Consensus Cloud Solutions, Inc. Q1 FY2025 Earnings Call

Welcome to the Consensus Q1 2025 Earnings Call. My name is Paul, and I will be the operator assisting you today. 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 Q1 2025 financial results and other key information, including our 2025 full year and Q2 2025 quarterly 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 operational update on the progress since our year-end 2024 investor call, and then Jim will provide Q1 2025 financial results and discuss our full year 2025 and Q2 2025 guidance range. After we finish our prepared remarks, we will conduct a Q&A session, during which 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 of our investor presentation. As you know, this call and the webcast will include forward-looking statements. Such statements involve risks and uncertainties that would 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 disclosed in our 10-K SEC filing. Now let me turn the call over to Scott for his opening remarks.

Thank you, Adam. As noted in the press release, I'm pleased with the results of the first quarter. This quarter was primarily without any of the volatility introduced by the tariffs, most of which were announced on April 2. We slightly exceeded our revenue objective with corporate revenue posting 5.6% growth over Q1 2024, ahead of our budget and the best growth year-over-year in eight quarters on a normalized basis. Revenue was in line with our expectations. We carefully watched our cost structure and exceeded our EBITDA expectations by more than the outperformance on revenue, delivering a robust 54.2% adjusted EBITDA margin. As we discussed on the Q4 earnings call, our goals for this year include the following: first, to pursue the acquisition of customers, primarily in the healthcare space for our corporate channel and drive revenue growth to 6.25% this year; second, manage our cost structure while making modest investments in our go-to-market operations for the benefit of 2026 and beyond; third, put our bank loan refinancing in place for the retirement of the remaining 6% notes due October 2026; and finally, manage the SoHo channel for cash flow efficiency, which we began last year. While Johnny will provide more detail in his portion of the presentation, I am pleased that our corporate channel exceeded our revenue expectations in Q1, driven by strong usage, improved revenue retention, new customer acquisition, and increased contributions from our advanced products. Additionally, eFax Protect had record sign-ups, and at the VA, we continue to see more facilities come online and a record level of usage. All these factors contributed to the 5.6% growth year-over-year. I am pleased to report that while revenues for the SoHo channel declined in the quarter as anticipated, it was the slowest rate of decline since we began the program to reduce marketing costs. We maintained our discipline on the cost side across the board, generating an EBITDA margin of 54.2%, 100 basis points ahead of our Q1 expectations. Free cash flow for the quarter was $33.7 million, modestly down from Q1 2024 due to increased receivables from our growing corporate channel and lower revenues and EBITDA year-over-year. We continue to expect our free cash flow in 2025 to be similar to 2024. We were able to repurchase approximately $10 million of debt in the quarter and an additional $6 million so far in Q2. This brings our total repurchases since launching the program in November 2023 to $222.6 million, reducing our total outstanding debt to approximately $582 million or 3.1x our trailing 12-month adjusted EBITDA on a gross basis and 2.9x on a net basis. We have made progress on the bank financing and expect it to be finalized in late Q2 or early Q3. Before turning the call over to Johnny, I would like to comment on the recent volatility in the markets and concerns regarding a slowdown in economic activity. First, the nature of our business is such that we are not directly impacted by tariffs and related negotiations. Second, we provide an essential service of critical and secure information delivery across various industries. As part of our normal quarterly process, we did look at a potential slowdown in the economy in the back half of the year with a reduced annual GDP output that is modestly positive but less than the GDP growth expected upon entering this year. Under such a scenario, we would expect a modest headwind to our revenues in Q3 and Q4, but still be within our range of guidance. To be clear, this is a stress test against our annual plans and budget, not our base case. We are not currently seeing any impact from the tariffs and related negotiations. We will closely monitor the situation as events develop. I will turn the call over to Johnny to provide more operating details.

