CSGS - NASDAQ

Thank you for standing by. My name is Jessica, and I'll be your conference operator today. At this time, I would like to welcome everyone to CSG's Q4 and Full Year 2024 Earnings Call. [Operator Instructions]. At this time, I would like to turn the call over to John Rea, Senior Vice President of Finance. John, you may begin.

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.

Thanks [Technical Difficulty]. On the revenue side, we grew Q4 year-over-year organic revenue 5% with 7% total revenue growth, setting a new CSG record for quarterly revenue of $317 million for the quarter. A giant thank you to CSG employees around the world for the strong sales and revenue results in Q4. On the profitability, adjusted free cash flow and EPS front, our non-GAAP adjusted Q4 results were even better as our operating efficiency and gross margin expansion contributed to fantastic results. CSG grew operating income 32% year-over-year in Q4 to 20.1% of revenue for the quarter. Q4 year-over-year adjusted EBITDA grew 21%, reaching close to a CSG high of 24.8% margin. And EPS topped all the metrics with 79% year-over-year Q4 growth, also setting a new CSG record of $1.65 EPS in the quarter. Our strong profit performance contributed nicely to free cash flow with $113 million or 9% year-over-year growth in 2024, setting the foundation for what we anticipate will be sustained strong double-digit adjusted free cash flow growth in 2025 and 2026. On the dividend front, CSG will be increasing our dividend by approximately 7% to $1.28 per year paid in quarterly increments. This marks our 12th consecutive annual increase and underpins our dedication to a friendly shareholder return policy. On the sales, renewal and new logo wins front, CSG also had a very good 2024, which I will share more on briefly. Slide 5 highlights the 3 key value creation commitments that the CSG leadership team and Board of Directors will hold ourselves accountable to deliver. First, 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. It was great to close Q4 at the upper end of our range with 5% organic revenue growth in Q4. Second, we have committed to expanding non-GAAP operating margin to our new long-term range of 18% to 20%, which we plan to achieve without impeding our ability to deliver mid-single-digit annual organic revenue growth most quarters and years. We also have a goal to become more asset-light to help us deliver strong double-digit adjusted free cash flow growth in 2025 and 2026 with our 2025 guidance range of $110 million to $150 million in adjusted free cash flow. Third, we will continue to return significant capital to shareholders as we've committed to over $100 million in share repurchases and dividends combined in 2025. As a reminder, we have returned nearly $540 million to shareholders in dividends and buybacks since 2020. On Slide 6, you can see the success we've had increasing our organic revenue growth since 2021 and diversifying our industry vertical revenue since 2017. CSG targets industry verticals that have highly recurring customer relationships powered by complex subscription and consumption-based business models. Across these verticals, CSG helps brands simplify their complex customer engagements with our industry-leading technology. Our platforms help customers reduce their cost to serve, while their customers and be more profitable, which is why the vast majority of our customers stay with CSG for decades. This is also why we've 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. Our sticky mission-critical technology helps 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 and Telstra in these same areas. While the industries are different, the customer pain points and business needs are surprisingly similar. Turning to Slide 7. We want to highlight some of the exciting new logo wins and deal expansions in Q4 and remind investors of the new sales wins in the year. Starting with big wins in Q4, we won a fantastic new logo with Gamma, a leading provider of technology-based communication services across Europe. Gamma selected CSG's configure, price, quote solution running in the cloud to help them adapt more quickly to market needs, offer personalized solutions and enable a more seamless self-service user experience. This win highlights the great momentum we are seeing with our industry-leading quote and order product. Team CSG also strengthened a 20-plus year relationship with MTN South Africa by securing an exciting multiyear managed services extension. MTN is one of South Africa's largest operators serving 39 million subscribers. CSG will optimize their billing and provisioning operations and enable MTN to further monetize their relationship with their consumer, SME and enterprise customers. We also had a fantastic multiyear managed services extension with Mobily, one of Saudi Arabia's largest telecom providers to continue supporting them on their journey to becoming a fully integrated operator. Team CSG became Mobily's digital transformation partner in 2021, and we are thrilled to continue to help Mobily create exceptional experiences for their customers. CSG won a contract extension with M1, a market-leading communication service provider in Singapore. Since successfully launching CSG Ascendon and digital wholesale to support the monetization of M1's enterprise business in 2024, we're excited to expand our relationship with a great managed service contract to continue to support M1 in their digital transformation journey. Another big highlight was a fantastic 6-year contract renewal with Comcast to extend our 35-plus year partnership. CSG will continue to provide broad mission-critical support for Comcast triple-play broadband subscribers and other areas of Comcast business. This giant deal was in addition to a meaningful new stand-alone billing deal at Comcast in another part of their business that was also won in early Q3. We were also excited to land fantastic renewals with 2 of the largest global technology companies in the world. For a decade, CSG has provided interactive voice response messaging on behalf of these companies to enable them to securely and effectively communicate with their end customers through their mobile device. CSG is powering a secure 2-factor authentication experience and providing tailored IVR for more personalized customer engagement. Another Q4 win outside of telecom was with the Oklahoma Turnpike Authority, one of the largest Turnpike authorities in the U.S. OTA selected CSG to provide data-driven customer experience solutions to streamline transactional communication with drivers and optimize their revenue collection. This win further diversifies CSG's presence in exciting new verticals like tolling and transportation. In payments, we won a great new logo with dealer-owned warranty company, a fast-growing leader in the insurance and vehicle service contract industry. DOWC had been working with multiple payment providers, leading to complexity in how they manage their payment transactions. They selected CSG's cloud payment platform to consolidate ACH, cards and digital wallets into a single system to centralize payment processing and improve their end-to-end customer experience. Moving to exciting sales wins across 2024 in global telecom, we announced several fantastic new Ascendon wins, including Telenor Denmark, Lyse in Norway and Claro in Brazil. These wins highlight an important inflection point that we're seeing in the telecom market as more leading wireless operators are willing to run their core billing and monetization engines in the cloud, a trend that bodes very well for our revenue growth with our AWS cloud-native Ascendon platform. Other exciting new logo sales wins and extensions in the telecom space in 2024 included One New

