Q1 2022 CSG Systems International Inc Earnings Call
Okay.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the DST systems International first quarter 2022 earnings call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question during that time simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again star one.
Thank you.
John <unk> head of Investor Relations you May begin your conference.
Thank you operator, and thanks to everyone for joining us like last quarter, we will be working from our 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.
In light of new or.
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 believe that these non-GAAP financial measures when reviewed in conjunction with our GAAP financial measures provide investors with greater trends.
Which guarantee to the information used by our management team and our financial and operational decision, making for more information regarding our use of non-GAAP financial measures. We refer you to today's.
As the 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 or Brian Shepherd, Chief Executive Officer, and high Tran Chief.
Financial officer with that I'd like to now turn the call over to Brian . Thanks, John Good afternoon, everyone for those using slides today. Please join us on slide four.
I'm pleased to share that CST business momentum continued in Q1 2020, the discounts associated with the exciting renewals with charter communications and dish that we signed and announced in Q4 of last year.
It is a testament to the strength of our recurring revenue SaaS business model and the continued success of our sales performance, which is as robust as ever to grow revenue and EPS in the quarters. Following two of our top three customer renewals.
Equally important for us as proud and as committed as every <unk> employee is to deliver excellent results every single quarter. The elevation and transformation of <unk> is much more profound and longer term in nature than any given quarterly results at <unk>, we aspire to be a $2 billion and beyond.
On purpose, driven SaaS platform company, who envisions events and shapes, a better more future ready world, we will hold ourselves accountable to change the lives of our employees and the customers. We are honored to serve for the better we will redefine. The industries. We are proud to lead we will make a lasting impact in the community.
The world in which we operate across the wider environmental social and governmental spectrum.
We still have much important work to do we are very proud of leading organizations are beginning to recognize the meaningful commitments ESG has and will continue to make on that.
SG and Eni bonds to this point I'm delighted to announce that we were recently honored to receive our first prime.
G rating from institutional shareholder services.
Yes for sure one of the leading ESG rating agencies in the World. This designation is based on an analysis of more than 100 sector specific.
G factors and those who are receiving high scores within their respective industry or awarded a prime distinction and with this designation our stock now qualifies as a responsible investment in the eyes of ISS, which is truly an honor and.
And on the back of our good Q1 start we are pleased to confirm all 2022 financial guidance targets based on the continued confidence we have in our near term and longer term business outlook. We have also increased our share repurchase activity by buying back over $45 million in stock over the last 12.
<unk> was $16 million spent on share buybacks in Q1.
From a product perspective, we launched CST encompass and open API product platform that enables global communication service providers to unlock the potential of <unk> by simplifying the complexity of multifaceted digital ecosystems that easily deliver a next generation digital services.
And extraordinary customer experiences I will provide more detail on this exciting new product in a few moments.
And we continue to win big in the North American cable market, where we signed a multi year contract renewal and expansion with a top six broadband cable provider in the U S and with respect to charter Communications, who we signed a $1 $5 billion six year contract expansion in November of 2000.
'twenty one the subscriber conversion plan from our competitors billing system is continuing as expected with the remaining approximately 10 million subscribers planned to be converted over the next 12 months.
Our good Q1 growth proves that <unk> has a strong healthy and resilient company, especially with the backdrop of today's turbulent global economic environment.
Turning to slide five I will revisit our five strategic objectives that form the foundation of <unk> long term future success. These themes should be familiar to everyone who has been following a big progress.
KFC aspires to deliver long term organic growth.
2% to 6% growth range, which we proudly achieved at the upper end in 2021, we aim to add operating scale and expand our operating leverage by growing to at least $1 $5 billion in revenue by year end 2025, with a stretch goal of $2 billion in revenue, we strive to be.
Number one SaaS provider of choice for global Tsp's by providing the most value added technology solutions and by being easier to do business within our competitors right.
Plan to diversify our revenue even more as we expand and big faster growth industry verticals with more direct sales and channel partner success in retail government financial services healthcare technology and more and finally, we will complement our accelerated organic growth with discipline.
And value enhancing M&A to turbocharge the value, we bring our customers and our shareholders.
Moving to slide six you can see that we performed well in Q1 against all five strategic objectives first with respect to revenue growth, we reported $264 million in total Q1 revenue, resulting in four 5% year over year growth.
