Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q1 2024 Earnings Call Transcript May 8, 2024
Consensus Cloud Solutions, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen, and welcome to consensus Q1 2024 Earnings Call. My name is Paul, and I will be the operator assisting you today. [Operator Instructions]. On this call from Consensus will be Scott Turicchi, CYO., Jim Malone, CFO, Johnny Hecker, CRO and Executive Vice President of Operations, and Adam Brown, Senior Vice President of Finance. I will now turn the call over to Adam for Ron 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 2024 financial results, other key information, Q2 2024 guidance and our 2024 guidance full year. Joining me today are Scott Turicchi, CYO., Johnny Hecker, CRO and EVP of Operations, and Jim Malone, CFO. The earnings call will begin with Scott. Providing opening remarks, Jonny will give an update on operational progress since our year end 2023 investor call. And then Jim will discuss our Q1 2024 financial results. Q2 guidance and reaffirmation for our 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 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 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 those 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. As noted in the press release, I’m pleased with the results of our first fiscal quarter. As we discussed on the Q4 earnings call. Our goals for this year include the following first eliminating certain costs of the SoHo channel, especially in the area of marketing, allowing us to stabilize the base of revenue over time to continuing to pursue the acquisition of customers primarily in the health care space for our corporate channel, three, reviewing our overall cost structure with the goal of driving EBITDA margins north of 54% and for continuing repurchase of our debt to further reduce our net debt to EBITDA ratio in anticipation of the first tranche maturing in October of 2026. Johnny will provide more detail in his portion of the presentation.
However, I’d like to highlight several things before turning the presentation over to him, I’m happy to report that while revenues for the SoHo channel dipped in the quarter, versus Q1 of 2023, it was better than our expectations. We were able to substantially reduce our marketing spend and still generate 63,000 paid ads more than in Q4 and similar to our Q. three productivity that had higher levels of marketing spend. We continue to monitor the various cohorts and look for opportunities to possibly allocate additional marketing dollars to work above our budgeted amount later in the year. In our corporate channel, our new cloud fax product effects protect had strong sign-ups in only its second full quarter of offering we also saw a record number of upgrades from our SoHo channel to corporate.
In addition, we saw more facilities come online and a ramping of usage from the VA. All of these contributed to 4% growth, which while not to our desired long-term target, is an improvement over the past three quarters. On the AI front, we saw additional wins for clarity PA and clarity, CD., we maintained our discipline on the cost side with cuts primarily coming from the SOHO marketing mentioned earlier. The result was a six percentage point pickup on our EBITDA margin to 54.5% and near the upper end of our long-term range. The combination of improved EBITDA, strong cash collections and retirement of debt allowed us to improve our free cash flow by more than 20% from Q1 of 2023 to approximately $36 million in Q1 of 2024, which is before our reduction in CapEx that begins this quarter, we were able to repurchase an additional $63.5 million of debt during the quarter.
This brings our total repurchases since launching the repurchase program in November of 2023 to $126 million and reducing our outstanding debt to $679 million or 3.6 times our trailing12-month EBITDA on a gross basis and 3.2 times on a net basis. I will turn the call over to Johnny. We’ll provide you more operating details.
Johnny Hecker: Thank you, Scott, and hello, everyone. Let’s dive into our sales and operations update. Starting with our encouraging performance in the corporate business, Q1 is traditionally an active quarter for us and this year was no exception. We are pleased to report revenue of $51.4 million versus $49.4 million last year for Q1, marking a 4% increase over the same period last year. This solid result demonstrates the continued momentum of our Corporate Solutions and marks another record quarter for our corporate business, underscoring the strength of our offerings within our corporate business. The sell upsell strategy remains a rich source for upsells with roughly 1,500 customers deciding to upgrade in Q1. This represents excellent growth up 24% quarter over quarter and an impressive 38% increase year over year.
We expect this initiative to slow down a bit in Q2 due to some operational changes we are making. Furthermore, our advanced products are regaining traction, accounted for 21% of new sales in Q1, driven by demand for clarity and Unite. This figure shows a healthy increase over Q4. Our commitment to innovation is paying off as customers embrace these powerful interoperability and IT-driven solutions. The momentum for FX protect remains strong, and we continue to see growing adoption and positive customer feedback. The Q3 launch of our dedicated e-commerce channel for corporate clients has been instrumental in driving the success. Turning to our SOHO business, Q1 revenue was $36.8 million versus $42 million previous year. Consistent with the marketing changes we announced last year, the total Sohu account base has decreased from 831,000 to 800 to 8,000.
