Earnings Call Transcript - CSGS Q2 2025

Operator, Operator

Welcome, ladies and gentlemen, and thank you for standing by. My name is Chris, and I will be your conference operator for today. At this time, I would like to welcome everyone to CSG's Second Quarter 2025 Earnings Call. I would now like to turn the conference over to John Rea. You may begin.

John Rea, Investor Relations

Thank you, Operator, and thanks to everyone for joining us. Like last quarter, we will be working from a slide deck, which can be found on the Investor Relations section of our website. Please take a moment to locate these slides. Today's discussion will contain a number of forward-looking statements. These include, but are not limited to, statements regarding our projected financial results, our ability to meet our clients' needs through our products, services, and performance, and our ability to successfully integrate and manage acquired businesses in order to achieve their expected strategic, operating, and financial goals. While these risks reflect our best current judgment, they are subject to risks and uncertainties that could cause our actual results to differ materially. Please note that these forward-looking statements reflect our opinions only as of the date of this call, and we undertake no obligation to revise or publicly release any revision to these forward-looking statements in light of new or future events. In addition to factors noted during this call, a more comprehensive discussion of our risk factors can be found in today's press release as well as our most recently filed 10-K and 10-Q, which are all available in the Investor Relations section of our website. Also, we will discuss certain financial information that is not prepared in accordance with GAAP. We believe that these non-GAAP financial measures, when reviewed in conjunction with our GAAP financial measures, provide investors with greater transparency to the information used by our management team in our financial and operational decision-making. For more information regarding our use of non-GAAP financial measures, we refer you to today's earnings release and non-GAAP reconciliation tables on our website, which will also be furnished to the SEC on Form 8-K. With me today on the phone are Brian Shepherd, Chief Executive Officer; and Hai Tran, Chief Financial Officer. With that, I'd like to now turn the call over to Brian.

