Consensus Cloud Solutions, Inc. Q3 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to Consensus Q3 2022 Earnings Call. My name is Paul and I will be the operator assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. On this call from Consensus will be Scott Turicchi, CEO; John Nebergall, COO; Jim Malone, CFO; and Adam Varon, Senior Vice President of Finance. I will now turn the call over to Adam Varon, Senior Vice President of Finance at Consensus. Thank you. You may begin.

Good afternoon, and welcome to the Consensus Investor Call to discuss our Q3 2022 financial results and other key information, as well as the reaffirmation of our 2022 guidance. Joining me today are Scott Turicchi, CEO; John Nebergall, COO; and Jim Malone, CFO. The earnings call will begin with Scott providing opening remarks, John will give an update on operational progress since our Q2 Investor Call, and then Jim will discuss Q3 '22 financial results and 2022 guidance. After we finish our prepared remarks, we will conduct a Q&A session. At that time, the operator will instruct you on the procedures for asking a question. Before we begin our prepared remarks, allow me to direct you to the safe harbor language on Slide 2. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that could cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to the risk factors outlined on Slide 3 that we have disclosed in our SEC 10-K filing, as well as a summary of those risk factors that we have included as part of the slide show for the webcast. We refer you to discussions in those documents regarding safe harbor language, as well as forward-looking statements. Now, let me turn the call over to Scott.

Thank you, Adam. I would like to touch on several areas before handing the call over to John and Jim for more details on our operations, Q3 financial results, and the reaffirmation of our guidance. This was another very good quarter for Consensus in light of high inflation and the volatility in our economy. We were able to produce a record quarterly revenue by growing 7.5% versus Q3 2021. We continue to operate healthy EBITDA margins of 53.5% consistent with our guidance of between 50% and 55%. These results were driven by continued strong performance by the corporate business, which grew 19% versus Q3 2021, 14% of which was organic. In addition, this is the ninth consecutive quarter of corporate revenue growth and nine straight quarters of ARPU growth of more than 15.9% versus Q3 2021. Our SoHo channel had good results notwithstanding continuing FX headwinds, which primarily affect this channel of revenue. As we discussed last quarter, we implemented a price change to approximately 30% of the base during the quarter. We expected that we would experience a similar cancel rate to Q2, given the additional cancels expected at the higher price point. I am pleased to report that the cancel rate of 3.6% was only modestly higher than our Q1 cancel rate and 27 basis points lower than Q2. We believe these FX headwinds will continue throughout the year. Jim will provide more detail on the financial performance for the quarter, as well as for each channel of revenue. As noted in our press release, we have received the authority to operate from the Veterans Administration as we had expected in September. Cognosante and the VA have been working to develop a plan for rolling out the solution across more than 2,000 facilities within the VA system. That plan is in progress. We now have interest from seven other federal agencies up from three last quarter, and we will begin working with them to understand better their needs. John will provide additional details on each of these areas in his portion of the presentation. Despite the tight labor market, we have continued to make progress in our overall hiring with a focus on our technical team and filling out our staff as a standalone company. We ended the quarter with 575 employees. I'd like to welcome all of our new employees who have joined us since our last earnings call. We also celebrated the one-year anniversary of the spin from our former parent Ziff Davis on October 7th of this year. I would like to congratulate all the employees for their arduous work to complete the separation. We were able to finalize the last payments to Ziff regarding transaction fees related to the spin. There are still some customer accounts of Ziff that map to some of our bank accounts. We remit the cash collected on a monthly basis and expect all such accounts to stop mapping to our bank accounts prior to year-end. In addition, we assisted Ziff with the additional sale of 500,000 shares of our stock, leaving them with an ownership position of less than 6% of Consensus. They now have approximately four years to dispose of those remaining shares. Before handing the call over to John, I would like to provide you with our thoughts on the economic environment and how it is influencing the operations of Consensus. The economy has not improved since our last earnings call and many expect a recession in 2023. I'm pleased to report that our usage volumes per business day are at their strongest levels, due in part to the approximately 40% of our business that is in the healthcare sector. However, we are noticing slower decision cycles for our larger customer opportunities. We believe that this has shifted approximately $3 million of revenue into 2023 from 2022. Notwithstanding this timing difference as well as the previously mentioned FX headwinds, we reaffirm our 2022 guidance. Jim will provide additional color on the guidance after reviewing the Q3 results in detail. Finally, we remain liquid with more than $100 million of cash on our balance sheet and the undrawn line of credit that we put in place in March. We remain well-positioned for these uncertain economic conditions due to the fundamental necessity of our services, the subscription nature of our business, which has approximately 70% fixed revenue, and the increasing percentage of our business that maps to the healthcare sector. I'll now turn the call over to John.

