Csg Systems International Inc Q2 FY2023 Earnings Call

Good afternoon, ladies and gentlemen. Welcome to the CSG Systems Q2 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. And please be advised that this call is being recorded. After the speakers' prepared remarks, there will be a question-and-answer session. Please follow the operator's instructions.

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 into the information used by our management team in our financial and operational decision-making. For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me today on the phone are Brian Shepherd, Chief Executive Officer; and Hai Tran, Chief Financial Officer. With that, I'd like to now turn the call over to Brian.

Thanks, John. Hi, everyone. We appreciate you joining the call as we begin on Slide 4. CSG had a fantastic start to 2023, with excellent results in both Q2 and the first half. We posted 9.2% year-over-year revenue growth in the second quarter and 11.1% double-digit revenue growth for the first half of 2023, both coming from 100% organic growth. Our performance over two quarters was the best first-half results we have posted in nearly two decades. Our Q2 non-GAAP adjusted operating margin was 16.2%, a nice step up from the 15.1% we reported in Q2 2022. Combining Q1 and Q2, it means Team CSG delivered 17.8% non-GAAP adjusted operating margin in the first half of 2023, which reinforces our commitment to maintaining good operating discipline and expanding our operating leverage over time. CSG also grew bottom-line non-GAAP EPS in the first half to $1.84 per share, which represents 7.6% year-over-year EPS growth, even as we had to offset much higher interest costs so far in 2023. Based on our strong first half, we are pleased to raise our full-year 2023 guidance. We are raising our revenue guidance to range from $1.15 billion to $1.175 billion, which means we've raised the bottom end of our revenue guidance by $20 million and the top end by $5 million. The midpoint of the new guidance now reflects a 6.7% year-over-year organic growth in revenue. We are raising our full-year 2023 non-GAAP adjusted operating margin percentage to range from 16.75% to 17.1%, up from the prior 16.5% to 17% range. Hai will share more details on all our revised guidance momentarily. In addition to reporting fantastic growth in raising our full-year 2023 guidance, we're also announcing a new $100 million share repurchase program which will run through year-end 2024. At the end of the day, our faster revenue growth was fueled by strong ongoing market demand for CSG's industry-leading SaaS products and good sales performance. CSG's sales pipeline is large and healthy as we win and wow big new customers in a wide variety of faster-growth industry verticals. I will share more details on several exciting Q2 customer wins in a few minutes. One question I often get from investors is whether we see any softening in market demand globally given higher interest rates and the risk of global economic slowdown in late 2023 or the first half of next year. While we continue to see good demand signals in customer buying behavior globally, I would share that almost all our customers are preparing for possible rainy day scenarios over the next four to six quarters. Based on what we see today, we continue to believe that CSG can grow organic revenue, consistent with our long-term 2% to 6% range as we strive to be at the midpoint or higher of this range in most quarters and years. So as CSG continues to focus on delivering sustained mid-single-digit organic revenue growth or higher, like we posted in both Q1 and Q2 2023, we're also taking timely disciplined steps to keep our operating margin healthy and growing faster than revenue regardless of how global economic conditions unfold in the coming years. I would like to give a giant shout out for our fantastic Q2 results to CSG's nearly 6,000 global employees, of which over 50% now live and work outside the U.S. Having the majority of our employees residing outside the U.S. is not a coincidence. When I was announced as CSG's next CEO in Q3 2020, one thing was crystal clear to our Board of Directors and to our Executive Leadership team: for us to elevate into a faster growth, more profitable, more relevant, and more diversified SaaS technology leader, CSG needed to become a more talent-rich, globally diverse company. A fantastic example of how our global team is executing on this is CSG India being named one of the top 100 Best Companies to work for in India in 2023, which we publicly announced in June. The success and momentum we're seeing in the first half results are 100% attributable to the dedication, talent, and innovation of CSGers all around the globe. We will continue