Thanks, Brian. Let's walk through our Q4 and full year 2024 financial results, and then I'll wrap up with some key conclusions. Starting on Slide 11, I'm pleased to share that we delivered strong financial results in the fourth quarter. We generated $317 million of revenue in Q4, which represents 7% year-over-year growth. The increase in revenue can be attributed to the growth of our SaaS and related solutions revenue in addition to the approximately $6 million of revenue generated from the acquired businesses. Also, as it relates to our top 2 customers, Comcast and Charter, we reported a 3% year-over-year increase in Q4 revenue. Our Q4 2024 non-GAAP operating income was $58 million or a non-GAAP adjusted operating margin of 20.1% as compared to $44 million or 16.1% in the prior year period. Similarly, our non-GAAP adjusted EBITDA was $72 million for the fourth quarter or 24.8% of revenue, excluding transaction fees as compared to $59 million or 21.7% in the prior year period. Our profitability results are among the strongest in the history of CSG and are a testament to our continued commitment to maintaining cost discipline. This discipline is a key driver of why we were able to grow Q4 non-GAAP adjusted operating income and non-GAAP adjusted EBITDA at 32% and 21%, respectively, against the prior year period. Looking ahead, we expect our profitability metrics to further improve as we have taken significant cost efficiency actions to optimize our capacity and better align CSG's resources to areas of our business that will deliver faster growth and higher operating profit in the quarters and years ahead. I'll share more on 2025 guidance targets momentarily. Lastly, our Q4 2024 non-GAAP EPS grew 79% year-over-year to $1.65 as compared to $0.92 in the prior year period. The increases in non-GAAP EPS are mainly due to the higher non-GAAP operating income, a lower non-GAAP effective income tax rate and the benefit of our share repurchases over the last 12 months. With respect to the lower income tax rate, we had approximately $0.20 per share benefit in Q4 of 2024 that we do not expect to recur in 2025. Turning to Slide 12. I will go through the balance sheet, our cash flow performance and shareholder returns. We had non-GAAP adjusted free cash flow of $113 million in 2024 as compared to $104 million of non-GAAP adjusted free cash flow in the prior year. This represents a 9% year-over-year improvement and showcases our internal initiatives to ensure our enhanced profitability is accompanied by increasing free cash flow. We expect continued improvements in free cash flow in years to come, in line with our focus on driving improved profitability over a multiyear period. Moving on, we ended 2024 with $162 million of cash and cash equivalents. That, along with our outstanding debt at December 31, 2024, results in $389 million of net debt, and our net debt leverage ratio sits at 1.5x adjusted EBITDA. Further, we have $612 million in liquidity as of the end of 2024. Turning the page, I will lay out our 2025 guidance. Starting with the top line, we expect our organic revenue before the impact of any future acquisitions to range from $1.21 billion to $1.25 billion and transaction fees to range from $106 million to $111 million. We are currently forecasting our first half 2024 revenue to make up approximately 48% of our full year revenue, while we expect 52% of our revenue to be generated in the second half. We also expect our non-GAAP adjusted operating margin percentage to range between 18.1% to 18.5%. We believe this non-GAAP adjusted operating margin guidance range demonstrates CSG's commitment to consistently expanding on our operating leverage with improved profitability. On the next metric, we anticipate our non-GAAP EPS to range between $4.55 to $4.80 based on a non-GAAP tax rate of approximately 28% and a share count of approximately 28 million shares for the year. Moving on, non-GAAP adjusted EBITDA is expected to range between $256 million to $267 million. On cash flow, we expect our non-GAAP adjusted free cash flow to range between $110 million to $150 million with a guidance range midpoint of $130 million. Additionally, we expect capital expenditures to come in between $20 million to $30 million. And with respect to the quarterly trends in 2025 and consistent with prior years, we expect Q1 to be the lowest quarter of the year for most metrics, including revenue, profitability and cash flow with revenue growth and profitability continue to grow each of the remaining quarters of 2025. Wrapping up, we love what we see in our business that are powered by our operating discipline, R&D innovation and ongoing sales wins. 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 Instructions] Our first question comes from the line of Dan Bergstrom with RBC Capital Markets.

