Good afternoon, ladies and gentlemen. Welcome to the CSG Systems Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. [Operator Instructions]. And now at this time, I'd like to turn things over to Mr. John Rea, Head of Investor Relations.

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.

Thanks, John. Hi, everyone. We appreciate you joining the call as we begin on Slide 4. CSG had a fantastic start to 2023, with excellent results in both Q2 and the first half. We posted 9.2% year-over-year revenue growth in the second quarter and 11.1% double-digit revenue growth for the first half of 2023, both coming from a 100% organic growth. Our performance over two quarters were the best first-half results we have posted in nearly two decades. Our Q2 non-GAAP adjusted operating margin was 16.2%, a nice step up from the 15.1% we reported in Q2 2022. Combining Q1 and Q2, it means Team CSG delivered 17.8% non-GAAP adjusted operating margin in the first half of 2023, which reinforces our commitment to maintain good operating discipline and expanding our operating leverage over time. CSG also grew bottom-line non-GAAP EPS in the first half to $1.84 per share, which represents 7.6% year-over-year EPS growth, even as we had to offset much higher interest costs so far in 2023. Based on our strong first half, we are pleased to raise our full-year 2023 guidance. We are raising our revenue guidance to range from $1.15 billion to $1.175 billion, which means we've raised the bottom end of our revenue guidance by $20 million and the top end by $5 million. The midpoint of the new guidance now reflects a 6.7% year-over-year organic growth in revenue. We are raising our full-year 2023 non-GAAP adjusted operating margin percentage to range from 16.75% to 17.1%, up from the prior 16.5% to 17% range. Hai will share more details on all our revised guidance momentarily. In addition to reporting fantastic growth in raising our full-year 2023 guidance, we're also announcing a new $100 million share repurchase program which will run through year end 2024. At the…

Thank you, Brian. Let's walk through our Q2 and first-half 2023 financial results and then I'll wrap up with some conclusions. Starting on Slide 11, we generated $585 million of revenue in the first half of the year which represents 11.1% year-over-year growth all of which was organic. The strong first half revenue increase was primarily attributed to the continued growth of CSG's revenue management solution including the conversion of customer accounts onto CSG solution, other ancillary services and increased payment volume. As we mentioned on our Q1 earnings call, some of the revenue uplift we recognized in Q1 was related to the timing of certain license oriented deal moving from Q4 of 2022 into Q1 of 2023. And the growth we get in 2023 from converting millions of subscribers off of a competitor at charter over the last 12 months. Even when excluding both of these items, our first half revenue growth rate was still have been higher than the top end of our long-term organic revenue growth range of 3% to 6%. Our first half 2023 non-GAAP operating income was $96 million or non-GAAP adjusted operating margin of 17.8% as compared to $77 million or 15.7% in the prior year. The increases in non-GAAP operating income and non-GAAP adjusted operating income margin percentage can be mainly attributed to the higher revenue and improved operating leverage we get as we grow faster. Moving on, our non-GAAP adjusted EBITDA was $124 million for the first half of 2023 or 22.9% of revenue excluding transaction fees, as compared to $106 million for 21.7% in the first half of 2022. Lastly, our first half 2023 non-GAAP EPS was $1.84 as compared to $1.71 in the first half of the prior year, which represents 7.6% year-over-year growth. The increase in non-GAAP EPS is…

Thank you, Mr. Tran. [Operator Instructions]. We'll take our first question this afternoon from Maggie Nolan of William Blair.

Hi, thank you. Congrats on the great results. I wanted to ask about the payments offering. Last quarter you talked about potentially accelerating payments growth and that was from a very strong performance last quarter. So can you give us an update on the momentum?

Yes. Hi, Maggie. Thanks for joining and hope you're doing well. I would say we continue to see the same similar strong double-digit organic growth in terms of the business. And it's really coming from a combination of increased volume from existing customers, continuing to win more new merchants onto our platform. So we just continue to execute. Hai you have kind of direct oversight of that business unit as well. You want to give some additional color to answer Maggie's question?

