Q3 2024 CSG Systems International Inc Earnings Call
Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to CSG's third quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press star then the number one on your telephone keypad.
To withdraw your question, press star 1 again.
Speaker Change: We ask that you please limit yourself to one question and one follow-up. I would now like to turn the conference over to John Rea, Head of Investor Relations and Treasurer. Please go ahead.
John Rea: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 8K. With me today on the phone are Brian Shepherd, Chief Executive Officer, and Hai Tran, Chief Financial Officer.
John Rea: With that, I'd like to now turn the call over to Brian.
Brian Shepherd: Thanks, John. Hi, everyone. Welcome to today's call. On slide four, we wanted to begin with several exciting highlights that showcase how well Team CSG is executing across all areas of our business.
John Rea: First, the big news that has been on every investor's mind, we were super excited to announce on Monday that we signed a fantastic contract renewal with Comcast.
Brian Shepherd: This great win-win deal builds on our 35-year-plus relationship with Comcast.
John Rea: and it gives both companies the opportunity to unlock much greater value in the future by continuing to do more business together.
John Rea: Comcast is undoubtedly one of the biggest and best connectivity and entertainment providers in the world, and we are honored and humbled to continue to serve this industry giant with mission-critical technology solutions well into the next decade.
John Rea: We're also very pleased to raise both profitability and EPS guidance targets for the second consecutive quarter, while reiterating all other full-year 2024 guidance targets.
John Rea: We achieved very good profitability in Q3, reporting an 18.4% non-gap adjusted operating margin.
John Rea: and Team CSG believes it can continue to deliver enhanced profitability in Q4 and into 2025 and beyond.
John Rea: It was also great to see the strong profit performance convert into better free cash flow as we generated $37 million in free cash flow during the first nine months of 2024, a 25% increase year-over-year.
John Rea: And as Hai will share more detail on, our cash flow growth would have been even stronger if you normalize out the $18 million in one-time restructuring cost reduction hits to cash flow through Q3 year-to-date.
John Rea: And lastly, our sales wins and deal expansions through the first nine months of the year have been very strong across the board with good wins in digital monetization, data-driven CX, and payments.
John Rea: Slide 5 provides some additional color on the Comcast renewal. The contract term extends through December 31st, 2030, over six years from now.
John Rea: CSG will continue to provide broad mission-critical support for Comcast triple-play broadband subscribers and other areas of Comcast business.
John Rea: Given the good contractual commitments that CSG received, we agreed to no day one price increase and no price increase in 2025, but the parties did agree to annual price escalators starting in January 1st, 2026.
John Rea: We are truly honored to continue to serve one of the largest and most innovative leaders in the connectivity and entertainment industries well into the next decade.
John Rea: Moving to slide six, we wanted to remind investors of the three key value creation commitments that the CSG leadership team and board of directors will hold ourselves accountable to deliver in 2025 and 2026.
John Rea: First, even as we grow through a lower organic revenue growth period for the next several quarters,
John Rea: CSG aspires to consistently deliver 2% to 6% pure organic revenue growth and to diversify revenue from exciting new industry verticals to greater than 35% of total CSG revenue by 2026.
John Rea: As a reminder, since January 1, 2021, CSG has added over $160 million of new organic revenue through Q3 2024.
John Rea: Second, we aspire to expand non-GAAP operating margin from our previous long-term range of 16% to 18% to our new long-term range of 18% to 20% with free cash flow growing much faster than revenue growth.
John Rea: And we fully expect to achieve this higher operating profit without impeding our ability to get back to the mid-single-digit annual organic revenue growth that we achieved from 2021 through 2023, and to do this by 2026 or sooner.
John Rea: And we believe that our improved profitability will convert into significantly higher free cash flow in 2025 and 2026.
John Rea: with a pathway to deliver between $110 million and $150 million in free cash flow in those years.
John Rea: Third, we will continue to return significant capital to shareholders.
John Rea: On that front, we are committing to over $100 million in share repurchases and dividends in each of 2024 and 2025.
John Rea: As a reminder, we have delivered nearly $500 million to shareholders in the form of dividends and buybacks since 2020, and we are now in our 11th consecutive year of increasing our dividend, a key tenet of the CSG investment thesis.
John Rea: Turning to slide 7, since we have a number of new followers to our story, we wanted to connect the dots on how Team CSG is setting ourselves apart in the market as a leading provider of mission-critical enterprise SaaS solutions to global brands in a wide variety of industry verticals.
John Rea: With the record-setting revenue diversification results we keep reporting most quarters, many investors ask us how we determine which industry verticals to target.
John Rea: The answer is simple. CSG targets industry verticals that have highly recurring relationships with their end customers, powered by a complex subscription and consumption-based business models.
John Rea: This is why we have expanded so quickly beyond our traditional telecom and cable broadband customer base into exciting industry verticals like media, financial services, healthcare, pharmacy, retail, technology, government, and more.
John Rea: We help great brands like Walgreens, JPMorgan Chase, NRC Health, and Formula One solve similar customer engagement and monetization business challenges just like we help Comcast, Charter, MTN, Telstra in these same areas.
John Rea: While the industries are different, the customer pain points and business needs are surprisingly similar. This explains why we've been able to sell our industry-leading, cloud-native SaaS
John Rea: Ascendant platform to one of the largest banks in Australia and why Formula One and other big content providers have selected CSG Ascendant to monetize their media and digital content businesses.
John Rea: and it's also why leading global wireless operators like Claro Brazil, M1 in Singapore, Telenor Denmark, and Lise in Norway have all selected CSG Ascendant in the telecom industry vertical.
John Rea: These common business needs across industry verticals also explain why we've been able to sell our data-driven CX and payment SaaS solutions to many big customers in faster-growing industry verticals.
