Q4 2022 Consensus Cloud Solutions Inc Earnings Call
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Good day, ladies and gentlemen, and welcome to consensus Q4 of 2022 earnings calls.
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.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
This call from consensus will be Scott to Ricky CEO .
John never go C O a Jim Malone CFO .
I'll now turn the call over to John Nebergall C. O at consensus. Thank you you may begin.
Good afternoon, and welcome to the consensus Investor call to discuss our Q4 and full year 2022 financial results.
And our 2023 initial guidance.
Joining me today are Scott to Rekey, CEO and Jim Malone CFO .
The earnings call will begin with Scott, providing opening remarks, I will give an update on our major realignment of our operating structure as well as sales and technology results.
And then Jim will follow up and discuss our full year and Q4 financial results.
After we finished 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.
A copy of this presentation and the associated press release will be available on our website.
Also if you have any questions you can always send an email to investor at consensus Dot com.
Before we begin our prepared remarks allow me to direct you to the Safe Harbor language on slide two.
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 three that we have disclosed in our SEC 10-K filing as well as a summary of those risk factors that we've included as part of the slideshow 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.
Thank you John .
I would like to touch on several areas before handing the call over to John and Jim for more details on our operations Q4 financial results fiscal year 'twenty two results as well as the publication of our 2023 guidance.
As noted in our press release, we intend to file an amended Q3 2022 10-Q2.
So primarily address two unintentional errors, we have identified and the preparation of our Form 10-K.
The first errors related to an accounting practice, we inherited from the spin.
Notably our Soho revenue stream was inadvertently grossed up by $5.3 million over the first three quarters of 2022 with a corresponding offset to bad debt expense.
This correction has no impact on the company's operating income net income EBITDA or cash for the relevant periods.
The second area relates to the timing of revenue recognition.
We initially recognized $2 2 million of revenue in Q3, 2022 for the sale of certain perpetual software licenses to one of our customers, which upon further review, we have decided to reclassify as deferred revenue.
This correction impacts timing only not the amount of revenue that we recognized over the contract term.
Either air has any impact on the company's cash or cash equivalents.
Jim will provide further details in his financial presentation later in the call.
Our operational Miss in revenue for the year to achieve the low end of our revenue range was approximately $3 million and was largely due to the timing of both customer decisions and implementation.
As we noted in our Q3 call and again earlier this year at an Investor Conference. We continue to see a more deliberate approach to decision, making and implementation by our largest prospects and customers.
We believe that this trend will continue in 2020 three and have accounted for it in our financial guidance.
As John will later detail, we continue to have a number of prospects in our pipeline and remain optimistic that over time, they will translate into revenue.
I would also observe the changes in our incremental revenue are more dependent on revenue coming from medium to large enterprise customers the timing of which is harder to predict.
As we believe that this will continue to be the case and is independent of economic conditions. We are widening the revenue range for our guidance that Jim will detail for you later.
In conjunction with our performance in Q4, we evaluated the sales and marketing structure that we inherited at the time of the spin.
We concluded that the approach of the three revenue streams, Soho Midmarket and enterprise and organizations to many manage them does not allow an optimal go to market strategy.
The siloed approach inhibits efficient marketing spend and creates gaps where one channel of revenue ins and the other begins.
I'm enthusiastic about the realignment of our people and resources and believe will produce a greater pipeline of opportunities, giving us more passed to meet or preferably beat our guidance John will give you the details in his presentation.
We continue to operate at healthy EBITDA margins of 54, 3% consistent with our guidance of between 50 and 55%.
These results were driven by continued strong performance in the corporate business, which grew 10, 1% versus Q4, 2021 and six 5% of which was organic.
Our Soho channel had good results, notwithstanding continuing FX headwinds, which primarily affect this channel of revenue.
Also as we discussed last quarter, there were additional customers affected by the price change, which had a modest impact on our cancel rate.
While slower than previously planned the V. A is on the verge of rolling out our E C facts towards first medical facility.
We expect revenue to start sometime in late Q2 or Q3.
The interest in E C facts from other government agencies has more than doubled since the end of Q3.
There are now more than 15 agencies interested in the service. It is still early and we do not expect any of these new agency opportunities to produce revenue in 2020 three but are encouraged by the widespread interest in the solution.
Before handing the call over to John I'd like to comment on the economy and how it is affecting our business outlook.
As noted previously the uncertain economic conditions in fear of a recession has slowed down decision, making of our largest potential customers. We believe that there will be a recession at some point this year and expect the slower decision, making trend to continue as well as to modestly impact the cancel rate of our Soho or E Commerce business.
In addition, the tight labor market and sticky inflation has an impact on the cost of our labor force, which is our largest single expenditure we.
We anticipate there will be an increase of approximately $12 million in cash compensation expense. This year over 2022 which is a combination of having more employees. In 2023, then 2022 as well as higher wages across the board.
We anticipate that this will have a 2.3 percentage point impact on our EBITDA margin in 2023.