We're also proud that EPS growth grew even faster at four 9% year over year.
On the right side of slide six we believe that the current economic environment benefit Csp's high recurring revenue SaaS business model and our strong healthy balance sheet creates attractive organic and inorganic market opportunities on the March to $2 billion and beyond.
As a reminder, by 2025, we aspire to gain scale in the markets, where we compete to exceed $1 5 billion to $2 billion in annual revenue, we aspire to expand <unk> operating leverage and use our strong healthy balance sheet to deliver EPS growth that outpaces revenue growth, we aspire to.
To consistently deliver better and better business results. So that our shareholders are rewarded with the trading multiples that they deserve we may invest in a purpose driven faster growth multi industry vertical SaaS platform company likes DSG and our base case, we aspire to exceed $1 $5 billion in revenue, which means.
Even if we come up short against our stretch case ambitions <unk> will still grow revenue by over 50% and add over $500 million and profitable recurring revenue by 2025.
To reach the $2 billion stretch case revenue aspiration by 2025, we will continue to allocate capital to its most value added use and to eventually close bigger scale acquisitions to become even more transformational for <unk> and the industry.
On this last point I will continue to reinforce the key point shared on almost every analyst and Investor call. This management team is laser focused on creating shareholder value not building empires, we will hold ourselves accountable to adding scale accelerating growth expanding our operating leverage and deploying capital towards high.
And most productive use all with a focus on rewarding our investors just like we work hard every day to delight, our customers and our employees.
Turning to slide seven we had good success in Q1 on our goal to be the number one technology provider of choice for communication service providers globally, and our continued sales success with both North American and global DSP through but we are executing well against the strategic.
<unk>.
Our revolutionary new product CST encompass enabled us to launch a more holistic end to end solution to solve the most complicated problems for csp's around the world in <unk>.
<unk> is a SaaS based open integrated and modular solution. This significantly simplifies the complexity of multi sided b to b, two X ecosystems and business models for our global telecom customers and its core encompass brings together <unk> cutting edge revenue manage.
Brent and digital monetization products with two of our acquisitions from last year Tango Telecom and Digi.
As a reminder digit technology provides a configure price quote <unk> for short order management platform that has a strong presence in adoption in the global telecom market, while Tango Telecom technology, RMC SG with real time dynamic policy and call control management.
Both of which are absolutely crucial to global CSP in a <unk> world.
We are excited to announce some early Q1 wins on the new encompass platform, including our deal with good track. The state owned enterprise that manages public transport infrastructure in Victoria, Australia, We deployed encompasses CPU and order management solution to support the digital transformation.
And automation of its telecommunications network.
With <unk> industry, leading platform Vic tracks exciting that work and processes now deliver more efficient and cost effective solutions to their in transport government and wholesale customers.
Joyce for all $65 million combined Comcast and charter subscribers. The two largest cable providers with CST, having migrated tens of millions of subscribers off both amdocs and net cracker over the last six years, we plan to build on this market share success in the years ahead.
Working hand in hand with charter CFT successfully migrated over 5 million subscribers in the Ohio, Wisconsin, Kansas completing over $4 million migrations in the second half of last year, while the timing could still very a little we're on track with the existing conversion plan.
To migrate the remaining $10 million charter customers over the next 12 months.
Additionally, we signed a multiyear renewal and expansion with the top six U S cable company with over $1 6 million homes passed.
This deal we expanded our standing as this customer's billing provider of choice and we will continue to support the cutting edge customer with additional services like our field service management platform.
And <unk> success is not limited to North America, and the global Telecom market, we continue to grow with new wins and contract extensions with leading telecom operators all around the world during the quarter, we closed a fantastic deal with Optus, the second largest wireless company in Australia with over 10.
<unk> customers this win positions <unk> as the strategic rating and revenue management provider of choice for office wholesale.
We're so special about this win is that we were able to unseat not one but two incumbent service providers further proving the CST has the right products and industry experts to unseat an incumbent providers.
Further we signed a multiyear deal with actually out to Sri Lanka. This deal our digital wholesale SaaS solution replaces one of our key competitors. We look forward to further helping actually order who is one of <unk> largest telecoms group were six operating companies to solve their most.
Pressing business challenges.
Turning to slide eight since 2017, <unk> has grown revenue from exciting new industry verticals like retail government financial services and healthcare from 7% of total 2017.