Brian A. Shepherd, CEO

Thanks, John. Hi, everyone. Welcome to the call as we begin on Slide 4. Team CSG delivered very strong results in Q2 and through the first half of 2025. We reported 19.5% non-GAAP operating margin in the first half with a 250-basis-point improvement compared to 17% in the same prior year period. Based on the confidence we have from our highly recurring revenue model, our success selling higher gross margin SaaS deals and our ability to consistently unlock greater operating efficiencies for the second consecutive quarter, we are pleased to raise our 2025 full year profitability targets, along with increasing the midpoint of our non-GAAP adjusted free cash flow expectations for the full year. Even as revenue comes in at the lower end of our revenue growth guidance, we continue to diversify our revenue with a goal to have greater than 35% of our revenue coming from exciting new industry verticals by the end of 2026. In the first half of 2025, 32% of total CSG revenue came from industries outside of cable and telecom, up from 31% in the prior year period. The consistently improving revenue diversification is being driven by our data-driven CX, monetization, and payment solutions. With more revenue coming from faster-growing new industry verticals, CSG's revenue concentration also continues to improve, with our top 2 customers, Charter and Comcast, now representing 36% of total CSG revenue, a significant reduction from 49% in 2017. And our revenue from Charter and Comcast has still grown nicely since 2017 as we expanded what we do for both customers. In Q2, we signed some exciting new logo sales wins and deal expansions in financial services, insurance, and property management that I will talk more about momentarily, along with some great wins in the global telecom market. On cash flow, we reported our best first-half non-GAAP adjusted free cash flow in a decade, generating $47 million of non-GAAP adjusted free cash flow in the first half, a huge improvement over the $5 million we generated in the same period last year, and we are well on our way to meet or exceed our $100 million shareholder remuneration commitment for 2025 as we rewarded shareholders with $19 million of dividends and repurchased $40 million worth of CSG shares in the first half of the year. We love the business momentum and acceleration we see across every aspect of CSG as we become more disciplined, more global, and more diverse. Slide 5 highlights the 3 long-term value creation commitments that the CSG leadership team and Board of Directors will hold ourselves accountable to deliver. CSG aspires to deliver 2% to 6% pure organic revenue growth and to diversify revenue from bigger, faster-growing new industry verticals to greater than 35% of total CSG revenue by 2026. We are pleased to reiterate our original full-year 2025 revenue guidance range. But as we discussed last quarter, we expect to grow total revenue between 2% and 3% at the lower end of our range for full year 2025. We are committed to consistently expanding non-GAAP adjusted operating margin with a long-term range of 18% to 20% without impeding our ability to deliver good annual organic revenue growth most quarters and years. And we expect this improving profitability to convert nicely into strong adjusted free cash flow growth in both 2025 and 2026, with the midpoint of our 2025 guidance range sitting at $135 million, which represents approximately 20% year-over-year growth in free cash flow in 2025 versus last year. We are also committed to excellent shareholder capital returns year in, year out as evidenced by the over $600 million in capital returned to shareholders since 2020, and we are clearly on track to meet our commitment to return more than $100 million in share repurchases and dividends combined with $59 million of capital returned to shareholders in the first half of the year. On Slide 6, investors can see the exciting revenue growth coming from big new verticals. As a reminder, CSG targets industry verticals that have high recurring customer relationships powered by complex subscription and consumption-based business models because the business problems and customer pain points are surprisingly similar across industry verticals. With CSG's integrated workflow solutions, our customers sell, monetize, and engage better as we help them simplify their complex monetization and customer engagement processes. The highly sticky, mission-critical nature of our SaaS solutions is also why we enter most years with 90% or greater revenue visibility, and it's why the vast majority of our customers stay with CSG for decades, thereby reducing the risk for us and our investors even during times of greater market volatility. And our global sales and go-to-market teams delivered exciting new sales wins in the quarter. Starting off, I'm pleased to share that we won a fantastic new deal with Orange Business, the enterprise division of the Orange Group and a leading network and digital integrator. The Orange Business team selected CSG to help accelerate its digital transformation journey across more than 25 different countries. Team CSG will help by simplifying the quote-to-cash process by leveraging our catalog-driven CPQ solution to enable faster air-free product configuration and order fulfillment. We look forward to helping Orange Business continue to pursue its digital transformation to deliver simpler, more flexible customer experiences. We also extended our relationship with Liberty Communications of Puerto Rico, one of the largest operations in Liberty Latin America's portfolio. Liberty Puerto Rico will continue to trust CSG for integrated billing and subscriber management across the residential and B2B fixed line subscribers. We are proud to announce this win with Liberty Latin America and look forward to propelling its business forward even more by helping them deliver great customer experiences. Moving outside of telecom. In April, we executed a great renewal with a large mutual life insurance and financial services company in the United States. Using CSG's exponent suite, this customer will continue to trust Team CSG to help them optimize how they attract and convert new customers and enable smarter, data-driven decisions in how they identify, engage, and onboard new advisers. This is another fantastic win for CSG in the insurance and financial services industry. In payments, we closed an exciting new win with a leading U.S. property management technology company. This customer selected CSG's cloud-based payment platform to modernize the payment experience for their residents and fuel scalable future growth. This is another great win for Team CSG to move us further into a high-margin property management vertical. We continue to see good business performance and growth in payments, where we grew our merchant base 14% year-over-year to 142,000 merchants in Q2. We continue to see good business performance and growth, and expect that to continue in the quarters ahead. Moving to Slide 7. I want to remind investors where the CSG management team and Board are focused to turbocharge CSG profitability and free cash flow well beyond our good H1 results. We are committed to evolving into a more asset-light SaaS business that consistently generates higher profit and cash flow from every dollar we invest. And although our annual CapEx remains modest at $20 million to $30 million each year, we are focused on further optimizing working capital and reducing fixed asset intensity with the same operational discipline that's also driving our big margin expansion. Following steady non-GAAP operating margin expansion from 16.6% in 2022 to 17.2% in 2023 and 18.1% in 2024, our updated 2025 midpoint guidance of 18.8% reinforces our belief that CSG can reach or exceed the upper end of our 18% to 20% target range in the years ahead with an aspiration to operate above 19% by 2026. And we are seeing similar improvements in adjusted EBITDA margin where we grew our adjusted EBITDA margin 240 basis points to 24.4% in the first half of 2025 year-over-year, a trend we expect to continue, which is represented in our revised 2025 guidance. As we drive these operating improvements, one of the top priorities remains translating stronger profitability into double-digit non-GAAP adjusted free cash flow growth in both 2025 and 2026. Turning to Slide 8. CSG has a strong, healthy balance sheet, a proven ability to unlock shareholder value with disciplined M&A, and a commitment to being an excellent offensive and defensive choice for investors looking for relative safety in today's turbulent markets. We believe CSG's stock price represents an excellent buy for 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 believe will deliver excellent value for shareholders. With respect to M&A, we are very pleased with the 2 smaller, highly accretive acquisitions closed in 2024. We were able to acquire both companies at highly attractive multiples, with both small tuck-in deals adding highly profitable recurring revenue for CSG. We continue to actively search for, vet, and potentially close more value-adding M&A deals in 2025. As I wrap up my opening remarks, we are excited about our good first half of the year as we stay laser-focused on making 2025 a year of breakthrough results to become the springboard for even bigger growth heading into 2026 and beyond. As we pursue every creative new idea that can help us elevate our performance and accelerate our results, the foundation of our success remains constant. CSG has an unwavering commitment to being a humble, culture-first, diverse global leader. CSG will hold ourselves highly accountable to world-class operating discipline with a relentless drive to constantly learn and get better. CSG will co-create quantifiable game-changing value with customers all around the world as we help them sell, monetize, and engage better with our integrated domain-specific CSG and workflow solutions. CSG will put our money where our mouth is by tightly linking management compensation to the business and financial commitments we make to shareholders. And CSGs around the world will stay hungry and obsessed because we know growth-oriented relentlessness is an essential ingredient to creating sustained value regardless of the obstacles standing in our way. I want to recognize and thank every single CSG employee and leader for what they're doing to contribute to the huge success and growth that CSG is experiencing. With that, I will turn it over to Hai.

