI returns is what gets you a closed-end one deal in this tough economic environment.

We're doing it like clockwork. Hai, anything you want to add on the numbers?

Hai Tran (CFO)

Yeah, so first off, you think about the journey we've been on. In some regards, we've been very fortunate to have started with cable and telecommunications, right? They were some of the most complex businesses to work with, and we've helped simplify their business proposition to their end customers, and what we're finding out is that that's not necessarily unique. We can take that expertise and the solutions we've built and add value to other industry verticals, so that's the journey we are on, and with regards to the numbers themselves, it's hard to predict. I mean, it's a great question, primarily because it's not as if our cable and telecommunications business are static. They're growing as well, right?

Brian Shepherd (CEO)

Because of that growth, some quarters, they're going to continue to grow very quickly versus the other verticals. And other quarters, other verticals are going to grow more quickly. So it's going to be a little choppy, but directionally speaking, over a multi-year period, do we expect those other verticals to continue a steady march above 30%? Absolutely.

Great. That makes sense. And just a quick follow-up. Anything you're seeing in terms of end customer dynamics, specifically within your large customers, and if there's any structural weakness there based on their previous prints and what you're seeing into 2025?

No. I mean, I think they're facing the same thing we are, which is how do they constantly strengthen and simplify their strategy? How do they execute better? And how do they make sure they invest in things that give them a payback?

And so that's why in our sales cycles, what do we focus on? How do we help them actually improve their financial results, get a quicker payback? And that's leading to the good sales wins. But structurally, nothing else that I would comment on.

Great. Thank you.

Thanks so much.

Hai Tran (CFO)

Thanks.

Operator (participant)

Thank you so much. This does conclude the Q&A portion of today's call. With that, I will hand the floor back over to Mr. Shepherd.

Brian Shepherd (CEO)

Thanks for joining us today on the call. Team CSG is laser-focused on having 2025 be a better year of results than we had in 2024. We're locked in on making sure we start the year strong with Q1. Look forward to talking to you in 90 days.

Operator (participant)

Thank you again for joining us. This does conclude today's conference call. You may now disconnect.