Q3 2024 Consensus Cloud Solutions Inc Earnings Call
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Paul: Good day ladies and gentlemen and welcome to Consensus Q3 2024 earnings call. My name is Paul and I will be the operator assisting you today.
Paul: 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.
Paul: On this call from ConsenSys will be Scott Chereke, CEO, Jim Malone, CFO.
Speaker Change: 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 ConsenSys. Thank you. You may begin.
Adam Varon: Good afternoon and welcome to the Consensus Investor Call to discuss our Q3 2024 financial results.
Adam Varon: other key information, and our Q4 and full year 2024 guidance. Joining me today are Scott Taricki, CEO, Johnny Hecker, CRO and EVP of Operations, and Jim Malone, CFO.
The earnings call will begin with Scott providing opening remarks.
Adam Varon: Johnny will give an update on operational progress since our Q2 2024 investor call and then Jim will discuss Q3 2024 financial results
and Q4...
quarterly and full year 2024 guidance.
Adam Varon: 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.
Speaker Change: Before we begin our prepared remarks, allow me to direct you to our forward-looking statements and risk factors on slide two.
Speaker Change: As you know, this call and the webcast will include forward-looking statements.
Speaker Change: Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results.
Speaker Change: Some of those risk factors and uncertainties include, but are not limited to, the risk factors that we have disclosed in our 10K SEC filing. Now, let me turn the call over to Scott.
Thank you.
Scott: Thank you, Adam. We have another strong quarter in Q3, beating our expectations for revenue, adjusted EBITDA, and adjusted non-GAAP net income per share.
Scott: The outperformance occurred in both channels of revenue. This combined with our disciplined approach to cost resulted in another quarter of excellent EBITDA performance and an EBITDA margin above the bid point of our range of 50 to 55 percent.
As we laid out in our Q4...
Scott: 2023 earnings call, our goals for this year include, first, eliminating certain costs of the Soho Channel, especially in the area of marketing, to provide for stabilization of the base of revenue over time, which Johnny will address in his remarks.
Scott: Two, continuing to pursue the acquisition of customers primarily in the healthcare space for our corporate channel.
Scott: And four, continuing the repurchase of our debt to further reduce our total debt to adjusted EBITDA ratio in anticipation of the first tranche maturing in October of 2026.
Scott: Our corporate channel had the best revenue growth in six quarters.
Scott: The 5.3% growth was driven by new customer additions and record usage for a quarter.
Scott: The new ads came primarily through our e-commerce efforts of E-Fax Protect, supplemented by upgrades from our SOHO base, as well as several key enterprise wins.
Scott: Notwithstanding the lower ARPA of eFax Protect customers than our current average, we were still able to maintain a $310 ARPA per customer in a tight range over the past several quarters.
Scott: As predicted, we continue to see additional sites from the VA rollout driving new levels of usage and revenue. In addition, we saw a return to 100% LTM revenue retention in our corporate channel.
Our sole revenues beat our expectations for the quarter.
Scott: The rate of decline slowed from Q2 and we expect that there will be a reduction in the pace of decline in 2025. We continue to track ahead of our 2024 budget and have tested additional marketing opportunities while maintaining a strong LTV to CAC.
Scott: We were able to substantially reduce our marketing spend and still generate 64,000 paid ads, similar to Q3 2023 and more ads than in the preceding three quarters.
Scott: The combination of robust adjusted EBITDA, strong cash collections, and retirement of debt allowed us to generate free cash flow of approximately $34 million. The change in free cash flow from the prior year is driven by the timing of tax payments, which Jim will address in more detail.
Scott: We were also able to repurchase an additional $31.1 million of debt in the quarter.
Scott: This brings our total repurchases since launching the program in November 2023 to $187 million and reducing our outstanding total debt to $618 million or 3.2 times our trailing 12-month adjusted EBITDA and 2.9 times on a net debt basis to our adjusted EBITDA.
Speaker Change: Jim will discuss our guidance for Q4 and the fiscal year in his portion of the presentation.
Speaker Change: However, I would like to note that Q4 usually has the fewest business days of the four quarters and approximately one-third of our total revenues are usage-based. This puts downward pressure on Q4 revenues relative to Q3.
Speaker Change: This year, however, the calendar is the most punitive as Christmas and New Year's Day both fall on a Wednesday.
Speaker Change: Based on historical analysis, we have compensated for this in the calculation of our Q4 business days.
Speaker Change: As a result, we expect approximately 61 business days in Q4 of 2024.
Speaker Change: which is one and a quarter business days less than Q4 of 2023 and approximately three and a quarter business days less than Q3 of 2024. I will now turn the call over to Johnny to provide more operational updates.