ESG revenue to over 24% of total revenue at year end 2021, and while this metric can vary a little bit from quarter to quarter. It is extremely encouraging to see 27% of our Q1 revenue came from new industry verticals.
Being a partner of choice for some of the biggest brands in higher growth industry verticals, where CFT helps them digitize and modernize their customer engagement and cloud payments continues to be a big game changer for CSP last year, we won and later expanded deals with two of the largest drugstore chains in the U S.
And one of the largest retailers in the world, who all selected <unk> software to power the retail and clinic customer engagements. Our solution is increasingly important to all three of these large customers given the unprecedented number of inbound requests that health care providers retail pharmacies and government agency.
These are getting related to vaccinations appointments and prescriptions and I'm pleased to report that during Q1, we continued to win new business in this space as we further expanded our relationship with and closed meaningful new business with one of the largest drugstore chains in the U S. As part of the new digital engagement deal.
But we signed in the quarter.
There are a couple of years ago, we signed a very good deal with Formula one to manage its directed fan OTT experience, where we've managed user subscriptions payments entitlements and devices I'm proud to announce that we signed a multiyear contract with them during the quarter, we are extremely excited and <unk>.
Brown to continue serving Formula one is the global popularity of this racing series continues to explode and grow all around the world.
In the payments market, we return to meaningful revenue growth in the quarter with good double digit growth in the last two months of Q1 coming from a strong industry vertical sales risk.
Results propelled by our industry, leading recurring revenue SaaS integrated payment platform <unk> provides the award winning full payback short for payment facilitation capabilities to 88000 Act.
Merchants and ISP partners.
In Q1, who need.
<unk> credit payment gateway and payment processing capabilities, serving a wide range of the recurring revenue industry verticals as a leader in ACTH processing.
We continue to add scale by signing ISP partners and fast growing industry verticals like property management in March we announced a strategic partner with philosophy, though which is the only provider of no code cloud native technology connectors. This.
Partnership enables drug with enterprise resource planning software vendors.
Single processing partner.
Looking ahead, we built an exciting sales pipeline in our payments business across multiple verticals that are contributing to our improved in the payments market.
Moving to the right hand side of slide eight we continue to execute against our disciplined value creation M&A.
A playbook, we expanded our offering in the digital customer engagement market with the purchase of Kai will SaaS based recurring revenue.
And this transaction formed.
The foundation of <unk>.
Exponent launch, our bold and innovative multi vertical market offering in the digital engagement space.
Plus as I mentioned earlier, the acquisition of Tango telecom and digit enabled us to launch DSG encompass which I spoke about earlier.
As we look ahead, we will remain laser.
Exciting new arenas.
Blocking even greater value from existing and new acquisitions that will help <unk> grow and elevate even more.
As I wrap up on slide nine across all five strategic priorities. The results speak for themselves <unk> is building meaningful momentum and elevating every aspect of our business, but we fully expect will fuel our continued long term growth.
And transformation we.
We hope you see the same thing we do when we analyze our business cst's purposes, both inspiring and growth oriented our strategic vision.
And daily execution, our focus and discipline, we are elevating our culture, our diversity and our global talent and now I will turn it over to high to provide more detail on Q1 results and our outlook for fiscal year 2022.
Thanks, Brian as Brian highlighted we are off to a good start in 2022.
Let's walk through first quarter financial results, and then I'll wrap it up with some key conclusions.
Starting on slide 11, we generated $264 million of revenue.
$246 million, our non-GAAP adjusted revenue during the first quarter.
These results represent four 5% and 41% year over year growth respectively.
Approximately two thirds of these increases were attributed to organic growth.
The year over year increase in revenue and non-GAAP adjusted revenue was driven primarily by the continued growth of our revenue management solution.
We serve many of the largest communications service providers in the world.
In addition, we are seeing healthy growth in our customer engagement offering.
We serve customers in large high growth industry vertical.
Care retail financial services and government.
I would also like to note that this growth was in the face of 3% to 5% discount headwind for two of our three largest customers.
First quarter non-GAAP operating income was $40 million or 16, 3% of non-GAAP adjusted revenue.
Compared to $40 million or 17.0% in the same prior year period.
This is consistent with our long term target range of 16% to 18% operating margin.
non-GAAP adjusted EBITDA was $56 million for the first quarter or 22, 9% our non-GAAP adjusted revenue.