This is slightly ahead of expectations as we introduce new price plans that are net economically beneficial. These 1st month discounted plans are popular among new customers in lieu of our free trial offering. Consequently, we see our PAT declined modestly from $15.12 in Q4 to $14.95 in Q1 while the cancel rate is up slightly at 3.42% compared to 3.34% in the previous quarter. Bear in mind that rate includes the accounts we have upgraded to the corporate PRODUCT basically making up the entirety of the increase in cancels. As discussed in our last earnings call, we have made these adjustments to improve the LTV to cap ratio. I am pleased to say these steps have shown real promise in that area, and Q1 has seen a dramatic improvement, demonstrating the effectiveness of our Smarter ad spend efforts and enhancing the profitability of our customer acquisition efforts.
While it’s early days, we’re encouraged with these results and we’ll continue to aggressively manage this key metric. Let’s discuss some of the key initiatives and wins. The VA rollout is progressing at the expected pace, and we remain optimistic about its potential. We have successfully adjusted our deployment approach to streamline the process with our partners and remain confident in our ability to achieve a seven digit contribution from the VA in 2024, laying a foundation for further growth in the following years. The uptake of our FX offering continues to gain traction in the extended public sector. We remain in close contact with our existing partner companies, Assante and are excited about their announced merger with Accenture signifies the strength of Cobham S&A and expands the potential opportunity for Equifax in that growing market segment.
In Q1, we were able to form a new partnership with a leading software company specialized in document delivery and data transfer solutions. These strategic collaborations expand our capacities and capabilities to deploy our FX and LPAI. solutions, enabling the consumption of structured data for our customers. The goal of this partnership is to provide a seamless and efficient experience for users, leveraging the expertise of both organizations to deliver innovative solutions. Furthermore, we are in the process of launching a joint go-to-market partnership with one of the largest revenue cycle management and electronic medical records systems in the country. This partnership represents a significant step forward, creating synergies with a major player in the health care technology.
At bringing our two leading brands together and combining the strengths and capabilities of both organizations, we aim to deliver comprehensive solutions that meet the evolving needs of the healthcare industry, enhancing patient care and streamlining administrative processes. During Q1, we attended three important industry events, five in Los Angeles and in Orlando and channel partners in Las Vegas. This provided invaluable opportunities to interact with current and potential customers as well as partners underscoring the importance of in-person connections. I’m also happy to announce that we have successfully refreshed the FX.com website. The redesigned site provides an optimized user experience and aligns with our ongoing efforts to attract and retain high value users.
Overall, we’re on track with the execution of our 2024 initiatives with customers and partners understandably focusing on cost consciousness and ROI. We haven’t witnessed any significant changes in the market or customer behavior. There remains a high level of interest in our solutions, but clients continue to be slow in decision making and remain resource constraints. We don’t expect this to change anytime soon. Now let’s delve into product updates. Our AI powered solution clarity continues to generate a strong pipeline, and we’re seeing increased demand for other document types that fax. We’re actively onboarding first customers and building the POC backlog. The ongoing interest in clarity remains very encouraging. For our flagship brand FX, we launched the integrated portal, providing an enhanced user experience and laying the foundation for future consolidated offers.
Our investment in security, including high trust and FedRAMP efforts, continues to pay off. While the recent cyber attack disruptions in the healthcare industry were horrific. We were pleased that our digital cloud fax solution was a fallback lifeline for some of the impacted parties. This resulted in some increased volume and project triggers. Security is paramount and consensus offers high quality solutions with a strong focus on secure information exchange. In summary, we made solid progress in Q1 2024 with record revenue in the corporate business and significant progress on key initiatives. We are successfully executing our strategy to focus on profitability, cash flow generation and the optimization of our customer base. And now I’ll hand the call over to our CFO, Jim Malone, who will provide further details about our financial results and guidance.
Jim?
James Malone: Thank you, Johnny. Hello, everyone. In our press release and on this earnings call today, we are discussing Q1 2024 results, Q2 2024 guidance and reaffirming full year 2024 guidance. We expect to file our our 10 Q today. Let’s start with our corporate business results. Q1 2024 revenue was a record $51.4 million, an increase of $2 million or 4% over the prior year comparable period and ahead of our expectations. Corporate offer of $316 is up slightly from the prior comparable period. Monthly customer churn was 1.92% for the quarter. Let me remind you that this metric is based upon account councils and the vast majority of customers are biased towards the lower end of our customer continue representing primarily e-commerce to SMB accounts.