investing in our people, our products, and our customers to grow revenue faster while we simultaneously expand our operating margins as we achieve meaningful size and scale in the years ahead with excellent operating discipline. Turning to Slide 5, I will reiterate the four strategic objectives that will help CSG create more shareholder value and allow followers of our story to track our progress. As I just shared, CSG aspires to deliver long-term organic revenue growth in the 2% to 6% range, striving to consistently be at or above the midpoint of this range. That is why we're so pleased to see the midpoint of our revised 2023 revenue guidance sitting above the top end of this range at approximately 6.7%. We aimed at operating scale and expand our operating leverage by growing revenue to $1.5 billion by year-end 2025, with the bottom line growing as fast or faster than top-line growth. This scale will come from a combination of good organic revenue and sales growth combined with disciplined inorganic moves. Further, we strive to be the number one SaaS provider of choice for global communication service providers, by providing the most value-adding technology platforms and by being easier to do business with than our competitors. And finally, we plan to diversify revenue even more as we win big in faster-growth industry verticals like retail, government, financial services, healthcare technology, and more. Moving to Slide 6, you can see that we delivered against all four objectives with our excellent start in the first half of 2023. On strategic revenue growth, we reported $585 million of revenue for the first half of 2023, resulting in an 11.1% year-over-year growth. Our best first half results in nearly 20 years. On the right-hand side of Slide 6, we believe that CSG's high recurring revenue SaaS business model and our strong, healthy balance sheet make us an attractive investment. By 2025, we aspire to gain scale in the markets where we compete and generate $1.5 billion in annual revenue, which implies that CSG will have added over $0.5 billion in profitable recurring revenue from 2020 to 2025. Over the medium to long-term, we aspire to expand CSG's operating leverage and use our strong balance sheet to deliver non-GAAP EPS growth that meets or exceeds revenue growth. On this last point, I will continually reinforce a key principle for the CSG Board of Directors and management team. Investors can be assured that team CSG is laser-focused on creating shareholder value and earning the right to grow profitable revenue faster, not adding empty revenue calories. We will maintain a disciplined high return on invested capital mindset as we explore a wide range of strategic moves to create more shareholder value. Turning to Slide 7, we had good successes in the first half of the year on our goal to be the number one technology provider of choice for communication service providers globally. Our continued success with both North American and global CSPs proved that we are executing well against this strategic priority. It is great to see that CSG grew revenue at our two largest North American broadband cable customers by approximately 7% year-over-year in Q2 2023. This result was partially driven by the migration of subscribers at Charter from a competitor's billing system over the last 12 months, but we also saw good growth coming from business expansion in other areas with our two largest customers as we help them solve many of their most important business objectives. With respect to new logo wins, we recently announced a great new deal with ATN International, a leading provider of digital infrastructure and communication services. Team CSG will modernize their networks with our mediation roaming settlement products. This will enable ATN to automate mediation and wholesale settlement workflows and access real-time performance data to better align resources and to more quickly react to changing business needs. We continue to win more business in the wireless telecom market. During the quarter, we announced a fantastic new deal with PLDT, the Philippines' largest fully integrated wireless operator. PLDT is expanding its two-decade partnership with CSG as it embraces the power of the cloud to bring its wireless business into the future and transform its customer experience, particularly for its enterprise unit. This large-scale revenue management and BSS transformation empowers PLDT Enterprise with a cloud-based unified billing and revenue management solution that enables streamlined processes across its business segments, minimizes cost and shortens time to market. Plus, this is the latest example of us serving our customers in an environment of their choice, this one is an Amazon Web Services