Hai, maybe I'll just start where you ended there. You mentioned a strong pipeline at the end of your remarks. Could you talk about the pipeline you see here to start calendar year '25? And then is there a way that you could maybe compare it to what you saw maybe a year ago at this time? Yes. Dan, I appreciate you joining the call. I mean what we've talked about kind of quarter in, quarter out is the size of our pipeline has been as healthy as ever. We continue to convert. And what's really driving that is first, we see customers really being sharp on what's going to enable them to get a return that helps them on the revenue side or to operate more efficiently. So what we do is we see a lot of win potential, both in our payments and our customer experience business that's a data-driven platform. These are smaller proof points. We can get deployed quickly. We can ring the cash register for our customers, and there's a quick payback. What we've also seen in both our North American cable business, cable broadband and the global telco is we see operators needing to deploy and simplify their customer engagement. and make it easier for them to do business with. So we also see meaningful transformations on a larger scale of their full customer engagement stack, including their billing and monetization. Those tend to kind of work through a slightly longer sales cycle, and we've announced as many wins, I think, in 2024 on the bigger transformation front, including with our Ascendon cloud that we ever have. And so it's still a tough market out there, but we've continued to be pleased with the performance on the sales side. Hai, do you want to talk about kind of how you've seen it where it is today entering 2025, maybe compare that to what you saw entering 2024.

Yes. I mean I think in terms of the size of the pipeline, I think it has grown, but I think more importantly, I think it's a healthier pipeline, right? We don't have big opportunities in the pipeline really skewing the pipeline. So I'd say it's more evenly distributed, that speaks to me to the job well done by our go-to-market team that we drive lots of opportunities across lots of different prospects.

That's great. And then maybe just on the dynamics of the quarter, anything to call out as far as linearity or any deals moving into the quarter or out of the quarter? Did you see anything around a year-end budget flush? Is that something you typically see? Just anything on the dynamics of the quarter?

I'd say nothing out of the ordinary, right? Because a lot of these opportunities can be large and sizable. They're complex in nature. The pursuits sometimes cross over the 12 to 18 months. And so there are always going to be opportunities that we hope or try to target within a quarter that might delay for a variety of reasons. But that's pretty normal as we look at our opportunities. I don't think there's anything out of the ordinary.

Yes. The only thing I would add is with our high recurring revenue, we tend to enter with a very high backlog. If anything, going into 2025 and even with the guidance we gave, I would say our backlog is a little higher even than what it was starting 2024. That gives us confidence. But what we've talked about the last couple of quarters is right now, we still see notwithstanding great sales wins, we see it's a tough competition in the market. Therefore, with our guidance, we're looking at more in the 2% to 4% organic growth as we look at 2025 full year, that's kind of reflected in that guidance in the midpoint. And we're focused on getting off to a strong start in Q1 and Q2 to see if we can perform at the upper end of that and get back to midpoint or higher. So that's kind of what we're seeing at this stage.

Your next question comes from the line of Maggie Nolan with William Blair.

Your operating margin expansion that you expect in 2025, there's still expansion, but it's sort of modest in the context of what you said for 2026, which is maybe aiming for the 19% range. So can you help us bridge the gap to 2026? Are there additional investments or cost adjustments you need to make over the course of 2025 to set yourself up for that?