Thank you, Scott, and hello, everyone. Thank you for joining us today to discuss our Q1 2025 results. As always, I will focus on key areas such as revenue, customer count, and go-to-market strategies for both our corporate and SoHo business channels. I will also provide an update on our operations and share some insights and highlights. I'm happy to report that our corporate business continues to demonstrate positive momentum. In Q1 2025, we saw revenue reach a record high of $54.3 million, representing a solid 5.6% increase compared to the $51.4 million in Q1 2024. It is important to remember that business days significantly impact our corporate business. Q1 2024 had an additional business day because of the leap year, which makes this quarter's growth rate the best since Q1 2023 on a normalized basis. The exceptional Q1 growth rate stems from several factors: sustained increase in Cloud Fax consumption within healthcare, greater advanced product adoption among existing and new clients, and the onboarding of new customers. We attribute this positive trajectory in our corporate revenue channel as a direct result of our focus on maximizing customer satisfaction through innovative product expansion that delivers tangible value. This approach is not only driving strong retention but also fostering enduring customer loyalty. I am excited to report an increase in our revenue retention rate by 55 basis points since just last quarter to now 101% for the last trailing 12 months, well in line with our target of at least 100% and significantly higher than the 97.9% in Q1 of last year. Our corporate customer base has grown to a record approximately 60,000 at the close of Q1, up 9% year-over-year. A key driver of success was the strong adoption of eFax Protect and the continued effectiveness of our SoHo to corporate upsell program, which together contributed over 3,700 new corporate accounts during the quarter within our lower SMB cohort. This robust growth underscores our ability to effectively penetrate the market and strengthens our confidence in future expansion across the corporate customer base. We observed a positive sequential trend in corporate ARPA, increasing by almost $3 to $307 from the previous quarter. However, our current corporate ARPA of $307 represents a $10 decrease year-over-year from Q1 2024. This reflects the inherent dynamics of our corporate customer portfolio where the ARPA is both supported by large enterprise clients such as the Department of Veterans Affairs and moderated by the success and growth within our lower SMB cohort. Speaking of the VA, we are pleased to report that the rollout continues with significant momentum and urgency. While we navigated the recent disruptions and uncertainties within the government and contractor ecosystem, our commitment to delivering this highly efficient offering remains steadfast. Usage within the VA is steadily increasing, and new deployments are proceeding as planned, reinforcing our confidence in the program's success. Furthermore, our recent FedRAMP high authorization has, given the circumstances, generated substantial interest and engagement from other government agencies, revitalizing our public sector pipeline. While we anticipate the tangible impact of these developments will materialize beyond 2025, the public sector remains a core pillar of our product and go-to-market strategy. Before moving on to SoHo, I'd like to provide some key insights into our revenue composition and the central role of cloud fax. It's crucial to highlight that cloud fax remains the cornerstone of our revenue, consistently contributing over 90% to our corporate revenue and exceeding 95% of our total revenue. Its ongoing growth underscores its enduring importance to our business. Our core fax business will continue to be a priority. Complementing this strength, we're delighted to see increasing adoption and broader usage of our advanced solutions like Unite and Clarity featuring AI technology for data extraction. Furthermore, we leverage and continue to see success with our integration solutions, which we've further enhanced since the 2022 Summit acquisition. The growing customer engagement with these offerings alongside eFax reinforces the validity of our go-to-market and product strategy, particularly within the important healthcare vertical. We are very happy with the strong momentum we've carried into 2025. This positive start driven by our successful strategies provides the tailwind needed to achieve our ambitious goals in our corporate business for the fiscal year and beyond. On to our SoHo channel. We recorded Q1 revenue of $32.8 million compared to $36.8 million in the first quarter of the previous year, representing a planned decrease of 10.6%. This reflects our ongoing strategic focus on optimizing profitability and maximizing the efficiency of our advertising investments in this business. As anticipated, the total global SoHo account base experienced a slight reduction from 747,000 to 730,000 during the quarter. While SoHo ARPA saw a minor decrease to $14.83 in Q1 of 2025 from $14.99 in Q4 of 2024, we're encouraged by the continued improvement in our SoHo cancel rate, which declined to 3.26% in Q1 of 2025 from 3.38% in the prior quarter. Our analysis reveals that the slight ARPA adjustment this quarter is primarily attributable to the residual effects of the 2024 holiday promotions last November and December. Importantly, our strategic transition away from free trials across multiple brands is proving effective in enhancing the monetization of newly acquired customers and increasing paid acquisitions, a positive impact that is partially balanced by customer churn. Our focus on automating and optimizing customer acquisition programs continues to yield success, with a very close eye on return on advertising spend attuned to the healthy lifetime value to customer acquisition cost ratio. Key to this success is our close collaboration with advertising partners and our focus on optimizing search results within the ever-changing search environment. In closing, despite the prevailing macroeconomic landscape, our confidence remains strong. Our corporate business is delivering as anticipated, supported by a robust pipeline and increasing customer engagement with our solutions. For our SoHo channel, our strategic direction is yielding positive results. While we maintain vigilance regarding macroeconomic factors, we are reaffirming our guidance. Before handing off, a big thank you to our employees for their dedication this past quarter and to our customers and partners for their continued trust and collaboration. We've had a great start to the year, and we anticipate continuing that way. With that, I'd like to turn the call over to our CFO, Jim Malone, who will now provide a detailed update on our financial performance and outlook.

