Thank you for standing by. My name is Bailey and I will be your conference operator today. At this time I would like to welcome everyone to the Q3 2023 CSG Systems International Inc., Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ prepared remarks, there will be a question-and-answer session. [Operator Instructions] And I will now turn the call over to 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 would 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. Team CSG delivered fantastic results in both Q3 and the first nine-months of the year. We posted 9% year-over-year revenue growth through the first nine-months of 2023, all coming from organic growth. Our performance through the first nine-months was the best results we posted in nearly two decades. Our year-to-date non-GAAP adjusted operating margin was 17.5%, which is a significant improvement over the 16.6% we reported through the first nine-months of 2022. Proving our ability and our commitment to consistently expand CSG’s operating leverage with disciplined execution. During the quarter, we took a big step in optimizing our balance sheet. In September, we completed a successful $425 million convertible debt raise. This transaction had many benefits, including lowering our interest rate to 3.875% on the majority of our debt, freeing up our revolver for future M&A and giving our capital structure a more balanced mix of fixed and floating rate debt. Plus shareholders will experience no equity dilution until our share price exceeds approximately $96.50 as a result of the derivative we simultaneously put in place with the convert. On the share buybacks, last quarter, we announced a $100 million repurchase plan. We are excited to announce that this program is complete as we have repurchased $107 million worth of CSG stock during Q3. On historical context, this was our largest quarterly share repurchase quarter since Q3 of 2007. Looking forward, we will continue to opportunistically repurchase shares through the end of 2024 with the expectation that we will buy back shares to offset employee stock compensation at a minimum with the opportunity to buyback more than this when we believe it will create greater shareholder value. From a guidance perspective, we are pleased…

Thanks, Brian. Let’s walk through our Q3 and nine-month year to date financial results, and then I will wrap up with some conclusions. Starting on Slide 13, we generated $817 million of revenue for the first nine-months of 2023, results, which represent 9.0% year-over-year growth, all of which was organic. Additionally, we reported 5.0% year-over-year organic revenue growth in Q3. Our strong first nine-month revenue increase growth was primarily attributed to the continued growth of CSG’s revenue management solutions, including the conversions of customer accounts into CSG solutions, strong year-over-year growth in our digital CX solutions and increased payment volumes. 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 deals moving from Q4 of 2022 growth into Q1 of 2023 and the growth we get in 2023 from converting certain subscribers off of a competitor at Charter over the last 12-months. Even when excluding both of these items, our first nine-months of revenue growth rate would have been at the top end of our long-term organic revenue growth range outlook of 2% to 6%. Our first nine-month 2023 non-GAAP operating income was $142 million non GAAP adjusted operating margin of 17.5%, as compared to $124 million or 16.6% in the prior year. Q3 non-GAAP adjusted operating margin of 17.0% contributed to the excellent year-to-date results. The good growth in non-GAAP operating income and non GAAP adjusted operating income margin percentage for the year-to-date period were driven by a combination of the margin improvement and efficiency we have implemented over the last four quarters and the faster revenue growth, which is enabling us to further strength and our operating leverage. Moving on, our non-GAAP adjusted EBITDA was $183 million results for the first nine-months…

[Operator Instructions] Your first question comes from the line of Maggie Nolan with William Blair.

Thank you and congrats on the results. Thinking about some of the commentary about the revenue growth rate and even when you back out some of those kinds of non-repeatable items, you are still at the high end of your growth range. I’m wondering if you can kind of distill for us what really drove this and what sort of factors we should be looking for to determine whether this level of growth is on the table for next year or years ahead.