Yes. Hi, Maggie. Thanks for joining. And thanks for the question. Yes, as Brian building upon what Brian said, a little additional color is that, I think we've invested a lot of time and energy in terms of enhancing the collaboration on the go-to-market side within the payments organization, much more focused in terms of our approach, in terms of the target customers that we are pursuing. And it's yielding some early and positive results. And that is kind of a playbook that we're looking to effectively rinse and repeat as we move forward, and then build upon with the additional investments on the go-to-market side.

Great, thank you. And then as we think about some of the growth drivers for 2023, there's obviously going to be some changing dynamics in 2024 with your largest customers. Can you give us an idea of what you think some of the opportunities are for growth or expansion with your two largest customer accounts in the following year?

Happy to do that, Maggie. The way we think about it in this environment, because we get asked a lot about both what about rainy day scenarios and others. First, anything that what we see going on in all of our customers, including our top two, anything that can help them drive revenue growth faster or be easier to do business with for their customers, actually drives improved result, gets funding. And so with CSG, we tend to be mission critical, and we help drive revenue growth and we help drive good improved customer experience that in some cases can drive operating leverage on their side. That's true of our big two? That's true of almost every customer we serve. And that's part of what's driving just good sustained revenue growth kind of across all of our business. Specifically, in our big two, I mean we were proud of Q2 showing 7% year-over-year in our top two customers. And we see increased homes passed. We see them kind of weathering the storm on some of their decline in broadband or the competition they face from fixed wireless in the U.S. market. We see them continuing to kind of work through that. So as they pick up more broadband subscribers, have more homes passed, that obviously drives more business for CSG. And then we constantly are trying to work with them having multi-decade relationships to just help them figure out how they could grow faster on the consumer or the enterprise side of their businesses, and how we could help them just perform better all-around our core applications. And it's a combination of both their growth and we like what we see from both the big two and the additional value we can bring to them. So obviously, that's a big focus for us.

Great. Thanks for the update.

Thanks so much, Maggie.

Thank you. We go next now to Nehal Chokshi at Northland Capital Markets.

Yes, thank you for taking my questions. Hi, was the results that you saw in the second quarter above your own expectations? I.e. above where the sell side consensus view was. And therefore, does the full-year guidance revenue raise merely represent the outperformance achieved in the second quarter?

Yes. Hi, Nehal. Thanks so much for joining us. We liked what we saw a lot in Q2. We had high expectations for ourselves, and we overachieved against what we thought was going to be had the potential to shape up and be a really nice Q2. So I would say at this stage, we've tried to reflect full-year guidance in terms of what we think the most likely that we can deliver based on what we see at this point in time in the business, which both reflects the strong Q2. It reflects the sales momentum we've continued to have in the business, and what we see in the outlook for Q3 and Q4. So I would say it takes into account a combination of both the strong performance in Q2 and what we think we can deliver kind of going forward. And with that said, that's really our focus at this stage. We see Q2 is now we celebrated for about 15 minutes and we're now one month and two days into Q3. It's all about the execution in Q3 and Q4 for us.

Great. And then shifting gears a little bit. Slide 6 you cite that you expect to drive operating leverage. Could you talk about what is the driver operating leverage, perhaps in the context of thinking about your business in terms of the cash count versus your growth portions of the business - high growth portions of the business?

Yes, I'll start, and then I'll have Hai kind of add some more color from his vantage point. First, we see operating leverage in a couple of different dimensions. First, what we've tried to do over the last 12 months and do even more in the coming several years is redirect every dollar we spend into what can deliver faster revenue growth or deliver better on a customer or the value we bring big customers all around the world. And if we can continually do that and get more efficient inside our four walls and put towards investments that will actually deliver a faster return, that should drive ongoing acceleration of both top-line revenue growth and bottom. Secondly, we have a commitment where we want to grow bottom line, whether that's non-GAAP operating margin and EBITDA and EPS faster than revenue growth, which means we've got to create operating leverage across both the investments we make in R&D and SG&A. And third, this whole point we talk a lot about of getting to $1.5 billion is to drive scale so that we can also drive operating leverage as we just add more size and helps us do that kind of across the Board. So there is a strong focus across all those dimensions on both the organic and the inorganic side to make sure that we're delivering. But Hai, do you want to provide any more color on that?