Hai V. Tran, CFO

Thanks, Brian. Let's walk through our Q2 2025 financial results, and then I'll wrap up with some key conclusions. Starting on Slide 10, we reported a record high $597 million of revenue in the first half of 2025 versus $585 million in 2024. This represents the highest revenue in the first half of the year in CSG's history. From a phasing perspective, our Q2 non-GAAP results came in slightly better than we had expected and benefited from a $6 million nonrecurring high-margin license revenue arrangement recognized in Q2. Moving on, our first half 2025 non-GAAP operating income was $106 million or a non-GAAP adjusted operating margin of 19.5% as compared to $91 million or 17.0% in the prior year period. Similarly, our non-GAAP adjusted EBITDA was $132 million for the first half or 24.4% of revenue, excluding transaction fees, as compared to $118 million, or 22.0% in the prior year period. Our margin expansion is being driven by improvement in our operating efficiencies and our increasing success in selling sticky SaaS revenue solutions. And because of our continued profitability improvements, we are raising our profitability guidance targets for the second quarter in a row. More on that in a moment. Lastly, our first half 2025 non-GAAP EPS was $2.29, a 13% increase as compared to $2.02 in the prior year period. The increase in non-GAAP EPS is mainly due to the higher non-GAAP adjusted operating income and to a lesser degree, a lower non-GAAP effective tax rate and lower diluted shares outstanding. These increases are partially offset by adverse foreign currency movements. Turning to Slide 11. I will go through the balance sheet, our cash flow performance, and shareholder returns. Our cash flow from operations was $49 million in the first half of 2025 as compared to $14 million in the first half of the prior year. Further, we had non-GAAP adjusted free cash flow of $47 million in the first half of 2025 as compared to $5 million of non-GAAP adjusted free cash flow over the same period last year. This represents our strongest first-half non-GAAP adjusted free cash flow result in a decade and is driven primarily by our increased operating margins and improvements in our working capital, including changes in our variable incentive compensation. Moving on, we ended the second quarter of 2025 with $146 million of cash and cash equivalents. That, along with our outstanding debt at June 30, 2025, results in $404 million of net debt, and our net debt leverage ratio sits at 1.5x adjusted EBITDA. Further, we have $621 million in liquidity as of the end of the quarter. Turning the page, I'll revisit our 2025 guidance targets. In summary, we are raising our profitability target for the second quarter in a row, while simultaneously increasing our non-GAAP adjusted free cash flow target, partially driven by a lower effective tax rate. Further, we are reiterating all other guidance targets for full year 2025. And as Brian mentioned, we are reiterating our original revenue guidance range, but believe total revenue growth will likely come in between 2% and 3%, just like we messaged on our last earnings call, primarily driven by continued small headwinds in the North American broadband market and slightly elongated sales cycles. We also wanted to note that we terminated a contract with a Latin American telecommunications customer in July. This customer accounted for $1.4 million of first half 2025 revenue. We do not expect this contract termination to have a significant impact on our 2025 revenue. From a revenue phasing perspective, we now expect approximately 49% of our full-year revenue to have come from our first half performance, and 51% will be generated in the second half, with Q4 revenue expected to be higher than Q3 revenue, consistent with our historical norms. Wrapping up on guidance, while it is early, we are likely to be in a similar 2% to 4% revenue growth range in 2026. Wrapping up, we love what we see in our business, powered by our operating discipline, R&D innovation, and ongoing sales mix. CSG will continue to relentlessly prioritize every investment we make and stay very disciplined in the allocation of resources and the use of capital. Innovation, including how we leverage the transformative power of AI across CSG 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 results even faster. CSG is well-positioned with a strong sales pipeline and a high-quality recurring revenue customer base. We remain committed to accelerating and diversifying our revenue growth, which may include closing and integrating disciplined value-adding acquisitions. We believe this approach, combined with our consistent capital distribution will serve our shareholders well. With that, I will turn it over to the operator to facilitate the question-and-answer session.

