Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q4 2023 Earnings Call Transcript
Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q4 2023 Earnings Call Transcript February 21, 2024
Consensus Cloud Solutions, Inc. misses on earnings expectations. Reported EPS is $1.11 EPS, expectations were $1.17. 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 Q4 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; 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 Q4 and fiscal year-end 2023 financial results, other key information and 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 our operational progress since our Q3 investor call, and then Jim will discuss our Q4 2023 and year-end preliminary unaudited financial results and 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 we discussed in our Q3 call, our focus has been on EBITDA and free cash flow generation. The market dynamics have not materially changed since our last call in November, and we expect these trends to continue throughout 2024 in the healthcare sector. We've taken the past three months to do a rigorous examination of the business to see where cost can be optimized. As we noted in the Q3 call, we found some spend in our SoHo channel that gave us low LTV customers. As we look even deeper campaign by campaign, we found additional spend that was at best marginally profitable and most likely uneconomic. As a result, we have made some additional cuts against our Q4 forecast that had a slight negative impact on revenues in the quarter but favorably affected EBITDA productivity and margin.
On the corporate side, the revenues were impacted by the enhanced collections process that reduced our outstanding receivables, but also resulted in some account closures. This has an effect on the base coming into 2024 and will likely affect corporate revenue growth rate by approximately 1 percentage point. Johnny will provide you with more details in his part of the call. I am pleased that for the quarter, we generated near our target EBITDA, notwithstanding the headwinds on the top line. Our bottom line EPS, while strong, were negatively impacted by a severe rallying of the euro against the US dollar that resulted in a charge of $5.8 million or $2.4 million more than our forecast. I would note that these are inherently difficult to predict and are noncash in nature.
We are working on a program to mitigate this volatility in 2024. The strong bottom line results, combined with the finance team's collection efforts allowed us to be $10 million better in free cash flow versus Q4 of 2022. For the full fiscal year, we produced $77.7 million of free cash flow compared to $53.1 million in 2022. This allowed us to repurchase 71.4 million of our bonds through January at an average price across both tranches at 91% of PAR. We ended the year with a healthy $88.7 million of cash and cash equivalents. As we look to 2024, the biggest change from our preview in November is how we are managing the SoHo channel. Given change in algorithms, increasing cost for advertising and an increasing amount of new sign-ups that have limited use cases and as a result, a short life, we are cutting almost two-thirds of our marketing spend in 2024 relative to 2023.
As a result, we will see a faster decline in revenue for SoHo in 2024 than previously articulated. However, the costs are declining by approximately the same amount as the revenues. As we continue to invest in our corporate channel, we have allocated a few million dollars of additional marketing spend to support this effort. In addition, we have been seeing initial benefits from the go-to-market realignment that we implemented approximately one year ago. We remain positive on the opportunity within the healthcare sector for our core fax products and interoperability solutions. We expect an increased corporate contribution exiting 2024 as a result of the strategy, and we'll continue to pursue it while we generate cash and retire our debt. At the midpoint of our range of guidance, we expect EBITDA to grow in 2024 and margins to expand by approximately 290 basis points.
We're also paring back our capital expenditures by approximately $7 million from the 2023 level while continuing to invest meaningfully above pre-spin levels. Notwithstanding an expected higher tax rate than 2023, we still expect to generate approximately $80 million in free cash flow. I will now turn the call over to Johnny.
Johnny Hecker: Thank you, Scott, and hello, everyone. Let me provide an update on our sales and operations, starting with our corporate business. In the fourth quarter of 2023, our corporate revenue reached $49.4 million, reflecting a steady increase compared to the previous year's $47.8 million. We are excited to report the continued success of our SoHo upsell strategy with approximately 1,250 accounts added in Q4 and a total of approximately 4,700 accounts that shifted from SoHo throughout the year. Notably, advanced products accounted for 13% of our total new sales, a continued strategic focus for us, and contributing to a 23% share for the full year. Additionally, our eFax protect offering has yielded impressive results, garnering approximately 1,000 paid customer adds in the quarter thanks to the Q3 introduction of a new e-commerce channel specifically tailored to corporate clients.