Thank you, Scott. On Slide 5, we can see a summary of our operating results for the quarter. In the third quarter, we achieved another record corporate sales result, closing $8.4 million in ACV and license bookings. As a reminder, our corporate sales team consists of enterprise field sales and inside sales teams focused on small and medium-sized businesses and the channel program targeting telcos, EMRs, and resellers. Sales bookings for Q3 grew 62% over Q2 and represented a 78% increase over Q3 of 2021. Included in our overall sales number is $2.8 million in advanced interoperability products, including a million dollars in new product sales. Our advanced product set accounted for 34% of our overall sales volume for the quarter. Some notable deals include a major fax deal with Change Health through our Amazon relationship and the University of California Irvine Health System. In addition, we had an expansive Go Live at WellStar, a large southeastern healthcare system with nine hospitals and over 300 locations. This particular implementation is a major integration of the eFax platform with an epic EMR system. Overall, our corporate business delivered revenue of over $51.2 million in the quarter, and the corporate stream accounted for roughly 53% of our overall top line. In Q3, SoHo saw the expected lift as a result of the price increase implemented in Q2. Now, while the bulk of those increases were fully implemented in the second quarter, there were a few remaining classes of SoHo accounts who will see the increase as their annual plan renews, or when a new sign up from the Q1-Q2 timeframe reaches the six-month mark. Overall revenues for SoHo were up over Q2 and virtually flat for Q3 2021 once normalizing for foreign exchange rates. Our churn was better than expected at 3.6% for the quarter in light of a price increase on approximately a third of the base, close to the cancel rate in Q4 2021 and Q1 2022. As mentioned last quarter, one of our traditional business practices is to reach into the SoHo customer base when we identify customers, particularly in healthcare, who could benefit from the expanded feature set in the corporate product. Now, this has been a successful small-scale sales tactic, and we're currently scoping a program to do that on a much more expanded basis. On the product front, as Scott mentioned, we're pleased to announce that ECFax has achieved authority to operate or ATO as expected in September. We are currently working with our partner Cognosante and the VA and have identified the first candidates to receive ECFax. Given that we're coming into the holidays and expect an abundance of time off associated with this part of the year, we anticipate that implementation is going to begin in early 2023. Now, since achieving ATO, the pipeline of interested government agencies has grown, as Scott mentioned, and we're working with Cognosante pursuing those opportunities. A key part of our overall program involves the commitment to security that envelops our entire platform. Central to this are certifications, audits, and reviews conducted by recognized third parties that test and validate our security. Last quarter, we shared that our fax environment passed HITRUST recertification, and this quarter, we have also renewed our PCI Level 1 and SOC 2 Type 2 certifications. In addition, the team has started work to get jSign ready for its inaugural HITRUST review and expects that we will have that work done by mid-2023. Keeping up with these credentials is vital to our position in the market and requires planning, time, and effort on the engineering part. It is very critical to our success. The product team continues to make progress with both Clarity and Harmony. We are still engaged in our first implementation of clarity, making refinements and adjustments at the customer's request. As we reported earlier, we have added handwriting recognition and our last round of changes for that to be fully operational in the customer environment is nearing completion. Progress is steady, and our pipeline for other customers asking for clarity remains strong. The team is also hard at work on Harmony, our cloud-based full communication solution for healthcare. As we previously discussed, message transformation is one pillar of the Harmony solution set. One of the transformation technologies of Harmony is a capability called fax to direct. Now, this enables a user from one facility to send the fax document and our system then transforms that in transit to a secure direct message based on the receiver's preference. This was something that we showcased at HIMSS earlier this year. Now in Q3, we completed a proof-of-concept with a large East Coast healthcare provider with fax to direct in a live production environment. While the overall Harmony product will be a late 2023 release, we intend to introduce capabilities that can help our customers and can drive revenue as they come available. So we're very pleased with this quarter in which we've had record sales, SoHo performance in line with expectations, achievement of the VA ATO for ECFax, and a number of major engineering and product deliveries. Now I'll hand it off to our CFO, Jim Malone, for a closer look at numbers.