cloud-based solution. A few weeks ago, we announced the completion of our digital BSS transformation project with Airtel Africa, a leading telecommunications and mobile money service provider with almost $140 million wireless subscribers across 14 countries in Africa. With CSG's unified revenue management solution, Airtel Africa is primed to streamline processes across its business, minimize cost, and shorten time to market, while delivering digital experiences to drive customer loyalty and sustainable business growth. Turning to Slide 8. Since 2017, we have diversified our revenue coming from exciting new industry verticals from 7% of total 2017 CSG revenue to 28% of our first half 2023 revenue. A fantastic accomplishment in a relatively short amount of time. We are a partner of choice for big brands in higher growth industry verticals where we will help our customers digitize and modernize their customer experience and provide them with cutting-edge integrated payment solutions. Both solutions delivered good double-digit organic revenue growth and continued to be game changers for CSG and our customers during the first half of 2023. During the second quarter, we expanded our customer experience business with NRC Health, one of the nation's largest healthcare performance improvement firms, supporting more than 7,000 organizations. We are enabling NRC to execute a digital multi-channel communication strategy in a streamlined, effective, and scalable manner. Another nice Q2 win was a contract expansion with one of the world's leading technology firms. We are deploying our AI-powered digital CX solutions to provide their customers self-service capabilities in the voice channel. These solutions will help reduce the number of contact center calls, lower the number of agent-to-agent phone transfers, and limit the number of repeat customer call center contacts. This is an excellent example of how CSG's AI-driven digital CX SaaS platforms help big exciting brands improve customer experience and save operating costs. In Q2, we landed a good contract with a bundled utility service provider for municipal and private utilities to support various customer engagement initiatives. This deal expands our footprint in the utility industry and is another example of how our customer experience suite of products is finding use cases across multiple industry verticals. In the payments market, our continued double-digit revenue growth is a testament to our industry-leading SaaS integrated payments platform. We now provide award-winning payment solutions to approximately 106,000 active merchants and ISV partners, who need ACH, credit card, payment gateway, and payment processing capabilities serving a wide range of recurring revenue industry verticals. In July, we were recognized by the Strong Hacker Group as having the best payment API set in their Annual Best of Breed Award showcase. As a leader in ACH processing, we continue to add scale by signing ISV partners in faster-growing industry verticals like property management. I will wrap up on Slide 9 before turning it over to Hai. Fiscal year 2023 is off to a fantastic start. We grew first-half organic revenue double digits on a year-over-year basis. We continue to win fantastic new customer logos, quarter in and quarter out in addition to growing revenue nicely at our two largest customers. We continue to diversify our business with over 28% of revenue coming from big, faster-growing industry verticals like healthcare, financial services, retail, tech, and government. We continue to demonstrate our commitment to running our business more efficiently, with first-half non-GAAP adjusted operating margins in the high 17% range. Our message to our three key stakeholders is clear. To our employees, CSG's best days and biggest breakthroughs are still ahead of us. We will keep dreaming big and demanding even more from our collective global talent as we do whatever it takes to turn our giant dreams into reality. To our customers, CSG is here for you. We are dedicated to being easier to do business with than any of our competitors while solving your toughest business and technology-related challenges. We thank you for your continued trust in CSG. To our shareholders, CSG's transformation is just getting started. Faster recurring revenue growth, improved operating leverage, and exciting industry vertical diversification are what this management team and our Board of Directors will hold ourselves accountable to. We will do it with a high level of integrity, focused execution, and good governance that you've always come to expect from CSG. With that, I will turn it over to Hai to provide more detail on our Q2 and first-half results as well as our revised guidance targets for 2023.