John Rea: Second, many investors ask us about our value proposition and what business problems CSG solves for customers in different industry verticals.
John Rea: The answer to this question also explains why CSG has been able to grow organic revenue over 5% on a compound annual growth rate basis since 2021.
John Rea: Every large customer in all these bigger, faster-growing, recurring revenue-inverted verticals have similar business challenges related to their post-purchase customer engagement.
John Rea: They all need to lower the cost and effort to activate, onboard, and educate new customers.
John Rea: They all need to give their customers the power and flexibility to upgrade and downgrade their services more seamlessly through digital self-serve channels.
John Rea: They all need to harness their data to more proactively upsell, cross-sell, and retain their most valuable customers with real-time, data-driven promotional offers. And they all need to make it easier to build, collect, and resolve payment disputes on a timely basis.
Speaker Change: An important point that is often misunderstood by investors is that CSG is not just a billing company. Our comprehensive workflow engines are foundational to how our customers holistically serve their end customers and make money.
John Rea: Third, our investors routinely ask us why we win against bigger competitors.
John Rea: The answer is because we relentlessly focus and prioritize our R&D
John Rea: Sales and Marketing and Disciplined Inorganic M&A to constantly strengthen our industry-leading, future-ready SAS portfolio so we can simultaneously grow organic revenue while expanding our operating margins and profitability.
John Rea: As a reminder, CSG is ranked in the Leaders Quadrant in Gardner's Integrated Revenue and Customer Management category.
John Rea: And CSG is also ranked in the leaders quadrant in Forrester's customer journey orchestration category ahead of almost all other competitors. And CSG routinely wins industry leadership awards in the payment space.
John Rea: Is doing all this easy? No, it's not.
John Rea: Being as mission-critical as it gets for giant customers all around the world in a wide variety of industry verticals is never easy. And yet, being a critical provider to help our customers lower their costs, retain and upsell their most valuable customers,
John Rea: Grow revenue faster and make more money is precisely why our customer relationships are so sticky often lasting three decades or longer
John Rea: And it also explains why we have continued to grow organic revenue and close exciting new sales wins even in tough economic conditions because our SAS Workflow solutions deliver faster ROI paybacks.
John Rea: On slide 8, you can see the success we've had in increasing our organic revenue growth since 2021, and the industry vertical revenue diversification success we've had since 2017.
John Rea: CSG's profitability is expanding at its fastest clip in many years as a result of both our operating discipline and our product-centric business model.
John Rea: Turning to slide 9, we want to remind investors on the many exciting new logo sales wins and deal expansions we've delivered year-to-date in 2024. These wins are underpinned by our strong global sales teams that continue performing well and delivering meaningful wins like clockwork.
John Rea: We won a fantastic new telecom logo in Q3 at Telenor Denmark, the second largest mobile operator in Denmark.
John Rea: We will be deploying both our cloud-native SAS Ascendant and CSG Exponent solutions.
John Rea: This win highlights our ability to cross-sell our cutting-edge digital customer experience suite of solutions together with our cloud monetization offerings
John Rea: It also highlights an important inflection point that we are seeing in the global telecom market as more leading wireless operators around the globe are willing to run their core billing and monetization engines in the cloud.
John Rea: A trend that bodes very well for our revenue growth with our AWS cloud-native Ascendant platform.
John Rea: We won a second fantastic CSG Ascendant and Exponent joint cross-sell new logo deal with Lise, a leading telecom and utility provider in Norway.
John Rea: Lise selected CSG for a full digital BSS transformation and will reap the benefits of becoming a digital operator as they too move from their core monetization and customer engagement technology platforms to the cloud with CSG Ascendant.
John Rea: We won a third-grade Cloud Ascendant Wireless win in Claro, Brazil. One of Brazil's largest telecom operators, serving more than 88 million mobile customers.
John Rea: To better serve the wireless market and monetize its mobile network, Clara Brazil chose CSG's highly scalable cloud-native Ascendant solution to set the foundation for its digital MVNO evolutions.
John Rea: Another 2024 Ascendant sales highlight was the excellent multi-year contract extension with the iconic brand Formula One, the world's most prestigious motor racing series.
John Rea: Since 2018, our cloud-native, multi-channel cloud Ascendant solution has enabled Formula One to quickly launch new live and on-demand OTT subscription services for fans who want to connect with Formula One's content.
John Rea: We expanded our relationship with One New Zealand, formerly Vodafone New Zealand, with an exciting win with the CSG Quote & Order suite of catalog-driven solutions to provide a seamless experience between the quoting of new products and the monetization of their offers.
John Rea: Team CSG had a great digital BSS transformation win with Mascom Botswana, a leading telecom operator in Africa, and we won more business with Zain Sudan, part of the Zain Group, and a leading wireless operator in the Middle East and North Africa.
John Rea: We previously announced a fantastic deal extension and expansion with Telstra, a 20 plus year customer of ours in the complex B2B segment.
John Rea: And on top of the big Comcast renewal, we were excited at the beginning of Q3 to win a meaningful new stand-alone billing deal at Comcast, which we expect to add approximately $10 million in non-recurring revenue in 2024.
John Rea: split fairly equally between Q3 and Q4 of 2024.
John Rea: During the third quarter, we also announced an innovative new partnership with Cellusys to help mobile operators optimize their roaming workflows, improve customer satisfaction, and capitalize on emerging technologies like 5G and IoT.
John Rea: Moving to the year-to-date sales wins in banking and financial services, we announced a fantastic deal extension and expansion with JPMorgan Chase, where we are deploying our CSG Exponent suite of solutions.