Operator, Operator

But first up, we have Dan Bergstrom of RBC Capital Markets.

Daniel Robert Bergstrom, Analyst

Maybe just to start on the broader macro environment. Is there anything to point out from your perspective? It seems like there's been some uncertainty for a few quarters now. You didn't really point anything out last quarter, whereas other companies did. I guess, just anything to point out around that end market, where we are now versus the start of the year, or where we sit as we enter the back half of the year?

Brian A. Shepherd, CEO

Yes. No, Dan, thanks for joining. Appreciate the question. I mean what we see is we don't see anything that's really changed. What we've seen over the last, I'd say, 12 to 18 months is in the prior 3 years, we've consistently grown organic revenue kind of 5% to 5.5%. And so what we've seen is we've just seen a little bit more cautiousness, and on some of the discretionary spend all around the world across different industry verticals, we've just seen decision-makers be a little more thoughtful and careful on some of those. What we see is big strategic decisions, transformations, new technology deployments that have a quick payback or a strategic element. We still see our customers making buy decisions and moving forward, like some of the deals we announced this quarter, we don't think that's changed. But on the margin, I would say there's still just a cautiousness. And what that's done is that's kind of caused us to be at the lower end, like we've said this year, we think we expect revenue growth in the 2% to 3% range. That's kind of the same thing we've seen over the last several quarters, and that's kind of what we're seeing heading into Q3 and Q4.

Daniel Robert Bergstrom, Analyst

And then there was some large M&A this quarter within the customer base. Could you maybe help frame acquisitions such as that from within the base from your perspective? And I guess, what have you seen historically when there's been consolidation among customers?

Brian A. Shepherd, CEO

Yes. You might be referring to an announcement regarding a significant strategic move in the U.S. cable broadband sector that is currently undergoing regulatory review between Charter and Comcast. Over the past two decades, we have observed a trend of consolidation in the cable, broadband, and telecommunications sectors globally, and this trend is expected to continue, even though there are now fewer players in the market. Historically, when such acquisitions take place, if you are a dominant incumbent with a long-standing relationship with these companies, you've established a reputation that often results in continued business. This has generally been favorable for us. In specific reference to the current situation, we will have to wait and see. While there are no guarantees, we have previously succeeded in displacing a competitor and securing all of Charter's triple-play business a few years back. Whether past experiences will indicate future outcomes remains to be seen. However, as long as we consistently provide value and serve our clients effectively, we feel confident about our position.