Thank you, Johnny, and good afternoon, everyone. In our press release and on this call today, we are discussing Q1 2025 results and guidance for Q2 2025 and full year. We expect to file our 10-Q by close of business today. Let's start with our corporate business results. Q1 2025 was a record quarter for corporate with revenue of $54.3 million, an increase of $2.9 million or 5.6% versus the prior year, performing ahead of expectations. This represents the highest corporate growth year-over-year in the past eight quarters on a normalized basis. As Johnny noted, we continue to see growing fax usage, demonstrating strong demand for our core digital fax product. Q1 2025 corporate ARPA of $307 was up sequentially by approximately $3 and down $10 over the prior comparable period primarily driven by the success of our growing eFax Protect base within the lower SMB cohort. Our record Q1 2025 corporate revenue delivered a trailing 12-month retention rate of 101%, a 310 and 55 basis points improvement from the prior comparable period and Q4 2024. Moving to SoHo, Q1 2025 revenue of $32.8 million compared to $36.8 million over the prior year represents a planned decrease of $3.9 million or 10.6%. We are continuing our strategic focus on optimizing advertising spend and profitability in the SoHo revenue channel. ARPA of $14.83 had a modest sequential decline, largely attributable to our holiday promotions in November and December of 2024. SoHo churn of 3.26% improved 12 basis points sequentially and 16 basis points year-over-year. Moving to consolidated results, revenue of $87.1 million represents a decrease of $1 million or 1.1% versus Q1 2024, performing in line with expectations and an improvement of 3.6% in Q1 '24 versus '23. Adjusted EBITDA of $47.3 million is a decrease of $0.8 million or 1.7% versus Q1 2024, delivering a solid margin of 54.2% and 100 basis points favorable to our Q1 2025 guidance range. As mentioned in our 2024 year-end earnings call, adjusted net income calculation will eliminate foreign exchange gain and loss on intercompany balances, both in current and prior comparable periods. This line item can fluctuate significantly from period to period, and the metric does not represent the company's operating performance. Therefore, beginning this quarter and going forward, adjusted net income will not include this foreign gain and loss. Q1 2025 adjusted net income of $27 million is an increase of $0.1 million or 0.2% versus Q1 2024 adjusted net income of $26.9 million, primarily driven by lower net interest expense, offset by adjusted EBITDA flow-through, depreciation and amortization and taxes. Adjusted EPS of $1.37 is unfavorable to the prior year by 2.1% or $0.03, driven by the items I just mentioned and a higher share count. The Q1 2025 non-GAAP tax rate and share count was approximately 21.2% and 19.7 million shares. As mentioned in our November 2023 earnings call, we announced a $300 million 3-year bond repurchase program. In Q1 2025, we repurchased $10 million face value bonds at par and an additional $6 million in Q2 2025 to date. Our continued strong cash flow has allowed us to repurchase approximately $223 million face value bonds for approximately $209 million cash program to date with approximately $77 million remaining under our current authorized program. We expect our free cash flow to be similar to 2024, providing us with sufficient cash to meet our leverage target on or before the maturity of our 6% notes. Scott noted in his opening remarks that we are working on the refinance process for a bank loan to retire our remaining 6% notes due October 2026. We expect the bank loan to be completed in late Q2 or early Q3. With the debt repurchases just mentioned, Q1 2025 total debt to adjusted EBITDA is 3.1x. Net debt to adjusted EBITDA ratio is 2.9x, and we are getting very close to achieving our total debt to adjusted EBITDA target of 3x. We ended Q1 2025 with cash of approximately $53 million, which is sufficient to fund our operations and repurchases of our debt and equity. Q1 2025 free cash flow is $33.7 million versus $35.8 million in the prior comparable period, primarily due to the increased receivables from our growing corporate channel and lower adjusted EBITDA. CapEx of $7.1 million was down $1.8 million or approximately 19% versus the prior year. Going to guidance, we are reaffirming our 2025 full year guidance as follows: Full year revenue between $343 million and $357 million with $350 million at midpoint; adjusted EBITDA between $179 million and $190 million with $185 million at midpoint; adjusted EPS of $5.03 to $5.42 with $5.22 at midpoint. Full year estimated share count and income tax rates are approximately 20 million shares and tax rate between 20.5% and 22.5% with 21.5% at midpoint. Please remember that, as previously mentioned, our 2025 guidance and actual results exclude foreign exchange gain or loss on the revaluation of intercompany accounts. For our second quarter, we are providing guidance as follows: revenue between $85 million and $89 million with $87 million at the midpoint; adjusted EBITDA between $45 million and $48 million with $46.5 million at the midpoint; adjusted EPS of $1.31 to $1.42 with a midpoint of $1.37. Estimated Q2 2025 share count and income tax rate are approximately 20 million shares and a tax rate between 20.5% and 22.5%. This concludes my formal remarks. I'd like to turn the call back to the operator for Q&A. Thank you.

