Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q3 2024 Earnings Call Transcript

Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q3 2024 Earnings Call Transcript November 9, 2024

Operator: 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. [Operator Instructions] 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.

Adam Varon: 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.

Scott Turicchi: 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; two, continuing to pursue the acquisition of customers primarily in the healthcare space for our corporate channel; three, 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 four, 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 additional $31.1 million of debt in the quarter. This brings our total repurchases since launching the program in November 2023 to $187 million, and 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 4 quarters and approximately 1/3 of our total revenues are usage base. 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.

Johnny Hecker: 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 customers 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 up sold from SoHo, continues to influence the corporate cancelation 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 cancelation 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 cancelation 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 a 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, 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.

Jim Malone: Thank you, Johnny, and good afternoon, everyone. In our press release and on this earnings call today, we are disclosing Q3 2024 results plus Q4 2024 and 2024 full year guidance. We expect to file our Q3 10-Q today. Let’s start with our Corporate business results. Q3 2024 revenue was a record $53.1 million, up $2.7 million or 5.3% versus prior year and performing better than expectations. Corporate ARPA of $310 was essentially flat with the prior quarter and in line with the last several quarters, ranging from $305 to $320. Q3 2024 customer churn of 2.61% increased a 112 basis points year-over-year and 32 basis points sequentially, primarily driven by customer churn at the lower end of the customer continuum. Normalized for eFax Protect to cancel rate we’ve been approximately 2%.

Notwithstanding this, these customers are net economically beneficial. I would also like to repeat Johnny’s comment that our cancel rate is calculated on a per account basis. A better measure is revenue retention, which came in at a 100% over the trailing 12 months and 1% improvement sequentially. SoHo results. Q3 2024 revenue of $34.7 million is a decrease of $5.5 million or 13.6% over the prior year and in line with expectations. As mentioned previously, this decrease is driven by our plan reduction in advertising spend and the corresponding year-over-year base reduction due to lower paid adds. ARPA of $14.88 decreased 2.8% year-over-year as a result of the shifting to price plans with a discounted first month versus a free trial. These plans are net economically benefit.

It should be noted that year-over-year paid adds were flat amid at approximate 40% lower spend as we continue to optimize our advertising campaigns. Churn declined 11 basis points to 3.38% year-over-year, and 2 basis points sequentially, in line with expectations. Moving to consolidated results. Q3 revenue of $87.8 million is a decrease of $2.8 million or 3.1% over Q3 2023, again in line with expectations. Adjusted EBITDA of $46.9 million, a decrease of $0.6 million or 1.2% over Q3 2023 was ahead of expectations and driven by lower revenue, partially offset by cost structure optimization, primarily in the area of SoHo advertising. Adjusted EBITDA margin of 53.5% was a 100 basis points better than the prior year comparable period, delivering a solid EBITDA margin amid cost — continued cost optimization.

Adjusted net income of $25.5 million is a decrease of $4.2 million over the — over 14.3% over prior year, driven primarily by a $5.8 million noncash foreign exchange revaluation of intercompany balances, partially offset by lower interest expenses on such — on the success of our bond repurchase program and lower income taxes. Adjusted EPS of $1.31 is lower than the prior year by 13.2% or $0.20, driven by the items previously mentioned and a modestly low share count. Q3 2024 non-GAAP tax rate and share count was approximately 19% and approximately 19.4 million shares. As mentioned in our Q3 November 2023 earnings call, we announced a $300 million 3-year bond repurchase program. In Q3 2024, we repurchased $31.1 million face value for $30.6 million cash.

Program to date, we have repurchased $187 million face value for $173 million cash and have approximately $113 million in bond repurchases remaining under this program. With the debt repurchases just mentioned, total debt to adjusted EBITDA is 3.2x and net debt to adjusted EBITDA ratio is 2.9x. We’re getting very close to achieving our total debt to adjusted EBITDA target of 3x. We ended Q3 2024 with $55 million in cash, which is sufficient to fund our operations and repurchases of debt and equity. Q3 2024 free cash flow is $33.6 million versus $49.9 million in the prior comparable period. This decrease was primarily due to a foreign tax refund and the deferral of Q2 and Q3 2023 federal income tax payments under the California Disaster Recovery Relief Act, which were subsequently paid in Q4 2023.

Q3 2024 CapEx of $8 million is down $2 million or 20% versus the prior year. Now let’s talk about guidance going forward here. Q4 2024 guidance. Revenues between $83 million and $87 million with $85 million at the midpoint. Adjusted EBITDA between $42 million and $45 million with $43.5 million at the midpoint. Adjusted EPS of $1.14 to $1.24 with $1.19 at the midpoint. Q4 estimated share count and income tax rate are 19.5 million shares and 19.5% to 21.5% tax rate. Our revenue — moving to full year. Our revenue and adjusted EBITDA range has been narrowed within previously provided guidance based on year-to-date Q3 2024 performance plus our Q4 2024 guidance range, revenues between $346 million and $350 million. Adjusted EBITDA between $186 million and $189 million.

Adjusted EPS between $5.45 to $5.55. Therefore, we’re narrowing the full year 2024 revenue and adjusted EBITDA guidance, while maintaining adjusted EPS range of $5.45 to $5.55. Our estimated share count and non-GAAP income tax rate are 19.5 million shares and 19.5% to 21.5% tax rate. That concludes my formal comments. Now I’d like to turn the call back to the operator.

Q&A Session

Operator: [Operator Instructions] First question today is coming from David Larsen from BTIG.

Jenny Shen: 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 2-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?

Johnny Hecker: Yes. Jenny, thank you for the question. This is Johnny. I think it’s a really good question, and you partially answered it already, right? Some hospitals are doing well. Others are struggling. I think we — I mentioned it in the call, right? We see the green shoots actually growing and converting. So I think we found a way, especially in the specialty healthcare space, in the multi-location healthcare providers, where we can find customers with, let me call it, accelerated interest and conversion. So while we still have some very large clients that take their time, and we still see continued headwinds in that area, we have found ways to convert and actually ramp new customers. So like you said, it’s a diverse environment out there and some customers are really accelerating, which is encouraging, even more encouraging that we find them and can engage with them and others continue to be slow.

From the question about the administrative change and the new rules that we — from the CMS, we don’t see any particular impact on our business at this point. I don’t know, Scott, if you want to…?

Scott Turicchi: No, I think you had a third question which is about the election and any impact it might have, specifically on customer acquisition. My guess is, generally the answer is going to be no. Obviously, there’s a lot of unknowns at this point. There’s still an undecided house race. And so, I think if you listen to even Chairman Powell today on the interest rate cut and his commentary going forward, 2 things: one, there’s a lot of unknowns because we don’t have a settled Congress; and two, a lot of the policies that have been talked about and may be implemented are probably still months in the future in terms of getting through even a unified Congress and then actually getting implemented. So it’s obviously something we will watch.

There’s all kinds of different pieces to it. Obviously, what — how does it affect the economy generally. Interest rates, you see already moving around, tax implications. There’s a whole myriad of things, but I think it’s too early to call. But in general, I would say that elections and the different parties that can be in control or divided government, doesn’t have a huge impact on our customer acquisition, go-to-market strategy. Clearly, if things either give an accelerant to the economy or a headwind, that could have an impact. But in terms of the direct correlation, I’d say it’s generally weak.

Operator: [Operator Instructions] 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.

Scott Turicchi: 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 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.

Operator: 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.