Operator, Operator

Next up, we have Greg Burns of Sidoti.

Gregory John Burns, Analyst

You've recently discussed the success you're experiencing in the global telecom sector, particularly in gaining access to the enterprise divisions of telecom operators. Orange was a notable example this quarter. Why is this such a strong opportunity for you? Are there instances where you've entered through the enterprise vertical and then expanded your reach over time?

Hai V. Tran, CFO

Yes. So Greg, thanks for joining. Thanks for the question. I think at the end of the day, that is kind of where we have defined our differentiated capability is on the enterprise space. We do particularly well where there's complexity. And we've proven that time and time again. Specific to Orange, we think we have an industry-leading capability on the CPQ side, right? And that's kind of played itself out. It was a very competitive process that Orange went through. Obviously, Orange being a Tier 1 operator was pretty diligent in their evaluation. And it just reinforces that our differentiated solution really stood above the rest of the competition. And as a result of that announcement by Orange, what we're seeing is we're in a number of conversations with other operators in the Tier 1 and Tier 2 space. So I think it's early innings yet. We think it bodes well in terms of our capabilities. Once again, that is really specialized and differentiated on the enterprise side.

Brian A. Shepherd, CEO

No, I think the only thing I might add is exactly right. Greg, you asked the second part of that question, have we seen cross-sell success, and the answer is yes. I can talk about 2 specifically. We've announced in the past big wins and expansions with MTN in South Africa. In that case, we actually started many years ago. We won their interconnected wholesale business, performed well. We then moved to enterprise for all the reasons in B2B that Hai talked about. And eventually, we then served them well there, and we won the consumer. There's also an example in Asia Pacific, where we started with a winning the large enterprise business with one customer after they had grown through some additional acquisitions, we then won a meaningful piece of business on the consumer. So it often can lead to an integrated stack because it can bring more value. It doesn't always. Sometimes they run different stacks, but it can.

Operator, Operator

Next up, we have Matthew Harrigan of Benchmark.

Matthew Joseph Harrigan, Analyst

I have one down in the weeds question and then one more or less base nation Sunday morning show question, I'm sure you'll be delighted with. I guess I'd like to actually go with the latter first. I mean you've got a realistic view of the implications of AI because you have to deliver ROI that you can show to your clients, and that's one reason why you've been successful in these bidding processes. But when you look at kind of the McKinsey view of AI and all these effects in global GDP, significant percentage points, I mean, you have to conclude that GDP would be down globally like 3% or 4% this year if it wasn't for AI. Where do you think we are in the maturation process? And you're kind of the adult in the room because you don't have to really drink the Kool-Aid too much because you can show the immediate impact, whereas a lot of what's out there is just kind of out there. And I know that's kind of literally a face in nation question, but I thought you might have an interesting perspective on it.

Brian A. Shepherd, CEO

Yes, Matt, thank you for the question. CSG is not a company that follows hype or trends. From a profitability perspective, we've previously discussed our approach in terms of four turns of the wrench, and AI is beginning to play a role in that. You'll start hearing us speak more about making incremental progress, with improvements of 80 to 100 basis points driven by changes in our business mix and operational discipline. A few quarters ago, we were cautious about AI's impact, recognizing its potential but advocating for a careful approach. Now, we are feeling more optimistic about how AI can enhance our products and deliver greater value. We're currently integrating AI and data-driven solutions into nearly all of our offerings. This effort is improving the efficiency and quality of our R&D, allowing us to accelerate our processes and operate more cost-effectively. Regarding our EBITDA, we have increased from 21% a few years ago and are nearing 25%, with aspirations to reach 28% to 30% within the next five years. We believe these improvements will come more quickly and have a greater effect than we anticipated a few quarters ago.

