Consensus Cloud Solutions Inc. Q1 2023 Earnings Call
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Good day, ladies and gentlemen, and welcome to consensus Q1 2023 earnings call.
My name is Paul and I will be the operator, assisting you today.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad on this call from consensus will be Scott to Rekey CEO , John Nebergall C O, Jim Malone, CFO , and Adam <unk> Senior Vice President of Finance.
I will now turn the call over to Adam Brown Senior Vice President of Finance at consensus. Thank you you may begin.
<unk> 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 10-K S SEC filing as.
As well as a summary of those risk factors that we have included as part of the slideshow 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.
Thank you Adam.
I'd like to provide a brief overview of the quarter before handing the call over to John and Jim for details on our operations and our Q1 financial results.
Q1, 2023 was a record first fiscal quarter with revenues of $91 5 million and an all time record for a fax volumes. Our revenue was in line with our expectations, representing approximately 24% of our annual expected revenue at the midpoint of our guidance for the year and consistent with our disclosure during the Q4 call.
The corporate channel experienced six 2% growth consistent with the organic performance in Q4 of 2022.
Despite this growth we continue to see slow decision, making by our largest prospects and slow implementation by those under contract.
This is driven by uncertainty in the economy and labor shortages that exist, especially in the health care space.
As we have stated before we believe that this will continue throughout 2023 and our previously released guidance has taken that into account.
The price changes for Soho are coming to an end this current quarter and continue to perform within our modeled expectations.
As you know during the quarter, we had to file both an amended 10-Q for Q3 2022 as well as the delayed 2022 10-K.
The amended 10-Q delays in filing an additional audit work had an incremental cost of $2 $3 million more than in Q1 of 2022 and had an impact on our EBITDA margin of two five percentage points.
In addition, as we noted in the Q4 call. Our labor costs are up about 3.3 million due to an additional 70 employees more than the current quarter most of whom were hired in 2022 and annual merit increases that took place on January one of this year.
This is approximately 25% of the $12 million increase that we noted in our Q4 call.
This had an impact on our EBITDA margin of three six percentage points.
As our revenue grow sequentially throughout the year and the audit costs do not repeat we will see an expansion of our EBITDA margin.
As we stated last quarter, we are judicious in our incremental hiring and are looking for ways to lower our non employee costs.
The sales and marketing realignment has taken place and we are starting to see some of the benefits of the new structure John .
John will give you additional details in his portion of the presentation.
I am pleased to report that the VA has begun the rollout of the <unk> service two facilities were deployed post the close of the quarter and Theres now roadmap for the next several months, we will generate a de minimis amount of revenue in Q2 and see the rollout ramping in future quarters as more facilities are brought online.
There are now more than 20 agencies interested in the service 10 prospects have already been provided a demo and are in active discussions with cognizant <unk> and ourselves.
It is still early and we do not expect any of these new agency opportunities to produce revenue in 2023, but are encouraged by the widespread interest in the solution.
Before handling the call over to John I'd like to spend a moment to discuss our liquidity and capital allocation alternatives.
We remain very liquid with more than $111 million of cash on our balance sheet and a 50 million dollar unlocked drawn line of credit that we put in place back in March of 2022.
These funds are targeted to debt paydown, which cannot occur until the second anniversary of the spin which would be October of this year and opportunistic stock repurchases to that end in the quarter, we were able to repurchase approximately 270000 shares at an average cost of approximately $34 per share.
I'll now turn the call over to John .
Thank you Scott.
As you'll recall in our last update we announced the broad realignment of our go to market organization.
This action was taken to build upon our sales and marketing Foundation that we had established post spin with a focus on improving both efficiency and effectiveness of our revenue generating efforts.
As part of that initiative, we eliminated the revenue stream designations of enterprise mid market and Soho streamlining the organization into strategic sales and direct sales.
As a reassurance to the interested call audience. We will continue to report Soho results consistent with your current models.
However, operationally, we manage under the realigned structure.
This past quarter. Following an extensive search we were able to secure new leadership for our direct sales team and are closing in on our targeted staffing level.
The activities around implementation and normalizing operations under the new structure are progressing.
In addition to the organizational changes we have completed an extensive account reassignment project and initiated outreach to customers for introductions to their new consensus comp.
In concert with this there have been a number of changes to the quota assignment and commission system designed to better motivate the sales team and drive top line performance.