Yes. Maggie, it's a good question. I think the answer is a couple of things, right? As we mentioned, you'll see some of the expansion, for example, in our gross margin percentage. And that expansion, we expect to continue, right? And that's a result of a combination of mix of business as we talked about in the past, our SaaS-like businesses are just growing at a faster clip than the rest of our business and therefore, positively impacting our gross margin percentage, which should then flow all the way down through from an operating leverage down to our operating income and our EBITDA margins. And then the second is, as we've talked about, we continually evaluate opportunities to drive further efficiencies. We've taken some actions this past year. We're going to garner the full year impact of those actions as we enter into 2025. Plus we'll continuously evaluate opportunities to drive further operating leverage. And then one of the things that we do count on as we look to 2026, for example, is truly operating leverage, right? As we continue to scale, our operating expenses shouldn't scale at the same pace, right? So the marginal revenue dollar should have a much greater impact to our operating and EBITDA margins.

Yes. Maybe, Maggie, the only thing I would add is on the investment question is we're going to continue this small quarter terms of rents, constantly drive operating efficiency in the business, as Hai has been talking about. But we are seeing an inflection point in the market with more SaaS, more cloud all around Ascendon, our Xponent suite around data-driven customer journey analytics solutions. And we talk a lot about some of the wins in our quote and order solution. And so we are continuing to invest on the SaaS cloud data-driven side. That's not going to prevent us from driving good margin expansion. We expect to operate 2026 at 19% or above. And let's see how 2025 comes out. But we have good expectations in terms of our ability to both innovate and drive margin expansion.

And the 35% revenue diversification that you cited, the other vertical is becoming fairly substantial. Can you help us understand the composition of that vertical buckets and what the drivers are to get you up to that greater than 35% you're calling for and maybe the time frame there.

Yes. I mean the revenue diversification, first, I'll just make a statement. CSG is not a holding company. We're focused with our portfolio in terms of where we are around helping great brands in lots of verticals simplify their complex customer engagement with data-driven monetization solutions, and we're resonating more and more around that. And so we see the exciting part is it's not just 1 or 2 verticals. We've announced wins in financial services, in insurance, in healthcare, in pharmacy retail, in tech kind of across the board. And what we're seeing is kind of what we've talked about in our Journey Analytics CX business, we can go in at a price point of between $500,000, sometimes a little less up to a couple of million dollars, and we can solve a very targeted business problem around onboarding, customer education or notification, dealing with an engagement issue or a customer dissatisfier, and it can give a payback in terms of reduced cost to serve or revenue uplift because it could also be revenue stimulation. So we get it at a low price point, and then we can upsell to lots of other use cases, and that's driving huge growth for us. We also see some of the Ascendon wins in cloud that is driving new transformations in telecom, but we also sold it to a large financial services provider in Australia, and we've sold it to large media companies like MediaOne and others. And another example in these other verticals is the tolling win. In that case, tolling that are dealt with by some of our customers, they deal with a license plate that's got to get attached to a customer ID that then has to figure out how to engage and collect the money. And so we're helping them with customer engagement solutions. So it really is the kind of broad portfolio, including our payments, and we can get in with those price points and then upsell and cross-sell. And so they're just going to grow faster, even though we're still growing in our North American broadband and global telco, we just see those other verticals growing at a much faster clip, usually double-digit organic revenue growth.

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

I think when you look at AI with respect to some of the forecasts with consultancies and academic institutions on economic growth, you can argue people are really starting to look more for where the pony is. I mean you can argue there's so much debt in the system, the economic growth numbers would be worse if it wasn't for AI. You had a number of interesting white papers, particularly early last year, I know relating more to enterprise AI and orchestrate the customer journey and that. But what have you really seen just over the last 2 or so quarters that makes you more or less confident in terms of the benefits for CSG and more broadly for the economy?

Yes. Matt, I'll take the first part and maybe talk about the revenue side of where we're selling and using AI embedded into our products. Maybe Hai can talk about it on the efficiency side. So first, CSG tends not to take the approach of some of our competitors that really go for the hype cycle. We really talk about how can we get very specific and agile with innovation, how can we build the capabilities, whether it's cloud or AI and data capabilities to really ring the cash register for our customers. And so what we've really focused on, on our side is not the hype, but things like Bill Explainer.ai. Two of the biggest use case problems in telecom and cable is promo roll-off where you come off a discounted price package and you're going to go to the higher package. Customers then get bill shock, they're surprised. They call the call center, it's expensive to our customers, and it might create a churn event. So we've actually built on what used to be kind of more machine learning now with the generative AI to actually come out with a very targeted use case to say, dip into the billing system, pull data, explain when there's likely to be a change that's going to cause a negative reaction of a customer and get out in front of that. And we've seen customer deployments have really good success. We've also seen a lot where you could use AI and the natural language processing capabilities to actually prevent needing a call or getting to the right agent in real time to try to avoid the length of call or a second call to get more of a first help success. We built in AI into some of these cross-sell, upsell that just become easier to engage and upsell a new promotional package and drive revenue. And so what we've tried to do with it, we do think is significant, but we think it's also going to become table stakes to drive more real-time proactive engagement to deal with a dissatisfier or to uplift revenue. And we think it's kind of table stakes and you just build it in as opposed to the hype cycle side. Maybe Hai, you could talk either something around how we're seeing it on efficiency at a real level. I don't know either of us could drive what's driving economic GDP. I'll probably leave that one to other people.