Yes, I mean, I think that's right, Brian. I think our internal mantra is a commitment to growing our expenses more slowly than our revenue, right? And that is something that we think about every day, every week, every month here at CSG. In order to do that and yet feel the growth in the business, we also spend a lot of time thinking about prioritization through the lens of impact. Where are we going to allocate resources, where are we going to spend those or make those investments that's going to yield the largest impact on the business itself, as Brian said. So that is something that we do think about quite a bit and we talk about quite a bit in turn.

Okay, thank you.

Thanks, Nehal.

Thank you. We go next now to Shlomo Rosenbaum at Stifel.

Hi, thank you very much for taking my questions. Brian, the revenue and EBITDA was very strong operationally and you guys are seem to be starting to hit it really a stride over here. Is the tightening of the EPS range is opposed to raising it, is that just due to higher interest expense versus last quarter? And then if that really is it, can you just tell us what you have embedded this quarter for interest expense for the year versus what you had last quarter?

Yes, thanks for joining Shlomo. I really appreciate the question. Hai will provide a couple a little more of the detail, but EPS is the area, even though we saw good growth in the first half over last year, we'd like to do better on and that's we constantly look at how we could improve. EPS the drag is really coming from two things in full-year 2023. One is the 100% floating debt with the higher interest rate north of $32 million in interest costs for the year, but Hai will provide the specifics on that. And the second one is the foreign exchange as the U.S. dollar kind of also created a hit. So overall from an EPS, we're seeing that we could between interest expense and Forex combined, we could take a hit of about $0.14, $0.15 per share on EPS that does create some headwinds. So what we've got to do is, we've got to grow faster on the top-line. We've got to continue to put out strong operating profitability, and then obviously work on getting the interest cost down, which Hai I think would be what is actually almost approaching just shy of $35 million now. But you want to provide a little more color?

No, I mean that's right. Specifically, our current expectations is that interest expense for the year is about $34.8 million. You can see that on Page 17 of the earnings release slide.

Okay. And then could you talk about the seasonality of the cash flow of the business. If I look back historically, a lot of times there is a back end weighted free cash flow year. You certainly saw that last year. But it seems to move around. Sometimes you have it more even. Could you talk about what's going to change in the second half of the year in terms of working capital? Are there specific like milestones and projects? Are there certain clients that tend to pay more in the second half of the year? Just give us a little bit of a bridge from basically $11 million of free cash flow to, let's say, the $80 million to $100 million like, what's going to change right now?

Yes, I think Shlomo, you hit the nail on the head. It is a couple of those things. We do have, as we've announced in the last couple of quarters, some large global Telco projects that we're in the midst of. And those projects are fantastic strategic opportunities for us to garner very robust and healthy long-term customers that provide a tailwind to our business for many years to come. But in the interim, as we are getting those projects off the ground, there are milestones that are tied to the cash flow, and those milestones will begin to hit in the second half of this year. And then on top of that, just some timing around CapEx and some timing associated with working capital. And so this year we see obviously, our cash position is much better than it was last year, but we see a similar dynamic in terms of a back half weighting on our free cash flows.

Okay, great. Thank you.

Thanks, Shlomo.

With that now to Matthew Harrigan at Benchmark Company.

Thank you. Can you talk about the adaptability of the Xponent product across so many industry verticals? It feels like you're nicely accelerating activity really outside the financial services space as well as within and are you getting better at really kind of assessing the attribution of consumer behavior and purchasing decisions and retention decisions as you go through the process, including the incorporation of AI, which you talked about in a white paper earlier this year, I think in concert of some consultancies?