Thank you, John. Good afternoon. Before I start the discussion of the P&L and Q3 performance, I wanted to briefly discuss our cash position. As you might recall from previous investor calls, we have pointed out that Q1 and Q3 are our strongest quarters for cash flow conversion. As a reminder, we made semiannual interest payments of $25 million in Q2 and Q4. We ended Q3 with $103.7 million in cash. Our liquidity remains strong to support our operations with the added benefit of the $50 million undrawn line of credit. Moving to Q3 results, starting with corporate results on Slide 7. Q3 2022 corporate revenue of $51.2 million was an all-time record, increasing $8 million or 19% over the prior year period. Corporate revenue grew $8.4 million or 20% on a constant dollar basis. The number of accounts at 47,000 was 2,000 higher year-over-year. Average monthly revenue per account increased $50 or 16% over the prior year comparable period, primarily resulting from increased usage of new launch customer acquisitions and a 14% increase in paid ads. A substantially lower churn rate also contributed to the momentum in double-digit growth. Noteworthy, as John stated, we landed several marquee logos. Our last 12 months revenue retention approximated 104%, consistent with our expectations. Moving to SoHo results on Slide 8. Q3 SoHo revenue was consistent with our expectations at $44.7 million, a $700,000 sequential increase over Q2 2022. On a year-to-year basis, revenue declined 2.7% or a negative 50 basis points, essentially flat to prior year on a constant dollar basis. As expected, the year-over-year revenue decrease was affected by lower pay heads and expected churn, partially offset by higher average monthly revenue per account driven by a Q3 price increase. Accordingly, the revenue mix further enhanced the contribution to SoHo fixed revenue. Now on to Slide 9 for our Q3 consolidated results. Q3 revenue of $95.9 million was an all-time record, increasing $6.7 million or 7.5% over Q3 2021. On a constant dollar basis, revenue increased $8.1 million or 9.2%. Reported adjusted EBITDA of $51.3 million was up $0.4 million or approximately 1%, delivering a 53.5% margin in line with our expectations. Non-GAAP EPS of $1.52 was $0.08 or 5.6% year-over-year reflecting higher revenue, foreign exchange impact resulting from a stronger dollar, and a lower share count. As noted on the slide, Q3 2022 is in line with expectations in a challenging economic environment. Now on to Slide 11 and our full year guidance. As Scott discussed in his opening remarks, we are reaffirming our full-year 2022 guidance range. With respect to full-year revenue and adjusted EBITDA, we are guiding to the lower end of the range due to FX headwinds and the timing of our large customer wins and new product adoption. Our pipeline continues to be robust for the near to midterm timeframe. Non-GAAP EPS is expected to be at the top of our range due to a strong U.S. dollar providing a benefit with respect to Euro-denominated liabilities. As mentioned in Scott's opening remarks, we negotiated a final settlement with our former parent regarding all spin-related transaction costs. The September 30th balance sheet reflects $900,000 due to the former parent, representing comingled inputs, which we paid in October. Both parties have made arrangements for customer repayments to be processed in their respective company accounts. These conclude my formal remarks. Now I'll turn the call back over to the operator for the Q&A session. Thank you.

