Consensus Cloud Solutions, Inc. Q3 FY2024 Earnings Call

Good day, ladies and gentlemen, and welcome to Consensus Q3 2024 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; Jim Malone, CFO; Johnny Hecker, CRO and Executive Vice President of Operations; 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 2024 financial results, other key information, and our Q4 and full year 2024 guidance. Joining me today are Scott Turicchi, CEO; Johnny Hecker, CRO and EVP of Operations; and Jim Malone, CFO. The earnings call will begin with Scott providing opening remarks. Johnny will give an update on operational progress since our Q2 2024 investor call. And then Jim will discuss Q3 2024 financial results and Q4 quarterly and full year 2024 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 our forward-looking statements and risk factors on Slide 2. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risk factors and uncertainties include, but are not limited to the risk factors that we have disclosed in our 10-K SEC filing. Now let me turn the call over to Scott.

Thank you, Adam. We had another strong quarter in Q3, meeting our expectations for revenue, adjusted EBITDA, and adjusted non-GAAP net income per share. The outperformance occurred in both channels of revenue. This combined with our disciplined approach to cost resulted in another quarter of excellent EBITDA performance and an EBITDA margin above the midpoint of our range of 50% to 55%. As we laid out in our Q4 2023 earnings call, our goals for this year include: first, eliminating certain costs of the SoHo channel, especially in the area of marketing, to provide for stabilization of the base of revenue over time, which Johnny will address in his remarks; second, continuing to pursue the acquisition of customers primarily in the healthcare space for our corporate channel; third, reviewing our overall cost structure with the goal of driving adjusted EBITDA margins north of 54%. I would note it’s 54.7% for the 9 months; and fourth, continuing the repurchase of our debt to further reduce our total debt to adjusted EBITDA ratio in anticipation of the first tranche maturing in October of 2026. Our corporate channel had the best revenue growth in 6 quarters. The 5.3% growth was driven by new customer additions and record usage for a quarter. The new adds came primarily through our e-commerce efforts of eFax Protect, supplemented by upgrades from our SoHo base, as well as several key enterprise wins. Notwithstanding the lower ARPA of eFax Protect customers than our current average, we were still able to maintain a $310 ARPA per customer and a tight range over the past several quarters. As predicted, we continue to see additional sites from the VA rollout, driving new levels of usage and revenue. In addition, we saw a return to 100% LTM revenue retention in our corporate channel. Our SoHo revenues beat our expectations for the quarter. The rate of decline slowed from Q2 and we expect that there will be a reduction in the pace of decline in 2025. We continue to track ahead of our 2024 budget and have tested additional marketing opportunities, while maintaining a strong LTV to CAC. We were able to substantially reduce our marketing spend and still generate 64,000 paid adds, similar to Q3 2023, and more adds than in the preceding 3 quarters. The combination of robust adjusted EBITDA, strong cash collections, and retirement of debt allowed us to generate free cash flow of approximately $34 million. The change in free cash flow from the prior year is driven by the timing of tax payments, which Jim will address in more detail. We were also able to repurchase an additional $31.1 million of debt in the quarter. This brings our total repurchases since launching the program in November 2023 to $187 million, reducing our outstanding total debt to $618 million, or 3.2x our trailing 12-month adjusted EBITDA and 2.9x on a net debt basis to our adjusted EBITDA. Jim will discuss our guidance for Q4 and the fiscal year in his portion of the presentation. However, I would like to note that Q4 usually has the fewest business days of the four quarters and approximately 1/3 of our total revenues are usage-based. This puts downward pressure on Q4 revenues relative to Q3. This year, however, the calendar is the most punitive, as Christmas and New Year's Day both fall on a Wednesday. Based on historical analysis, we have compensated for this in the calculation of our Q4 business days. As a result, we expect approximately 61 business days in Q4 of 2024, which is 1.25 business days less than Q4 of 2023 and approximately 3.25 business days less than Q3 of 2024. I will now turn the call over to Johnny to provide more operational updates.