Thanks a lot for joining the call and I appreciate the question. We absolutely do believe we can continue to execute on an accelerated organic growth. As we have said, 2% to 6% is our range. We fully expect a good performance to be at the midpoint or higher, so we absolutely do believe that accelerated faster growth is sustainable. There is a couple of things that is going on. First, the diversification in the new industry verticals. In the AI-driven Digital CX, we are adding big new wins. Our pipeline is strong. We continue to deliver value. And as we know in this environment, if you can deliver cost savings, improve CX, and do it using their data in a SaaS model, then that space of undercut line even in terms of a tough environment. Same thing in payments. SaaS-driven platform, good growth with a number of merchants, we see transaction volumes growing. And both those 2 on diversification are big contributors. You kind of come back to the core of BSS and revenue management. Global Telecom, we continue to win big deals and consistently execute both on the sales and the delivery side. And what we see with global telecom commoditization of voice and data, the need for less customized solutions, lower cost, be more agile, leverage of product business model, is resonating all around the world. We love the growth we continue to see in the global telecom business. Then if we come all the way back into our American cable business, there is been questions about slowing broadband net adds in that space. First, we see significant growth potential even in our big two cable customers. Opportunity to expand land mass, opportunity to take on more new areas if we just continue to serve them well. And notwithstanding some of the maybe current short-term challenges, when we look at who is positioned to win in a consolidating plot play U.S. market, we think our big two customers in the longer term have a lot of potential, including with the homes past and what they are doing to invest in their networks. We do absolutely expect to continue this accelerating momentum we have had.

Thanks for that, Brian. And then you gave the example of the different outcomes you were able to achieve through CSG Forte Engage, and you talked about reduced uncollected payments and increased customer engagement and a few other metrics. Are solutions and offerings like this additive to the margin profile of the business? And when you think about those different outcomes that you outlined, is there a way to kind of monetize this in a different way, like outcome-based or gain share type of arrangement?

I will maybe take the first and Hai, you can talk about the outcome-based. We do expect in our Digital CX business and in our Payments business be able to gain strong double-digit organic growth and potentially to layer on disciplined value-creating acquisitions as we just add to our product portfolio and strength. One of the strengths on the payment side is our ability to have our SaaS platform to be able to quickly onboard merchants. And not just credit card transactions, which is the bigger percentage, but also we are one of the best in the industry at ACH, which is a more efficient payment channel, and we can do SMB or launch enterprise. And so kind of that modular approach where we can sell direct or through channel partners, ISVs who can onboard and sell on our behalf as they onboard more merchants, are two of our bigger initiatives. As far as the business model, I think you will see us stick more with the model we are using. But Hai, do you have any thoughts on how we might use different approaches in this space?

Yes, I will take that. Generally speaking, in this type of economic environment there are a lot of financial pressures on our customers across multiple different geographies in the industry. Our ROI-based selling approach is something that we are hyper focused on. It is very much outcomes-based, whereby it is very quantifiable. That differentiates us to be able to really speak directly to customers around some of their real challenges and how we can be able to quantify.

Your next question comes from the line of Matthew Harrigan with Benchmark.

Thank you. Congratulations on the results, clearly. I was curious if you could elaborate on what you are seeing on the M&A side as you target that $1.5 billion in top line, particularly given the latitude you now have with your balance sheet and that you think pricing is getting saner in the SaaS market. Are you seeing opportunities that really fit like a glove with what you are trying to do, particularly given your capacity to leverage AI? Thank you.

Thanks, Matt. Hope you are doing well. Absolutely, M&A is part of our strategy. The two questions we probably get the most from investors, one, can you still get to $1.5 billion by 2025? And two, are you going to do that with discipline to deploy capital? The answer that we have hopefully demonstrated with the results of the deals we have done is yes on both. First, what we see on the acquisitions, we continue to look for strategic product capability that can be added to what we do and bring more value to our end customers. And if we do that with good integration of culture and people, then that is how we have been able to unlock value with the acquisitions that we have done. And we like our track record. And as we do that, the second thing we like, we see valuations on various companies, either they might want to divest certain assets or on companies who would sell the whole company, valuation to come down closer to what we would see as a good value-creating strike zone. Because we think the best way you can mess up a good acquisition is to overpay, and so we do think valuation continues to say there will be good actionable deals in the coming period of time. Now, specifically on the discipline, and hopefully we have seen with the deal we did with Kitewheel, it was an AI-driven data-driven platform that became a centerpiece of our Exponent launch in Digital CX. We see the results on double-digit organic growth and profit contribution coming from that. We see Tango Telecom, where we added capability in to our global telco offer. Really strong performance. Same thing on DGIT, adding CPQ and order management. In all the areas, we expect and are constantly looking at dozens of deals and being very disciplined to make sure it comes into the strike zone of what a good deal looks like. The one area that I think we are seeing valuations come in is more in the AI space. And so what we see right now is, A, we have strong AI capabilities inside our four walls, and we are leveraging that for internal efficiencies as well as improved and expanding the offering and the value we bring customers. But you are seeing us take a more partner-driven approach like the partnership we referenced with Microsoft. If there is big players in the space, and there is a lot of the smaller players that have what we might consider overinflated valuations, we think there is going to be a lot of shake out at the low end of this. We don’t think that is a great, highly disciplined approach on the AI side specifically, but we are not ruling any of those out. Again, just stick to our disciplined strategic focus on M&A.