Thank you. We will now be conducting a question-and-answer session. And the first question is coming from Fatima Boolani from Citigroup.

This is Mark on for Fatima, thanks for taking our questions. So maybe just diving into your guidance a little bit. I appreciate that you guys reaffirm guidance, and maybe moving towards a little bit on the lower end of that guidance. But the $3 million shifts of enterprise out from 2022 into '23, just in terms of given you guys reaffirm, should we expect any sort of upside or anything to make up that $3 million or are we more being on the lower end of guidance?

So I mean we're going to unpack this a little bit more. So if you take actually the two comments together, and you look at the full range guidance and you start at the midpoint of 380, there's about $3 million of FX headwinds and then another $3 million of customer shifting, so that would actually put us below the end of 375 with relative implications to the EBITDA. And so we are making up some ground to get to somewhere above the low end of the range. One of the things that I think everyone should understand is, as the business has evolved and we have focused on both larger scale fax deployments out of our corporate channel as well as the newer services, these tend to be increasingly lumpy in terms of the timing of the win and their relative contribution within a given quarter. I think what John said was extremely important, and that is that we're entering a time of the year and I think with the uncertainty in the economy, we believe that there are unlikely to be material decisions made that would impact Q4 in any positive material way from a revenue standpoint. Not saying that can't happen, we'll push very aggressively, but I think just where we're at in the time of the year, a lot of these decisions while they may be made before year-end will not have revenue implications for 2022. So taking that all into account, we're going to do everything we can from SoHo to our enterprise channel to generate as much revenue as we can, but this is our best estimate as we sit today.

The next question is coming from Jon Tanwanteng from CJS Securities.

Commendable job just keeping the guidance even with these headwinds that you are seeing. Interesting. I guess to follow up on that question, the push out that you're seeing on the enterprise side, are they healthcare or are they non-healthcare corporate? Can you give us a little bit more color on the types of customers you’re referring to in this segment?

I don't think this issue is exclusive to healthcare, but with our focus on corporate sales, nearly 70% of our new sales are in healthcare, which is where we notice it most. There seems to be two timing issues at play: first, the customer’s decision to adopt the service, and second, even after that decision, their ability to implement it. We can help with some aspects, but we depend on the customer for full implementation. We’ve experienced delays in both situations; sometimes it’s just a timing decision, and other times we are prepared to proceed, but our clients aren't ready to commit yet. We've also noticed that at this time of year, some institutions decide to wait until January to make any changes to their systems. We can't influence that decision. We are ready to start as soon as they want in January. John, do you want to add anything?

Yes. I would echo that. I think that in terms of even some specifics we can talk about, and we talked about the Change Health deal, which is a significant deal for us. The lumpiness is evident there as we had anticipated that would be an early Q3 deal wound up being a very late Q3 deal. And then there are implementation considerations as we go into Q4. I think the same can be said, as we talked about the clarity implementation that is stretching on a bit longer than we thought it would, but in our estimation, we want that clarity implementation, especially this first one, which is going to be a bit of a flagship for us, to be as impeccable as can possibly be. So again, this is a timing issue, it's not a question of if, it's about when. And that these things have slipped into 2023 is certainly something that, in terms of guidance we're still in the range, but things have moved out a little bit further than we thought they would.

And as you move into '23, do you catch up with this and do things push out in Q1, if you don't, and everything's just to the right? Do you have the capacity to execute all the stuff that maybe you're backed up on?

We have the capacity to execute. It all comes down to customer readiness and how that fits with us. We're fully expecting that we're hitting 2023 running. We're going through a budgeting process now. And of course, we'll have more to say about that as we have the fourth quarter earnings.

The next question is coming from Greg Burns from Sidoti & Co.