Thank you, Scott, and hello, everyone. I will provide an update on operations and go-to-market for the Corporate and SoHo businesses, respectively, including details on revenue, customer accounts, and go-to-market strategy. Q3 was another record revenue quarter for our Corporate business. I'm very pleased with our growth and the increased momentum resulting in another solid performance in Q3. Our revenue for the third quarter increased by approximately 5.3% compared to the same period last year, the highest rate in the last six quarters. We have reached a total of $53.1 million, up from $50.4 million in Q3 of the previous year. Particularly, cloud fax, especially in healthcare, showed solid consumption growth within our existing customer base while we were able to implement and ramp recently one new customer across the board. Our Corporate customer account has reached roughly 58,000, the highest ever for Consensus. And I am pleased to report that Corporate ARPA has maintained flat quarter-over-quarter at $310 and well within the stable $305 to $320 range for 8 quarters now. Driven by automation, e-commerce, and SoHo upsell to Corporate added over 3,000 customers to the overall Corporate account base in Q3, another significant increase since last quarter. Our eFax Protect service is experiencing sustained growth. To further capitalize on this momentum, we're investing in its expansion, as outlined in the go-to-market strategy represented last year. While the recently introduced in-product upsell options from SoHo to Corporate have been successful in reducing the need for direct customer interaction and driving growth, we're seeing this upsell strategy plateau after many successful quarters. Moving forward, we'll maintain this profitable program but continue to shift our focus towards e-commerce as the primary driver for acquiring small Corporate accounts. The success and growth of Corporate accounts on the lower end of the ARPA spectrum, driven by those new customers acquired through the e-commerce channel or upsold from SoHo, continues to influence the corporate cancellation rate. It has increased by 112 basis points year-over-year, and 32 basis points quarter-over-quarter, reaching 2.61% in Q3 of 2024. It is important to note that our cancellation rate is calculated on a per account basis rather than on revenue. As a result, we believe that the revenue retention metric is more relevant than the cancellation rate. Our dedication to customer retention, upselling, and cross-selling is yielding positive results, with a modest increase in revenue retention to 100% over the past 12 months in the corporate channel. This is another encouraging indicator of our momentum and remarkable success in the Corporate revenue channel. I am pleased that our go-to-market plan for 2024 is unfolding successfully. The green shoots we've previously mentioned are driving revenue growth across our entire customer base. As service utilization continues to rise, customers who have made a purchase are demonstrating a strong commitment to swift adoption. Let me share a quick update on the VA. The implementation of ECFax at the Department of Veterans Affairs is progressing as planned. We have observed steady growth that is aligned with our projections and allows us to confidently confirm the forecast of over $2 million in revenue from the ECFax program in 2024. As we move forward, we anticipate sustained growth in the coming months and years, further solidifying the program's success at and beyond the VA. In line with our vision for 2025, our core fax business remains our primary focus. We maintain our commitment to investing in the ongoing development and enhancement of our cloud fax platform. With customer satisfaction at the forefront, we are consistently working to improve the platform while ensuring our continued economic success. Clarity, which features AI technology, continues to generate significant interest among potential customers. We're actively engaged in implementing the solution for clients. Simultaneously, we're diligently addressing our increasing backlog of proof of concepts to ensure that all interested parties have the opportunity to experience the capabilities of Clarity. I am now shifting to the SoHo Channel. In the third quarter, the SoHo business generated revenue of $34.7 million, a decrease from the previous year's $40.1 million. This represents a decline rate of 13.6%, which is a slower decline compared to the previous quarter. The total SoHo account base has also slightly decreased from 785,000 to 768,000 during the quarter. Despite experiencing this decline, our SoHo business manages to modestly exceed expectations, showcasing the robust strength of our brand portfolio, particularly exemplified by eFax. The introduction of new first-month discounted pricing plans across several brands has proven effective in boosting revenue velocity within SoHo. Moreover, in Q3, the average revenue per account remained relatively stable at $14.88. Additionally, the cancel rate showed a modest sequential improvement to 3.38% compared to 3.49% in Q3 of the previous year. Looking ahead, we remain focused on executing our strategy for the SoHo business, maintaining profitable stability and optimizing current operations and resources. Rather than pursuing aggressive growth strategies, we aim to leverage our existing strengths and offerings to ensure the long-term sustainability of our business in this market. Our smarter ad spend strategy designed to enhance customer acquisition profitability has delivered sustained success. We've maintained a focus on automating and optimizing this program, resulting in marginal outperformance across all brands compared to our projected outcomes. The synergy between our digital advertising strategy and SEO initiatives has been instrumental in optimizing our LTV to CAC ratio. By integrating these channels, we have achieved a holistic and comprehensive approach to digital marketing, effectively reaching our target audience and driving profitable customer acquisition. In closing, I'd like to provide an update on the current market conditions. While they remain less than optimal, we've been successful in navigating around the challenges and building a sales pipeline, resulting in closing new customers across our customer spectrum. Particularly, multilocation and specialty healthcare as well as state and local government have shown promising results. Also, some positive signs are emerging as macroeconomic uncertainties persist. Despite these, we stay committed to our strategy, prioritizing cash generation and profitability. Our go-to-market efforts will continue to focus on driving growth within the Corporate business. With that, I want to extend a heartfelt thank you to our employees for their extraordinary commitment and to our customers and partners for their continued collaboration and trust. And now I'll hand the call over to our CFO, Jim Malone, who will provide an update about our financial results and guidance. Over to you, Jim.

