Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q1 2023 Earnings Call Transcript May 9, 2023

Consensus Cloud Solutions, Inc. misses on earnings expectations. Reported EPS is $1.1 EPS, expectations were $1.18.

Operator: Good day, ladies and gentlemen, and welcome to Consensus Q1 2023 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. [Operator Instructions] On this call from Consensus will be Scott Turicchi, CEO; John Nebergall, COO; and 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.

Adam Varon: Good afternoon, and welcome to the Consensus investor call to discuss our Q1 2023 financial results. Other key information and reaffirmation of our 2023 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 year end investor call and then Jim will discuss Q1, 2023 results and 2023 guidance. After we finish with our prepared remarks, we will conduct a Q&A session. At that time, the operator will instruct you on procedures for asking a question. Before we begin our prepared remarks allow me to direct to you to the safe harbor language on slide 2. As you know, this call and 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 risks and uncertainties include, but are not limited to, the risk factors outlined on Slide 3 that we have disclosed in our 10-K SEC 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 these documents regarding safe harbor language as well as forward-looking statements. Now let me turn the call over to Scott.

Scott Turicchi: Thank you, Adam. I would like to provide a brief overview of the quarter before handing the call over to John and Jim for details on our operations and our Q1 financial results. Q1, 2023 was a record first fiscal quarter with revenues of 91.5 million and an all time record for our fax volumes. Our revenue was in line with our expectations representing approximately 24% of our annual expected revenue at the midpoint of our guidance for the year. Amit And consistent with our disclosure during the Q4 call. The corporate channel experienced 6.2% growth consistent with the organic performance in Q4 of 2022. Despite this growth, we continue to see slow decision making by our largest prospects and slow implementation by those under contract.

This has driven by uncertainty in the economy and labor shortages that exist, especially in the health care space. As we’ve stated before, we believe that this will continue throughout 2023 and our previously released guidance has taken that into account. The price changes for SOHO are coming to an end at this current quarter and continue to perform within our model expectations. As you know, during the quarter, we had to file both an amended 10-Q for Q3, 2022, as well as the late 2022 10-K. The amended 10-Q delays and filing an additional audit work had an incremental cost of $2.3 million more than in Q1 of 2022 and had an impact on our EBITDA margin of 2.5 percentage points. In addition, as we noted in the Q4 call, our labor costs are up about 3.3 million due to an additional 70 employees more in the current quarter, most of whom were hired in 2022, an annual merit increases that took place on January 1 of this year.

This is approximately 25% of the 12 million increase that we noted in our Q4 call. This had an impact on our EBITDA margin of 3.6 percentage points. As our revenue grows sequentially throughout the year, and the audit costs do not repeat we will see an expansion of our EBITDA margin. As we stated last quarter, we are judicious in our incremental hiring and are looking for ways to lower our non employee costs. The sales and marketing realignment has taken place and we are starting to see some of the benefits of the new structure. John will give you additional details in his portion of the presentation. I am pleased to report that the VA has begun the rollout of the EC fax service. Two facilities were deployed post the close of the quarter and there is now a roadmap for the next several months.

We will generate a de minimis amount of revenue in Q2 and see the rollout ramping in future quarters as more facilities are brought online. There are now more than 20 agencies interested in the service. 10 prospects have already been provided a demo and are an active discussions with Cognosante and ourselves. It is still early and we do not expect any of these new agency opportunities to produce revenue in 2023, but are encouraged by the widespread interest in the solution. Before handling the call over to John, I’d like to spend a moment to discuss our liquidity and capital allocation alternatives. We remain very liquid with more than 111 million of cash on our balance sheet, and a $50 million undrawn line of credit that we put in place back in March of 2022.

These funds are targeted to get paid down which cannot occur until the second anniversary of the spin, which would be October of this year, and opportunistic stock repurchases. To that end in the quarter, we were able to repurchase approximately 270,000 shares at an average cost of approximately $34 per share. I’ll now turn the call over to John.

John Nebergall: Thank you, Scott. As you’ll recall, in our last update, we announced a broad realignment of our go to market organization. This action was taken to build upon our sales and marketing foundation that we had established post spin with a focus on improving both efficiency and effectiveness of our revenue generating efforts. As part of that initiative, we eliminated the revenue stream designations of enterprise, mid market and SOHO streamlining the organization into strategic sales and direct sales. As a reassurance to the interested call audience, we will continue to report SOHO results consistent with your current models. However, operationally we manage under the real line structure. This past quarter following an extensive search, we were able to secure new leadership for our direct sales team and are closing in on our targeted staffing level.