Just to maybe follow up on the commentary about next year. From a margin perspective, what would move you towards the top or low end of your 50% to 55% guidance range next year? Have you made all the investments you've needed to make or with the government coming online? Is there more upfront costs that you need to absorb before you know you start to recognize revenues?

That's a great question. As John mentioned, we're currently in the early to mid-stage of budgeting for 2023. There are several key factors to consider regarding revenue, which impacts margin and costs. One important factor is the overall economy. I want to gather as much data as possible before finalizing our budgets, which means our budgeting process will be slower this year compared to previous years. This is to understand how our core customer base is behaving and to address any issues where we've seen fluctuations from one quarter to the next. This aspect may influence our revenue projections. On the cost side, we have indicated from the start that this is a multi-year investment program. We aren’t finished with our investments in technology and sales resources. Some of these expenses are linked to revenue projections, affecting how much we require for professional services and additional technical and sales resources across our inside sales and enterprise segments. It’s quite interconnected. I should mention that we may face downward pressure on our margins due to our employee base expanding this year. Hiring has been costly, and we will incur the full expenses of those employees next year compared to partial costs this year. Furthermore, we are still experiencing inflationary pressures on our workforce, impacting all employees. We will seek ways to counterbalance anticipated increases in employee-related expenses with savings from other cost categories. We have significant expenses in areas like telecommunications and external services, which range between $60 million to $70 million. However, it's uncertain if the rising labor costs can be entirely offset by savings in other areas. At this point, it's too early to determine, although I have no reason to believe we won't work within that projected range. However, I wouldn't expect any improvement in our current margin structure for 2023.

And the next question is coming from Ian Zaffino from Oppenheimer.

I just want to get a little bit more into the SoHo channel. You're taking a price, and it's sort of similar if I could draw maybe a comparison to what you did during the financial crisis, you took pricing up, you saw a little softness on the customer count side. But that sort of mitigated the type of weakness that you probably would have seen in the financial crisis? I mean, are you expecting something similar this time around or anything to divine from what you're doing now versus what happened in '08, '09?

There are some similarities. But I think, look, there's also differences, partly it appears this recession will be different than the Great Recession. So one of the questions is, what does this recession look like compared to that. I would just make the note that similar to last time, we completed the price change and it was coincident; we weren't that smart prior to the real onset of the Great Recession. So, to the extent we're not in a recession now, but it's around the corner in '23, it looks like that will be a similar fact pattern. There was though, just to be clear and to be fair, there was an increase in the cancel rate in '09 relative to the '08 performance that had nothing to do with the price change but was influenced by the severity of the recession, albeit relatively brief in duration. We suffered increasing cancel rates for maybe a couple of quarters, then they started to return not only to the previous means but actually went lower. Is that a fair overlay for '23? Who knows. Because I don't think right now there's an anticipation the recession will be as shockingly severe as '08, '09 but I think there's a belief that it might have a longer duration than '08, '09. So these are kinds of things we have to play around with. But yes, getting the price change substantially done before the onset of the recession is a mitigant and needs a help, because quite frankly, I'd rather have a smaller base of customers that is a steadier, better base of customers than a larger base that is more fragile. So it does have that effect of winnowing out some of the weaker customers, and generally managing the smaller base is better versus managing a larger but arguably somewhat weaker base. But these are all variables that are to say this is why I want as much data as I can get before we lock things down for '23.

The next question is coming from James Breen from William Blair.

Can you just talk a little bit about the growth you saw in the fax corporate side? You called up mid-market in the presentation, is there anything specific you're doing there from a sales motion sort of drive growth? And then from an overall cost perspective as you're thinking about potential for recession and the impact on the overall business, how do you manage around that? And can you keep the margin structure relatively stable, in case could see a little bit worse revenue growth?