Thank you, everyone, for joining us this afternoon. Today, we are sharing our Q3 2024 results along with our guidance for Q4 2024 and the full year 2024. We anticipate filing our Q3 10-Q today. Let's review our Corporate business results first. In Q3 2024, we achieved a record revenue of $53.1 million, an increase of $2.7 million or 5.3% compared to the previous year, and this exceeded our expectations. Our Corporate ARPA remained stable at $310, consistent with the previous quarters, which ranged from $305 to $320. Customer churn for Q3 2024 was 2.61%, representing an increase of 112 basis points year-over-year and 32 basis points sequentially, mainly due to churn among lower-tier customers. When adjusted for eFax Protect, our cancel rate has been around 2%, and despite this, these customers are still economically beneficial. I would reiterate that our cancel rate is assessed on a per account basis, with revenue retention being a more accurate indicator, which stood at 100% over the last 12 months, showing a 1% sequential improvement. Now, moving on to our SoHo results, we saw Q3 2024 revenue of $34.7 million, down $5.5 million or 13.6% year-over-year, which was expected. This decline is attributed to our planned cuts in advertising spend and the subsequent decrease in our year-over-year base due to fewer paid subscriptions. Our ARPA fell by 2.8% year-over-year to $14.88, a change driven by a shift to pricing plans offering a discounted first month instead of free trials. These pricing plans remain economically beneficial. It's important to note that paid subscriptions year-over-year remained steady despite a nearly 40% reduction in advertising expenditure as we optimized our campaigns. Churn decreased by 11 basis points to 3.38% year-over-year and by 2 basis points sequentially, which aligns with our expectations. Looking at our consolidated results, we reported Q3 revenue of $87.8 million, which is a decline of $2.8 million or 3.1% compared to Q3 2023, and again, this was anticipated. Our adjusted EBITDA was $46.9 million, dropping by $0.6 million or 1.2% year-over-year, but it exceeded expectations due to lower revenues being partially alleviated by our cost optimization efforts, particularly in SoHo advertising. The adjusted EBITDA margin of 53.5% improved by 100 basis points from the same quarter last year, indicating a solid margin during ongoing cost optimization. Our adjusted net income stood at $25.5 million, down by $4.2 million or 14.3% from the prior year, mainly due to a $5.8 million noncash foreign exchange revaluation of intercompany balances, slightly offset by reduced interest expenses from our bond repurchase initiatives and lower income taxes. Adjusted EPS came in at $1.31, a decrease of 13.2% or $0.20 from the previous year, influenced by the previously mentioned factors and a slightly reduced share count. For Q3 2024, our non-GAAP tax rate was approximately 19%, with around 19.4 million shares outstanding. As discussed in our last earnings call in November 2023, we initiated a $300 million bond repurchase program over three years. In Q3 2024, we repurchased $31.1 million in face value, totaling $30.6 million in cash. To date, we have repurchased $187 million in face value for $173 million in cash, leaving approximately $113 million remaining in the program. After these repurchases, our total debt to adjusted EBITDA ratio stands at 3.2x, with a net debt to adjusted EBITDA ratio of 2.9x, bringing us close to our target of 3x for total debt to adjusted EBITDA. At the end of Q3 2024, we had $55 million in cash, which adequately supports our operational needs as well as our plans for debt and equity repurchases. Our free cash flow for Q3 2024 was $33.6 million, down from $49.9 million in the same quarter last year. This decline was primarily due to a foreign tax refund and the deferral of federal income tax payments under the California Disaster Recovery Relief Act, which we paid in Q4 2023. Our Q3 2024 capital expenditures were $8 million, a decrease of $2 million or 20% compared to last year. Now, regarding our guidance for Q4 2024, we expect revenue to be between $83 million and $87 million, with $85 million as the midpoint. Our adjusted EBITDA is projected to be between $42 million and $45 million, averaging $43.5 million. For adjusted EPS, we anticipate a range from $1.14 to $1.24, with $1.19 as the midpoint. We estimate the share count for Q4 to be 19.5 million shares, with an income tax rate between 19.5% and 21.5%. Moving on to full-year guidance, we have refined our revenue and adjusted EBITDA range based on our year-to-date performance as of Q3 2024 and our guidance for Q4 2024. We are now anticipating revenues between $346 million and $350 million, with adjusted EBITDA forecasted to fall within $186 million to $189 million. Our adjusted EPS estimate remains within the range of $5.45 to $5.55. Our estimated share count and non-GAAP income tax rate remain at 19.5 million shares and between 19.5% and 21.5%. That wraps up my formal remarks. I will now turn the call back to the operator.