Compared to $54 million or $23 zero percent in the same prior year period.
Moving to our first quarter non-GAAP EPS.
Delivered 86.
A four 9% year over year increase compared to 82.
In the prior year period.
We anticipate our bottom line EPS growing as fast or faster than our topline growth for the full year. It should be noted that like other company, we continue to monitor and navigate the current uncertain macroeconomic geopolitical and inflationary environment.
So turning to slide 12, I'll go through the balance sheet, our cash flow generation and shareholder returns for the quarter.
Our first quarter 2022 cash outflow used in operation was $6 million as compared to an outflow of $2 million.
In the prior year period.
Further we had non-GAAP free cash flow of $60 million in Q1, 2022, as compared to $10 million of outflows in Q1 of 2021.
As a reminder, the first quarter each fiscal year is generally lower than other quarters due mainly to the payment of year end accrued employee incentive compensation from the previous year and our full.
Full year cash flow generated from operations before working capital movements increased from $49 million in Q1, 2000 $21 million to $50 million in Q1 of 2022.
Can you just at a high visibility and recurring nature of our revenue and cash flow. We continue to expect robust cash flow generation in the remaining quarters of 2022 moving on we ended the first quarter with $188 million of cash and short term investments.
That along with our outstanding debt as of March 31, 2022 resulted in $204 million of net debt.
And our net debt leverage ratio remains under one times.
The past eight months.
We have completed a couple of financing transaction, which has reshaped our balance sheet in March of this year, we settled our outstanding convertible debt.
This transaction following the refinancing of our credit agreement last September which had the benefit.
Thank you.
Upwards $205 million remains undrawn.
As you have made to enhance our capital structure.
In the coming quarters.
Our balance sheet remains in great shape, and we have a lot of options for future on the bottom right of the slide we declared $9 million in dividends in the quarter.
The $1 of common stock under our stock repurchase program.
Looking ahead, we expect that 2020.
The expected dilution from employee stock expense.
Moving to slide 14, we are pleased with our first quarter 2022 operating results taken together the strong start to the first quarter.
Outlook for the remainder.
For the year gives us the confidence to confirm our 2022 financial guidance that we laid out in February which is outlined in the table on the right of the slide.
Continue to believe our revenue to be weighted towards.
With approximately 51% or up.
Full year revenue realized in our third and fourth quarters.
Additionally, as I mentioned before we continue.
Seeing a monitor the current uncertain macroeconomic geopolitical and inflationary environment.
Finally, I wanted to leave you with a few concluding thoughts.
We believe that the momentum we are creating and the malaise that boosted that this leadership team has on executing against our strategic priorities.
<unk> does well in the marketplace.
He is committed to accelerating our revenue growth and diversifying our industry vertical revenue.
Including closing and integrating discipline value, adding acquisitions and we believe this investment in our future strategic growth combined with our consistent capital contribution in the form of dividends and share buybacks will serve our shareholders well.
That I will turn it over to the operator to facilitate the question and answer session.
At this time, thank you would like to ask a question. Please press star followed by the number one on your telephone keypad.
First question comes from the line of Maggie Nolan with William Blair. Your line is open.
Hi, Thank you.
Wanted to ask a little bit more about <unk> and Comcast career existing <unk> customer base.
<unk> kind of streamlining services.
To do business with than your competitors I guess any any comment on the opportunity there and then early adoption or penetration would be helpful.
Yes, Hi, Maggie Thanks for the question this is sitting in.
In the market.
It is enterprise as one of the fastest growing and most profitable segment for both global telecom operators.
It's an opportunity after the acquisitions of Tango telecom and digit to fully integrate a modular open API structure, where we could help enterprise telecom businesses, both launch new marketplaces and allow them to bring on new partners that could really accelerate.
Revenue and help them with their return on their <unk> investment. So when you think about what they are trying to do all around the world. They are trying to make it easier to buy a broad range of good in certain goods and services. So I'd unifies. The catalog. It provides configure price quote it improves SLA response time it deals with order orchestra.
<unk> that really helps telecom.
New services to gain that that return.
Yes.
Okay.
A couple of context.
And then on the acquisition pipeline.
King our target companies.
And it's large scale.
Likely best uses of capital in the near term here.
Yes, no there's a couple of good questions.
Slides first of and once we've got it.
Continuing to create and extract.