And the first question today is coming from BTIG, and it's David Larson.

Congratulations on the good quarter. Can you talk a little bit more about growth in corporate revenue? The growth rate looked pretty good to me. And I think you mentioned in your prepared comments that the VA deployment is accelerating. I think you finally got like this formal paperwork and formal certification recently. Just any more color around the government sales process and the VA corporate growth would be great.

Yes, I can take that. This is Johnny. Hi David, thanks for getting on the call. Good questions. To answer your first one, the corporate growth was really supported by multiple things. First of all, we saw continued strong usage across our fax brands, upmarket as well as downmarket, but significantly growth upmarket in our existing customer base. Secondly, good adoption and deployment of advanced solutions contributed to that as well. Lastly, adding new customers was another key component driving corporate revenue this quarter. Overall, good trends on all three of those fronts. Regarding the VA, yes, we got the FedRAMP high certification, which was an important milestone on that journey, something required from us that we have now accomplished. That is unlocking some new opportunities and revitalizing a couple of older opportunities that had actually stalled in that public sector pipeline. So customers who had previously paused their process are resuming it now that we have this certification. Are we going to see a significant impact of this in 2025? I don't think so. Maybe we’ll close a couple of deals, but as you know, with the government, it will take a while for those to ramp. There’s general reluctance and uncertainty in the government space, right, in the ecosystem as well as within the agencies. So we're experiencing some of that, but we’re encouraged by the engagement. We thought it would be significantly worse.

Great. And then in terms of like SoHo, I completely understand how you're converting SoHo accounts to corporate. So the decline in revenue is intentional. But when would you expect that decline to sort of moderate or perhaps become flat on a year-over-year basis? Just how are you thinking about the intentional contraction of SoHo, which is still a significant portion of total revenue?

Yes. That's a difficult question to answer because there are so many things that influence that number. Right now, we saw a little bit of a reduction in the cancel rates. We're encouraged by the new customers we're adding, which is a positive trend, resulting in the revenue decline slowing down in that space. However, this is really a function of multiple factors, particularly how much advertising spend we're willing to expense every quarter in order to win new customers. We are monitoring profitability closely. At the point where we don't find it profitable anymore to spend in that area, we will likely slow down our advertising expenditures, which may accelerate that decrease in the customer base a bit more. But determining when that stabilization might occur is unclear, whether it is in '26 or '27. As long as it remains profitable, we wouldn't stop investing in that space. Scott, do you want to add anything?

No, I think that's well said. As you referenced in your prepared remarks, what we watch very closely is the LTV to CAC in terms of the marketing spend. On the other hand, we look at each cohort and their retention rates, which consequently affects cancel rates. This math guides us in deciding how much we're willing to invest, and projections are consistent with what we indicated last quarter in terms of guidance. There is no immediate solution that will abruptly stabilize that channel, likely not this year, and probably not next year either.

And then just one more quick one on tariffs. I think I heard you say no impact. There are two potential areas of concern on the hospital side: hospitals may face higher supply costs, which might slow their purchasing of eFax solutions, and on your side, any technologies or hardware? I think what I heard you say was you're not seeing any impact from tariffs either on the demand side or on your cost side?

Before we go to the next live question, we've received a couple by email. Let me at least take one as it leverages the conversation we just had with David regarding revenue growth. The question summarized is about the company as a whole but feeds off the points we've just discussed. When do we expect total revenue growth for the whole company? If we're going to be flat year-over-year, we do expect that to occur at some point during this year under our base case scenario. I would say that it's really a Q4 event. The follow-on question is whether we expect that growth to persist? The answer to that is, barring any wild economic fluctuations, we would expect the rate of decline in SoHo to continue to lessen as corporate growth increases. So, that should imply that once we hit positive total enterprise growth, that should continue. That being said, it's subject to economic conditions and how much we choose to invest in the SoHo channel for marketing.

If there's another live question, ready to take it.

So, related to those questions around growth of the corporate channel, Scott or Johnny, I think you talked about making some hires this year, maybe about 40 people in sales and sales-related functions. Can you talk about where that stands at this point? And I joined the call a little late, so I don't know if you talked about it already.