I'll try to take the first question because those channels have inside sales and field sales reporting to him. Yeah, he might share some secrets. We're obviously very pleased with the inside sales programs. I think what we've done is we've taken a program that had traditionally been focused on being a part of the web marketing program, meaning that you get hand raisers or you get warm fills from businesses that are larger than a SoHo business. The inside sales team does either outreach or follow-up and closes those deals. What we've been able to do, though, is introduce this idea of a channel kind of relationship that starts to funnel new and different kinds of opportunities to our inside sales team. You have folks like resellers or folks who are managed services providers that are interested in being able to bring fax to their customer sets; we've been successful with expanding into that. We have also expanded into specific account-based marketing practices. So each of these steps we have sort of builds on the step before to help us continue to move forward with how we sell, how we reach out into the marketplace, and how we identify new opportunities. One of the places that we consistently find new opportunities is by reaching into the SoHo base, and frankly farming out of the SoHo base as we can tell by the analytics that we use. The sell those SoHo customers are members of larger organizations; we reach in start that conversation and upsell them into a corporate product that better suits their needs and their business purpose. So I think as time has gone on, what we've been able to do with our inside sales team is keep expanding the kinds of techniques that they use in order to drive demand and capture that demand. And we've been able to show that that's a fairly bottomless pit of opportunity in that, there's always a new idea or a new way that we can think about to then continue to drive new business. And then, Jim, in terms of the second question, I think look, we put out and we've said consistently, we have a range of margins of 50 to 55. That is our commitment. Right now, I don't see any reason why we will not operate that range in '23. I'll just say, I'm not expecting the Great Recession of '08, '09. So, if something draconian like that comes, maybe we'd have to caveat the statement. But I think based on what most people are expecting, we still see a very positive trajectory in terms of revenue growth. And the question is how much in '23. But I think it's also important to understand, and it's something that we will beat the drum on. We need to make investments in this company, those will continue in '23 because the opportunity is so large. So it's not so much about planning for a given quarter in '23, we’re looking at '23 as a whole. So the issue for us is really where do we think we can land revenue-wise, such that we can measure and calibrate, if you will, the pace of that investment that will be commensurate with the growth in revenue. But not like we're going to shut down, and where we look for cost savings and where recession can be helpful is not in our people. It is in the other areas of our business. I know in '08, '09, we were able to make tremendous savings in our telco costs, meeting our third-party vendors in certain marketing programs. Those are the areas we'll be looking at and quite frankly, the type and severity of the recession will be indicative of the magnitude of the opportunities there. But it's not in our people. Our people will grow in '23 versus where we are right now in '22. That is a necessity, in my view, even if it does mean that the margin could be somewhat lower than the current 53.5.

And the next question is coming from Jon Tanwanteng from CJS Securities.

I was curious about how you've been able to tap into SoHo channels to acquire corporate customers who may not be fully served. I'm interested in how much this has occurred over the past few quarters or since then, specifically how much revenue you have generated from SoHo and how that has impacted both revenue and margins as you transitioned these customers into corporate.