John Rea: to create an enhanced fraud alert notification experience for Chase cardholders.
John Rea: Also, Walgreens has been a CSG customer and partner for nearly 15 years through a third-party relationship.
John Rea: This last quarter, I'm pleased to report that we successfully executed a direct contract with Walgreens to provide CSG's smart communications platform with real-time messaging to the most important customer segment of Walgreens, their prescription customers.
John Rea: PSG is executing real-time prescription refill reminders and prescription status messaging to drive higher drug adherence, a critical KPI for Walgreens.
John Rea: We just met a new milestone this month and have executed over 5 billion IVR messages to prescription customers on behalf of Walgreens. We appreciate our partnership and look forward to further expansion.
John Rea: CSG expanded our relationship with NRC Health, one of the nation's largest healthcare experience management firms, supporting over half the healthcare systems in the U.S. We are partnering with NRC to execute a digital multi-channel customer engagement strategy in a streamlined, cost-effective and scalable manner.
John Rea: And finally, I'll wrap up with a good sales win we had in the payments arena with a leading regional bank in the U.S. selecting CSG to power their payments' needs.
John Rea: Specifically, CSG's payment solutions allow this bank to reduce transactional costs and modernize their online payments portal with our BillPay product. We believe there are many domestic banks that could benefit by similarly leveraging our solutions for their payments needs.
John Rea: While all these fantastic sales wins will take time to onboard and convert into recognized revenue, they are why we fully expect to grow organic revenue at the midpoint or higher of our 2% to 6% organic growth range over the medium to longer term.
John Rea: Moving to slide 10, we would like to provide more color on our second value creation priority, our commitment to consistently expand CSG's profitability.
John Rea: One of the most meaningful highlights this year is the high confidence we have in CSG's ability to continue to significantly expand our profitability and operating leverage into quarters and years ahead.
John Rea: We have shown continuous improvement in our non-GAAP-adjusted operating margin as it grew from 16.6% in 2022 to 17.2% in 2023.
John Rea: Looking ahead, we absolutely believe there's a clear pathway for CSG to consistently achieve 18% to 20% non-GAAP-adjusted operating income in 2025 and beyond.
John Rea: And it's important to note that this enhanced profitability is not coming at the expense of sales.
John Rea: Our continuously expanding profitability stems from our improved operating leverage at scale, our smart investment in AI, our ongoing cost efficiencies unrelated to sales and marketing, and our ability to grow higher gross margin SAS revenue faster than the rest of CSG.
John Rea: And as we generate higher non-GAAP operating margins in the quarters and years ahead, this should absolutely result in free cash flow growing much faster than revenue growth.
John Rea: Turning to slide 11, we will summarize our third value creation priority, our commitment to shareholder returns, and our ability to execute a creative value creating M&A.
John Rea: CSG is committed to returning over 100 million dollars in shareholder remuneration via share buybacks and dividends in each of 2024 and 2025.
John Rea: Discipline capital allocation and a dedication to returning capital to our shareholders is a cornerstone of our shareholder return strategy.
John Rea: Regarding our 1.5 billion dollar revenue ambitions by year-end 2025, it is possible that this goal may take us a little longer to achieve depending on the size of good value creating M&A deals that we find in the market over the next three to five quarters.
John Rea: We believe that CSG's stock price represents an excellent buy for both investors and for CSG. So we will stay balanced, disciplined, and focused on any strategic or financial move that the Board of Directors and management team believe will deliver the greatest value for our shareholders.
John Rea: On this front, we increased our share repurchase activity in Q3, buying back $15 million worth of CSG stock versus the $10 million we repurchased in Q2.
John Rea: When we set the $1.5 billion revenue goal in 2020, we knew about half of the revenue expansion would need to come from disciplined and accretive M&A. While we continue to assess qualified M&A opportunities, when our share price trades lower, the hurdle rate for good M&A deals gets that much higher.
John Rea: We are very pleased with the two smaller, highly creative acquisitions that we've closed so far in 2024.
John Rea: We were able to acquire both companies at highly attractive multiples. Both small tuck-in deals add highly profitable revenue for CSG, and with respect to integration, both deals remain well on track to deliver the value we expected in our M&A business cases.
John Rea: And on an organic revenue growth side, we have delivered on our commitment of approximately 5% annual organic revenue growth from 2021 to 2023, with significantly expanding profitability at the corporate level.
John Rea: Given these exciting business results and momentum, we hope you see why we absolutely believe that CSG's best days and biggest breakthroughs are still ahead of us. We are so grateful to every CSG-er for contributing to the transformation and growth of our company.
John Rea: As I wrap up my opening remarks, I want to be crystal clear on what we aspire to deliver to each one of our important shareholders.
John Rea: For CSG employees, we will continue to be a culture-first company centered on inclusion and impact, where every employee can be seen, heard, and valued, and where CSG becomes a platform for you to reach your fullest career potential.
John Rea: A giant thank you to all of you for the value you deliver every single day.
John Rea: For CSG customers, we will obsess over helping you solve your toughest business and technology challenges on the way to lowering your operating costs, wowing your end customers, and helping you grow your revenue even faster.
John Rea: for CFG Shareholders.
John Rea: While we realize we don't completely control our relative total shareholder returns, we absolutely believe you deserve to be rewarded with excellent across-the-board results, including faster revenue growth,
John Rea: higher operating margins, double-digit free cash flow growth, and above-market relative TSR performance.
John Rea: This board and management team will do everything in our power to try to make all this a reality sooner rather than later and Always with the operating discipline and high integrity you have come to expect from CSG no matter what
John Rea: With that, I'll turn it over to Hai, who will share more details on our good financial results.