Yes. I think CSG is no different than any other company. We're all trying to experiment with AI, right, to try to figure out where we can drive the biggest return I think for us, we're taking a very pragmatic approach, right? We're not looking to necessarily develop our own AI tools internally. We're leveraging a lot of our partners to help us do that. And to that extent, what that means for us is as AI becomes less expensive, that's only helpful to us. So even the recent disruption in the market, to us, it just means that there's opportunities for our partners to continue to evolve their solutions and make them visible to us around things like Agentic AI, right? As Agentic AI becomes even more commoditized and more available for us, we can deploy kind of bite-sized solutions that are very targeted around how do we drive automation. And what that means is it will just accelerate our continued path towards improving our profit margins and cash flow over time.

And actually, secondly, quickly, do you have any concerns relating to DOGE as far as your governmental business and also the heightened FX volatility we're seeing given that you're not in frontier markets, but you're in some interesting international markets nonetheless?

Yes. We don't have much exposure to kind of DOGE from a U.S. government perspective. We don't really have any sort of exposure to kind of government-related contracts per se. So directly, no, what that means indirectly over time, it's tough to say, Matt, at this point.

I would just say we have no concerns about our revenue guidance for 2025 as it relates to any of that, Matt.

Your next question comes from the line of George Notter with Jefferies.

This is Karen [ph] on for George. I just wanted to talk about or ask about traction in CXM payments. Are we still tracking on the Rule of 40? And how do we see outlook for those 2 segments going into '25 and '26?

Yes. I mean I think what we're seeing is that we're still seeing fairly robust growth on both of those businesses. I think combined, we're talking about kind of rule of 30-ish, right, not quite rule of 40, but still pretty healthy performance on both businesses.

We expect over the near term and the medium to longer term, both those businesses have the ability to grow double-digit organic. Every now and then we might see a quarter where we saw in 2024, where payments might dip down into the mid- to high single digits for a quarter, some timing and get back, but we see good double-digit growth over some sustained period, and we like those prospects going forward as well.

Great. And then just a quick follow-up. Tell me if I'm interpreting this wrong. I'm just wondering, I see that the Asia Pacific revenue ticked up in December. I know it was down last quarter, but is that a sign of any projects playing out there? Or anything you can tell on that?

No. I mean, one, it's a law of small numbers, right, because you've got the numbers in the APAC region, that's probably our smallest region. So kind of small wins and/or go-lives in some of our deployments will impact that number meaningfully. So I wouldn't read into that too much.

Your next question comes from the line of Nehal Chokshi with Northland Capital Markets.

Congrats on those great results. Hai, can you give a little more color as far as how much is increasing SaaS mix driving the gross margin increase on the Q-over-Q and year-over-year basis?

Yes. We haven't really broken that out. Let's just say it's a meaningful number. It's really just 2 factors, like I said, it's the mix of revenue combined with efficiency around the rest of our businesses, right? So as we highlighted, in 2024, we took actions several times throughout the year to drive some meaningful efficiency. They were very difficult decisions in our part. They were the right decisions for us to really continue to drive improved profitability and cash flow, right? And you see that manifest in our improving gross profit numbers. And at the same time, you can probably assume that if we're continuing to grow our payments, our CX business, which are higher-margin businesses, right, at double-digit organic growth relative to the rest of our business, that's the mix contribution.

It sounds like mix is less than a 50% contributor to the increases in gross margin you've been seeing, though, on a year-over-year basis at least. Would that be fair?

I think it depends on the quarter and the timing.

Okay. And then, Brian, you mentioned big wins, definitely big ones from my perspective of Claro Brazil, Telenor Denmark and Lyse. Could you give us some detail as far as who are the incumbents here? And a follow-on to that would be, are you seeing any difference in frequency of success against NetCracker and Amdocs over the past year?