Your next question comes from the line of Timothy Horan with Oppenheimer.

Congratulations on moving so rapidly on AI. Just wanted to focus on that if you don’t mind. Do you own the label data to train the models? And can you give us a little bit more color on what model you are using? And how long do you think it will take to have a material impact on your financials, either to reduce expenses or drive new revenue growth? And do you have a lot of new products in mind that can leverage AI? Thanks.

Hey, Tim, thanks. Yes, really good questions and timely questions. First, AI, the way we describe it is - we don’t think we are leading it, but we do think we are leading edge in terms of how we are deploying and using. On the data side specifically, I would say that the majority of the data is actually not ours. There is some data in some of our solutions in some of our businesses where we actually have access to and can leverage more directly. But I would say the bigger is it would actually be customers’ data and they would be needing to opt in and work with us on that, as many of them are, and looking at different opportunities. Specifically on kind of the balance between revenue growth and accelerating and contributing to being at the upper end or above, upper end of our long-range targets, is it is - you have seen us launch three products and there is more in the works around that. And we just think it is kind of core to the capability and it is an extension of what we have already been doing on machine learning and others. We are really excited by the Bill Explainer.AI launch to address bill shot. That is a huge opportunity and big driver in cable global telecom, but also in lots of other industries, whether that be insurance, utilities, other enterprise businesses that serve the consumer on that side. We do expect to be doing more launches around it. And on the model side, you see us - we have data scientists inside our four walls. We will also leverage some of our bigger partners and some of our smaller partners that have targeted large language models around that. Hai, maybe you want to talk about the efficiency side of this. Our long-term debt range is 16% to 18%. We have shown we can solidly operate the company in the 17%. We’d love to get to the upper end. How do you think about AI on the margin side, Hai?

Yes. I think it increases the pace at which we can get to the debt rate of our target. We are clearly trying to take full advantage of the new and immersing technology, and we are democratizing that across the organization as we speak. As you can see in the chart that Brian shared, every department across the organization, we are now starting to explore unique and interesting opportunities. And that is where I think we really unlock a lot of the efficiencies in the model.

And then just maybe two financial questions. Broadband has been, revenue has been relatively stable now in the last three, four quarters. When do you expect that to accelerate? And what is it going to take there? It sounds like you have some basically new products, maybe it is related to AI, to kind of get that going again.

Yes. On the cable side, I mean I think there is a couple of things. One, I think one of the biggest maybe misunderstood aspects of our story and our company, is video core coming, core big cable customers, does not hurt CSG. It is about the customer relationship. And what we focus on is even though we have a high market share in North American cable, we have huge headroom for growth. They do a lot on internal IT development. There is still meaningful parts that we don’t serve today that we could displace vendors. They also we think will grow through some of the current challenges they have. We absolutely expect and think that our big two and our North American cable in general can grow year in-year out at or above the rate of the company growth. Any given quarter may not be that way exactly. That is on us to say what do we do in that. We have got to bring them more value. We have got to constantly have the best operational ups of any vendor they use. Because usually when bigger customers feel pressure, they tend to turn and give more to those partners and vendors that are serving the best. Ours is, we don’t take it for granted. We try to go earn that respect and value every day. We absolutely think we can continue to do that nicely even with some short-term headwinds or even intermediate headwinds that any of our customers may face.