You can view this as an unintended experiment. While it wasn't unintentional for those managing the inside sales channel, we're discussing several hundred customers monthly. The average revenue per user for our SoHo customers stands at $15. You can assume that the customers we're transitioning have a higher ARPU, possibly around $50 or $60. This translates to tens of thousands of dollars each month. What we've noticed is that when customers enter the inside sales channel, two significant things happen. Unlike in the SoHo channel, the opportunity engages directly with the customer. This enables a quicker availability of services in the inside sales channel compared to SoHo. You're not only building a relationship but also identifying genuine issues and offering a range of solutions to select from. In most cases where this happens, we see at least a doubling of revenue, meaning $10,000 turns into $40,000 monthly. Historically, this isn't very significant. We haven't previously analyzed the SoHo channel in relation to shifting possibly $100,000 to corporate since it seems minor. However, this has provided us insights on whether we can expedite that program and transition thousands of customers from SoHo into inside sales. The challenge lies in needing more inside sales personnel to reach out to customers, but the current team isn't big enough to connect with 10,000 individuals in the next 30 to 60 days. Thus, we're actively hiring for that group to speed up the movement of customers from SoHo to corporate. At this moment, we believe it's wise to move several customers into the corporate channel if they cannot be effectively served. Having the right personnel is crucial for making calls, conducting outreach, and performing research to facilitate productive discussions and potentially doubling or even tripling the ARPU for those customers. We find this area to be very promising. However, as previously stated, there is the expectation to gain revenue without incurring costs. I share that sentiment, but that’s not a feasible approach. The real question is how much we are prepared to hire before realizing that revenue because, although the revenue impact can be quick, there may be a delay between incurring expenses and seeing revenue growth. These are the various balancing acts we are currently navigating. When we step back and consider the upcoming quarters, there are significant opportunities in the next 18 months. The remainder of this year, along with 2023 and 2024, includes these potential opportunities, as well as clarity opportunities and additional customers, ongoing efforts to target fax customers in the healthcare sector still operating on-premises, and other substantial customers we haven't yet addressed through our integration initiatives. There’s Harmony, which might contribute modestly next year but more in 2024. There's a wealth of opportunity. However, a key constraint is our workforce. We are unable to capitalize on all these opportunities as quickly as we would prefer, and there are limitations since our partners must also be prepared. If they lack the personnel, we don’t want to advance too quickly. This is the situation we are currently managing as we plan for 2023, focusing on budget considerations, hiring rates in relation to revenue opportunities. But there is a considerable amount of opportunity available.

Second question just on the SoHo piece. I think you're planning to keep increasing the price across the base, but hasn't received price increases yet? How much should we be expecting in future months and quarters, number one? And number two, could you give us a little bit of insight into just the pace of churn in October so far and if it's changed from Q3 at all?

I think the answer to the last question is no; it's continuing in line. In terms of the pacing, remember that about 10% of the group is international, which we are not expecting to change in price. We completed about 30%, so that’s 40%. There’s just under 20% that are annuals affected by upcoming renewals, specifically in quarters 4, 1, and 2 of next year, leading to approximately 60%. Additionally, there is a significant portion already on special programs. I don’t have the exact figure, but it’s likely a few points. Internally, we have several different offer codes for special situations where high usage clients take multiple numbers. It’s probably unlikely that many of them will be affected; some might be. Therefore, we are considering an additional 15% for which we might increase prices in the not-too-distant future. However, the international segments are currently off the table, and the non-U.S. segments are also off the table. That doesn’t mean they won’t be reconsidered in the future, but for now, we anticipate no changes over the next few quarters.

We received a few questions by email. I think some of these we have addressed through either the direct prepared remarks or in response to other questions. But I think we should maybe unpack a couple of these additionally. John, one of them is a question about the Authority to Operate with the VA and how it and FedRAMP certification interplay with each other. Are they the same? Are they different? What does it mean in terms of our authority to operate with the VA and what other potential opportunities we have out there?

The way that works is a little bit of a hierarchy; you have to have sponsorship and approval of your first government agency, and then they sponsor you to a review for FedRAMP. So what's happened is that the authority to operate means that ECFax met all requirements for the system to transact in production. So as to the VA, we have the full set of requirements met and the ability to transact in productions, and it's all a matter of rolling out. Now, the VA then submits that information that is used to come to that determination to the FedRAMP marketplace audit committee for evaluation. We've been told that that committee is backed up about 12 weeks in getting through the submissions. So our expectation is that we'll get that FedRAMP feedback probably in Q1 in January or early February to get that answer. But as of right now, the ATO gives us full authority to operate in production with the VA for the stated purpose.

Okay. We have another question that came by email. I think John touched on these, but there is an interesting interplay here. One was a little bit more detail on the Change Health customer win, and also the UC Irvine contract and where those can lead. And then Change Health comes through a relationship with Amazon Connect. So how do those two interplay with each other? A couple of different questions for John.