Yes. What we've tried not to do, Nehal, I hope you're doing well, is talk about our customers' business. I'll let Dan talk about who we're displacing in. But obviously, all 3 of those wins were meaningful. And you can assume we were competing against everybody and their brother and sister as part of those wins. The market continues. Any deal that we're selling, we're going up against the top competitors. And if it's a billing deal, yes, we'll always go up against an Amdocs, an Oracle, a NetCracker and some of the smaller players. That's just the nature of winning the kind of deals we are. So I've been in the space now since 2002. And so I don't see anything changing in terms of the competitive intensity. There are always tough wins to get, and we're always proud when we do it. I think the one thing that I've commented on that I do think is different is I think there is an inflection point where the telecom market, and it's also true of what we're seeing in North American broadband needs to take out significant complexity not starting with their technology, but their business process. And so that's why we invested in an AWS cloud-native Ascendon. That's why we developed and acquired part of the stack with this analytics-driven digital CX platform Xponent and why we also built out our quote and order to be able to integrate those 3 products and operate in the cloud and help them simplify their business process and with a goal of reducing their cost to serve by 40% or 50%. We do think that is a big competitive advantage that we have against some of our players that they don't have. They'll say they do, but they don't. And so we're trying to leverage that across the board, and there's still intense competitions with my friends over at Amdocs and at NetCracker.

Your next question comes from the line of Shlomo Rosenbaum with Stifel.

Brian, can you just talk a little bit about market conditions and how they've been trending? Have they been getting better, staying the same, getting worse? I guess what I'm hearing is I'm hearing you more enthusiastic over the last few quarters. It doesn't sound like the market is getting better. It feels like you are, I'm not sure if there's like more manufactured wins just from you guys maybe grinding it out better, having hitting the right places better. I'm just trying to put this all together. And then in the context of kind of the 2% to 4% revenue growth, given the enthusiasm that you have, does it seem likely that we could see that growth moving up over the course of the year?

Yes. Shlomo, it's a great question. I mean, first, we're not pleased at all with 2024, right? Organic growth, that's sub-2%. We loved Q4. We saw it coming. We saw the sales wins and the onboarding, which got us to the 5% organic in Q4. We weren't pleased with 2024. We got to do better heading into 2025. And as we said, we're entering the year with better backlog with better visibility than we had 12 months ago. We still see a tough market, which is why we tend to be call balls and strikes pretty straight down the middle. And that's why we're saying right now, it's still a tough market condition, notwithstanding the great sales wins. That's why we're guiding more to a 2% to 4% organic with the chance if we get a good start to the year that we could come in at the upper end of that, but let's see what happens. So it's a combination. yes, we're entering this year with more optimism than we entered 2024, but it's still a tough market condition. We just got to keep executing quarter in, quarter out. Probably have a little more flavor and insights after we close Q1.

Okay. Great. And then this one is for Hai. The free cash flow was very good in the quarter, and we saw the receivables go down. And I'm just wondering, particularly in the unbilled, like were there milestones that were hit for payments? Has that been more of a focus for your team in general? Just checking into that, in particular, in the context of the company expecting a lot better free cash flow going forward for the next few years.

Yes. Shlomo, I mean I think that each year will bring kind of different challenges to us in terms of continuing to drive up our free cash flow performance. I think this year, what we did do, and we talked about it in the past, which is we did implement a lot of intensity around improving our free cash flow. And so we put in place kind of a high-intensity process to really drive improvements on our net working capital. Now when you first put it in at the beginning of the year, it takes a little time for it to really have an impact, but we really started to see that impact, particularly in the second half of the year, and that's what you're really seeing here at the end of the day. There were some improvements in the unbilled, but I would say that wasn't really what was driving the bulk of the free cash flow improvement. The bulk of the free cash flow improvement was, one, just a growth in our operating income as well as the improvement on net working capital. As we enter this year as we look into 2026, yes, we do have confidence that we're going to continue to drive those improved working capital numbers. We have confidence that we're going to continue to drive up our profitability. And we do believe we're going to start to make a bigger dent in our unbilled as well, right, as we hit those project milestones and then convert the unbilled to receivables.

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

I know you don't disclose it exactly, but do you think your cloud SaaS revenues are in line with your industry peers or enterprise migration to the cloud? Would it be kind of above or below those trends? And can you give us a sense of where you think that ultimately ends up as a percentage of revenue? And I guess related to this, what's the gross margin for this business versus legacy?