These improvements to quota and commission are the result of a data driven approach employed by our sales enablement team.
And we will continue further to further our data analysis program to identify opportunities for the business.
One more facet of the sales piece of the realignment is establishment of a new account development team.
This group is making use of new analytics tools to target existing accounts for wallet expansion activities.
While still fully developing their approach. This team has already contributed nicely to our pipeline building results for Q1.
On the marketing front, we have merged the former corporate and web teams into a single marketing organization.
The team has begun evaluating the business more holistically and identified several tools that will increase the efficiency and effectiveness of our marketing efforts.
The team has also worked hard on ensuring our success at two major health care conferences.
The HIMSS show in Chicago, and Vibe in Nashville, which were both held only weeks apart.
Those efforts, resulting in the acquisition of hundreds of new leads and the ability to demonstrate clarity to thousands of new healthcare leaders were wildly successful for the company.
Surrounding the entire go to market restructuring is our it infrastructure and the work to arrange all of the reporting forecasting billing and attribution changes in support of the new organization is an ongoing task.
With the size and scope of the work needed to have this project completed we expect that it would be an ongoing effort for the entire balance of 2023.
On the next slide we can walk through some of the key operating results for the quarter.
Consistent with our commentary on the Q4 call. We continued to see delayed decision, making in the face of client side staffing shortages and customer project backlogs caused largely by the current macroeconomic uncertainty.
I would describe the sales outcome is flattish.
Slightly sequentially from Q4 and down slightly year over year.
While we have worked hard to mitigate the impact of our realignment on overall sales productivity as you can tell from the earlier slide there was a lot of activity around this and there was certainly some loss of sales efficiency in Q1.
That said there was a few items of note that are important to discuss first.
Sales of fax was up both over Q1 of 2022 and sequentially over Q4.
In addition, the advanced interoperability product again accounts for a significant portion of overall sales coming in at 30% of bookings.
Also of note is that the upsell program, we announced last year and a plan to accelerate through the realignment accounted for nearly $1 million of new bookings expanding our revenue from existing accounts.
Finally, we did close two larger sized J signed deals as the feature set is proving very competitive the market incumbents.
We remain pleased overall with the state of our pipeline and while we continue to see slow prospect movement through the sales process. It remains strong and in fact continues to grow both with government agencies as well as our commercial prospects.
In the Soho business. There are only a few months of annual plans to adjust for the price increase we enacted last June and the customer base overall is holding very solidly within our modeled expectations for churn with churn for the quarter coming in at six six basis point improvement from Q4's results.
This past April we had our first two successful deployment of the <unk> solution for the VA with additional sites planned in the coming months.
It's still early times here, and we haven't yet gotten to a predictable cadence for us to Continentally forecast the base.
We look forward to working towards some normalization on that front, but until that time, it will remain somewhat lumpy and difficult to accurately anticipate EC <unk> contribution in the coming months.
The first production instance of clarity has been accepted by the customer and the rollout timing is dependent on availability of client side resources.
We have also had very successful demonstrations of the clarity technology at both <unk> and fives and interest in AI powered solutions generally is reaching a high level.
In the meantime, we have active poc's in process with additional customers and are actively engaged in a number of discussions with pipeline prospects.
The product team is working on several fronts from security to new products and infrastructure improvement are high Trust annual certification is underway and we will be introducing Jay sign as a new addition to our high trust certified product set.
Progress continues to be made on harmony, and where code complete with a production version of facts to direct a feature that allows fax documents to be delivered as direct secure messages across the direct trust network.
This allows providers to use either our recipients fax number or are there direct address to securely deliver vital health care information.
As announced in the last call product team is introducing the new discipline, a product marketing, creating a more effective bridge between the engineering work that creates products and the commercialization process.
We have successfully recruited a strong leader for the team and are beginning the work of establishing this vital function for the business.
As we talked about on the last slide there is an important systems component to a realignment that the product engineering team is building as part of our larger Genesis initiative, including Salesforce and consolidation of our billing systems to generate better and more insightful reporting for the sales enablement team to use as a key.
<unk> of their data driven approach.
Finally, the engineering team is working on several system improvements that will support our up market move in Japan.
There have been several large prospects in Japan, who have expressed interest in a corporate version of our product, which has historically not been available in the Japanese market.
We anticipate beginning upmarket activities there in Q3.