The trailing 12-month revenue retention was 98%. Moving to Sylvo Q1 2024 revenue of $36.8 million, a decrease of $5.3 million or 12.6% over the prior comparable period and again, better than expectations. The year-over-year decrease was primarily driven by planned reduced advertising spend in the current period and a year over year base reduction due to fewer paid ads. Hopper of photos sorry, of $14.95, decreased 1% primary primarily as a result of shifting to price plans with a discounted 1st month versus a free trial period, resulting in higher paid ads in the quarter. As Johnny mentioned, these plans aren’t are net beneficial to us. Churn declined 34 basis points to 3.42% year over year as we accelerate the movement of SOHO customers to corporate.
This will have an effect on the solo cancel rate in the quarter. That movement of customers accounted for for about 66 basis points of the churn. Moving to Q1 consolidated results, revenue of $88.1 million, a decrease of $3.3 million or 3.6% over Q1 2023 and better than expectations adjusted EBITDA of $48.1 million and 54.5%. Margin was an increase of $3.8 million or 8.7% over Q1 2023. The main drivers were our focus on cost structure, most notably the reduction in SOHO marketing spend as well as other operating savings. Ebitda margin of 54.5% is near the higher end range of the range presented in our annual 2024 guidance and an increase of six percentage points of the prior year comparable period. Adjusted non-GAAP net income of $29.8 million, so an increase of $7.8 million or 35.6% over the prior year, driven by items I mentioned above I mentioned plus benefits from non-cash foreign exchange on revaluation of inter-company accounts and net interest expense and a modestly lower share count.
Adjusted non-GAAP EPS of $1.55 higher than the prior comparable period by 40.9% or $0.45. Q1 2024 non-GAAP tax rate and share count was 21.3% and 19.2 million shares. Moving to our capital allocation strategy. As mentioned in our Q three or 2023 earnings call, we announced a $300 million year bond repurchase program approved by our Board. In Q. one 2024, we purchased $63 million face value for $58 million of cash program. To date, we have purchased $126 million face value for $115 million cash. We have approximately $174 million in bond repurchases remaining on this plan, you’ll see in the deck that we have distributed a new slide, debt to EBITDA leverage, as mentioned by as much as I mentioned, and Scott, as we have purchased $126 million of debt program to date.
The schedule depicts our gross and net debt to EBITDA leverage from spin to Q1 2024, as we were not able to repurchase any debt until the second anniversary of the spin, which was October 2023 through purchase activity began in Q4 of 2023. As of Q1 2024, our net debt to EBITDA ratio has decreased to 3.23 0.2, solid progress towards a debt burden of less than three times. We ended Q1 2024 with $61.5 million in cash, which is sufficient to fund our operations or repurchase of debt and equity. This decrease from our year-end balance of $89 million, primarily due to the repurchases Q1 2024 free cash flow, $35.8 million or 21.6% versus prior comparable period Q1 2024. Capex of 8.9 that is consistent with the prior comparable period. Moving to guidance, we are reaffirming our full year 2024 guidance.
In addition, for assistance with the quarterly spread of our guidance, we are providing guidance for them for the current quarter. For the full year, our guidance revenue between $338 million and $353 million dollars or $345 million at midpoint. Adjusted non-GAAP EBITDA, $182 million, $294 million with $188 million at midpoint, adjusted non-GAAP EPS of $5.8 to $5.31 with $5.20 at midpoint. Our estimated share count and income tax rate on $19.4 million shares at a tax rate of 20.5% to 22.5% . For Q2 24. Guidance revenues are expected between $84.5 million and $88.5 million with a $86.5 billion midpoint. Adjusted non-GAAP EBITDA between $46 million and $49 million EUR with $47.5 million at the midpoint, adjusted non-GAAP EPS of $1.30 to $1.36 with $1.33 at midpoint.
Our estimated share count and income tax rate of $19.3 million shares and 20.5% to 22.5% tax rate. This concludes my formal remarks, and I’d like to turn the call back to the operator for QA. Thank you.
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Q&A Session
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Operator: [Operator Instructions]. And the first question today is coming from Jon Tanwanteng from CJS Securities. John, your line is live.
Jon Tanwanteng: Hi, good afternoon and thank you for taking my questions on. I was just wondering, looking at the midpoint of the Q2 guidance, it’s a little bit down sequentially on an EBITDA basis. And I’m wondering on what’s going on in that number and kind of what the puts and takes are. I know that so you’re bleeding off a little bit, but is there increased expenses? My understanding was that, so maybe about a low to no margin business that the customers that you were down, you’re running off.