Moving on to SoHo. As we had anticipated and regularly communicated, there was an expected decrease in revenue during Q4 of 2023, with $38.3 million compared to the previous year's $42.2 million. As we discussed in Q3, we cut some unproductive advertising spend. As we did a deeper analysis, we made additional advertising cuts in Q4, which will continue into our 2024 budget. Our goal is to optimize our SEM spend with a focus on targeting the most profitable customers. As a result of this decreased intake, we did see our total account base decrease from 859,000 to 831,000. However, it is important to note that our churn rate improved from 3.49% in the previous quarter to 3.34% in line with what we would expect to see given our more selective customer acquisition strategy.
Now let's move to some key updates that have shaped our operations. Firstly, the VA rollout has begun its acceleration. All parties involved have worked in close alignment to adopt a new method of rollout. Evolving in that new format, we're ensuring a smooth and efficient implementation. As a result, we anticipate to reach a seven-digit contribution in 2024 with a promising runway beyond that. In terms of our ECFax offering for the federal government, other government agencies progress has been steady, albeit slow. The pipeline remains robust with prospects remaining cautious of the ongoing federal government spending cap being a regular contentious issue. We are closely monitoring developments as we await the federal budget resolution. It's worth noting that our commercial offering eFax corporate has proven to be a viable alternative for smaller government agencies with less demanding requirements.
Furthermore, I'm pleased to share some notable wins, including our success with MRO, a customer in the healthcare IT space and expert for the exchange of clinical data and the initiation of a partnership with Lexmark, a leading provider of printing and imaging products, software solutions and services. Our go-to-market realignment strategy has yielded positive outcomes, particularly with the earlier noted success of eFax protect, our corporate e-commerce offering. We have strategically redirected our focus towards our existing customer base, maintaining the healthcare industry as a gold standard for new business and product strategy. In line with this, we are actively cultivating partnerships with electronic health record and healthcare IT vendors.
I'm happy to report that the go-to-market realignment efforts have resulted in increased operational efficiency, steady booking results, a stable sales pipeline and data-driven adjustments to our strategies. Now let's briefly discuss our product updates, beginning with our AI-driven solution, Clarity. We continue to build a solid pipeline for Clarity CD for clinical documentation and Clarity PA for prior authorizations. And we are excited to announce that we have already booked our first Clarity CD customers. New prospects and existing customers have shown great interest in adoptable AI and a real-world solution, yielding them immediate savings. Additionally, our first-generation Harmony offering is now in production, marking a significant milestone in our product roadmap.
With this specific application of Harmony, the center transmits a fact document by eFax, and Harmony delivers it as a direct secure message, a broadly used electronic delivery protocol for healthcare. We're excited to announce that we are partnering closely with one of the leading cloud-based EHR and practice management solution providers for small and medium-sized medical practices on this project. As we look ahead to 2024 on the next slide, it's important to note that while we recognize the positive changes within our organization, we are maintaining a conservative outlook on our growth prospects. By optimizing our marketing efforts with a focus on increased profitability, we have deliberately put an emphasis on margin and retention. While in the near term, top line growth will be moderate, our primary focus remains on cash generation and achieving operating profits.
For our SoHo business, we have implemented several strategic measures as part of our go-to-market realignment. By merging the marketing departments for SoHo and corporate, we aim to leverage deeper insights from a propensity analysis indicating that a portion of our SoHo base possesses corporate attributes. Furthermore, we finalized the eFax price increases in early 2023, allowing us to concentrate our efforts on a more engaged user base. In 2023, we encountered some challenges related to significant changes implemented by our primary digital advertising partners. The changes were aimed at stabilizing their businesses, but they resulted in a significant increase in our customer acquisition costs, yielding less profitable customers. To navigate these challenges, we have undertaken a thorough analysis of our campaigns to identify those that yield high-quality customers.