Thanks, Matt. Appreciate you joining us today. I hope you're doing great. Yes, the core of our CSG Xponent, which really has a lot of applicability across industry verticals, is at its core a decisioning engine that really takes the data that our customers has and helps them harness that in real time to give next best action capability for onboarding new customers, cross sell, upsell, deflecting customer engagement calls so it can both drive revenue and offset operating costs and just improve their overall customer NPS scores. So that's the core of what it does. And wrapped around that then is just targeted use cases vertical by vertical that makes it easier to implement and get faster ROI, and so even in I'd say a more bumpy economic environment. It has such a good return that it kind of pays for itself quickly. So what we're trying to do more of is constantly improve that decisioning engine and the analytics capability that we provide to our customers, wrapped with targeted use cases. So in financial services we see that with digitizing different types of loans and payments and notifications. In retail, we see that improved kind of experience that we're driving on pharmacy retailers around prescription notifications, prescription abandonment or improving how they notify the customer in some of the areas like big tech, you're talking about the win, where we're really helping on contact center routing that can really take a lot of costs out of their business and get the customers issue solved more quickly. So at the core it's AI decisioning and AI driven platform that is providing value on a very targeted use case. So what we're trying to do expand out the use cases and be more even more specific in those verticals and sell direct but also get our channel sales because there's a lot of great partners we have that could actually sell with the relationships they have pull us in because what we do is the decisioning and the SaaS platform often they can wrap it with a bunch of additional capabilities and services. So that is a big focus and we've just got to continually turbocharge that part of our business.

So given that and given the resilience predictability of the billing business, where would you expect to get dented if we did have a mild recession in the U.S. and maybe a little worse in Europe?

Yes, it's hard to predict, I mean exactly kind of where it is, I mean that's that balance we tried to talk about in the earnings call, one we do see every customer looking and asking questions about how they can take costs no different than CSG is out of their business. But so far what has held up well in terms of our accelerated revenue growth. If the spend they make with CSG helps them accelerate revenue or cut their operating costs or while their customers better, then those costs aren't what get left on the cutting floor as they try to squeeze OpEx improvements out of their own business, because we become part of this solution. So, I don't -- I think it could create risks in any one of these verticals where we see some pullback, but so far, we've been on the side of the ledger that actually says we help solve those challenges and improve their business results. Therefore, we stay and continue to win those programs. So I actually don't think that there's one industry vertical or one region of the world. I think it's something that we've just got to continue to sell the value and the ROI, the proven ROI business case that we can drive. And if we do, I think you'll continue to see good organic growth. That said, we're also trying to make sure that we're disciplined and we don't get our forecasting wrong so that we constantly grow our OpEx slower than what our revenue is growing as Hai talked about earlier.

Congrats for the number. Thanks.

I appreciate it, Matt. Hai, anything else you would share on just how we think about kind of that balance of the growth part of the business, and then if we did get to see a slowdown in coming quarters, how else we would respond?

I think you covered it, Brian. I think for us, it's we're always trying to do two things. One, develop tools and capabilities that are very data driven that enables us to peer around the corner, looking at both financial and non-financial trends in the data so that we have a bit of a canary in the coal mine that helps us rapidly respond to where we identify those risks and then rapidly flex our cost base where possible, right but that is an ongoing battle, as Brian mentioned to be able to have more visibility in the business.

So you get a decent economic view just off the data that you have in house as well it's just what your clients are telling you?

Yes, I mean we do. You can imagine, particularly like in the CX business, we have a lot of access to data. In the payments business, we have lots of access to data, right. So that large data set enables us to perform some interesting analyses. Now it's the question around getting more sophisticated, trying to figure out which one of those metrics are more predictive in nature.

That's great. Thanks, Hai.

And we'll take our next question now from Brett Knoblauch at Cantor Fitzgerald.

Hi guys, thanks for taking my question. I guess the first on a new share repurchase program. How does this change maybe your near-term acquisition strategy as we are approaching call it 2025 soon and your goal to reach $1.5 billion. Should we think of this as you guys being more favorable to share buybacks over the near-term, over M&A or is there another way to think about it?

No, hey Brett, hope you're doing well. Thanks for joining the call. Great question. No, it doesn't change at all. Our three main priorities that we try to be pretty consistent on every call and an interaction. One hands off glass on dividend. We've pretty much historically raised 6% like Clockwork for over a decade now as an Aristocrat, dividend provider. We're going to continue that. Secondly scale with great value adding acquisitions to create scale and operating leverage in our business. And third, at a minimum offset executive base comp dilution on the share buyback side. And if we see an opportunity where we think our stock is undervalued and we can deploy capital that way, we will just like we had a big bunch of share buyback in 2022. And so that doesn't change any of that. And we see opportunities kind of continue to execute that across the board.