In summary, we have made some great progress on our realignment initiatives and while there is certainly more work to do we're pleased with what's been accomplished we continue to see slow decision, making in our prospect pipeline. However, the dialogue remains active sales results for the quarter are consistent with.
Our expectations, given the macroeconomic environment and progress in our efforts to upsell within the base as well as seeing J signed getting traction are encouraging.
The VA rollout has begun our first clarity production installation will commence once client side resources become available and the Soho base churn has been holding within expectations.
Finally, the product development team is focused on security, how many development and infrastructure support of the go to market realignment.
Now, let me turn the discussion over to Jim Malone, our CFO .
Jim.
Thank you John and good afternoon, everyone.
Let's start with our corporate business business results.
Q1, 2023 corporate revenue.
It was $49.4 million.
An increase of $2 9 million.
Or six.
<unk>, 2% over the prior year comparable period.
On a constant dollar basis corporate revenue was six 4%.
Offer difference is due to a greater portion of paid debts coming from SMB customers.
Kind of acceleration of Soho migration to corporate.
Monthly churn was one 4% down from 2% for the prior year supporting our last 12 months revenue.
Pension of approximately 102%.
Consistent with our expectation.
Moving to Soho results.
Q1 revenue was aligned with expectations of $42 million.
A decrease of approximately <unk> eight.
8 million or a negative one 8% over the prior year comparable period.
On a constant dollar basis Soho revenue was up.
<unk> 4 million or 7% negative.
Aqua are $15.10 increased to $1 22, or 9% year over year.
Monthly churn was three 8% up from 3.5% over the prior year period in line with expectations.
The year over year revenue decrease was due to lower paid ads.
Partially offset by higher ARPA related to price increases.
The price increase further enhance the contribution to Soho fixed revenue.
Moving now to consolidated results for Q1 revenue was $91 5 million and.
An increase of $2 2 million or two 4% over Q1 2022.
On a constant dollar basis.
Revenue increased $2 7 million or 3% year over year.
Reported adjusted EBITDA of $44 2 million is a decrease of $4 4 million or 9% delivering a 48, 4% adjusted EBITDA margin driven by planned employee related expenses and professional fees in connection with the <unk>.
22 year end audit.
non-GAAP EPS of $1 10.
<unk> was lower by 23 cents or 717, 3% compared to comparable prior year period, driven by the adjusted EBITDA items mentioned had a negative 1 million noncash foreign exchange impact.
Related to the intercompany balance revaluation, partially offset by higher revenues.
We entered it.
We ended the quarter with $111 million in cash, which is more than sufficient to fund our operations and debt.
We are reaffirming full year guidance.
Adjusted EBIT for revenue adjusted EBITDA and adjusted non-GAAP EPS to 2023 guidance ranges are as follows revenue 370 million to $390 million with $380 million at the midpoint.
Adjusted non-GAAP .
EBITDA of 192 million to $206 million.
With $199 million at the midpoint.
Adjusted non-GAAP EPS.
$4.93.
Two $5 in 'twenty.
With $5.08 at the midpoint.
Our Q1, non-GAAP tax rate and share count was 1990, 8%.
And $19 9 million shares within our 2023 guidance.
We are planning to file our Q1, 2023 10-Q or market closed Tomorrow may 10.
This concludes my formal remarks I will now.
Turn the call back to the operator for QA session. Thank you.
Thank you we will now be conducting a question and answer session and.
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One moment, while we begin.
And the first question from the range is coming from.
Ian Zaffino from Oppenheimer.
Your line is live.
Alright. Thank you very much is it Joe joined a couple of minutes late but I'm glad.
Glad to see this V. A is now being implemented how do we think about the ramp of the V. A you know as it relates to the rest of the remainder of the year and then into 2024.
Yeah. Ian this is Scott I appreciate the question.
So the way the VA rollout.
The rollout works is there was an initial group of five facilities of which two have launched as was noted in our press release and our comments. The other three are to be washed over the next 60 to 90 days.
Cognizant, a VA and ourselves are working down on our plan for the rollout beyond that timeframe and there is some different methods of doing it what has occurred to date.
Yes.
To go a facility by facility with the goal of cutting over predominantly if not exclusively all of the modes by which that facility send and receive boxes. So that would be reporting of telephone numbers for inbound may be connected to servers multi function printers and devices converting over of which those.
A variety of underlying providers like lexmark, and HP, Ricoh, Canada et cetera.