Hai Tran: Thanks, Brian. Let's walk through our Q3 2024 financial results, and then I'll wrap up with some key conclusions.
Hai Tran: Starting on slide 13, we generated $295 million of revenue in Q3 versus $287 million in the same prior year period.
John Rea: The increase in revenue can be attributed to the growth of our fast and related solutions revenue in addition to the approximately six million dollars of revenue generated from the acquired businesses.
John Rea: which offset lower software and services revenue for the quarter.
John Rea: Also, as it relates to our top two customers, Comcast and Charter, we reported a 4% year-over-year increase in Q3 revenue.
John Rea: Please note that approximately $5 million of Q3 revenue was driven by non-recurring process implementations at Comcast.
John Rea: We do not expect this revenue to recur next year in Q3 2025 or subsequent periods. Our Q3 2024 non-GAAP operating income was $50 million, or a non-GAAP adjusted operating margin of 18.4%.
John Rea: As compared to $45 million, or 17.0% in Q3 2026.
John Rea: We are extremely proud of Team CSG's Operating Discipline that led to this 11% double-digit year-over-year growth in Adjusted Operating Profits.
John Rea: Similarly, our non-GAF adjusted EBITDA was $64 million for Q3 2024, or 23.4% of revenue excluding transaction fees, as compared to $60 million, or 22.3% in Q3 2023.
John Rea: Looking ahead, we expect our profitability metrics to further improve as we take significant cost efficiency actions in the first nine months of 2024 to optimize our capacity and better align TSU's resources to areas of our business that will deliver faster growth and higher operating profit in the quarters and years ahead.
John Rea: Lastly, our Q3 2024 non-GAAP EPS grew 15% year-over-year to $1.06, as compared to $0.92 in Q3 2023.
John Rea: This significant increase in non-GAAP EPS is mainly due to higher non-GAAP operating income and the lower share count partially offset by foreign currency movements.
John Rea: Turning to slide 14, I will go through the balance sheet, our cash flow performance, and shareholder returns.
John Rea: We had non-GAAP-free cash flow of $32 million in Q3 2024 as compared to $18 million of non-GAAP-free cash flow in Q3 2023.
John Rea: From a year-to-date perspective, we generated $37 million in non-GAAP-free cash flow in 2024 versus $29 million in 2023, a 25% year-over-year improvement.
John Rea: Going forward, we believe we have a significant opportunity to deliver between $110 million and $150 million of free cash flow in 2025 and 2026.
John Rea: Moving on, we ended the third quarter of 2024 with $118 million of cash and cash equivalents.
John Rea: That, along with our outstanding debt at September 30, 2024, results in $434 million of net debt. And our net debt leverage ratio remains at 1.8 times adjusted EBITDA.
John Rea: Further, we have $566 million in liquidity as of the end of the quarter.
John Rea: And on the bottom right-hand side of the slide, you can see we have returned $70 million in dividends and share repurchases to shareholders through the first nine months of 2024.
John Rea: Specifically, in Q3, we increased our share repurchase activity by buying 15 million dollars worth of stocks in the quarter versus 10 million dollars in Q2.
John Rea: Turning the page, I'll revisit our 2024 guidance targets.
Speaker Change: As Brian highlighted, for the second consecutive quarter, we are pleased to be increasing certain 2024 guidance targets, including our non-GAAP Adjusted Operating Margin Percentage,
Speaker Change: non-GAAP-adjusted EBITDA, and non-GAAP EPS.
Speaker Change: We are also reiterating all other guidance targets for the full year 2024. We continue to take disciplined cost reduction actions that will optimize and streamline our business while still investing in higher growth activities.
John Rea: We believe these cost efficiency moves will elevate CSG's profitability for years to come.
John Rea: With that said, the cost reduction steps we have taken, and continue to take, will result in some short-term impacts to our cash flows in 2024 due to restructuring expenses related to these initiatives.
John Rea: At this point, the cash impact from our restructuring activities in the first nine months of 2024 has been approximately $18 million.
John Rea: which means that our good cash flow performance through Q3 year-to-date would have been even better if we had not had this $18 million of restructuring hit our cash flow.
John Rea: As it relates to our $1.2 to $1.24 billion revenue guidance range,
John Rea: We will likely end up around the low end of the range.
John Rea: As the amount of revenue we expect to generate from our acquired assets in 2024 is anticipated to be more than offset by lower revenue expectations in our core business when compared to our original guidance expectations in February.
John Rea: Some of the main drivers of this include, one, we are seeing a little belt tightening with our current and prospective customers.
John Rea: Two, we're experiencing smallest headwinds in the North American broadband markets.
John Rea: And three, there are some services-based revenue recognition timing-related headwinds surrounding a couple of the larger global telecommunications deployments as we continue to implement these important projects.
John Rea: Because of this, we expect our 2024 organic revenue growth to be around the low end of our 2% to 6% range.
John Rea: even as we expect to deliver very strong profitability and free cash flow in 2024 and beyond.
John Rea: Wrapping up, we love what we see in our business and the results being reported by our operating discipline, R&D innovation, and ongoing sales models.
John Rea: CSG will continue to relentlessly prioritize every investment we make and stay very disciplined in the allocation of resources and the use of capital.
John Rea: Innovation, including how we leverage the transformative power of AI across the issues and an adherence to a risk-reward framework with continuous learning, are key cornerstones of how we have and will continue to grow top and bottom line results even faster.
John Rea: CSG is well-positioned with a strong sales pipeline and a high-quality recurrent revenue customization.
John Rea: We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating discipline, value-adding acquisitions.
John Rea: We believe this approach, combined with our consistent capital distribution, will serve our shareholders well.
John Rea: With that, I will turn it over to the operator to facilitate the question and answer session.