Johnny Hecker: I know, John, remember that revenues are down sequentially from Q1 to Q2, so that puts pressure on as you’re going to make up that difference. Customers that cancel can actually are very profitable for member there on the margin. They’re paying us something in some prior period, whether it’s the last quarter of the last month where there are customers that are less or not profitable is a function of the marketing issue that we discussed both in the call and previously and what type of customers signing up and are they quote-unquote taking advantage of the free trial period and as a result, not making any payment to us. But yet we’ve expanded marketing dollars or they stay for a very short period of time. And that’s a different question, but that’s really the shift in introducing a new plan, which has you pay upfront albeit at a discounted amount.
But all customers that we lose or substantially all that we lose in Soho are profitable to varying degrees because remember, those marketing costs have already been expensed in some prior period. So we have to make that up. So I actually think that the our midpoint shows an improvement in margin and a similar level of EBITDA.
Jon Tanwanteng: Got it. That’s helpful. Tom, if I could sneak another one in there on. I was wondering about the mix changes you mentioned about on that would impact the upsell our amount in Q2 and kind of what’s going on?
Scott Turicchi: Well, I think that, yes, yes.
Johnny Hecker: So this is an important program for us as it adds to the number of sales. But as you are for new customers. But as you know, this is on the on the lower end. So we expect the impact to not be dramatic on. We’re going through some changes, some prioritizing some of the positioning of the people that we have in that program towards a more lead generation up market so on and then we will be backfilling those positions. But it will lead to a little bit of a of a decline and not be as strong in Q2 as it was in Q1.
Operator: The next question is coming from David Larsen from BTIG. David, your line is live.
Jenny Shen: Hi, this is Jenny Shen, on for Dave Larson. Congrats on the quarter and thanks for taking my call, and it was taken color to hit here that advanced products made up 20% of new sales. Can you just provide some more color there? What opportunities you’re seeing from CLARITY and Unite, how receptive prospective clients have been and also the potential revenue and margin impact there?
Johnny Hecker: Thanks. And yes, thanks for your question, Tom. So what we’re seeing is obviously, what we have seen, we’ve seen we’ve been strong with unit sales in the past. This is a suite that offers and I’m more than just faxing to mainly smaller physician offices and smaller and clinics on and offer offers a more broader suite of interoperable products than than just track. And we’re seeing we’re forcing continued interest in this product and we have a very focused our sales initiative on that product line, and that has really paid off in Q1 on strong sales. Secondly, and your question with regards to clarity, as I mentioned in the call, we’ve won our first customers for the Clarity platform. We are in the process of rolling that out from.
So yes, so we bought and the increasing use cases and there’s some proof of concepts going on that are beyond the prior proof of concept in certain areas we’ve talked about in the last couple of quarters. So there is an expanding interest in what clarity can do as a platform. And it’s iterating around either a new use cases for it or derivatives of some of our existing UK use cases which would be in clinical documentation prior authorizations. In terms of your question on the margin, I would say certainly in the aggregate clarity you made really almost all the advanced services would in general be consistent with our margin structure. Some depending upon how they’re deployed could have a slightly higher contribution margin. Some might be slightly lower.
But as a basket, I’d say they’re in line with where we operate today. And I when I say that I’m talking about an operating contribution margin, so before things like G&A and whatnot, so higher than the 54.5% EBITDA margin that we reported, which includes all of those G&A costs on the overall revenue mix of the mass injuries and is just based on the large baseline that we have in the fax business, obviously still our FX revenue and it will take some time for those advanced products to to catch up since we’re still growing and as well, right. So the vast majority of our revenue mainly maintains and continues to be fax on the new sales side, very excited that we’re able to book a substantial part of our of our bookings and with AdvancePCS.
Jenny Shen: Got it. That’s very helpful. And in fact, and sneak in a quick follow-up here. I’m not sure if I missed it. But did you guys report a bookings number? And Mark, can you just provide some general comments around and your visibility and the pipeline? Thank you.
Johnny Hecker: So yes, the bookings you’re correct. There was never a formal metric in our presentation. It is something that for a number of quarters we would talk about in the operational section. Our view was that it was not terribly helpful because it was not you cannot extrapolate from the booking numbers to a future, say, a quarter or a year worth of revenue. And it’s a fairly volatile number so you can have that like with the VA comes in a very big increase, but that may spread over a number of years. So that is not something that we currently book are on track or report and don’t intend to. But I think Johnny can give you sort of a feel for in terms of the sales activity and what’s going on in terms of both in the core fax business. And I think you’ve already addressed the advanced interoperable, what we’re seeing there.