No, Gene, we didn't really address any detail. You're correct. For those who were not part of the Q4 call in February, we discussed plans to add personnel, predominantly in the go-to-market area, which is Johnny's purview. There was a modest amount of hiring in Q1 per the plan, and this hiring will accelerate as we progress through the year. While our EBITDA margin was above our own expectations, these margins hadn't been fully accounted for, meaning they would be somewhat higher relative to our guidance midpoint. I'll turn it over to Johnny to discuss the specific areas where he plans to hire this year; however, we will be cautious with these hires as we consider economic conditions. Presently, we aren't experiencing impacts from tariffs or any downstream economic effects, but if we see a significant downturn in economic conditions, that may influence how many hires we wish to make for this year.

Gene, it's a really good question. It's really across the entire customer lifecycle. We’re strengthening the marketing and operations sides. We're also focused on hiring for upmarket sales, where we need to engage with customers, whether through sales representatives or sales engineers, to win and retain those accounts. Beyond that, it's about implementation and customer service, especially for the advanced product, which requires more customer engagement. So, those are the areas where we're hiring, primarily upmarket sales and customer onboarding. We're on track with our hiring and placing a strong emphasis on this as an investment into the future.

And so my follow-up would be just on the SoHo side. I understand the ARPA was down sequentially as a result of the absence of the holiday promotion. But in theory, that ARPA of $14.83 will probably be the low watermark for SoHo this year. Is that the way to think about it?

Hard to say, Gene, because we do—and we are doing right now—a variety of promotions and testing. What occurred at the end of '24 with holiday promotions is not ongoing, but it bleeds into this year as the customer base comes in at cheaper ARPAs that will affect 2025. And there are some factors that could go in the other direction as well. I would say ARPA is probably within a fairly narrow range due to the mix across brands. For example, we have some brands like eFax that have a higher price at full price and others that are below the $15 ARPA. The distribution across brands will drive a lot of what is happening. Yes, I think it’s fair to consider around $15 as a baseline ARPA for our customer base, but it will fluctuate, especially depending on the cancel rate. We do certain things that can affect cancel rates, either negatively or positively. So, can it move a few basis points either way? Yes.

Before we go to another live question, I've got another email question. There are actually two of them, but they're related. The first is regarding a $5 million investment, not in our own company, but in another. What is that strategic value? As many may recall, in early '23, we invested in one of our vendor partners in the advanced products or services space. This is a follow-on investment in the same company. I'm unable to disclose the name or much more about them right now as they are in the process of raising capital. However, I hope to discuss this in more detail in our Q2 call in August. To clarify, they are a third-party vendor that we partner with in the advanced product area of our business, and this is a follow-on investment to our earlier one back in early '23. The adjacent question is regarding our capital allocation strategy: why are we building cash? We built cash from Q4 to Q1 in part due to a strong free cash flow quarter. We bought some debt as both Jim and I noted, but it has been hard to buy the debt in the open market. As we have reduced both the 6% and 6.5% bonds, the volume that we could buy this quarter was limited. We initially would have liked to allocate more capital to share repurchases but found ourselves in a closed window, so we executed very few share buybacks this quarter. We need to build some cash on our balance sheet as we are soon engaging in bank financing, targeting to take out the 6% notes. Right now, the expectation is that this will be a $225 million issuance combination of line of credit and Term Loan A. These will be secured, and our bond indentures have conditions linked to a lien test that necessitates a certain cash balance. Our goal is to continue to apply excess cash from our operations to both debt retirement and share repurchases, but we need to be mindful of maintaining sufficient balances for the lien amount as we approach our financing timeline. Next question is coming from Ian Zaffino from Oppenheimer.

This is Isaac Sellhausen on for Ian. I just have two on the corporate business as well. In terms of corporate accounts, it's good to see the growth there. You talked about the growth of eFax and upsells. But could you also discuss any notable adds for larger enterprise accounts? And then secondly, anything you could share on general sentiment from larger enterprise prospects regarding purchasing decisions?

Yes. This is Johnny. I can comment on that, absolutely. We’re adding customers, and I think I alluded to it during my remarks; we're acquiring customers across the board. We disclosed the number on the lower end regarding certain programs, but we’re also adding customers through other means on the lower end. We have a robust pipeline and have had success in converting that pipeline into new customers. So it's really corporate success across the entire customer spectrum.

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

Great. Thank you, Paul. We thank you all for joining us today for our Q1 2025 earnings call. As I mentioned in response to one of the questions, we'll report our Q2 results in the first week to 10 days of August and obviously have an earnings call associated with that. There may be a couple of conferences that we attend between now and then, so be on the lookout for those announcements. If you have any questions that were not asked during this call, feel free to reach out, and we'll get back to you. 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.