Speaker Change: At this time, I'd like to remind everyone, in order to ask a question, press star followed by the number one on your telephone keypad, and we ask that you please limit your questions to one and one follow up. Our first question will come from the line of Greg Burns with Sidoti. Please go ahead.
Greg Burns: Thank you.
Speaker Change: We'll see you soon.
John Rea: Hey Greg.
John Rea: Hi, just when we look at the
John Rea: the Comcast renewal
John Rea: It's not that you're able to get it done without...
John Rea: The number of subscribers declining over time, and they're moving down maybe tiers in terms of ...
John Rea: The level of service you're providing, so there's a little bit of a wash there in terms of what you're going to be providing prospectively. If you could give us any more color on the dynamics that drove the structure of the deal.
Speaker Change: No, happy to. Great, thanks. It was a fantastic, it was a win-win contract.
Speaker Change: There are no, we had a lot of questions when people saw the press release.
Speaker Change: Are there any kind of hidden steps down? The answer is no. It's a strong commitment across the board. We're going to continue to serve Comcast on all the triple play like we do today across almost all aspects of their technology stack supporting triple play. We support Comcast in a wide variety of use cases beyond triple play. That will continue. And the contract, it did not have a price increase.
Speaker Change: Adrian Tram心后来 跟着我说 We've been investing a lot and then the reason we didn't get a price increase day one Was we wanted to contribute to the strong competitive response? We've seen Comcast's bring forth in the market They posted excellent results in Q 3 and they talked about they think there's some headroom for growth in their own earnings call and what we try to do in this is
Speaker Change: is actually and sent them where they do more business with us.
Speaker Change: either on our more legacy stack or on our Ascendant platform, they could get economic benefit by doing more with this. I'd say stay tuned on that in terms of where it goes, but it is a win-win. There's no step down. There's no degradation of anything we're doing. And the reason for that is, is because we've invested heavily over the last six or seven years to just bring substantially more value to Comcast and our other large
Speaker Change: North American Cable Broadband Providers and they're seeing the benefit of that and they're rewarding us for that good investment and the good value that we'll bring into them. It's a fantastic contract, Greg, for us and for Comcast.
Greg Burns: Great. And then just in terms of maybe a little bit of a near-term slowdown, you mentioned in the core business,
Greg Burns: Can you just talk about maybe what what the pipeline looks like you know your view on Kind of maybe what's driving that in the near term what the pipeline looks like and your confidence and maybe
Speaker Change: Growth reaccelerating at some point next year.
Speaker Change: Yeah, no, so what we see is, I mean, I think first...
Speaker Change: We love what we're seeing in terms of our sales pipeline, the shape.
Speaker Change: The size, the coverage ratios, the progression through our six stages and coming out with high win rate on the back end. So that gives us a lot of confidence to reiterate we fully expect to be a 2-6% and we fully expect to be midpoint or higher in most quarters and in most years.
Speaker Change: What we, as Hy talked about, we just see the normal belt tightening. I think everybody's feeling it in the global economy, even as there's some positive things around interest rates and others. Every brand is trying to squeeze OPEX a little bit and try to put more to the bottom line. You see that with our own results. And that's what's contributing to a little bit of the slower growth period where we're at the bottom end of that range as opposed to being mid or upper end that we've done for three-and-a-half consecutive years. And so our best guess is, first, we typically have a big fourth quarter. Let's see how that comes. I mean, that's what we're working towards. We think this slower kind of just...
Speaker Change: John Rea, Brian Shepherd
Speaker Change: All right, thank you.
Speaker Change: Thanks Greg. Our next question will come from the line of Dan Bergstrom with RBC Capital Markets. Please go ahead.
Dan Bergstrom: Yeah, on the Comcast contract renewal, just any thoughts around the timing of the renewal? Maybe if you could share, you know, what are some factors that enable you to announce it now versus say, you know, six months from now, a year from now?
Speaker Change: Yeah, it's a good question, Dan. I mean, what we've been signaling the last couple quarters is this was possible, but, you know, Comcast had the pen on that on deciding when they wanted.
Speaker Change: and I think it kind of came down to one thing that laid the foundation for this is...
Speaker Change: We've performed extremely well in terms of uptime, in terms of value on both.
Speaker Change: the core platform they use for their core triple play and for the platforms they use for some of their digital businesses. We've invested heavily and that's brought significant value to Comcast and I think they recognize that and see that.
Speaker Change: I think secondly, you know, the fact that there was a commitment to put this renewal behind us.
Speaker Change: focus on how we can co-innovate together and actually bring more value as opposed to spending time, you know, negotiating around a negotiating table. And we did give them two meaningful concessions. We
Speaker Change: gave them no day one price increase.
Speaker Change: which
Speaker Change: You know, we've seen them raise price with their customers, we've invested, we thought it could be reasonable for us to get a price increase, we were willing to do a flattish contract.
Speaker Change: And we were willing to give them a no price increase starting Jan 1 as trying to help what
Speaker Change: John Rea, Brian Shepherd
Speaker Change: That's helpful, thank you. And then anything to point out around international trends this quarter? It seemed like Europe was maybe a little stronger relative to last quarter, APAC maybe a little softer relative to last quarter. Just anything to point out in those geographies?
Speaker Change: Yeah, I'll hit one and then I'll talk maybe a little bit more about just some of the pricing model transition you're likely to see.
Speaker Change: We are at an inflection point. The number of big cloud...
Speaker Change: John Rea, Brian Shepherd, John Rea, Brian Shepherd, John Rea, Brian Shepherd, John Rea,
Speaker Change: For a long time, we've been waiting for the market to be willing to run their core monetization in the cloud. That time is now.