As our employees are our most valuable asset and we need them to ramp up from the spin to meet the obligations of a standalone public company as well as dedicate more resources toward development sales and marketing efforts, we do not see an opportunity for cost savings in this area. However, we are looking carefully at our non employee air.
He has to make our operations more efficient.
Moreover, we believe these investments in both technology and human capital will strengthen our leadership position in the market.
Finally, we remain liquid with more than $94 million of cash on our balance sheet and the Undrawn line of credit that we put in place in March of 2022.
I'll now turn the call over to John .
Thank you Scott, let's move to slide five.
In early Q4 of last year, Johnny Hecker joined consensus.
Johnny came to us from Google, where he led sales efforts in Europe and previous to that has a long history in the cloud fax industry.
We gave him the objective of evaluating our current go to market structure and to develop recommendations to improve our offensive capabilities finding ways to break down any silos that stifle performance, ensuring a strong focus on health care.
Bringing more discipline in data analytics to drive the business and to find ways to make our overall execution more effective and efficient.
Based on those recommendations the executive team has implemented a sweeping realignment of our go to market operation.
I'll ask Johnny to lead this new go to market team and have implemented the following changes.
Our strategic sales team has been established to focus on our largest current customers and biggest prospects including government.
This will be a hand selected team working with only large multimillion dollar opportunities.
A single direct sales organization that eliminates the former enterprise and mid market sales approach for a more integrated sales operation.
As part of this change the old Soho sales segment has been eliminated and responsibility for E. Commerce sales is now a sales function rather than a marketing function.
We have created a new discipline called the sales enablement and optimization function.
This team will be dedicated to using data analytics and statistical analysis to continuously improve our sales process to manage our RFP and <unk> responses and control pricing across the organization.
This will unlock the power of our internal data collection program and optimize sales execution.
Marketing will be consolidated into a single organization we.
We had recognized that our marketing program on the web also has an enormous impact on driving upmarket customer behavior and so we have integrated the marketing function.
Our marketing team will maximize our demand generation efforts driving leads to sales and our e-commerce portals, managing spend more efficiently and improving overall impact of our efforts.
Our channel program and services team will also join the new revenue organization and report to Johnny Hecker as well.
Our new strategy team will be formed under bevy miner, a recognized expert in healthcare it.
This team will concentrate efforts on emerging opportunities in the healthcare industry, becoming involved and given consensus of voice and legislations and CMS HHS rule, making and standard towards.
The strategy team will also provide competitive analysis manage the events that we attend and develop a series of seminars and webinars aimed at the North American healthcare market.
The international operations are unchanged in this realignment.
It is important to emphasize that this action is focused on improving our efficiency and our effectiveness in the north American market with a strong emphasis on healthcare interoperability.
This is not I repeat not a cost cutting exercise a reduction enforce or downsize.
We believe that taking these actions will help us become even more competitive raise our profile in the industry and give us better command over our overall go to market execution.
Now, let's go onto slide six.
I will comment on the year the quarter in a number of in progress operating items.
First for the year 2022, we saw record corporate sales performance with $23 $2 million in bookings of 59% improvement over 2021, and a 35% improvement if you exclude sales associated with the assets acquired in our purchase of summit health care.
Sales included $9 $7 million in our advanced product set more than double last year and in total these non FX products represented slightly more than 36% of our overall bookings.
As we have stated on a number of occasions over the last several months, we were bidding beginning to see a more deliberate pace of decision, making by our prospects largely as a result of economic uncertainty that dominated the financial news.
While our pipeline remains promising deferrals by several key prospects as well as the natural historical seasonality of our business impacted the fourth quarter results.
Overall bookings for the quarter were $4 6 million.
44% increase over Q4 2021.
And when you exclude the perpetual license products sale of $2 5 million in Q3. It was a 2020 it was a 22% decline.
That sequential decline is somewhat better than 2021 seasonal declined 32% between Q3 and Q4.
In the quarter. We also saw sales of our advanced products at 46% total bookings.
The broad price increase we executed in the Soho base is nearing completion.
All in year increases for 2022 had been implemented in all of that remains are the outstanding annual plans, who will receive the increase when their renewal comes due.
For the quarter overall, Soho churn was 382%.
A 22 basis point increase from Q3, which was better than the 28 point basis point increase we experienced last year.
The churn rate remains favorable to our post price increase modeling, which we continue to monitor closely.
On the EC facts front, we are well into the planning stage. The first system deployment and anticipate that we will be live with the first user in either late Q1 or Q2.
We have spoken on previous calls Theres been an interest from other government agencies for use of the <unk> system and we've actually scammell scheduled the first demos of the system in the coming weeks.
Aside from those scheduled demos, we also have a number of formal RF and RF.
<unk> that we received.
Over the past two quarters, we've been involved in it.
It's a concept trial with our clarity product.
I'm pleased to say that we're now in the final stages of negotiating the production <unk> for clarity, which expected is expected to put us into production in Q2.