The activities around implementation and normalizing operations under the new structure are progressing. In addition to the organizational changes, we have completed an extensive account reassignment project and initiated outreach to customers for introductions to their new Consensus content. In concert with this, there have been a number of changes to the quota assignment and commission system designed to better motivate the sales team and drive top line performance. These improvements to quota and commission are the results of a data driven approach employed by our sales enablement team and we will continue further to further our data analysis program to identify opportunities for the business. One more facet of the sales piece of the realignment is establishment of a new account development team.

This group is making use of new analytics tools to target existing accounts for wallet expansion activities. While still fully developing their approach, this team has already contributed nicely to our pipeline building results for Q1. On the marketing front, we have merged the former corporate and web teams into a single marketing organization. The team has begun evaluating the business more holistically and identified several tools that will increase the efficiency and effectiveness of our marketing efforts. The team has also worked hard on ensuring our success at two major health care conferences the [indiscernible] show in Chicago and [indiscernible] Nashville which were both held only weeks apart. Those efforts resulting in the acquisition of hundreds of new reads and the ability to demonstrate clarity to 1000s of new health care leaders were wildly successful for the company.

Surrounding the entire go to market restructuring is our IT infrastructure and the work to arrange all of the reporting forecasting, billing and attribution changes in support of the new organization is an ongoing task. With the size and scope of the work needed to have this project completed, we expect that it will be an ongoing effort for the entire balance of 2023. In the next slide, we can walk through some of the key operating results for the quarter. Consistent with our commentary on the Q4 call we continue to see delayed decision making in the face of client side staffing shortages, and customer project backlogs caused largely by the current macro economic uncertainty. I would describe the sales outcome is flattish up slightly sequentially from Q4 and down slightly year-over-year.

While we have worked hard to mitigate the impact of our realignment on overall sales productivity, as you can tell from the earlier slide, there was a lot of activity around this and there was certainly some loss of sales efficiency in Q1. That said there was a few items of note that are important to discuss. First, sales of fax was up both over Q1 of 2022 and sequentially over Q4. In addition, the advanced interoperability price again accounts for a significant portion of overall sales coming in at 30% of bookings. Also of note is that the upsell program we announced last year, and a plan to accelerate through the realignment accounted for nearly a million dollars of new bookings, expanding our revenue from existing accounts. Finally, we did close two larger size [indiscernible] deals as the feature set is proving very competitive to the market incumbents.

We remain pleased overall with the state of our pipeline and while we continue to see slow prospect movement through the sales process, it remains strong and in fact continues to grow both with government agencies as well as our commercial prospect set. In the SOHO business, there are only a few months of annual plans to adjust for the price increase we enacted last June. And the customer base overall is holding very solidly within our model expectations for churn with churn for the quarter coming in at six basis point improvement from Q4 as results. This past April, we had our first two successful deployments of the EC fax solution for the VA with additional sites planned in the coming months. It’s still early times here, and we haven’t yet gotten to a predictable cadence for us to confidently forecast the pace.

We look forward to working towards some normalization on that front. But until that time, it will remain somewhat lumpy and difficult to accurately anticipate the EC fax contribution in the coming months. The first production instance of clarity has been accepted by the customer and the role of timing is dependent on availability of client side resources. We have also had very successful demonstrations of the clarity technology at both [indiscernible] and Vives. An interest in AI powered solutions generally is reaching a high level. In the meantime, we have active POCs in process with additional customers and are actively engaged in a number of discussions with pipeline prospects. The product team is working on several fronts, from security to new products and infrastructure improvement.

Our high trust annual certification is underway. And we will be introducing J-sign as a new addition to our high trust certified product set. Progress continues to be made on harmony. And we are code complete with a production version of fax to direct a feature that allows faxed documents to be delivered as direct secure messages across the Direct Trust network. This allows providers to use either a recipient fax number, or their direct address to securely deliver vital health care information. As announced in the last call, the product team is introducing the new discipline of product marketing, creating a more effective bridge between the engineering work that creates products and the commercialization process. We have successfully recruited a strong leader for the team and are beginning the work of establishing this vital function for the business.

As we talked about on the last slide, there is an important systems component to our realignment that the product engineering team is building as part of our larger genesis initiative, including salesforce and consolidation of our billing systems to generate better and more insightful reporting for the sales enablement team to use as a key component of their data driven approach. Finally, the engineering team is working on several system improvements that will support our upmarket move in Japan. There have been several large prospects in Japan who have expressed interest in a corporate version of our product, which has historically not been available in the Japanese market. We anticipate beginning up market activities there in Q3. In summary, we have made some great progress on our realignment initiative and while there is certainly more work to do, we’re pleased with what’s been accomplished.