Got it. Understood. And then maybe just on the EPS guidance, you guys raised, call it revenue guidance, margin guidance across the board, but kind of left the midpoint of EPS and free cash flow unchanged. Should we just think about that as maybe any EPS improvement is being offset by maybe higher interest costs? Or is there anything else going on that would have led to maybe not raising the midpoint there?

Good question. Hai, you want that?

Yes, that's correct. We are seeing improved performance in the underlying business, but those improvements are facing the headwinds of both higher interest costs as well as currency fluctuations, taking away some of those benefits. As Brian mentioned earlier, it's about a $0.14 headwind this year for us.

Perfect, understood. And then maybe if I could squeeze kind of one last one in there. I guess on the payment side, it seems like that's still growing quite robust. But I guess as we break out, first half revenue growth of 11% and second half implied closer to 3%, 3.5%, could you maybe just help parse the differences between what's driving such a dispersion growth between the first half of this year and the second half and what maybe the payments is contributing to that?

Yes, we don't break out the specifics, but maybe I can help a little bit, Brett. If you look at our first half just a little bit, over 11% year-over-year organic growth, there's two contributors that kind of really took it to that double-digit level. If you take the conversions we did at Charter and converting $14 million subs off of one of our bigger competitors, and then we talked about the kind of the big one-time license. Those two things combined, even if you neutralize those out, are about 4%. So it says the core business is still growing above the 6% range around that, but that gives you a kind of maybe you take those two out, it kind of just says we're still in that 2% to 6%, but slightly above. And so what we've seen in the business is all of our units are contributing to that good growth. So we fully expect our payments in digital CX to consistently be strong double-digit organic growth businesses, and we see really good growth potential in both North American cable and definitely the global telecom space on the consumer and enterprise side as we win more big wireless deals. So obviously, what we try to do then in digital CX and payments is both through growth and smart acquisitions that can add value, get the size and scale of those faster growing units even bigger as we continue to also grow nicely in the core cable and telecom.

Understood. All right, thanks, guys. Really appreciate it.

Thanks, Brett.

And we'll go next now to Dan McDermott at Oppenheimer.

Hi, everyone. Dan on for Tim Horan. Thank you for taking my question. I don't believe you currently support Comcast and Charter's mobile business. Their mobile business is obviously growing extremely fast, adding around 1 million subs this quarter combined. Wouldn't it make sense for Comcast and Charter to consolidate onto one platform? Are customers currently getting two bills, one for their broadband and video services and the other for mobile? Thank you.

Yes, hey Dan, thanks for the question. Thanks for joining. Hope you're doing great. We love the question. Yes, that is something that we try to raise to our good customers and the execs at both Comcast and Charter, we do not serve with the BSS platforms, the wireless today. We respect that our customers often will use different vendors for different parts of their business. We respect that. And at the same time, we don't love it. And we try to give them a lot of business cases and reasons why it could make sense to consolidate. So today it is separate platforms. There's not 100% converged bill, although we work with Comcast and Charter, as does one of our competitors to try to deliver still a great experience for their customers. I.e. for one of the Quad Play customer of one of those, given where I live in Denver. And we think it could make sense over time, but so far, we respect that. That's not the decision that they felt makes sense today. And we just try to serve them well with what they give us and give them reasons to consider how they could expand with us if they wanted to at some point in time. It's completely their choice.

Got it. Thank you so much.

Thanks, Dan.

Thank you. And I currently don't see anyone else in queue. I'd like to turn it back to Mr. Shepherd for closing comments.

Thanks everyone for joining the call. We're extremely proud of Q2. But for us, like we talked about earlier, we're now a month and two days into Q3. So as good as Q2 was, we think we can still do better. We can do better on EPS, we can do better on our interest expense, we can deploy more capital in the way that add shareholder value with good acquisitions. So we're proud of what we're doing, but we've got a lot of work to do to keep elevating the results. Thanks for the time and look forward to talking to you next quarter.

Thank you, ladies and gentlemen. That will conclude the CSG Systems Q2 2023 earnings conference call. We'd like to thank you all so much for joining us and wish you all a great remainder of your day. Goodbye.