The product team continues initiatives in Q4 rolling out the compliance 365 initiatives. The purpose of this program is to we've compliance and security into our daily execution not only on the development team, but throughout the entire organization.
While we continue to support the Sop, two fed ramp and high trust audits as they come due the team is also working to maintain a very aggressive schedule of employee training self review and earned internal testing that insurers are security environment is second to none in the industry.
We move our customers most critical information and remain committed to strengthen our already formidable security programs.
Our technology team is also expanding the ability for us to support our customer base with the formation of a level three support team.
Moving further past what is considered ordinary technical support of level three group will have development skills to work with clients on a deeper technical level solving their most important and challenging issues.
Ah like expansion and our product team is the addition of product marketing to our capability set.
This newly formed group will be dedicated to product commercialization education and launch activities.
Working closely with the newly announced strategy team product marketing will serve as the key link between the drawing board and revenue generation.
Finally, our engineers continue to be hard at work pushing forward our project that builds on what is already the most flexible platform in the industry and applying emerging practices and technologies to ensure we offer our customers an exceptional experience, while supporting emerging needs and revenue opportunities.
The team is also building for the future with harmony and we are still expecting an MVP version of the product by the close of Q4.
To sum up the operations finished the year with record bookings it clear establishment of our advanced products in the marketplace and execution of a wide range in price increase.
While we have seen prospect decisions slow in Q4, we are confident that this is a timing issue and anticipate that the pipeline will produce many deals. This year that we had expected in 2022.
Now I'll turn it over to our Chief Financial Officer, Jim Malone for a closer look at the financial metrics.
Jim.
Thank you John and good afternoon, everyone.
I would like to review, our fourth quarter financial results discuss our performance for the full year 2022, as well as provide initial guidance for 2023 before I discuss our Q4 results and as Scott alluded to earlier in the call I want to call out that overall revenue in 2022.
<unk> was impacted by two extraordinary items totaling approximately $10 million.
Our legacy spin accounting practice that was in a vertically.
Does it universally increase revenue with an offset reducing bad debt.
Second separate accounting error in Q3.
We're at $2 5 million revenue transaction was incorrect was recorded as revenue.
Instead of deferred revenue.
Jumping to this first item.
Soho legacy adjustment.
As a consequence of the spin consensus inherited at legacy Soho, whom practice affecting revenue and bad debt.
This practice inadvertently gross up revenue with a corresponding offset to bad debt expense.
Our 2022 financials reflected correcting adjustments reducing revenue for the nine months ending September 32022 by $5 3 million and the full year by $7 3 million with an offsetting reduction in our bad debt expense of the same amount.
With no impact on net income EBITDA, Okay ish.
The judgment is not accumulative for representatives threet reclassification between revenue and bad debts. This issue will not reoccur.
The second item in the third quarter of 2022, the company recorded $2 5 million of revenue related to our sale of perpetual software products.
Upon further consideration the company request the revenue to deferred revenue.
Consensus invoice the customer was paid in full in Q3.
Revenue and EBITDA was reduced by $2 5 million and net income was negatively impacted by approximately $2 million.
Now turning to the fourth quarter consolidated revenue was $90 2 million, an increase of $1.2 million compared to Q4 of 2021 or one 4% growth.
On a constant dollar basis revenue grew 2.8 per se as.
As foreign exchange fluctuations had an unfavorable impact of 1.2 million Q.
Q4 reported adjusted EBITDA was $49 million.
Dan one.
$2 6 million or five 1% delivering a 54.3.
<unk>.
EBITDA margin in line with expectations.
non-GAAP EPS of $1 13 reflects a decrease of 21 cents.
Versus $1 34 in Q4 of 'twenty one.
The decrease reflects.
Flex higher revenue fully offset by the EBITDA shortfall.
And a negative impact of foreign exchange from a strong dollar.
Jumping to corporate fourth quarter revenue was $47 8 million, an increase of $4 4 million over the prior year period.
Corporate revenue increased $4 7 million on a constant dollar basis or 11%.
As John discussed in his.
Prepared remarks, we continue to add meaningful new logos in the fourth quarter.
Testament to the value that we're delivering as we hope sold to healthcare interoperability and connectivity challenges that our customers face.
Soho and the fourth quarter revenue was $42 4 million a decrease of 2.9 million over the prior quarter.
On a constant dollar basis, Soho revenue decreased by $2 million for 646%.
As I mentioned previously of the $7 3 million revenue virtual impacting 2022.
$2 million was moved out of the fourth quarter.
The Soho market is price sensitive and churn was better than our expectations, even considered in the employer implementation of $1 to $2 price increase.
It is important to note that as our customers churn, we are left with a more stable and higher quality sticky base of revenue.
Now turning to full year results.
Consolidated revenue was $362 4 million was up $9.7 million over full year 2021.
Sure.
2.8.
8% increase at increased $14 1 million on a constant dollar basis or 4%.
Note that our full year's grow them into your approximate $10 million of revenue adjustments discussed earlier in this call.