Thank you, Brian. Let's walk through our Q2 and first-half 2023 financial results and then I'll wrap up with some conclusions. Starting on Slide 11, we generated $585 million of revenue in the first half of the year, which represents 11.1% year-over-year growth, all of which was organic. The strong first half revenue increase was primarily attributed to the continued growth of CSG's revenue management solution including the conversion of customer accounts onto CSG solutions, other ancillary services, and increased payment volume. As we mentioned on our Q1 earnings call, some of the revenue uplift we recognized in Q1 was related to the timing of certain license-oriented deals moving from Q4 of 2022 into Q1 of 2023. The growth we saw in 2023 was also due to converting millions of subscribers off of a competitor at Charter over the last 12 months. Even when excluding both of these items, our first half revenue growth rate was still higher than the top end of our long-term organic revenue growth range of 3% to 6%. Our first half 2023 non-GAAP operating income was $96 million, or a non-GAAP adjusted operating margin of 17.8%, as compared to $77 million, or 15.7%, in the prior year. The increases in non-GAAP operating income and non-GAAP adjusted operating income margin percentage can mainly be attributed to the higher revenue and improved operating leverage we achieved as we grow faster. Moving on, our non-GAAP adjusted EBITDA was $124 million for the first half of 2023, or 22.9% of revenue excluding transaction fees, as compared to $106 million for 21.7% in the first half of 2022. Lastly, our first half 2023 non-GAAP EPS was $1.84 as compared to $1.71 in the first half of the prior year, representing a 7.6% year-over-year growth. The increase in non-GAAP EPS is mainly due to the higher operating income in the quarter, offset by higher interest expense and foreign currency headwinds. Turning to Slide 12, I'll go through the balance sheet, cash flow generation, and shareholder returns. Our first half 2023 cash flow from operations was $28 million as compared to a negative $13 million in the first half of the prior year. Further, we had non-GAAP free cash flow of $11 million in the first half of 2023 as compared to a negative $33 million in the first half of 2022. The primary driver of this increased cash flow performance was favorable working capital changes driven by accrued employee compensation and deferred revenue. We continue to anticipate our full-year 2023 free cash flow to range from $80 to $120 million as we anticipate strong operating performance and working capital benefits in the second half of the year. Moving on, we ended the second quarter with $146 million of cash and short-term investments. That, along with our outstanding debt at June 30, 2023, results in $281 million of net debt, and our net debt leverage ratio sits at 1.2x of adjusted EBITDA. As a reminder, our capital structure is currently 100% floating rate, but we continue to explore potential ways to balance and optimize our exposure to interest rate volatility. Moving to the bottom right of the slide, we declared $18 million in dividends during the first half of 2023. During the first half of 2023, we did not repurchase any stock under a repurchase program, but as Brian mentioned in his comments, we are excited to announce a new $100 million share repurchase program that will run through year-end 2024. Turning the page, I'll provide my insights on the raise we are making to our 2023 financial guidance target. The key highlights are: one, we are raising revenue guidance from $1.15 billion to $1.175 billion, which means we raised the bottom end of our revenue guidance by $20 million and the top end by $5 million. The midpoint of the new guidance now reflects a 6.7% year-over-year organic growth in revenue. Secondly, we are raising full-year 2023 non-GAAP adjusted operating margin percentage to 16.75% to 17.1%, up from the prior 16.5% to 17% range. We are also tightening our non-GAAP EPS range to $3.43 and $3.58, which still results in the midpoint of our non-GAAP EPS guidance remaining at $3.50, the same as before. In summary, CSG will continue to relentlessly prioritize every investment we make and stay disciplined in the allocation of resources and the use of capital. Innovation and an adherence to a risk-reward framework with continuous learning are key cornerstones of how we manage the business. Our business is well-positioned with a strong sales pipeline and a high-quality customer base. We are also heavily focused on cross-sell opportunities within our existing customer base. Today, approximately half of our top 20 revenue customers take either digital customer experience or payment solutions from us. We remain committed to accelerating and diversifying our revenue growth, which fame through closing and integrating disciplined value-added acquisitions. We believe this approach, combined with our consistent capital distribution, will serve our shareholders as well. With that, I'll turn it over to the operator to facilitate the question-and-answer session.