And then there is the outbound piece, which is defending of documents via the service, which actually do not require a telephone number to effectuate that so.
The first five or going on essentially a full cutover basis.
It is typical with our corporate clients that we actually if they are as sophisticated as the VA facilities are we actually do it in phases.
So instead of trying to do everything all at once particularly when we find there's a distribution of traffic oftentimes say a multifunction front are there specific brands. They have a very small amount of the total traffic of that facility or that entity.
Would phase that to be at the <unk> to be cutover.
That's not currently what is going on so we're cognizant of the VA and ourselves we're working with the plan once we get through the first five to hopefully have a more streamlined approach that can accelerate the pace of rollout certainly at least of the outbound services for certain of the facilities and then phase in over time.
Other elements on a facility by facility basis, but that's still very much underdeveloped with the VA. So it's a long answer to your question, which is you still got to stick to.
I don't think the five.
Facilities that we know are in this current phase as.
As I mentioned in my comments they'll have a de minimis contribution to revenue in Q2.
It'll be somewhat slightly above de minimis in Q3, and hopefully slightly greater than that in Q4, it's really as we get beyond the first five and start layering in.
Ramp beyond that in the mode by which that ramp occurs it will be better able to answer the 24 questions, but I don't think in any event, it's going to be terribly impactful for 'twenty three revenue.
Okay. Thank you and then on the margin side.
How are you thinking about margins I guess as we kind of enter a recession or the slowdown we're seeing.
Margins were down year over year.
Hum.
How do you intend to I guess hit that margin target of between 283% and what type of offsets can you do on the cost front. Thanks.
We focus first on the EBITDA margin, that's the 50 to 55 and actually if you look at Q1, we had these.
Unfortunate as rather large expenses related to the 10-Q filing and the delayed 10-K filing of about $2 $3 million versus what we spent in Q1 of 'twenty. Two that's two five points of margin right there.
Those expenses, certainly will not reoccur, our audit and other professional services go down.
Always dramatically in Q2, and Q3 and we start to ramp in Q4, as we look to the next product cycle.
So we're kind of in the range, having said that.
There is as I said in my prepared remarks, there is about $12 million of increase year over year in compensation expense related primarily to our employees. We have about 70 more employees in Q1 of <unk>.
But Q3 versus Q1 of 'twenty, two although essentially flat with where we were at year end, but we do have merit raises that took effect in January of this year. So that's been fully budgeted and we saw basically.
A full quarter's effect of that with an increase of non-GAAP compensation expense of about $3 3 million. So that I do expect to persist throughout the year and then as our revenue grows we should see the margin continue to expand off of what I'll call. The pro forma margin of about 50, 150% 50%.
The 1% when I back out the excess accounting.
And legal fees associated with the audit.
So we're very as I mentioned on the last earnings call given that our budget contemplates at the beginning or the middle of this year of recession were very judicious on.
Incremental costs, particularly as it relates to.
Additional hires we do still continue to hire.
We are not hiring anywhere near the pace, we did in 2022.
And when we look outside of the employee costs, which are about 56% of our total cash cost structure.
We look for areas, where we can either eliminate cost or trim some costs.
So there'll be puts and takes I think as we go through the balance of the year.
Where.
We probably will pick up some incremental savings in these non compensation non employee related expenses.
Okay. Thank you very much.
Youre welcome.
Thank you and once again, if you have any questions. Please press star one on your phone at any time.
Next question is coming from Jon <unk> from CJS Securities.
John Your line is live.
Hi, Good afternoon, it's Pete Lucas for Jon <unk>.
A lot of the questions in the prepared remarks do appreciate that I guess, just going back to you talked about the delayed decision, making impacting sales can you kind of break that down in terms of how it's affecting health care budgets and specifically are there any reasons why it departments are getting stuck or hung up and then also.
How it relates to the non health care corporate end markets, such as legal and financial are they seeing a similar headwinds to health care.
Yeah.
Yes. Thank you for the question I appreciate that.
You know I think what you've got in health care is.
A lot of.
Pressure on health care organizations to say stay staffed stay staffed and.
And we started to see that as we came out of the pandemic.
That part of it accelerated beginning about middle of last year.
We started to see the roots of it I think we talked about it on a on a couple of these calls now and.
In health care in particular was pretty hard hit.