We continue to see slow decision making in our prospect pipeline. However, the dialogue remains active. Sales results for the quarter are consistent with our expectations given the macroeconomic environment and progress in our efforts to upsell within the base as well as seeing J-sign getting traction are encouraging. The VA rollout has begun. Our first clarity production installation will commence once client side resources become available and the SOHO base churn has been holding within expectations. Finally, the product development team is focused on security, harmony development and infrastructure support of the go to market realignment. Now let me turn the discussion over to Jim Malone, our CFO. Jim?

Jim Malone: Thank you, John. And good afternoon, everyone. Let’s start with our corporate business business results. Q1, 2023 corporate revenue was $49.4 million, an increase of 2.9 million or 6.2% over the prior year comparable period. On a constant dollar basis, corporate revenue was 6.4%. Opera difference is due to a greater portion of paid debts coming from SMB customers and acceleration of SOHO migration to corporate. Monthly churn was 1.4%, down from 2% for the prior year, supporting our last 12 months revenue retention of approximately 102% consistent with our expectation. Moving to SOHO results, Q1 revenue was aligned with expectations of $42 million, a decrease of approximately 0.8 million or a negative 1.8% over the prior year comparable period.

On a constant dollar basis, SOHO revenue was a 0.4 million or point 0.7% negative. [indiscernible] of $15.10 increase the $1.22 or 9% year-over-year. Monthly churn was 3.8%, up from 3.5% over the prior period and along with expectations. The year-over-year revenue decrease was due to lower paid debts partially offset by higher opera related to price increases the price increase further enhance the contribution to SOHO fixed revenue. Moving now to consolidated results for Q1. Revenue was 91.5 million and increase of 2.2 million or 2.4% over Q1, 2022. On a constant dollar basis revenue increased 2.7 million or 3% year-over-year. Reported adjusted EBITDA of 44.2 million is a decrease of 4.4 million or 9% delivering a 48.4% adjusted EBITDA margin driven by planned employee related expenses and professional fees in connection with the 2022 yearend audit.

Non-GAAP EPS of $1.10 was lower by $0.23 or 17.3% compared to comparable prior year period, driven by the adjusted EBITDA items mentioned and a negative 1 million non-cash foreign exchange impact related to the intercompany balance revaluation partially offset by higher revenues. We ended the quarter with 111 million in cash, which is more than sufficient to fund our operations in debt. We are reaffirming full year guidance, for revenue adjusted EBITDA and adjusted non-GAAP EPS. The 2023 guidance ranges are as follows: revenue 370 million to 390 million with 380 million at the midpoint. Adjusted non-GAAP EBITDA 192 million to 206 million with 199 million at the midpoint. Adjusted non-GAAP EPS $4.93 to $5.20 with $5.08 at the midpoint. Our Q1 non-GAAP tax rate and share count was 19.98% and 19.9 million shares within our 2023 guidance.

We are planning to file our Q1, 2023 10-Q on market close tomorrow May 10. This concludes my formal remarks. I will now turn the call back to the operator for QA session. Thank you.

Q&A Session

Operator: Thank you. We will now be conducting a question and answer session. [Operator Instructions] And the first question from the line is coming from the Ian Zaffino from Oppenheimer. Ian your line is live.

Operator: Thank you. [Operator Instructions] The next question is coming from Jon Tanwanteng from CJS Securities. Jon your line is live.

Operator: Certainly. [Operator Instructions]

Operator: There were no other questions from the dialed audience. This time, I’d now like to hand the call back to Scott Turicchi for closing remarks.

Scott Turicchi: Great. Thank you, Paul. Thank you all for participating today in our Q1 earnings call. We have a release that will come out that will reference additional conferences that we’ll be at over the coming weeks. My recollection is correct, will be at an [indiscernible] conference of Goldman Sachs coming up and then virtually at a Needham conference which is being held in New York, but our participation will be virtual. And both of those will be entertaining one-on-one and in some cases, we’ll also have a public presentation so stay tuned for the webcast links for that. In terms of the next regularly scheduled call we’ll look to report Q2 earnings probably the week of I believe it’s August the 8, or August the 9 I can’t remember exactly which that Monday is but it’ll be sometime that week. We’ll obviously put out a notice well in advance to alert you to the times and wait to participate. Thank you.

Operator: Thank you. This does conclude today’s call. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.