Reported adjusted EBITDA for the full year 2022 was $196 7 billion a decline of $6 3 million.
Or negative 331% delivering a 50 450.
54, 3% margin in line with our expectations.
And then two in the upper band of our historical rate of 50.
Percent to 55% guidance on EBITDA margin.
Adjusted EBITDA was negatively impacted by the deferred requests of the $2 5 million.
Finally, non-GAAP EPS for the year 2022 was $5.33.
A decrease of 13 cents or two 4% the.
The impact of the deferred revenue adjustment of $2 5 million was 10 cents.
<unk>.
We ended the Q4.
Just over $94 million in cash or.
Our liquidity remains strong.
To support of operations with the added benefit of $15 million line of credit remains undrawn.
I would like now to provide a preliminary guidance for 2023.
We expect 2023 revenue to be in the range of $3 $70 million to $390 million.
We expect EBITDA in the range of $192 million to $206 million translating to a margin of approximately 50.
<unk> 52, 3% at the midpoint.
We expect non-GAAP to be in a range.
$4 1 billion in <unk>.
Two photos in 'twenty.
Net income would be negatively impacted by increased depreciation and amortization.
$6 million to.
To 7 million relating to software products placed in service.
Thank you for your continued interest and investment I would like now turn the call back to the operator. Thank you.
Thank you we will now be conducting a question and answer session in the interest of time, we ask that you. Please limit yourself to one question. If you would like to ask a question. Please press star one on your telephone keypad comp.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove yourself from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we begin.
And the first question is coming from Fatima <unk> from Citigroup.
Fatima Your line is live.
Hey, Good afternoon, guys. This is mark conquer team thanks for taking our questions.
That's where my question digging a little taking a little bit into 2023 guidance can you maybe parse out the assumptions on macro conditions, and maybe how much noise or headwinds from the go to market realignment efforts you guys are expecting and then just maybe as a quick follow on there.
Is there anything that we should keep in mind in terms of just first half second half balance.
Balance for the year.
Just given all the headlines.
Arkansas changes that you guys are going through.
And how we should think about the corollary court quarters for 2023.
Sure. This is Scott Mark good to have you on the call so look.
As you know everybody has got their own view of the economy.
Whether it will go into recession, and if so when I'll give you our assumptions and we're likely to be wrong on this as I suspect. Many companies are but it does influence how we think of our guidance. So we don't see the economy being in a recession right now independent of that the uncertainty of the economy. We've talked about this now for two running quarters.
John and I and everybody is I think hit us pretty hard has delayed power.
Larger customer decision, making which can impact and we did see it certainly impact revenue to some extent in Q3 and definitely in Q4. So we believe that carries over all four quarters, where there tends to be the most sensitivity in the streams of our customers is in the ecommerce space or the formerly Soho base.
And so what we did there is it will look from our estimation is though the cancel rate is somewhat flat over the course of the year, but we kept it elevated.
Near its current three 8% three 8%.
Now the reason in the near term in Q1, and Q2 is because as John mentioned, we still have a tail effect for the next two quarters are finishing off the last of the.
Annual customers, who will not reach the one year anniversary until June 30. It is in the second half of the year, we would normally expect a return to the norm of cancel rates, while we keep them elevate in the three eight range. So that is our best estimate to acknowledge.
Our recession may influence the cancel rate the Soho base in the back half of the year, we do not anticipate we're not budgeting that this recession would be anything like the OE to nine recession.
That would be we'd probably have to add some incremental cancels to it. We've also said in the back half of the year and so somewhat lesser new paid ads.
In a recession, sometimes you pull back your marketing or your market become less effective for the customers are less fragile. So most of the economy influences. How we think of the Soho business and its performance over the former sole business ecommerce business, if you will and to a lesser extent.
Really timing on the decision, making as we move upstream to what we call our large accounts and to some extent the strategic accounts in the new nomenclature in terms of the how does sort of spread the revenues.
Sure.
We see it sort of going like this over the course of the year.
About 24, plus that ratable, 525% each quarter, it's about 24% in Q1 by 26% in Q4, just shy of 25% in Q2, just a little north of 25% in Q3. So there is.
Some ramping going on throughout the course of the year as customers. We won in Q4, we get a full year benefit of it as they ramp up and as we add new business throughout the year I would also note. When you think of the margin profile, although Jim talked about in the aggregate.
With 52, 3% EBITDA margin at the midpoint of the range.
A lot of the costs over the course of the year.
Not totally fixed, but theyre more fixed than not.
So you should expect a somewhat lower EBITDA margin in Q1, we have lesser revenue and a somewhat higher EBITDA margin. In Q4, now does that can probably be radical variation across the four quarters, but once again the margins should not be expected to be constant over the four quarters.
Thank you.
Okay.
And the next question is coming from Ian Zaffino.
From Oppenheimer Your line is live.
Hey, good afternoon. This is <unk> on for Ian.
Yes. My question is around just the you're talking about $3 million I guess missing.