Matthew Joseph Harrigan, Analyst

Regarding the second question, related to earlier inquiries, it’s evident that Liberty Puerto Rico faced challenges integrating the AT&T Mobile acquisition. Many telecom companies experience significant difficulties with billing system integrations during mergers, and Liberty Puerto Rico is not unique in this regard. This issue appears prevalent across the industry. When you assess the telecommunications landscape, do you perceive a substantial opportunity not only to replace competitors but also to address inefficiencies that companies may not have recognized? Especially if you consider implementing Exponent, CSG Exponent, to enhance billing operations?

Hai V. Tran, CFO

Yes, we still observe that customers are being very deliberate about transitioning their billing systems. These systems are essential to their operations, so deciding to change or replace them is a significant choice. However, we believe it has become a necessity for many global telecom operators. They face considerable pressure on operating expenses and are expected to offer lower prices while increasing their capital expenditures. To achieve their financial goals, they must start with simplifying their business, becoming more digital, and streamlining their processes. This digital transformation allows them to better serve their customers in innovative, AI-driven ways. Often, this requires adopting new technologies that are more software-as-a-service and product-oriented. This trend works to our advantage compared to our competitors who focus more on managed services. We attribute many of our recent sales successes to this shift, and we anticipate it will continue to grow, though we acknowledge that these decisions are still challenging for them.

Operator, Operator

Next up, we have Lee of Cantor Fitzgerald.

Unidentified Analyst, Analyst

Congrats on the strong, steady, consistent execution. So Brian, my question revolves around a more longer-term strategy rather than just this quarter. I understand that CSG is more disciplined when it comes to M&A. What are your thoughts of doing more of a transformational larger M&A deal to kind of like accelerate the diversification, whether it be cross-border or in the U.S. What are your thoughts on that? And what verticals would it be or adjacency would it be, if so?

Brian A. Shepherd, CEO

Yes, thank you for joining us. I appreciate your comments. There are really two main strategic avenues we are considering. We do have larger moves in mind that we would like to execute, but we pride ourselves on being disciplined acquirers. Therefore, to proceed with bigger deals, we need to ensure they are the right fit. We have a strong track record that we want to maintain. The larger moves we are considering fall into two categories. First, at the core of our operations, we assist large brands across various sectors in simplifying their sales, monetization, and customer engagement within recurring revenue industries. Our significant successes, like in the U.S. cable broadband market and global telecom, occur when we have a fully integrated stack for that sector, including catalog, billing, wallet, and workflows to enhance digital customer engagement. Consequently, we could look at acquiring a domain-specific monetization platform to integrate with our SaaS product workflows, creating a comprehensive solution for those verticals. This is an example of the type of larger move we are exploring, although we must proceed with care. The verticals we prioritize are clear to us. The second type of larger move would be a scale acquisition in the global TMT space, where we could obtain a solid product capability, expand our portfolio, or acquire a competitor that would provide us with scale at an attractive price, both pre- and post-synergy. These are the two main types of bigger moves we might pursue in the near future.

Unidentified Analyst, Analyst

And I just want to follow up quickly. I know the previous caller talked about GenAI and AI usage. Apologies, I dropped off back to dial back in if some of the questions are answered on that part piece of it. I felt like this is an area that affects everything in terms of the economics, technology that to gain efficiency on. In terms of leveraging GenAI, are there target acquisitions, Brian, that you could target that can help you accelerate, whether it be a specific vertical like customer experience or data fraud protection, that was a great use case in the financial services, I think you mentioned a couple of quarters ago? That could help you speed up on that. And in terms of the Latin America termination contract, can you just give us a little more color on why this contract was terminated? And that's it for me.

Brian A. Shepherd, CEO

Thanks. I'll cover the first. Hai will cover the second, give a little more color. First, we've done a lot with data even before there was Gen AI, going back to machine learning, natural language processing. We both have built products around data-driven CX, and we acquired a few years ago, a fantastic industry-leading asset at a great price, and multiple that really moved us in a much bigger way into the data-driven CX. We're going to continue to focus on leveraging those assets. And I would say from the ecosystem, the partnership side, you'll see us leverage large hyperscalers and do more of a partnership play to add more capability. I don't think you'll see us or would anticipate any meaningful M&A move because, quite frankly, we see the multiples and the money getting thrown around as being, let's just say, not necessarily conducive to shareholder value. So we think we can execute it with R&D and partnerships based on the assets that we've already either built or acquired, don't anticipate as much on the acquisition side in AI and data. Hai, do you want to take the second part of that?