Speaker Change: John Rea, Brian Shepherd
Speaker Change: Yeah, and I think that's right. I think what we're seeing is that we're in the midst of that transition as a business on the global telco side to be you know, more focused on SAS recurrent revenue with higher margins.
Speaker Change: and less reliant on the traditional services deployment model.
Speaker Change: And as we make that transition, you know, you feel some headwinds to growth on the services side and some tailwinds to growth on the staff side.
Speaker Change: So those headwinds, what the trade-off you're making is you're getting much greater visibility on the revenue, higher quality revenue because you've got higher recurring revenue, and you're seeing that kind of play itself out across different geographic regions.
Speaker Change: Thank you.
Speaker Change: Thanks Dan. Our next question will come from the line of Selima Rosenbaum with Stiefel. Please go ahead.
Selima Rosenbaum: Hi, thank you very much. I'm going to focus just a little on some of the tactical stuff this quarter, next quarter.
Selima Rosenbaum: Just there's a decent revenue step up even at the
Selima Rosenbaum: low-end of the range in the next quarter in 4Q24.
Speaker Change: And I was wondering if, you know, it's the same thing for EBIT and EBITDA. Is there anything that's flipped from 3Q into 4Q? Is there something...
Speaker Change: that you just have specific visibility into over there, if you can just give us a little insight as to where it is. I know there's normally like an 8 million step up or something like that, and here we're looking at something like closer to 20 million, I think.
Speaker Change: Thanks for joining us. The answer is yes. When we think about the sequential bridge, there are a couple of things that really play itself out. The first is the payments business, as you recall, the payments business.
Speaker Change: It has a little seasonality in it where Q4 is always the strongest quarter, traditionally. This year, it's compounded by the fact that we've made an acquisition on the payment side, right? So, you're going to see a compounding effect.
Speaker Change: with regards to that sequential uplift from Q3 to Q4, more so than you would traditionally.
Speaker Change: On top of that, one of the things that we highlighted is just some of the timing on the revenue recognition around some of these global telco deployments that we talked about. So some of the timing of that revenue recognition.
Speaker Change: will flow into, you know, from what would be the middle of the year towards the end of the year as well.
Speaker Change: Okay, and then just this really nice increase sequentially on the adjusted gross margin, is that a revenue mix type of thing? Is there something where there's particularly high revenue on that non-recurring Comcast stuff that you were talking about? I was just wondering if you can can discuss that a little bit.
Speaker Change: Yeah, I'd say there's two big drivers and then a smaller driver that we'll see contribute more over time. The smaller driver that will contribute more over time is as we continue to grow, we're gonna operating leverage, right? We're controlling our expenses.
Speaker Change: pretty tightly.
Speaker Change: took some actions earlier this year and then we took some further actions at the beginning of the third quarter and you're seeing the benefit of that as well. And then the last one is one that you alluded to, which is mixed, right, as our higher margin
Speaker Change: You know, SAS can grow faster than the other parts of our business. You're seeing the benefit of them next.
Speaker Change: Okay, thank you.
Speaker Change: Thanks
Speaker Change: Our next question comes from the line at Brighton O'Block with Kandra Fitzgerald. Please go ahead.
Speaker Change: Hi, this is Thomas Shenton, I'm for Brett. Thank you for taking my question.
Speaker Change: Can you point to anything specifically you're seeing in Q4, or I guess can you provide more details on the specific factors you guys are mentioning that are contributing to the margin expansion, whether it be through AI or cost optimization?
Speaker Change: That gives you the confidence to increase the adjusted operating income and adjusted EPS guidance.
Speaker Change: Yeah, no, hey Tommy, thanks for joining.
Speaker Change: Yeah, like Shlomo called out.
Speaker Change: You know, even though we're hitting some of these, you know, slightly slower revenue periods, if you kind of model out Q4, it does suggest...
Speaker Change: and even on an organic basis, we could be at the mid or upper end of the range we're trying to get to in Q4. So, obviously we're working hard to deliver a strong Q4. Specifically on the margin expansion, it is a combination not any one specific. AI obviously is contributing. We're seeing GitHub and the overall productivity at the engineer and R&D level contribute. We're seeing improvement in terms of our self-service by using AI across the board. We see it in various portions of our G&A business, just to constantly invest to get better in terms of what we're doing and to operate more efficiently. So, that's, I'd say, more some of what AI is contributing. We're also...
Speaker Change: covered. Again, John Rea, Brian Shepherd
Speaker Change: We go back to Q2 of 2022, we ran slow into a slowing period, and we learned from that, and we said we're never doing that again, and we believe we can, at operating scale with higher gross margins, we...
Speaker Change: can kick out a higher-operating...
Speaker Change: adjusted op margin which is why we raised it to 18 to 20 percent.
Speaker Change: We're just taking every dollar and either redirecting it to a higher profitability or redirecting it to a higher yield, whether that's sales and marketing, whether that's R&D, whether that's our G&A spend. And that operating discipline is starting to permeate through all parts of our leadership and our business, and it is here to stay. And we think we can do even more in the quarters and years ahead, but it's a mindset, constant quarter turns of the wrench to just constantly be more efficient and generate a higher yield and better cash flow. And obviously with the transition to SaaS.
Speaker Change: and higher gross margins that also should contribute to that as well. It's all of the above. Yeah, I think the only other thing I add specific to the fourth quarter, Thomas, is the, as I mentioned earlier, right, we have this compounding effect affecting our payments business.
Speaker Change: Joe Roberto, Sales Manager, Marketing and Marketing,patient care,
Speaker Change: perfect thank God thanks guys and then just one more if I may congrats on the extension with Comcast I guess what specific opportunities do you see over the next six years to expand within that relationship
Speaker Change: Yeah, I mean, what we've seen is, I mean, first,
Speaker Change: Tom Kast, along with Charter and many of our other customers, as innovative and industry-leading as it gets.