As reported in our last earnings call, consequently, we narrowed spending on campaigns targeting high profit customers starting in Q3 of 2023 and are continuously evaluating the effectiveness of our campaigns. Our focus on the smarter Aspen project involves analyzing our subscriber base to optimize digital advertising spending. We are closely monitoring ad costs and will strategically reenter campaigns when the LTV to CAC ratio meets our defined level of return. The narrowed spending in SoHo allows us to shift a portion of net advertising spend to the corporate business while reducing SoHo spend. Our strategy centers around prioritizing high LTV customers, which will positively influence the profitability of newly acquired SoHo customers. Encouragingly, we are already observing positive indicators with a decrease in CAC resulting from an increase in organic sign-ups and reduced overall spending.
In total, we are planning for approximately $139 million in SoHo revenue at the midpoint for 2024. Through active management, we expect this targeted reduction in revenue to allow us to maintain and possibly improve cash generation in comparison to previous periods. Now let me address the corporate business and direct you first to our balance sheet. You'll notice a significant decrease in our accounts receivables from Q3 to Q4 of 2023. We've expanded our collections team in a short period, allowing us to focus on rigorous collections management in those quarters. Jim will go into more detail in his prepared remarks. While this effort has improved cash generation, it has also resulted in an increase in customer terminations impacting both our 2023 revenues and run rate entering the new year.
Regarding other impacts on our baseline, the FaxBox migration in Europe resulted in the discontinuation of that platform, retaining less than half of its base. Also, this may seem significant from a top line perspective, it remains justified from a technical platform retirement and cost standpoint. Additionally, the Summit acquisition strategically conducted for its great talent and technology, continues to generate baseline revenues, but it declined in 2023 and will not contribute to growth in 2024. As we have previously discussed, slow decision-making in the previous years of 2022 and throughout 2023 did not generate the addition of new business as initially anticipated in our 2023 post-pandemic plan. Consequently, we have adopted a more conservative approach to our baseline.
We see some, but little change to that behavior, thus keeping our new revenue ambitions roughly flattish as well. Despite the challenges we are encountering, we are budgeting corporate revenue to $206 million at the midpoint for 2024, representing a 3.1% growth compared to 2023, in line with our recent quarterly growth rates. So looking ahead, we are maintaining stability in new business and anticipating initial returns from the Japanese corporate launch. In response to market conditions, we have kicked off focused sales initiatives in 2024 and reallocated resources to enhance customer retention and cross and upsell opportunities in our large baseline. These initiatives position us for accelerated corporate growth in 2025, while we remain committed to cash generation.
And with that, let me hand the call over to our CFO, Jim Malone, who will provide a bit more color on our Q4 2023 and full year 2023 financial results as well as our 2024 guidance. Jim?
Jim Malone: Thank you, Johnny, and good afternoon, everyone. In our press release and on this earnings call today, we are discussing preliminary unaudited 2023 results and 2024 guidance. Our fiscal 2023 audit is still underway, and will result in audited financial results filed with our 2023 10-K, scheduled to be filed late next week. Let's start with our corporate business results. Q4 2023 revenue was $49.4 million, an increase of $1.6 million or 3.3% over the prior comparable period. Q4 2023 year-over-year corporate revenue growth increased by 30 basis points versus Q3 2023 year-over-year. As Johnny mentioned, Q4 year-over-year revenue was impacted negatively by the cleanup initiated related to the Q4 collection efforts, migration of FaxBox to legacy platform and Summit.
In the second half of the year, an increased focus was put on cash collections. This effort improved collections by 9% from slow paying customers and, however, did result in terminations of nonpaying customers. Corporate ARPA of approximately $306 was down $16 or 4.9% from the prior year, driven by the mix of paid ads at a lower ARPA, including SoHo accounts moving to corporate and the new eFax Protect initiative that Johnny mentioned in his remarks. Monthly churn of 1.82% increased 33 basis points, delivering a trailing 12-month revenue retention of 99%. The churn increase was primarily due to terminations of nonpaying customers. 2023 full year corporate revenue was $199.6 million, a $7.4 million or 3.9% increase over 2022 results. Year-over-revenue was also affected by the cleanup initiative related to Q4 collection efforts, migration in FaxBox and Summit.