Hai V. Tran, CFO

Yes. The customer is Digicel, an operator in the Caribbean with operations in various markets. We have great respect for their leadership and team, but the organization has undergone several changes in structure and management, as well as in their financial standing. With these changes, adjustments in strategic direction can occur. However, what is crucial, as mentioned in the prepared remarks, is that the revenue impact for us in the first half is relatively small, at $1.4 million. The termination will not affect our revenue guidance for the year either. That's where I would focus.

Operator, Operator

Next up, we have Nehal Chokshi of Northland Capital Markets.

Nehal Sushil Chokshi, Analyst

Congrats on the strong profitability results. I think typically, you guys assess that the driver of profitability growth are the quarter turn to wrench and then also the ongoing SaaS mix shift. Was it a 50-50 mix as usual? Or was it a little bit more tilted towards SaaS mix shift this year, I mean, this quarter?

Brian A. Shepherd, CEO

Yes. This quarter, there are a couple of important points to highlight. If we examine the gross margin calculation, the significant year-over-year change was largely due to the $6 million nonrecurring license we discussed, which has a very high margin and significantly contributed to the gross margin improvement. Nevertheless, even without factoring in that amount, we still observed over a 100 basis point year-over-year increase in gross margin. This improvement is attributed to better cost management in our services, which has enhanced our service margins and contributed to the overall gross margin improvement, as well as changes in product mix.

Nehal Sushil Chokshi, Analyst

And then just to pick a little bit here on the guidance raise here. Can you help me understand why doesn't the $3 million increase in EBITDA translate to an increase in EPS?

Brian A. Shepherd, CEO

Yes. One of the key points we discussed in our prepared remarks is the negative impact of currency fluctuations, which mainly affects our balance sheet. This will show up as a net other line in our profit and loss statement. It's primarily due to the revaluation of balance sheet items that flows through our P&L and influences our earnings per share. Without this factor, our EPS would show a much larger positive effect. However, I want to emphasize that our core business is performing well. As currency movements become favorable for us, you can expect a significant improvement.

Hai V. Tran, CFO

In another way, Nehal, exactly like you were highlighting, is without that negative foreign exchange impact, you would have seen the 13% EPS year-over-year growth in the first half be even bigger.

Nehal Sushil Chokshi, Analyst

Well, that was a little bit too easy, so I'm going to sneak another one in here. Brian, you mentioned that you're striving for a greater profit for every dollar that you invest. Basically, that's an ROIC metric. What is that actual ROIC that CSG holds itself to today? And what was it, say, 1 and 3 years ago?

Brian A. Shepherd, CEO

Yes. If you consider it this way, our WACC is likely in the high single digits right now. Therefore, our ROIC will significantly exceed that. This is how we approach it. We keep it simple when making daily decisions by translating ROIC into actionable steps for our team, focusing on cash and cash return. Every time the team invests, we are actively considering cash and cash return. The positive aspect of this, Nehal, is that we genuinely believe we are close to a turning point for accelerating profitability growth because AI, as others have noted, will have an impact.

Operator, Operator

Next up, we have George Notter of Wolfe Research.

George Charles Notter, Analyst

This is Tern speaking for George. I have a quick question about AI. Are you experiencing increased competition from AI-enabled competitors, particularly considering your focus on the complex billing space? Any insights you could share would be appreciated.