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

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

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

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

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

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

Great. Thanks for the update.

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

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

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

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

Yes, I'll start, and then I'll have Hai kind of add more color from his vantage point. First, we see operating leverage in a couple of different dimensions. We've been trying to redirect every dollar we spend into what can deliver faster revenue growth or provide better value to our customers all around the world. If we can continually do that and get more efficient inside our four walls, directing our investments towards ones that will deliver a faster return, that should drive ongoing acceleration of both top-line revenue growth and bottom line. Secondly, we have a commitment where we want to grow the bottom line, whether that's non-GAAP operating margin, EBITDA, and EPS, faster than revenue growth, which means we've got to create operating leverage across both the investments we make in R&D and SG&A. Lastly, we talk a lot about the goal of getting to $1.5 billion to drive scale so that we can also create operating leverage as we grow in size. There is a strong focus across all those dimensions on both the organic and inorganic sides to ensure we're succeeding. Hai, do you want to provide any additional insights?

Yes, I mean, I think that's right, Brian. Our internal mantra is a commitment to growing our expenses more slowly than our revenue. That is something we think about on a daily, weekly, and monthly basis here at CSG. To achieve that while still fostering growth in the business, we spend a lot of time prioritizing our resources, considering the impact they’ll have. We evaluate where we allocate resources and where we will invest that yield the largest impact on the business itself.

Okay, thank you.

Thanks, Nehal.

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

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

Yes, thanks for joining, Shlomo. I really appreciate the question. Hai will provide a bit more detail, but EPS is an area where, despite good growth in the first half over last year, we'd like to do better on and that's something we constantly look to improve. The drag on EPS is primarily coming from two factors for full-year 2023: one is the 100% floating debt with higher interest rates, amounting to over $32 million in interest costs for the year, and the second is foreign exchange impacts as the U.S. dollar has created a hit. Overall, between interest expense and Forex combined, we could take a hit of about $0.14, $0.15 per share on EPS that creates some headwinds. We've got to grow faster on the top line, maintain strong operating profitability and work on managing the interest costs down, which I think are now approaching just shy of $35 million. Hai, do you want to provide more color?

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

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

Yes, I think, Shlomo, you hit the nail on the head. It is a couple of different factors. We have some large global Telco projects that we're in the midst of, which are strategic opportunities for us to gain very robust and healthy long-term customers that will provide a tailwind to our business for many years to come. But in the interim, as we get those projects underway, there are milestones tied to the cash flow, and those milestones will begin to hit in the second half of this year. Additionally, there's some timing around CapEx and working capital. This year, our cash position is much better than last year, but we see a similar dynamic in terms of back-half weighting on our free cash flows.

Okay, great. Thank you.

Thanks, Shlomo.

We go next now to Matthew Harrigan at Benchmark Company.

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

Thanks, Matt. I appreciate you joining us today. Yes, the core of our CSG Xponent, which has a lot of applicability across industry verticals, is fundamentally a decisioning engine that takes the data our customers have and helps them harness that in real-time to provide next best action capabilities for onboarding new customers, cross-selling, upselling, or deflecting customer engagement calls. It can drive revenue and offset operating costs and improve their overall customer NPS scores. That's the core of what it does. Wrapped around that are targeted use cases for each vertical that make it easier to implement and achieve faster ROI, even in a more bumpy economic environment. It has such a strong return that it often pays for itself quickly. We're continually working to enhance that decisioning engine and the analytics capability we provide to our customers, tailored with specific use cases. In financial services, we see digitization in various loan types and payments and notifications. In retail, we improve experiences for pharmacy retailers around prescription notifications and abandonment. Regarding big tech, we help with contact center routing that can significantly reduce business costs and speed up issue resolution for customers. It's primarily an AI-driven decisioning and platform providing value through targeted use cases. Our goal is to expand those use cases and become even more specific in different verticals, selling directly but also engaging our channel partners, as they can incorporate our solutions with additional capabilities and services. This is a significant focus so that we can turbocharge this part of our business.

So given that and the resilience and predictability of the billing business, where would you expect to get impacted if we face a mild recession in the U.S. or possibly a worse situation in Europe?