Yes. There's a couple of aspects to that. Let me maybe start to peel that onion and then Hai can add some more color, Tim. I appreciate you joining. First, from a SaaS standpoint, we have quite a few solutions that would be either AWS or a cloud-native solution. For those businesses, we expect like any cloud, we expect net retention well above 100%. We expect gross margins to be above 70%. We expect to be able to drive those kind of economics where you could get to 75% or 80% on the gross margin. So on that side, that is our expectation. It doesn't mean every one of the businesses are there because some of them are smaller in the early stages, and we're really starting to get scale around that. But that is our expectation and kind of what we see around cloud. I think in terms of when you look at the BSS side and kind of compare some of our competitors have more of a managed service offer. So they may be doing a lot that they would call cloud. But a lot of times, it might be moving a large telecom operator from an on-premise iron, their own data center to more of a services-based project to go to an Azure or one of the hyperscalers. They'll call that cloud, but that's very different than having a true cloud-native platform that can drive the kind of economics and revenue and mix shift that Hai is talking about. That's why we do think we're on to something with our Ascendon. In the digital CX space, again, that is a cloud solution, just like our AWS cloud payments. In payments, you see probably more of our competitors do also have a true cloud native. Same would also be true in the CX. So I think that competition question differs by industry vertical. But Hai, anything else you'd talk about on the financial side of that?

No. I mean I think, Brian, you touched upon it, which is we're no different than any other business, right? So the relative difference you see in the industry around gross margins associated with the SaaS platform versus gross margin associated with services. Even within a "SaaS company" they'll have deployment revenue associated with services and they're much lower margin relative to the platform margin. We're no different than that, and it's a relative mix.

But Hai, can you give us a sense of the revenues? I mean, some metric, is it above or below 10% or above and below 20%? Not looking for exact numbers, but it's obviously a major driver of the business, and we're kind of flying blind here.

Yes. No, look, it's something we've talked about, right, is that we're not at a point where we're prepared to kind of break that out, right? We don't have segment reporting. That's not what we do. But we're constantly evaluating Tim. And I appreciate the challenge. But at the end of the day, we're in the early stages. We think there's a long runway here for growth. At some point when it becomes meaningful enough, it is something we'll look to break out. But suffice it to say, like I said, we're currently looking at our payments in our CX businesses are a rule of somewhere between 30 and 40, right? That's the way we think.

Great. And Brian, how are you thinking about industry consolidation? Do you think you can create more value by buying smaller companies over time and accelerating your growth rate there? Or do you think it would make more sense for you to roll up into a larger company where they can do something similar in terms of synergies over time? How do you think about how the industry evolves?

Yes. Maybe I'll answer it from 2 angles. On the M&A, it's pretty much the same, highly disciplined. We think price points have come down, but we constantly look at small, mid and larger. Obviously, if you get into the mid and larger, it means that the diligence goes up 3x, the discipline goes up 3x because you got to get those 100% right. And we think our track record speaks for itself on that. And we do expect to be able to announce and close deals in the coming quarter and in 2025. Stay tuned on which size spectrum those fall into. On broader market speculation, there was a report that went out. We don't comment on specifically, but we're pretty straight shooters. So I'll just share what I talked to our customers and our global employees about on maybe some of the bigger industry scale rumors that are out there. First, we just believe with the results we're putting out, you put out better and better results, people are going to take notice and you're going to get talked about more. So we think being more relevant is a good thing, not a bad thing. Second, what I remind our teams about around this bigger scale consolidation, our customers are in the news every day about who's going to buy who and what do they do at the exact level? They keep their head down. They know that's noise, and they know the best thing they can do is just kick out better and better results kind of every quarter. And that's what we just try to get our teams to focus on. From an industry logic, if you kind of step back as an analyst, the reality is somebody like an NEC, a large network equipment provider that's acquired both an OSS and a BSS that looks a lot like our company, probably a similar size. Is there industrial strategic logic of what could be unlocked by putting assets like that together? Of course, there's large strategic industrial logic. And kind of what we're focused on is just perform and deliver results like we put up in Q4, and it will take care of itself. And of course, our Board, I'd put our Board up against any Board out there. If something moved from rumor mill to actually a compelling offer that looked like it could be actionable, of course, our Board would do the right by shareholders with the right thorough process. So is industry consolidation in telecom, has it happened consistently over 2 decades? Yes. Is it likely to continue to happen? Yes. What do we do? Just perform quarter in, quarter out.

Sorry, last question, sorry to monopolize. Palantir had a quote on their call 2 days ago that they won a very large pharmaceutical contract, $67 million contract value. They're automatically load balancing prescription fulfillment and orchestrating patient outreach. Are you partnering with them or competing with Palantir on their AI? And obviously, they're talking about 80%, 90% kind of productivity improvements with using their AI. Do you see them at all, and I guess, are you partnering or competing?