Your next question comes from Gregory Burns, Sidoti & Company.

Why are margins projected to be down sequentially in the fourth quarter? And then looking beyond the fourth quarter, obviously you are driving steady, consistent organic growth driving that scale. Do you see upside to your operating margin targets? I know in the past historically, you have kind of operated at certain points at higher levels of profitability. Is there potential there for margins to expand from here?

Yes. Thanks, Greg. First, we thought about that in terms of the guidance for the remainder of the year. And so first, we always come into every quarter expecting and believing we have a chance to be at the upper end, not the lower end. And it is absolutely our expectation to be able to drive that from the revenue growth. But we have got - we know we have got to execute well in Q4, and we are already a month into the quarter. We don’t expect currently to have any step down, but let’s see how Q4 comes in. We have got some work to do with 2 months left in the year. Now specifically on the margin side of that, it was great to see where we actually last quarter increased our non-GAAP adjusted op margin range up to 16.75% to 17.1%. You see us now through three quarters in the business at 17.5%, which is just shy of 100 basis points improvement over last year. It is well within our 16% to 18%. And what we like to say is we like 17% better than 16%. Now that we are operating solidly at the 17%, we are not giving guidance yet for next year. We would expect - we don’t expect to take a step back, Greg. And we talk a lot about just operational discipline. And that is more small terms of the rents, constantly looking at how do we redirect our OpEx to better sales, better value and performance for customers and accelerated growth. And that is what we have been doing. We expect to continually expand operating leverage now. Bottom line grows faster, faster than top line. Year in-year out, there may be some quarter that is better or a little lower than the others, but we like the discipline we are seeing across our business. We thank our global division leaders for finding a way to do that in a tough exciting market.

Okay. And what is the share count now? I guess where do you expect the share count to be in the fourth quarter?

In the fourth quarter - let me get back to you on that, Greg. I will get you a very specific number.

Okay, great. Thanks.

What we have said now, just as Hai is pulling that up, what we said on the share buyback is, first after the big Q3 where we bought back $107 million worth of stock, you’d see us do a little - it is the third leg of our capital allocation stool. First is hands off class on dividend. Secondly, focus on strategic value creating acquisitions. And then third, have buybacks at a minimum offset share dilution. I think you will see, at least at this stage, share buybacks focused more on a steady approach. It is more along the lines of offsetting dilution after the big Q3 and the big prior year we did on buybacks.

And Greg, you could have seen some modest - about [indiscernible].

Your next question comes from Shlomo Rosenbaum with Stifel.

First question, just a little bit of just kind of the sequential gyrations. This big step up in telecom revenue, and I know that is an area of focus for you, Brian. Maybe you could talk about that and then compare that with the two large clients had a little bit of a step down. And are they just like projects that are rolling in and off on that? Maybe just a little bit more color on that. And then I have a follow-up.

That is great, Shlomo, thanks so much for the questions. Yes. On telecom, I mean I guess what I would say is, we have been talking a while about the giant wins we have had in Global Telecom, and we are gaining a lot of traction in that business. When we deploy a big win in telecom, there is both recurring revenue, maintenance, recurring license, other fees that we get. And then there is also implementation that would come on. The big deployments in the middle, in Saudi with Mobily, the second largest. We have got big global customers in South Africa, in South Pacific, in Australia. And then we talked about the big win in the Caribbean. That is just part of the growth and the momentum building that is going on in Global Telecom. And then you will see that evolve some, including with the implementation revenue that gets recognized in a given quarter. Just a lot of traction in that part of the business. In our big two, you have actually seen quite strong growth prior to this quarter, strong growth over the last couple of years in the combined big two. And as this quarter it was more flattish, and I would say we get an evolution of some of its services. The majority of it is recurring revenue. You will just get some fluctuations around that in a given quarter. But kind of our overall message, like we commented on a couple of the earlier questions, we absolutely do believe that our big cable customers can grow consistently in the 2% to 6% range. And in some quarters can be at the midpoint or higher, and you will see some deviation on that quarter in-quarter out.