Just revenue just due to the customer decisions.
Implementation decisions.
I guess as you look to the first quarter and throughout this year.
Are you expecting to see that come back.
Sort of how that paces out in terms of implementations and customers deciding.
But when they want to adopt the solution.
Yes. This is John thanks for the question.
I think what we're going to see is that this deliberate decision, making is going to be something that occurs.
Has that continued coverage of what may or may not happen with the economy is sort of the topic of the day.
And then went into our thinking is as we looked at the coming year, and we thought about where we wind up we certainly factored in what we saw in Q4 and made the assumption that until whatever it is is going to happen in the economy actually manifest itself that we would continue to see this.
Deliberate kind of pace of people being able to make decisions that they feel comfortable making or be able to have enough assets in place to be able to actually implement and roll out.
And our expectation is that while this sort of hangover.
The head, but everybody that has to work in this economy that that was what we were going to see but that also is as I mentioned before that was factored into our thinking as we came into the.
The guidance that we provided so let me just add to that so things we were talking about in.
In Q3, and Q4, yes, we are seeing them coming to fruition in Q1.
Things, we thought would come to fruition in Q1 may not now play out until Q2 or Q3.
The thinking or the what we've been posed if you will on the budgetary model as we rollout over the four quarters now as I said in my.
So earlier remarks, how the economy will actually play out and how people will behave against it it's very much I think to be determined but we felt it was prudent to take our near term experience.
And assume that at least for the.
Correct four quarters, meaning 2023 that this situation will persist and so things that we thought would occur will occur but on a delayed basis and then we just keep rolling that from a pipeline perspective throughout the year, meaning things that we thought would occur in 'twenty, three probably won't occur till 'twenty four.
As you get later in the year.
Great. Thank you very much.
Thank you and just a reminder, ladies and gentlemen, if you wish to ask a question today. Please press star one on your phone that star one if you wish to ask a question.
And the next question is coming from Jon <unk> from CJS Securities John Your line of life.
Hi, Good afternoon. Thank you for taking my questions. Just a quick one on the deferred revenue over what timeframe do you expect to recognize that that the ones that are.
Were identified in 'twenty, two that are going there.
Hi, This is Jim Malone.
Deferred revenue would be will be recognize it first of all I would say, it's solid solid revenue.
<unk>.
Product was accepted by the client.
We received a cash so it's a matter as youre raising all it's a timing issue not that the revenue is in question.
Likely that we're looking into that now John .
And.
The revenue according to the accounting principles, we recognized over the term of the contract or a shorter period of the contract. So it has good future revenue, we're looking into that you'll likely see some of that revenue coming about.
In 2023.
So.
And we will continue to assess it but unlikely that it would be all of the revenue.
Unlikely would be all of the revenue in the current fiscal year, probably they spread over some number of quarters or some number of years correct.
Understood. Thank you and then.
Just regarding the new market structure is this something that will take time to implement or are you ready.
Have you already run.
The whole thing through the organization.
What kind of traction do you expect to see from from this program.
So it's actually been implemented the good news is that as John mentioned this was not.
Sign for cost savings, although I think there will be efficiencies, saying, our marketing dollars of spend by reorganizing our sales and marketing in the manner. We did but it was really putting a better structure in place and putting people in the place that we currently have where they could really spread their wings and take advantage of a bigger opportunity.
<unk> now in the evolution of the structure, there is probably a and theres always debate a handful or so of incremental hires that we will embark upon so it has been implemented.
Everybody knows there are new role within the structure that we very recently rolled it out so far it's been functioning for two or three months of functioning for about a week and there are a handful of hires that we will be pursuing if you fill in some of the gaps as we roll from the old siloed structure to the new structure, but it is.
Much in the early stages of being enforced.
I think like everything you have to be a little bit cautious because even though all of the people are in the boxes with a small exception.
They're all got to get used to their new roles.
How they interact with each other and part of it is breaking down historic Natal I remember the Siloed mentality is not one.
We came up with a year or two years ago. This was back 20 years.
In some cases some of the people have been with the company for a number of years. So a lot of it is.
Breaking apart that mindset understanding we're now thinking holistically about marketing of the certain brands.
Going to market as a unified sales not I'm an e-commerce bucket on the mid market bucket around the enterprise bucket and then filling in some gaps that were identified as we tried to stretch from the.
The old mid market too.
<unk> the former enterprise there was a gap in their customers say generating <unk>.
Significantly tens of thousands of dollars, maybe $100000 a month in revenue that kind of fell between the cracks of those two previous sub channels of revenue. So I do think that we're going to have some.
The period of time to digest, the structure, where people get confident and comfortable with it.
The real goal if you look at it from a sales standpoint, or a booking standpoint is to dramatically increase the aperture at the top of the funnel and to have a lot more.
In the pipeline.
So that there is many more routes are ways are passed by which we can achieve the revenue and it is not so dependent upon say, one or two or three handfuls of larger customers that are currently in the pipeline that people think we're going to close now, but then they close a month later or two months later three months later and it creates a ripple effect in.
