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CSG Systems International, Inc.

CSGS: NASDAQ

CSG Systems International, Inc. (CSGS) is one of the leading providers of business support solutions (BSS), primarily serving global communications service providers (CSPs) [1] It is an industry leader in the North American cable market with upwards of 60% share. [2] CSG’s software based solutions help CSPs manage revenue, customer interactions and the overall digital ecosystem. [3] The company spun out of First Data in 1992 and has 35 years of experience and expertise in voice, video, data and content services. [4]

Investment thesis

We liked that the company had less than $100M in net debt, close to 50% gross margins and was increasing its return profile with return on equity (ROE) in the twenty percent range as of yearend 2016. [5] For us to make an investment, though, we needed to know that CSG’s solutions were critical to its customers.

Confirmation through research

In our discussions with CSG as well as sell side analysts, we gained confidence in the company’s business support solutions. CSG’s top three customer relationships have lasted 15-20 years and the contracts are long term. [6] CSG investor relations said that customers recognize the need to upgrade and modernize, especially with increasing pressures from Over the Top services, cord cutting, and low net promoter scores. CSG has a new product, Ascendon, which will support its customers as alternative media delivery becomes a bigger strategic growth driver. [7]

We believe CSG will continue to benefit as the communications industry consolidates. We expect 10M customers to switch over to CSG as a result of the Charter/TWC/Brighthouse merger, which would provide upside to our thesis. Outside of that, we think the company will continue to grow as new services are added, driven by Ascendon. CSG should be able to leverage top line growth to drive further operating margin expansion, as it did when it converted 8M Comcast subscribers to its platform and saw 400bps margin improvement. [8]

Variant Perception

As an industry leader with multiple avenues for long term growth and solid financials, we believe that CSGS will prove to be a strong core holding for Anchor. [9]