This is Jenny Shen on for Dave. Congrats on the quarter. Just doubling down on the hospital environment right now. I know the general consensus has been that it's kind of a two-sided coin with some hospitals doing better than others. Just broadly speaking, where are you guys seeing in terms of the labor and inflation trends for hospitals? And also whether you think the recent election or even CMS's recent physician fee schedule will have any impact on your hospital customers if they've said anything yet so far?

Yes, Jenny, thank you for the question. This is Johnny. I believe it's an important question, and you’ve already touched on part of the answer. Some hospitals are performing well while others are facing challenges. As I mentioned during the call, we are seeing positive signs of growth and conversion. Particularly in the specialty healthcare sector and among multi-location healthcare providers, we are identifying customers with heightened interest and conversion potential. While we do have some large clients who are taking their time and we are still facing challenges in that area, we have discovered methods to convert and onboard new customers. As you highlighted, the environment is quite diverse, with some customers accelerating their progress, which is promising. It’s also encouraging that we are able to engage with them, even as others continue to move slowly. Regarding the recent administrative changes and new rules from CMS, we currently do not see any specific impact on our business. I’m not sure, Scott, if you would like to add anything?

I believe you had a third question regarding the election and its potential impact on customer acquisition. Generally, I would say no. There are many uncertainties at this stage, such as the ongoing undecided house race. If you listen to Chairman Powell's remarks today about interest rate cuts, you'll note two key points: first, there are many unknowns since Congress hasn't settled; and second, the policies being discussed will likely take months to implement, even with a unified Congress. We will monitor the situation closely as there are various factors to consider, including the overall economy, the fluctuations in interest rates, and tax implications. However, I think it's premature to make definitive conclusions. Overall, I would contend that elections and shifts in political control do not significantly affect our customer acquisition and go-to-market strategy. While political changes could either boost or hinder the economy, the direct relationship is generally weak.

And there were no other questions from the lines at this time. I will now hand the call back to Scott Turicchi for closing remarks.

Great. Well, thank you very much for joining us today. It was obviously a very busy day to report earnings. So if any of you in listening to the replay or reading the transcript have questions, please feel free to reach out to us. We will have probably one or two conferences between now and our next reporting period, which we will target for the third week of February. Of course, on that call, we will discuss not only the Q4 results, but we'll release 2025 guidance on revenues, adjusted EBITDA, and non-GAAP earnings per share, much as we've done this year. So we look forward to talking to you in the interim and then giving you that update in about 3 months. Thank you.

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