Speaker Change: And so, one is a mindset that I think we've really improved on over the last five or six years, which is a co-invention mindset. They do a lot of great innovation, including software development on their side, and they can leverage some of our great technology. So, this mindset, which says, let's put great people in a room and just think about how we can make it better. Obviously, we don't support them on the wireless.
Speaker Change: stage today, a competitor of ours does that. We try to, every day, show them with our great WIMs and wireless all around the world, that if they ever wanted to consolidate, like they consolidated 11 million subscribers in triple play billing a few years ago off that same competitor, we think we could bring them value. Will that materialize? Time will tell, you know, but obviously that's one that we would love to do for business.
Speaker Change: They're doing a lot in the content and the digital brand space with their Comcast Now and others obviously we support some of
Speaker Change: those various use cases, and we'd love to continue to do even more. So I would just say, stay tuned. As long as we bring value, we're always up and bringing them more reliability and resiliency and just being easier to do business with.
Speaker Change: Typically it works out well, so I'd say stay tuned.
Speaker Change: Great, thank you.
Speaker Change: Thanks, John.
Speaker Change: Our next question comes from the line of George Notter with Jeffries. Please go ahead.
George Notter: Hi guys, thanks very much. I have a question on the CX and payments businesses. I think in the past you guys have talked about them in the context of rule of 40 businesses. I guess I'm curious if that's still the case. And then also I saw from the presentation I think the two businesses in aggregate are
Speaker Change: I guess I should be careful here. Your non-cable, non-telco business is about 30% of sales and I think you're to Dave's with the presentation references. I assume that's also true for Q3. Any insight there would be great.
Speaker Change: Yeah, I think on a Q3, you'll probably see it in the detail, it's 29%.
Speaker Change: Little bit of timing just but we see strong growth across the board last quarter We were 31, but overall we're progressing at a really nice rate
Speaker Change: and we have high expectations and aspirations. We should be able to continue to expand up towards 35% in 2025 and 2026 as we grow into maybe 12 to 24 months out, just a steady progression like we've done the last five or six years.
Speaker Change: High Single Digit, but fully expect that. We think that's more timing, as I talked about, typically Q2, Q3, a little more seasonality, but we love what we're seeing in the business overall and expect it to be a strong double digit over the medium to longer term. And I think what we talked about last year for that individual piece, it was just slightly below. It was more in the rule of 30s range, and that's kind of where that business is operating.
Speaker Change: Hi, is there anything else you want to add on that? No, I think that's right. The expectation is that...
Speaker Change: You know, the slowdown on the organic slowdown on the pavement is temporal in nature. And so as we kind of look to next year, we still expect that business to get back to double-digit organic growth.
Speaker Change: And then just a quick follow-on there, can you just remind me the M&A contribution in these businesses? I think ICG Pay and then I think you had another acquisition in the insurance vertical, but can you remind me how much revenue comes from those deals in 2024?
Speaker Change: There's roughly $6 million in the court.
Speaker Change: in 24. Okay.
Speaker Change: And how much do you got for him?
Speaker Change: Thank you. Bye.
Speaker Change: Yeah, it's high single digits for the full year. I'll get you that number, but it's specifically $6 million for the quarter.
Speaker Change: Got it. Okay, got it. And then I think both those deals are around mid-year in terms of when you close them. So, you know, loosely, if we can scale it up for next year, another probably ...
Speaker Change: Six, eight million bucks, I would imagine, in terms of next year's contribution.
Speaker Change: You're not that far off.
Speaker Change: Okay, super. Thanks guys. Appreciate it
Speaker Change: Thanks George.
Speaker Change: Our next question comes from the line of Matthew Harrigan with Benchmark. Please go ahead.
Matthew Harrigan: Thank you. I guess this is more or less the tertiary piggyback off some of those questions on margins.
Matthew Harrigan: I'm sure that you're not going to hire Elon Musk as your efficiencies are after he lays off 80% of the total workforce, but can you give any
Matthew Harrigan: More specificity.
Matthew Harrigan: on your cost composition in terms of labor and such. And also, it seems like there's such a high level of familiarity between yourselves and Comcast.
Matthew Harrigan: and Sharder. I'm sure they understand the economics of your business and to some extent any of those long-term contracts they're probably somewhat of a gaining function on your on your margin increases.
Matthew Harrigan: given that that's still a heavy chunk of revenues.
Matthew Harrigan: But is it natural to think that, you know, as you hopefully go even beyond 35 and exponent really continues to grow.
Matthew Harrigan: You're just going to see a...
Matthew Harrigan: Pretty continual reset, upward reset.
Matthew Harrigan: on that margin creep, even if it's always gated somewhat by the great relationships you have with Comcast and Charter.
Speaker Change: Yeah, I think there's a couple. Hey Matt, I hope you're doing well. Thanks for joining. I think there's a couple different concepts in there. First, when we elevated our range to 18 to 20 percent, we absolutely expect in 2025 and 2026 and beyond to be in that range. That would be 0.1 and we love what we're seeing in the business and our ability to deliver against that aspiration.
Speaker Change: Secondly, we think that there can be this consistent
Speaker Change: quarter turns of the wrench to just constantly get better in the
Speaker Change: over a several-year period, we would not expect to be hovering at the low end of that range. We would expect to be progressing.
Speaker Change: Here you see.
Speaker Change: Uh.