We have dedicated a significant amount of time over the past few years to developing our channel program, and Change Health is a key product resulting from that effort. The Amazon Marketplace and Amazon Connect have extensive reach and access to customers who purchase commercial services, including our service that the Amazon Connect team sells. We look forward to continuing our partnership. Change Health is a well-known and respected name in healthcare, which we are very pleased about. It’s important to note that when we discuss bookings, we are referring to minimum commitments. Typically, actual revenue tends to surpass these minimum commitments as transactions increase. Considering the potential of Change Health and UC Irvine, we anticipate that their performance will exceed our bookings projections. We are enthusiastic about both opportunities, particularly the recent Go Live in the southeast, which includes a significant integration with the WellStar System that we believe will have a positive impact moving forward.

And then the last question, which I'll take, has to do really I think with capital allocation. But the question was framed, we built our cash balances to north of $100 million notwithstanding making the various payments to our former parent Ziff Davis that Jim referenced. And the question was any reason for pausing repurchases. First of all, I remind everybody, we have a umbrella program that covers three years, so we never paused the program. But there are depending on our various windows, prices that we set, which then determine whether there's any execution. There were no executions or repurchases in Q3 because the stock, I guess the good news was, did not hit our level. So there were no repurchases. So we will reset level as we go forward between now and the next time we have an earnings call in February to discuss Q4 results, depending on where the stock trades we may or may not have additional repurchases. Having said all that, it's not in my view, a bad thing in this environment to build some cash. And there are a few reasons for doing so. You know, we may remember that about a year from now, 11 months from now, our first tranche of debt, not so much that I'm interested in calling it because it's at a premium, but for the first time you can actually buy debt in the open market currently traded at a discount. Whether that would be a good investment versus buying the stock, I don't know what to do, but the debt may get deeper into '23. But that is an option available to us once we hit the second anniversary date of the spin, which will be October 7, 2023. Also, two, I think, in this environment, while we do have the additional line of credit, it's not one that I really am anxious to tap into. So to the extent we will find something interesting M&A wise, I'd like to be able to pay that kind of cash balances versus having to incrementally borrow. Speaking of M&A, even though that's not per se the nature of the question, we continue to look for opportunities. But I would say we are very discerning. And the discernment comes on a variety of levels, obviously, price as you would imagine we're sensitive to, those of you that have followed us historically know that how we get our rates of return is very important to us and thinking through our capital allocation. But I would just emphasize going even beyond that. As I mentioned in response to an earlier question, we have a lot of organic opportunities in front of us that I believe are important that we execute against. One of the things that is of utmost priority is that any M&A that we do, like Summit, is not only complimentary to what we're doing, but can assist us in accelerating what we're doing. But to the extent any way becomes a distraction from what we are doing organically, that is a disqualifying factor. That is a very narrow lens through which you can look at M&A, because a lot of things need repair or they need substantive integration. Those at least in the near to intermediate term to me would be problematic. But having the cash available and being able to act quickly on all cash basis is another reason that if such a transaction were to occur, we'll be able to respond quickly without having to increase our borrowing.

I'll now turn it back over to you Paul to see if there's any more people in the queue for questions.

Great. Thank you, Paul. We appreciate all of you joining us today to get an update on Consensus’ Q3 earnings and our outlook, certainly for Q4. We will be at a High Yield conference in Boca Raton in late November, I believe on November the 30th. There should be a fireside chat there, so we may get some additional updates even though it is a conference geared towards high yield bondholders. And then we have a series of conferences coming up in January, and in fact, three of them in the same week: the JPMorgan Healthcare Conference; the Needham Conference; and the CJS Conference, so quite a balance to be able to attend all of them, if not in-person, at least virtually. At that time, we will release full guidance, and we will be able to give you a more fulsome answer to a lot of the questions you asked today about how much will the VA contribute? What will the margin structure be, what will our pace of hiring be? Is the recession in any way impacting our view in terms of revenue generation? So we get it, those are all the questions that we're interested in too. So stay tuned over the next 60 or so days, we’ll increasingly have answers. Thank you.

Thank you, ladies and gentlemen. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.