Brian A. Shepherd, CEO

We don't currently see any direct competition. On the customer experience side, which has shown strong double-digit growth, we need to enhance our selling value proposition and target our messaging around the value and use cases. Sometimes potential customers contemplate whether they can handle this themselves or if they should opt for a larger tool or partner with someone like CSG for our Exponent solution. We need to be more precise in our approach. Our focus has remained on the use cases and the speed of return on investment, which has proven successful as we continue to grow the business. We haven't noticed any impact on our core monetization or payment segments. This is partly due to the complexity and interconnected nature of our services; we essentially serve as the backbone for customer onboarding, engagement, and monetization. We can optimize that entire ecosystem more quickly, which is beneficial for us, and we don't face the same risks seen in simpler cases or standalone applications, which is a different model from what CSG represents.

George Charles Notter, Analyst

And also, is that CX and payments business of each growing like that combo, the Rule of 30 still? Are there any changes in each individual one? And any more insight the acceleration?

Hai V. Tran, CFO

I think in combination, you're right, it's around the Rule of 30. That's kind of where we remain. With that said, we do expect some acceleration in the back half of the year.

Operator, Operator

Next up, we have Matt Dezort of William Blair.

Matthew Alan Stotler, Analyst

This is Matt on for Maggie. Congrats on the results. I guess how are you thinking about new business pipeline into the second half? I know you cited some elongated sales cycles you're still dealing with. I guess what's causing that? How are you embedding the newer sales pipeline and close rates, and win rates into your outlook?

Brian A. Shepherd, CEO

Matt, thank you for joining, and please extend my congratulations to Maggie on the new addition to her family. I look forward to her return. What we are observing is quite similar to what we've discussed in previous quarters. We continue to maintain a robust and healthy sales pipeline, with numerous new deals entering the funnel. We are satisfied with the current shape of the pipeline. However, this has translated into a slight decrease in overall growth, around a few single-digit percentage points, compared to what we saw from 2020 to 2023. There isn’t a specific factor causing this; all areas of our business are performing well with solid deal flow. What we are seeing is that customers are being a bit more cautious and are looking for quick payback before proceeding. Additionally, we are noticing a slight reduction in discretionary spending, which can vary from quarter to quarter. This contributes to the difference from what we experienced for three consecutive years with low 5% organic growth, as we're now projecting around 2% to 3%. Regarding Q3 and Q4, we will provide guidance that we believe is straightforward. We anticipate this year's revenue growth to be in the range of 2% to 3%, which gives you an insight into our expectations for Q3 and Q4.

Matthew Alan Stotler, Analyst

And then can I ask about pricing and contract renewals within the big 2? Can you just remind us of the timing of those when you last renewed, how the pricing came in versus your expectations, and how you're thinking about expansionary opportunities with those special clients as spending rebounds?

Brian A. Shepherd, CEO

Yes, we are very thankful for the business from our top two customers and all of our clients. We have been well-positioned, having converted 9 million subscribers from Amdocs when I joined the company, and those conversions were successful. We have seen solid growth with Comcast and have ventured into digital business. Last year, we announced a significant new project outside of triple-play cable, and we have continued to expand. We believe there are further opportunities for growth as long as we maintain our focus on delivering great value. Charter, a few years later, consolidated all their triple-play subscribers and transitioned 14 million subscribers from a competitor to CSG. Our relationship has also deepened. Since 2017, our top two customers have grown about 2.6% year-over-year with us. This growth comes from subscriber increases and new lines of business, despite some reductions in discretionary spending. Recently, we signed our best renewal deal with Comcast, extending through the end of 2030 without any price discount—something we have not done before. We allowed them to avoid some annual price increases this year. Charter's contract is set until about the second quarter of 2028.

Operator, Operator

And with that, I'm seeing no further questions in the queue. So I'll turn things over to Brian Shepherd for concluding remarks.

Brian A. Shepherd, CEO

Thanks, everyone, for joining. Hopefully, you see why we're excited and love what's going on in the business. We are now, what, 5 weeks into the third quarter. We are fixated on trying to ensure that Q3 and Q4 are even more impressive than Q1 and Q2. We got work to do, but that's where we're laser-focused, super grateful to every CSG around the world. Thanks for joining.

Operator, Operator

All right. Ladies and gentlemen, this does conclude your call. You may now disconnect your lines, and thank you again for joining us today.