Terms of deferring revenue out to future periods.
Got it thanks for that color.
Last one from me any.
Any thoughts on use of cash over the next year, you guys still generate a fair amount even with some headwinds.
Help me understand what the priorities are.
Yeah. The priorities are look I think in this environment building cash is not a bad thing doesn't mean, we're going to sit and do nothing in fact, I'd like to get that cash invested and get a little better yield out of it meaning short term very liquid investments.
Actually and probably even more negative on M&A in the near to intermediate term. It doesn't mean, we don't look it won't look, but I really don't anticipate any transactions this year.
I think there is a lot for the development teams to do that as internal John's outline a number of them in terms of evolution of existing products development of new products like carbon department of MVP.
Consolidation of existing internal systems that is not so transparent for the outside world. There's a lot of work to be done and I think we're going to be very judicious this year.
How we bring on incremental hires we're not going to not hire but obviously given our view of call it 5% topline growth we're.
We're not going to add at the same pace. We did in 2022. So we have to really prioritize I think just adding an M&A deal would be it.
It would cause distraction on the front end and probably even greater distraction on the back end. So I don't see M&A in the near term as being a priority really at all.
That may change in 'twenty, four 'twenty, five, but I think for 'twenty three it's highly unlikely.
So that leaves us to really opportunistic stock repurchases, which we remain interested in depending upon the level of the stock, but I am more and increasingly interested in paying down some debt now.
Now as you know from the spin we really can't do anything until October of this year, when we hit the two year anniversary and even at that point, we can only.
<unk> transactions against the 6% notes the five year notes at 6%, obviously, it's a very attractive interest rate in this environment. So we have to look at what are the bonds trade what are ways of buying demand I don't see a rationale for calling them because the pulp prices 103, and they trade below par. So those are all things, we're going to watch as we get.
Later in the year, but I do think some actual retirement of debt if not this year next year in anticipation of the maturity of the 6% notes and 2026 would be a good use of cash.
Great. Thanks, Scott I'll jump back in queue.
Sure.
Thank you and the next question is coming from Joe Goodwin from JMP Securities Your.
Your line of life.
Great. Thanks for taking my question I guess Scott.
Or John your last week <unk> announced the six organizations that were approved to participate in tusker two of what you're integrated with I believe but can you just share your perspective on the announcement and then maybe talk about what type of care it could mean for.
For the industry and any positives or negatives it brings to your business.
For those of you, who don't know task as a framework for interoperability of that.
Relies on on.
Entities called Q hands to be able to communicate the fire or past healthcare Internet resources in order to move information.
Now we believe the task of framework is going to play favorably for US I think that we have a <unk>.
Reis to play.
In front of the queue hands to be able to assimilate communications through a number of different protocols deliver those to Q hens, who will then speak fire to other queue here. So from our point of view we have.
And opportunity with the queue him and as you pointed out there are a couple.
Who are already customers.
To potentially expand our footprint there.
As a multi channel multi protocol.
Intake to be able to deliver information to a queue in so that they can communicate over the test. So we're looking at it.
There is an opportunity for us.
Got it thanks for that and just the just to clarify in order to do so that would be an incremental product development.
Natively, we speak all of those languages already so it wouldn't be incremental for us and in fact, we think it would be a nice opportunity to showcase clarity in particular as.
An uplift to <unk>.
Our value delivery that they can make to their customers.
As the market themselves to the health care.
Health care endpoints.
Yeah.
Understood. Thank you.
Thank you I will take.
A few questions that have come in by E Mail.
Paul.
Okay.
Well I've got one question.
So, yes, but we'll take some questions by E mail, we've gotten some questions by email so let's address those.
<unk>.
It was noted that and I'm pleased with it.
Sequential uptick in our corporate channel. It was <unk> 47 to 52000 customers that was the good news.
Not that there's any bad news, but they happen to be on the smaller mid market into the spectrum versus larger customers have they been larger customers. We probably would have easily made up the 3 million shortfall and then so that's that's how sensitive on the margin. It is whether theyre five big customers that come in strategic.
Customers large accounts or they are mid market.
Unfortunately in terms of Q4 revenue productivity they were in predominantly the mid market.
In terms of the visibility that next question our guidance corporate revenue so.
Leaving aside the economic assumptions I think it's clear to most people.
<unk> strong visibility on the E Commerce channel.
As a function of marketing dollars in.
Paid ads that generates cancel rate.
We've disclosed in our own assumptions around it.
As you know there is a continuing though and as you move out of the E Commerce model into the mid market.
Large accounts are the strategic go farther upstream you go the less visibility you have as it relates particularly to new customer wins and implementation the book of business that in house.
Is very predictable that sometimes there will be some volatility we saw in Q4 for example, youll notice it in the metrics a sequential decline of $1 million in variable revenue Q3 to Q4.