Okay. Great. Thank you. And then just a point to the lower end of the free cash flow guidance range, are you seeing your customers kind of extending the payment I don’t know if I would call it terms, but maybe just paying late in the current environment or is that really just kind of a timing of milestones for various implementations and things like that?

Yes, it is primarily timing of milestones. I think that our customers have still been fairly good about making their payments. Our AR hasn’t aged or looked materially different than it has in the past. It is more about the unbilled balance growing. We view that as a timing issue, particularly around some of the larger transformative global telco projects going on.

The final question will come from Brett Knoblauch with Cantor Fitzgerald.

Congrats on the quarter. Maybe just one on gross margin. I think it is kind of stepped down a couple of hundred basis points year-over-year, all this year kind of sequentially declined. What is driving that? And what should we expect on the gross margin on the go-forward range or go-forward basis?

The majority of any movement on gross margin will be around mix today. And in our business, we have obviously a combination of services revenues and license revenues, SaaS revenue, all of which have a very different profile. The mix of business will drive some of that. With that said, in particular if we look at our non-telco business, our SaaS business on payments and CX, they are totally SaaS. As those ramp up, that is going to improve the mix. As we drive greater efficiencies across the board in our other lines of business, that is going to drive opportunities for margin expansion on the gross margin side as well. Our expectation, as Brian said, I love the phrase, a turn of the wrench. Because that will continue to kind of have a steady march towards margin improvement mix aside.

Perfect. Understood. And then just on the AI front, you talked about a lot of using it internally to make your employees more productive. Do you think this could be a potential driver for you guys to reduce headcount as this becomes more intertwined in the organization?

I think that there is a lot of things that I think a lot of companies are looking at. To be more efficient? Absolutely. And the question is though, as you continue - if we can continue, like we expect to do, to continually accelerate our organic revenue growth, that means it is going to potentially lead to the growth in headcount over time. What you may see is more of a headcount avoidance as opposed to a specific headcount cut because of the amount of growth we are having overall. Do we expect it to drive improved customer service, more efficient customer service, more efficient sales and G&A and more efficiency in our R&D capabilities? Absolutely, across the board, and we are already seeing that with some of the just innovation that our teams are unleashing in all parts of the business. Will it lead specifically the headcount cuts? I would say more headcount avoidance at this stage, but that is something that we could watch and update on in future quarters.

And the next question comes from Nehal Chokshi with Northland Capital Markets.

Yes, thank you, and nice strong quarter here. Given that it was a nice strong quarter, why not raise calendar 2023 guidance?

Nehal, I hope you are doing well. Yes. No, it is a good question. Like we said, we talked about the guidance. We love the performance, the momentum that we are building in the business, and we decided to keep the guidance the same and focus on just seeing how we can perform to get to the top end or above in Q4. We do fully expect to have - I think when we shared some maybe color at the end of Q1, we said this was going to be a little different shaped year. We said Q1 with the giant would look - Q4 would look a lot like Q1. We said Q3 would look a lot like Q2. What you saw just announced was Q3 actually came in $1 million ahead of Q2. We delivered a giant Q4 last year and Q1. Now what we have got to do is rinse and repeat and have Q4 beat both last Q4, and materially, and the strong Q1 we had. But I would say we just decided we wanted to have our results be better than our predictions, and we just wanted to make sure that we are overachieving with what we see.

And there are no further questions at this time. I will hand it back to Brian Shepherd, CEO, for closing remarks.

Great. Thanks, everyone, for joining. I guess what we would say in closing is, hopefully the results we have been putting up quarter in-quarter out so far this year, point to two main things. We absolutely intend to execute against a mid-single-digit organic growth like clockwork that is up to us to prove with results, not words. That absolutely is what we believe we can and will continue to deliver. There is no reason our bottom line shouldn’t grow as fast or faster than top line with great disciplined execution, and we look forward to just continuing to create more value and we are super grateful to every CSG-er everywhere around the world that continues to just dream bigger and deliver bigger and better results. More to come in Q4. Thanks for the time.

And this concludes today’s conference call. You may now disconnect.