Yes, it's hard to predict exactly where it may impact us. That's the balance we discussed in the earnings call. We see every customer looking to find ways to cut costs just as CSG does, but thus far, what has held up well is our accelerated revenue growth. If their spending with CSG helps them enhance revenue or reduce operating costs or improve customer interactions, then those expenses are generally not the ones being cut as they try to streamline operations and improve expense management. I don't think there's one specific industry vertical or one geographical region that would be more at risk. We must continue to demonstrate the value and ROI that we can drive. If we do that, we will maintain good organic growth moving forward. Additionally, we are working diligently to remain disciplined and ensure that we grow our operating expenses slower than our revenue, as Hai mentioned earlier.

Congrats on the numbers. Thanks.

I appreciate it, Matt. Hai, anything else you would like to add regarding our approach to managing growth while preparing for potential imminent slowdowns?

I think you covered it, Brian. Our objective is always to develop tools and capabilities that are data-driven, enabling us to identify both financial and non-financial trends in data, providing early warning indicators that assist us in identifying risks and quickly adjusting our cost structure as needed. This is an ongoing effort, as Brian noted, which requires constant visibility in the business.

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

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

No, hey Brett, hope you're doing well. Thanks for joining the call. Great question. No, it doesn't change anything. Our three main priorities that we try to be pretty consistent on every call and interaction are: one, maintaining our dividend growth, we've historically raised it 6% annually like clockwork for over a decade as an Aristocrat dividend provider; secondly, scale through value-adding acquisitions to create scale and operating leverage in our business; and third, to offset executive base compensation dilution with share buybacks. If we find an opportunity where we believe our stock is undervalued and can deploy capital effectively, we would respond as we did with our large share buyback in 2022. That will not change, and we see opportunities to execute this across the board.

Got it. Understood. And then just on the EPS guidance, you raised revenue guidance and margin guidance across the board, but kept the midpoint of EPS and free cash flow unchanged. Should we interpret that as any EPS improvement being offset by higher interest costs or is there something else at play that would have led to not raising the midpoint there?

Good question. Hai, would you like to address that?

Yes, that's correct. We are observing improved performance in the underlying business, but those improvements face headwinds from both higher interest costs and currency fluctuations, which negate some of those benefits. As Brian mentioned previously, that’s around a $0.14 headwind this year for us.

Perfect, understood. And then just on the payments side, it seems like that's still growing quite robustly. But if we break out first half revenue growth of 11% and second half implies closer to 3%-3.5%, could you help clarify the differences driving the growth discrepancy between the first half of this year and the second half?

Yes, we don't break out the specifics, but I'll help clarify a little. Our first half experienced just a little over 11% year-over-year organic growth, with two primary contributors driving this: the conversions at Charter and the one-time licenses. If you neutralize those out, you find core business growth still exceeding the 6% mark, showing signs of solid growth potential. All of our units are contributing to good growth. We fully expect both our payments segment and digital CX to consistently see strong double-digit organic growth, backed up by significant growth opportunities in North American cable as well as the global telecom sector on both the consumer and enterprise sides as we continue to win more large wireless deals. We aim to further expand our faster-growing units while maintaining good growth in our core cable and telecom businesses.

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

Thanks, Brett.

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

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

Yes, hey Dan, thanks for the question. Thanks for joining. Hope you're doing great. We love the question. Yes, that is something that we try to raise to our good customers and the execs at both Comcast and Charter. We do not serve their wireless businesses with our BSS platforms. We respect that our customers often use different vendors for different parts of their business. However, we do try to provide business cases for why it could make sense to consolidate. Currently, these platforms are separate, and customers receive two bills for their broadband and mobile services. Although we work with Comcast and Charter, alongside one of our competitors, to deliver a strong customer experience, we believe that consolidation could offer more value over time, though the choice is ultimately theirs.

Got it. Thank you so much.

Thanks, Dan.

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

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

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