Yes. No, it doesn't mean we won't. We've never competed directly because what our solution is, is not an AI in and of itself solution. It's really how do you actually ingest data from customers, put it in a format that then you can turn into real-time actionable insights on a targeted use case and then actually deliver that through different channels so that you can optimize it in a very low-cost fashion. We've never, to my knowledge, competed against Palantir as a pure stand-alone AI solution. It doesn't mean we might not, I guess, but that hasn't been one we've ever come across. And we know them fairly well.

Your next question comes from the line of Brett Knoblauch with Cantor Fitzgerald.

This is Thomas Shinske on for Brett Knoblauch. Just one for me. I wanted to ask about the solid revenue growth outside of Comcast and Charter, which grew around 8.5% year-over-year. Referring to comments made on the call about inorganic and organic growth. Does it sound accurate that approximately $4.5 million of that growth came from inorganic contributions, leaving about 6% as organic growth in the business outside of Comcast and Charter? And then could you maybe also provide additional insights into what drove the remaining growth, excluding the inorganic contributions?

Yes. I mean I'll let Brian talk about kind of the drivers of growth. But mathematically, you're directionally correct in the math that you're doing in terms of the difference between organic and inorganic, right? So like I said, it was a great quarter for us, a very strong quarter. and it really illustrated the power of the value that we're bringing to the table for many of our customers existing or through our recently acquired business.

Yes. And on the organic side, I think the main drivers in 2024 were our strong sales performance and revenue performance in our customer engagement analytics CX business. And we just had fantastic both expansions of existing customers and good wins in that space. Payments grew nicely in 2024, although we know we can do better in payments in 2025. And we had that really nice deal with Comcast, where we had an adjunct billing solution for another part of the business outside of their triple play that also contributed nicely. Those would probably be some of the bigger ones, notwithstanding good wins in telco, but I think you'll see some of that revenue coming online as those big programs get implemented.

And your final question comes from the line of Michael Berg with Wells Fargo.

This is Bronin [ph] on for Michael. Just a quick question on the other vertical segment. You said that number, it's like hovering around 30%. Could you talk about like the dynamics of your diversification journey and when we should expect that number to start accelerating?

Yes. I mean, first, I think I'll let Hai close off on the back end of that on the numbers. But first, we're not in a diversification for diversification's sake. CSG is laser-focused on how do we help great brands simplify their complex customer engagement and monetization and deliver better results. And so all the wins come from a unified simple strategy that brings about integrated technology that just does that better than any of our competitors. So that's what we're seeing around that is just a better performance that's actually driving them better growth as a result of that in those other verticals. Tolling was a great win. We talked about stuff in media. We talked about financial services, big technology, some of the pharmacy retailers and small price points, quick ROI returns is what gets you a closed and won deal in this tough economic environment. We're doing it like clockwork. Hai, anything you want to add on the numbers?

Yes. So first of all, if you think about the journey we've been on, in some regards, we've been very fortunate to have started with cable and telecommunications, right? In fact, they are some of the most complex businesses to work with, and we've helped simplify their business proposition to their end customers. And what we're finding out is that, that's not necessarily unique. We can take that expertise and the solutions we've built and add value to other industry verticals. So that's the journey we are on. And with regards to the numbers themselves, it's hard to predict. I mean it's a great question, primarily because it's not as if our cable and telecommunications business are static, they're growing as well, right? And because of that growth, some quarters, they're going to continue to grow very quickly versus the other verticals. In other quarters, other verticals are going to grow more quickly. So it's going to be a little choppy. But directionally speaking, over a multiyear period, do we expect those other verticals to continue a steady march above 30%? Absolutely.

Great. That makes sense. And just a quick follow-up. Anything you're seeing in terms of like end customer dynamics, specifically within your large customers? And if there's any structural weakness there based on like their previous prints and what you're seeing into 2025?

No. I mean I think they're facing the same thing we are, which is how do they constantly strengthen and simplify their strategy, how do they execute better and how do they make sure they invest in things that give them a payback. And so that's why in our sales cycles, what do we focus on? How do we help them actually improve their financial results, get a quicker payback, and that's leading to the good sales wins. But structurally, nothing else that I would comment on.

Thank you so much. This does conclude the Q&A portion of today's call. With that, I will hand the floor back over to Mr. Shepherd.

Thanks for joining us today on the call. Team CSG is laser-focused on having 2025 be a better year of results than we had in 2024, and we're locked in on making sure we start the year strong with Q1. Look forward to talking to you in 90 days.