Moving to SoHo results. Q4 2023 revenue of $38.3 million, a decrease of $4.1 million or 9.6% over the prior comparable period. The year-over-year decrease was within expectations, given the impact of price increases in prior year and lower optimized advertising spend. This approach delivered a net base reduction due to fewer paid ads but potentially higher value customers, partially offset by an increase in ARPA. ARPA of 15.12% increased by $0.41 year-over-year, benefiting from last year's price increase. Churn declined 48 basis points to 3.34% compared to the prior period and are now at pre-pandemic churn levels. Full year 2023 SoHo revenue was $162.9 million from $7.3 million or 4.3% decline over 2022 results, and essentially in line with our full year SoHo guidance range of negative 4% to negative 2%.
Moving to Q4 consolidated results. Revenue of $87.8 million is at the increase of $2.5 million or 2.7% over Q4 2022. Adjusted EBITDA of $47.2 million and 53.8% margin was a decrease of $1.8 million or 3.7% over Q4 2022. The main drivers of the revenue flow from -- mentioned above -- planned employee-related expenses, partially offset by effective cost management. EBITDA margin of 53.8% is within our guidance range of 50% to 55%. Adjusted non-GAAP net income of $21.3 million, a decrease of $1.3 million or 5.6%, driven by lower revenues, a higher tax rate, offset by interest income of $1.5 million and noncash foreign exchange revaluation of intercompany accounts of $0.5 million. Adjusted non-GAAP EPS of $1.11 was lower than the prior comparable period by 1.8% or $0.02.
In Q4 2023, non-GAAP tax rate and share count was 21.8% and 19.2 million shares. Moving to 2023. Full year consolidated results. Consolidated revenue of $362.6 million is essentially flat versus the prior year. Adjusted EBITDA of $186.6 million was a decrease of approximately $10 million or 5.1% compared to the prior comparable period, delivering a 51.5% within our 50% to 55% guidance expectations. The main year-over-year EBITDA driver and flat revenue is plain employee related expenses. Adjusted non-GAAP net income of $99.8 million decreased $6.8 million or 6.4%, driven by lower operating income, offset in part by interest income, expense benefit by $4.2 million and lower tax expense by $2.7 million. Adjusted non-GAAP EPS of $5.09 was lower than the prior comparable period by 4.5% or $0.24.
The 2023 non-GAAP tax rate and share count was 19.7% and 19.6 million shares. As mentioned in our Q3 2023 earnings call, we announced a $300 million bond repurchase program approved by the Board of Directors. In Q4 2023, and the first week of January 2024, we repurchased $62.6 million and $8.7 million in face value across both tranches for $57.1 million and $7.9 million cash, respectively. We repurchased 349,000 and 1 million shares in Q4 and 2023, respectfully for the cash outlay of $8.5 million and $23.5 million. We ended 2023 with $88.7 million in cash and cash equivalents, which is sufficient to fund our operations and purchase of and repurchases of debt and equity. Our normalized 12/31/23 cash balance would have been flat versus 9/30/23 at $156 million, excluding the $65.5 million in bond and equity repurchases.
2023 full year free cash flow was $77.7 million. For additional assistance with the quarterly spread of our guidance, we will be revising additional guidance for the current quarter. For the year 2024, guidance is as follows. Revenues between $338 million and $353 million with $345 million at midpoint. Adjusted non-GAAP EBITDA between $182 million and $194 million with $188 million at midpoint. Adjusted non-GAAP EPS at $5.08 to $5.31 with $5.20 at midpoint. For Q1 2024, revenues are expected to be between $85 million and $89 million with $87 million at midpoint. Adjusted non-GAAP EBITDA between $45 million and $48 million and $46 million at midpoint. Adjusted non-GAAP EPS at $1.27 to $1.33 with $1.30 at midpoint. Estimated share count and income tax rate are 19.4 million shares and 20.5% to 22.5%.
This concludes my formal remarks. Now I'd like to turn the call back to the operator for Q&A. Thank you.
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