Q3 2024 Earnings Summary
- CSGS is successfully diversifying its revenue base by expanding into new verticals such as financial services, insurance, and big tech. The company is able to tailor solutions to customer needs in these areas, which enables rapid scaling and growth, offering cost-effective entry points with quick payback periods between $0.5 million and $2 million.
- The company is at an inflection point in transitioning to cloud-native SaaS solutions, evidenced by recent big deals on their Ascendon platform with customers like Telenor Denmark, Lyse Norway, Claro Brazil, and Formula 1. This shift leads to higher-margin recurring revenue, greater revenue visibility, and significant growth potential over the next 2 to 5 years.
- CSGS expects continuous improvement in operating margins, has elevated its non-GAAP adjusted operating margin target to 18% to 20%, and anticipates progressing through this range over the next several years. This improvement is driven by operational efficiencies, a favorable revenue mix shift towards higher-margin SaaS business, and benefits from past R&D investments. ,
- CSG Systems expects to end 2024 around the low end of their revenue guidance range ($1.2 billion to $1.24 billion), indicating lower revenue expectations in their core business compared to original guidance.
- The company is experiencing "belt tightening" among current and prospective customers and smaller headwinds in the North American broadband markets, leading to slower organic revenue growth at the low end of their 2% to 6% range.
- Services-based revenue recognition timing-related headwinds surrounding larger global telecommunications deployments are impacting near-term revenue growth.
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Comcast Contract Renewal
Q: What are the key details of the Comcast contract renewal?
A: CSG Systems has renewed its contract with Comcast for six years with no day 1 price increase but with price escalators in future years. This is a win-win deal with no hidden step-downs or degradation of services. They will continue serving Comcast across all triple play services and beyond. -
Margin Expansion Outlook
Q: How will margins expand going forward?
A: CSG Systems raised its adjusted operating margin guidance to 18% to 20% and expects to progress through this range over the next few years. This is driven by efficiency actions, a shift to higher-margin SaaS business, and operating leverage from growth. They don't see customers like Comcast and Charter as a drag on margin expansion. -
Revenue Growth Expectations
Q: When do you expect growth to reaccelerate?
A: Despite a slight near-term slowdown due to customers tightening costs, CSG Systems expects to return to the midpoint or higher of its 2% to 6% growth range in the mid to second part of 2025, maybe sooner, based on a strong sales pipeline and high win rates. -
International SaaS Transition
Q: What are the trends in international business?
A: CSG Systems is at an inflection point with an increase in cloud-native deals on its Ascendon platform. They are transitioning to more SaaS recurring revenue with higher margins and less reliance on traditional services, leading to better revenue visibility and quality. -
CX and Payments Business Growth
Q: How are the CX and payments businesses performing?
A: The CX business continues to see strong double-digit growth and is considered a Rule of 40 business. The payments business saw a slowdown to high single-digit growth but is expected to return to double-digit organic growth next year. Non-cable, non-telco revenue represents 29% of sales in Q3, progressing towards 35% by 2025-2026. -
Impact of Restructuring on Free Cash Flow
Q: Why is free cash flow guidance unchanged despite higher EBITDA?
A: The company took difficult decisions to drive efficiencies, resulting in restructuring charges that are cash in nature. These charges are a near-term headwind to free cash flow but will be a tailwind in the long term. -
M&A Revenue Contribution
Q: What is the M&A contribution from recent acquisitions?
A: Recent acquisitions contributed approximately $6 million in revenue for the quarter, expected to amount to high single digits for the full year 2024. -
Opportunities with Comcast
Q: How can you expand within the Comcast relationship?
A: CSG Systems aims to support Comcast in areas like wireless services, where they currently do not. They also look to do more in content and digital brand spaces. As long as they bring value, they anticipate further opportunities. -
Gross Margin Increase
Q: What drove the gross margin increase this quarter?
A: The increase was due to efficiency actions, revenue mix shifting towards higher-margin SaaS business, and operating leverage as the company grows. -
Revenue Step-up in Q4
Q: What is contributing to the revenue increase in Q4?
A: The sequential revenue increase is due to seasonality in the payments business, compounded by a recent acquisition on the payments side, and timing of revenue recognition around global telco deployments. -
Cost Composition and Margins
Q: Are long-term contracts with Comcast and Charter limiting margin increases?
A: The company believes it can expand operating margins despite these contracts, expecting 20 to 40 basis points improvement consistently. Investments and innovation bring value to customers and contribute positively to margins. -
Diversifying Revenue Base
Q: How are you tailoring solutions to expand in other verticals?
A: By focusing on post-purchase digital customer engagement and building industry-specific domain expertise, CSG Systems is expanding into verticals like financial services, insurance, and big tech, offering cost-effective entry points with quick payback.