Value. So you saw us launch <unk> in the latter part.
Whereas last year, they really as a customer experience customer engagement platform that helps big brands with lots of verticals. That's what it is.
Specifically on the Max.
We do believe that some of the terminal.
Personal lines that we're seeing more globally actually can create attractive.
Disciplined buying opportunities for <unk> as we continue to execute.
M&A strategy.
So we're we're focused in several of those areas and we try to be very disciplined with a pretty tight sweet spot on what we believe in it.
An attractive mid size or larger acquisition is and we think the economic environment.
It might make it even more attractive as we continue to pursue those opportunities on the strategic side.
Thank you.
Your next question comes from the line of Greg Burns with Sidoti <unk> Company.
Opportunities.
In terms of maybe new verticals or technology.
Or.
What are your focuses are.
Effective and then if we do something more transformative is there.
So any particular market that you'd be looking at whether it's something you're already in or.
Our new <unk>.
Clearly new industry.
Yes really covers a couple of different avenues.
There is one.
Yeah.
We stay very flexible and open whether that the deals and the acquisition would be larger mid size and smaller it really depends on the SaaS technology. The contribution it could bring to accelerated revenue growth and how it could help us pass.
Package, our solutions and technology together to be more relevant to those big brands. So a couple of key areas that we focus on that kind of vary by industry vertical one we look for solutions that are SaaS based that can help us in monetization customer experience customer engagement and.
In digital payments, where you really focus on those areas. We think that there is an opportunity to expand scale. So if it's more of a scale acquisition than it needs to be able to have sticky revenue.
Accretive have great call.
Cost synergies as well as contribute to the revenue growth.
It's more on the higher growth SaaS end of that then we're looking for it to be highly complementary where we can easily integrate into our existing suite still provide a modular approach that will enable us to expand either the geographic global reach of our solutions to expand our addressable market and our growth rate.
And to be more value, adding and relevant to the customers. So we really looked at.
M&A opportunities across that entire landscape with that focus area.
Okay.
And then in terms of.
Charter the decline in revenue year over year and sequentially is that strictly a function of the price setting is that fully baked into the numbers now and do you expect revenue to grow from here.
Yes, Greg the answer is yes.
Alright.
I think part of.
We know here in April .
To transition by 15 day, instead of which we've already moved over about $5 million.
So there is still.
More room for us to grow with.
With charter of the company.
And maybe the only thing I would add to that Greg I think we gave a little bit of color late last year, but we expect to be.
The renewals to be in the plus or minus 5% range. We saw that come in the other the other aspect. Besides just the renewal discount that factored in we had some.
Revenue that was spread over the term and so when we saw the term late last year only be three months left some of that revenue was spread over a shorter period of time as we then renewed two a six year period. Some revenue from an accounting standpoint, <unk> got just spread over a longer horizon. So.
Several different factors. In addition to what I commented on that we haven't seen all the subscribers come onboard yet.
Okay, Thanks, and lastly.
On the payment side, it looks like you're back to pre pandemic levels, but maybe you can just confirm whether or not that's the case and what's the pipeline of opportunities look like.
So that business.
We love what we're seeing in the payments business, we started to see the performance that our sales and our new customer account revenue activation.
And our ISP channel partners really start to bear fruit and start to grow in the second half of last year and I think we've been signaling that for.
For three or four months now and we saw that really transpire, we saw January would be a little bit better but not <unk>.
Back to normal levels.
<unk> very very strong results back to pre pandemic levels of Medisoft.
The latter part of Q1 and we.
I have high confidence that we will continue from a sales performance we outperformed in.
In the payment space, both in direct sales and in our IFC Channel partners. We've improved in the activation of new customers to basically reduce the time to onboard and revenue recognition and revenue acceleration and we love what we're seeing in the payments business.
Great. Thank you.
There are no further questions at this time I will turn the call back to CEO , Brian Shepherd for closing remarks.
Now thanks. Thanks, so much we appreciate everybody joining we are laser focused on what we're doing to accelerate top and bottomline growth bring more value to the fantastic brands all around the world. We're super Grateful to all 5200 and beyond <unk> employees for making a difference elevating our culture, we look forward to doing bigger.
And better things every single quarter. Thank you for the time.
This concludes today's conference call. Thank you for joining you may now disconnect.
Okay.
Sure.
Okay.
Okay.