That was largely a function of two things one lessor business days in Q1, which is always true, but there was some very bad weather conditions on the east coast, particularly in the latter part of December last two three weeks of December that impacts that so those kind of things can be taken into account and they're not always knowable when you sit.
Even 12 months out and are giving annual guidance, but the book of business is very solid.
The timing of wins and the implementation in their ramp is what is less visible and what we did this year in the guidance as we I wouldn't say, we completely derisked it but relative to last year's guidance. We took out a lot of the speculation of what would be the conversion of the pipeline the timing and the implementation because.
For a variety of reasons the back half of the year that didn't play out as we hoped for.
Then the next question was on FX headwinds I don't have this for the quarter, although I'd be happy to provide it I know for the year was about $2 7 million for.
For the whole company the vast majority of that goes to the e-commerce or Soho channel 200 Grand would be to the corporate.
Our FX this year and what we do in the budgeting process as we do sort of a.
An average of a variety of economists that are out there usually at a variety of brokerage firms.
The Euro is probably the key currency that has the most influence and volatility in both our revenues EBITDA and the intercompany relationships below the line.
It's projected to be fairly stable at around 108 range of where it ended the year, which I think was 107% change there is some moderation across the four quarters I think it might hit a high of 109. So what we do is we baked that in.
Our analysis, but if you take Q4 relative to at least the other three quarters of 'twenty two it should be stable if in fact, the euro behave that way.
And whether it behaves better or worse, we will take that into account obviously as we.
How our financial reporting for each quarter and then as Jim has mentioned historically and he will do so prospectively, we will give it to you on a constant dollar basis and Thats why youll notice there is about a one percentage point better growth rate for the corporate channel and the company as a whole in 2022, if you look at our constant dollar versus as reported in the <unk>.
But it's relatively modest.
But we give you that additional information so that you have access to it if you look.
Look at the business that way because that is really the strength of the business. We don't obviously control or have any influence on the FX exchange rates and so we.
Sometimes are benefited by them, sometimes we are it is to our detriment.
Last year was towards that.
Okay, Paul we'll go back to live questions.
Certainly we did have a follow up command from Jon <unk> from CJS Securities. John Your line is live.
Hey, Thanks for taking my follow up.
Not to ask you too to make guidance our outlook for another year, but let's say, we get past. These recessionary headwinds people go back to making decisions that are more timely.
Churn rates and so tick back down to more normalized rates.
Can you what could you envision 2024 might look like.
Both getting back to a revenue growth rate, that's more normalized number one and number two.
What kind of margins would you be able to generate that scenario would it be the case. So you keep investing more to drive future growth or is there some room for expansion there.
Yes, I think look.
I Love the question John .
Just really play for you guys, let's talk about 'twenty four 'twenty five but in some respects I lie.
The question because I do think.
I don't know where the economy will.
As we articulated.
Will it recover by early 'twenty four will it still be in a malaise or who knows but I guess I'll take at face value your assumptions, which is we have a mild recession hit the back half of the year and it's on an improvement up ramp going into 'twenty four I think as we think about it and think about the range. We gave all the way back to the time that we said 5%.
To 9% revenue growth, we're projecting at the low end of that range. This year.
But at the low end it has been my view my belief my hope and my desire, but all the caveats it.
We will drive double digit growth I think in light of economic conditions.
Probably not likely in 'twenty four but if we start migrating from the low end of the range to say the mid ish point, we're slightly above that.
That would probably be trending in the right direction and.
The exact numbers in 'twenty four we're also that'd be a function of well how much does the VA contribute.
Substantially rolled out will it be we've seen unfortunately, some delay after delay after delay you may recall going back some number of months ago.
The VA desire that there would be the first implementation in our fiscal Q4. The government's fiscal Q1 that were talking about the first rollout coming in late Q1 for us for some time in Q2 and producing revenue in Q2 or early Q3. So.
If we go out far enough all of those things should start contributing revenue other agencies should be onboard clarity should be producing revenue all of these things should start accumulating on itself.
And I would expect that some.
Deceleration of growth, but this is very very high level and it's very very early I generally don't like to get into.
Talking two to three years out, but I do think we are setting the stage.
Or when there is a.
Good improving economy with all of the pieces, we put in place to see some acceleration hopefully good acceleration off the 5%.
Estimating this year at the midpoint.
And in terms of margins.
That's an interesting question. We're judicious this year there continues to be demand like ours to become primarily a people oriented business that.
That's how we drive incremental revenue.
We need the people to build we need to develop we need the people to the market. We have the people to sell into people to support the customer it's all about people.
So, yes, theres a marketing dollar spend.
That is not it's a real number but it's all people first as I said, we wouldn't be very judicious this year.
Incremental hires.
If in fact, we trend with 5% revenue growth I.
I would say this if we start to trend higher in the range and you'll notice there's a modest expansion of margin. If you move from three eight to 390, but.
But we do anticipate there would be some reinvestment of those incremental revenue dollars.
Back into the business.
So if you think out longer term.
I don't know I mean, I do what I don't want to have happen here.
