CSG Systems' (CSGS)- Strained Model
Behind the model risks and suspect quality of recent growth
CSGS is an SaaS company that provides billing and customer support solutions for cable and telecom customers. The company returns nearly all cash flow to shareholders as dividends and share repurchases, yet the dividend yield is still only 2%. The heavy share repurchases helped Q1 EPS growth by 1.9% and in Q4 by 1.1%.
We see several shortcomings with the company's SaaS model:
CSGS does not post consistent top-line growth. Sales rose by 0.5% y/y in Q1, but this drops to a decline of 1.5% after adjusting for acquisitions. CSGS is forecasting 2%-6% organic growth for FY 2025, but has warned that growth will be backloaded to the second half and get a boost from 2024 acquisitions. Guidance is only for $1,104-$1,139 million in sales vs. the $1,100 million in 2024.
Client retention is a significant risk. Often, a retail client is signed up for a discounted plan, and as that rolls over, their churn increases as customers seek a better deal. CSGS is paid on transactions.
The SaaS model typically produces higher cash flow as a customer pays up front and the revenue is deferred and recognized over the year. However, CSGS deferred revenue is only about 20-25 days of revenue. It is not driving cash flow.
It has already reduced costs, likely more than can be maintained. In addition, we identified multiple items that we believe reduce the quality of the company's recent revenue and earnings. Let's take a closer look behind the numbers…