Speaker Change: Good Renewals and the position we're in with our big two or three and some of the other big customers is Partly we're reaping the benefit of that from the R&D we invested in 2018 2019 2020 early parts of this decade is We've now made those investments that's bringing them huge value and it can actually then generate nice Profitability for us and it's a win-win for both of our customers and for us So we don't see any of our customers necessarily as a drag on our ability to expand operating margin Just like they do in their business
Speaker Change: If you invest well and you innovate well, typically you're rewarded on both top line and bottom line. And that's how we're trying to build our business model with this product-based approach.
Speaker Change: Great, thanks Brian.
Brian Shepherd: Thanks, Pat.
Brian Shepherd: Our next question comes from the line of
Pat: Thank you.
Speaker Change: Yeah, thank you. Hey, have all the non-Comcast wins signed in the quarter and then separately year-to-date?
Speaker Change: Can you give a sense as far as what's the annual contract value of these signed? I recognize that a lot of these are to ramp over to future quarters. So just getting a sense of what that annual contract value is and thus why it will drive towards the midpoint of your long-term growth.
Speaker Change: Yeah, hey Neal, I hope you're doing well. We don't provide the ACV. I guess we'll take that under advisement if we decide to disclose that in future quarters. Those wins, to be clear, that we shared on the slides,
Speaker Change: were
Speaker Change: Q3 year to date. They were not just Q3 wins. I think we called out in some of the commentary the wins that we did have in Q3 specifically.
Speaker Change: But overall, when we look at the performance on both an annual contract value ACV and a total contract value TCV standpoint, we track both in our sales methodology. We're performing well this year, and we like where we are in our ability to do it. So I think those are some of the factors, including the renewals, including some of the volume expansions in some of the business areas that we have that are more SAS in nature that contribute to why, as we work through this,
Speaker Change: several quarter, kind of just slower growth period, what gives us the confidence to get back to that mid-point 4% or higher organic growth going forward?
Speaker Change: Okay. And then, hi, you're raising adjusted EBITDA for calendar 24 but not free cash flow. Walk us through what that is.
Speaker Change: A big chunk of that is because, as you recall, you know, and then as I mentioned
Speaker Change: We've taken some difficult decisions to drive efficiency and as a result of those difficult decisions What you have is you end up with restructuring charges That are that are cash in nature, right? And that's a headwind of free cash flow. So it's a near-term headwind of free cash flow over the long term It will be a tailwind of free cash flow
Speaker Change: Got it. Understood. Thank you.
Speaker Change: Yep.
Speaker Change: We'll take our final question from the line of Maggie Nolan with William Blair. Please go ahead.
Speaker Change: and John Rea. Thank you. Thank you.
Maggie Nolan: Thank you. On the increase in margin guidance, none of the levers that you outlined were necessarily incremental to what you've spoken about in the past. So is there any more detail you can share with us on what specifically surprised you to the upside to allow you to increase guidance? And maybe what is the magnitude of each of those levers in the future that would drive you into that 18 to 20 percent range?
Speaker Change: Yeah, I think Maggie, I think that's not so much what surprises us. I think it's us hedging the timing, right? Like when you take, you know, some, you make some difficult decisions, you know...
Speaker Change: We need time to really think through the ripple effects of those decisions, and so where there was uncertainty, there was uncertainty around timing, and how much of that we'd be able to realize this year.
Speaker Change: that as we got through the third quarter, we were able to execute on it, you know, faster than we originally thought we might. I think hence the benefit we're feeling in New York to some of those actions that were taken.
Speaker Change: Right, and so that that's really more context. You know as we look to next year right part of it is
Speaker Change: kind of that continued discipline. I think there's more opportunities for us to continue to drive efficiencies in the business across all of our businesses.
Speaker Change: Plus mix will come into play quite meaningfully and then lastly, you know at some point when you think about kind of the SG&A piece You know, you know, there can be some meaningful operating leverage as we continue to grow our high margin business
Speaker Change: Other vertical in particular, are customers within that vertical coming to you and asking for vertical specific knowledge or offerings or solutions, and do you have the ability to kind of tailor that as you attempt to continue to scale those end markets?
Speaker Change: Yeah, no, it's a great question, Maggie. I mean, as we gave some color commentary, the fact that we focus on that post-purchase
Speaker Change: Digital Customer Engagement, you see a lot of similarities across, which is what gives us the credibility and why we are ranked as a leader.
Speaker Change: multiple quadrants.
Speaker Change: And so I think that is what's driving a big chunk of the win rate, but then yes, as we do more in financial services, we do work with three of the largest pharmacy retailers, as we do more in insurance.
Speaker Change: and Big Tech, we are starting to build in more industry vertical specific domain that is helping us actually scale those those verticals out and then look for add-on cross sell and upsell. And the nice thing about these SaaS solutions is typically we can get in with a great ROI that rings the cash register for them with a quick payback.
Speaker Change: With anywhere between half a million and two million dollars, so it's a relatively Cost-effective entry point from a price and then we can expand those extremely quickly as we deliver value
Speaker Change: And so, we're not limited by the fact that we haven't had decades of experience in those verticals because we do know the targeted value props, but then we're starting to build out those domain expertise as well.
Speaker Change: Thank you.
Speaker Change: And with that, I'll turn the call back over to Brian Shepherd for closing remarks.
Brian Shepherd: Hey, thanks everyone for joining. Hopefully you see why we're excited about what's going on in the business. 11% year-over-year growth in adjusted operating margin, 15% year-over-year growth in EPS, 25% year-over-year growth in free cash flow, and we think we can do better. We're proud of the quarter. We're going to continue to work on delivering greater value and improve results in the quarters and years ahead. Look forward to seeing you and talking next quarter.
Speaker Change: That will conclude today's meeting. Thank you all for joining. You may now disconnect.