And I don't believe this business is really a margin play business.
Mike margins expand somewhat.
As we get to high single or low double digit growth, yes, but I don't think its fundamentally a margin play saying all right. We're at 52, three and the goal is to get to 55, and then to 57 five.
It's more about revenue generation and being a revenue play.
Very good margins, so, yes, we will definitely reinvest.
Incremental revenue dollars to some extent back into the business and we will probably bring some to the bottom line.
Great. Thanks, Scott.
You're touching on some of the things I wanted to ask about the VA.
Was wondering if you could point out if anything what the cause of the delays were over the last several quarters.
And if going forward.
What could break the logjam I know that you know being under a continuing resolution having a budget can make a difference in a lot of cases.
Is that something that you're thinking.
Taking on and is that something that impacted us yet.
I'll, let John take it because he's closer to the front line.
I think what we're seeing is that the.
As you go into engagements with clients any client.
There is a perception of the ease of a fax system in terms of.
The kind of complexity that actually has to go into delivering.
Cloud fashion in a high quality way and I think what surprised the customer more than anything was the level of information necessary in order to make sure things were routing connect correctly that connections were made that the right numbers to be ported reported and search.
Required work on.
We implemented <unk> as well as the customers.
As you go through I think the first.
Deployment.
Shake out a lot of those kind of concerns.
Additionally, as you look at the landscape and.
Some challenges that this.
This government agency in particular has had with different kinds of deployments of new technology.
There is there is a.
And overall feeling that they want to be very careful to make sure that they're doing things exactly the right way and that the rollout is successful.
I think we're getting to the point with the first deployment, where we get.
Customers up and running and the lessons learned as we've gone through that process with the implement implement or in with the customer are going to be able to be applied forward. So we can start to accelerate but it's really getting that first one and I think that that's what we're seeing in terms of the things that we're moving some more.
Slowly than any of us would have liked.
Understood. Thank you for that color good luck guys.
Thank you thanks. Thank.
Thank you and there were no more questions in queue. At this time I would now like to hand, the call back to Scott <unk> for closing remarks.
We actually have one more that came in by E Mail, Paul So I'll take this and then we'll close out the call because we are on the hour Mark.
I actually think it is.
And insightful good question I'm glad to get on the record here question is about free cash flow generation and we don't guide to free cash flow.
Tricky thing to estimate.
Having said that I want to make some comments about 2022 and free cash flow and a variety of adjustments that impacted the reported results some of which will have some occurrence in 'twenty three but most will not.
Sure.
Well I want to highlight is about 22, and a half of $23 million of payments that hit our free cash flow in 2022.
Two of which should not reoccur one had to do with taxes, we paid in 'twenty two to actually related to 'twenty. One of $6 5 million, we had payments the ZIP exclusive of the commingled cash that was about $11 million.
And then as you heard Jim talk about you've seen it in our case in our Qs, we've been going through a process with the states to settle.
Historical sales tax issues, we paid about $5 million in mostly in Q4, but in the latter part of 2022, Thats almost $23 million of free cash flow now the BDA piece will continue in 'twenty three but it's hard to estimate how much we'll pay out in 'twenty three because it is.
Really a function of how fast the state's respond to us we think it could be in that range of $5 million to $7 million.
It could be lower than that it could be higher than that by probably a modest amount. So as I look at it at the 197 of EBITDA, we paid $30 million in cash taxes that related to the year $52 million interest expense 30, and Capex you would expect about $85 million of free cash flow. The adjustments I gave you got gets you somewhere in that.
The mid to high seventies, and then Theres always dribs and drabs of things in terms of working capital timing and things like that so the derivative question was what do we think the free cash flow will be at the midpoint of the guidance range was 199 of EBITDA or Capex, which really capitalized labor will go up probably offset the 197 to 109.
Nine Delta so I would expect it to be somewhere between the high <unk>, maybe to the mid eighties, but it will be dependent upon the pace at which we settled with the states.
And it is something we want to do our settlements have generally been.
Under our accruals.
So in that sense, it's been favorable it's been a very smooth process.
Something that I would like to see us get behind us on the other hand, we cannot unilaterally for stat issue, it's a dialogue with various states.
So that's all the questions that we have both live and by E. Mail. We appreciate your time and attention today for listening to the Q4 and fiscal year 2022 call. Hopefully we've given you enough information. So you can understand both the historical results for two accounting adjustments as well as how we think.
Our guidance for 2023.
There are a handful over the next two to three months of conferences, we'll be participating at.
JMP conferences coming up in early March that will be a live presentation. I believe is a Needham conference coming up that will be virtual we will announce all of these by press release. So you can participate if you happen to be their lives request a one on one if not I think in most instances, though either be a fireside chat or.
A formal presentation and those will be webcast.
Okay. Thank you. This does conclude today's conference you may disconnect at this time and have a wonderful day. Thank you for your participation.
Have a wonderful afternoon.
No worries speak to you next next time have a good day.
Okay.