With the ability to find some of these technical resources they need to run their IP projects. So you can imagine if you're a large health system you have any number of projects and now you have a dent dwindling number of staff to help with the implementation.
And while it's certainly the kind of implementation that we perform at these kinds of of facilities.
Facilities is a relatively light touch it still does require interaction and work with the internal project teams on the client side.
So where we're seeing a.
A fairly large impact in our ability to drive revenue is in those particular areas I think secondarily. What we're also seeing is some caution and and the caution I would say is not limited to just health care.
Around.
Making the decision.
To pull the trigger on purchasing so well, we're still working through and working with these clients and having engaged conversations.
The question is is this something that I'm going to pull the trigger on right now can wait a month.
And it's not a matter of a in our minds, if it's a matter of when.
And I think that like much of everybody else that is looking at the economy right now.
It's it's trying to decide at what point.
Whatever it is this recession whatever form this recession takes when does it hit what does it look like and how effective how effective and probably going to be and I think those questions are keeping the market.
Slow to be able to feel comfortable moving into new kinds of technology.
That's very helpful. Thanks, I'll jump back in the queue.
Okay before Paul we go to the next question, we got a few questions that have come by email.
He's a pretty quick answers. One is question came is or is anything from the VA contract or Japanese expansion revenues that John mentioned include in our guidance the answer but I would say our budget the answer to that is no.
Obviously, our guidance is a wide range so.
The expansion of the range, particularly to the upside if you could argue part of the way to achieve that outperformance would be contributions from the VA contract with Japan, but as I noted earlier I don't expect to be a contract this year to be a major contributor and I would say the same is true of Japan, but theyre not in our budget.
And then the other question regarding cost is exclusive of the audit costs, which I assume is the $2 $3 million that I referenced.
In the prepared remarks that our SG&A and R&D come in relative to our expectations pretty much in line.
Little bit heavy on some employee costs, but maybe two to 300 grand but in the aggregate both SG&A and R&D were in line exclusive of the $2 3 million of professional fees that I referenced earlier.
Let's go back to live questions, then we'll come back to another.
Question by email.
Certainly once again, ladies and gentlemen, if you did have any questions from the dial in please press star one at Star one if there were any final questions today.
Alright, well ill take this opportunity for them to go to the next question by email.
And the question is some of you may have seen that we put out a press release, a few days ago regarding our relationship with AWS the ISR opportunity.
Well I think it was a pretty detailed release, but John why don't you give some additional color I think that.
The question I would like some additional color on that relationship.
Absolutely I think that.
So much of what we've been able to gain over the last two or three years has been.
Part of our growth in <unk>.
Channel area.
The channel program is something that.
The organization has developed probably beginning in 2017 or 2018.
And when you think of the AWS as a channel that you're really looking at is is.
The large customers that.
Very often use AWS as their platform.
As they look for technology solutions, AWS becomes a great source for them to be able to not only direct them to quality vendors.
Ourselves, but also.
Understand that those vendors because they use AWS handle a high degree of compatibility with the environment that they're already working at now I know.
As we have spoken with not only AWS, but the customers that we have had through the introduction through AWS that the entire ecosystem there.
He is very interested in making sure that you have.
Solutions that can.
Interact simply with each other and that are.
Custom to the same platform. So I think that as we look at that relationship. We look at the relationship we have with <unk>.
Verizon and Salesforce those kinds of relationships continue to be important drivers for us and those kinds of introductions.
Are very helpful for us as far as how we advance our ability to sell into a variety of markets and be able to drive the top line.
There were no other questions from the diagnose.
I'd now like to hand, the call back to Scott tricky for closing remarks, great. Thank you Paul. Thank you all for participating today in our Q1 earnings call.
We have.
Have a release that will come out that we will reference additional conferences that we'll be at over the coming weeks. My recollection is correct will be Adam and I at the high yield conference with Goldman Sachs coming up and then virtually at a Needham conference, which is being held in New York, but our participation will be virtual at both of those will be.
The entertaining one on ones and in some cases, we will also have a public presentation. So stay tuned for the webcast links for that.
Terms of the next regularly scheduled call will look to report Q2 earnings probably the week of I believe it's August eight.
Our August Atlanta, I can't remember exactly which that Monday is that it'll be some time that we will obviously put out a note as well in advance to alert you as to the times and the way to participate.
Okay.
Thank you. This does conclude today's call you may disconnect. Your lines at this time have a wonderful day. Thank you for your participation.