Thank you, Scott. And hello, everyone.
Johnny Hecker: I will provide an update on operations and go-to-market for the corporate and SOHO businesses respectively, including details on revenue, customer accounts, and go-to-market strategy.
Johnny Hecker: Q3 was another record revenue quarter for our corporate business. I'm very pleased with our growth and the increased momentum resulting in another solid performance in Q3.
Johnny Hecker: Our revenue for the third quarter increased by approximately 5.3% compared to the same period last year, the highest rate in the last six quarters.
Johnny Hecker: We have reached a total of $53.1 million, up from $50.4 million in Q3 of the previous year.
Johnny Hecker: Particularly CloudFacts, especially in healthcare, showed solid consumption growth within our existing customer base while we were able to implement and ramp recently won new customers across the board.
Johnny Hecker: Our corporate customer count has reached roughly 58,000, the highest ever for consensus.
Johnny Hecker: And I am pleased to report that Corporate ARPA has maintained flat quarter over quarter at $310 and well within the stable $305 to $320 range for eight quarters now.
Thank you for tuning in.
Johnny Hecker: Driven by automation, e-commerce and Soho upsell to corporate added over 3,000 customers to the overall corporate account base in Q3, another significant increase since last quarter.
Johnny Hecker: Our Effects Protect service is experiencing sustained growth. To further capitalize on this momentum, we're investing in its expansion as outlined in the go-to-market strategy we presented last year.
Johnny Hecker: While the recently introduced in-product upsell options from SOHO to corporate have been successful in reducing the need for direct customer interaction and driving growth, we're seeing this upsell strategy plateau after many successful quarters.
Johnny Hecker: Moving forward, we'll maintain this profitable program, but continue to shift our focus towards e-commerce as the primary driver for acquiring small corporate accounts.
Johnny Hecker: The success and growth of corporate accounts on the lower end of the ARPA spectrum driven by those new customers acquired through the e-commerce channel or upsold from Soho continues to influence the corporate cancellation rate.
Johnny Hecker: It has increased by 112 basis points year over year and 32 basis points quarter over quarter, reaching 2.61% in Q3 of 2024.
Johnny Hecker: It is important to note that our cancellation rate is calculated on a per-account basis rather than on revenue. As a result, we believe that the revenue retention metric is more relevant than the cancellation rate.
Johnny Hecker: Our dedication to customer retention, upselling, and cross-selling is yielding positive results with a modest increase in revenue retention to 100% over the past 12 months in the corporate channel. This is another encouraging indicator of our momentum and remarkable success in the corporate revenue channel.
Johnny Hecker: I am pleased that our go-to-market plan for 2024 is unfolding successfully.
Johnny Hecker: The green shoots we've previously mentioned are driving revenue growth across our entire customer base. As service utilization continues to rise, customers who have made a purchase are demonstrating a strong commitment to swift adoption.
Let me share a quick update on the VA.
Johnny Hecker: The implementation of EC FACTS at the Department of Veterans Affairs is progressing as planned.
Johnny Hecker: We have observed steady growth that is aligned with our projections and allows us to confidently confirm the forecast of over $2 million in revenue from the EC FACTS program in 2024.
Johnny Hecker: As we move forward, we anticipate sustained growth in the coming months and years, further solidifying the program's success at and beyond the VA.
Johnny Hecker: In line with our vision for 2025, our core FACTS business remains our primary focus. We maintain our commitment to investing in the ongoing development and enhancement of our Cloud FACTS platform.
Johnny Hecker: With customer satisfaction at the forefront, we are consistently working to improve the platform while ensuring our continued economic success.
Johnny Hecker: Clarity, which features AI technology, continues to generate significant interest among potential customers. We're actively engaged in implementing the solution for clients.
Johnny Hecker: Simultaneously, we're diligently addressing our increasing backlog of proof-of-concepts to ensure that all interested parties have the opportunity to experience the capabilities of clarity.
I am now shifting to the Serho channel.
Johnny Hecker: In the third quarter, the Soho business generated a revenue of $34.7 million, a decrease from the previous year's $40.1 million.
Johnny Hecker: This represents a declining rate of 13.6%, which is a slower decline compared to the previous quarter. The total SOHO account base has also slightly decreased from 785,000 to 768,000 during the quarter.
Johnny Hecker: Despite experiencing this decline, our Soho business manages to modestly exceed expectations, showcasing the robust strength of our brand portfolio, particularly exemplified by e-facts.
Johnny Hecker: The introduction of new first month discounted pricing plans across several brands has proven effective in boosting revenue velocity within SoHo. Moreover, in Q3, the average revenue per account remained relatively stable at $14.88.
Johnny Hecker: Additionally, the cancel rate showed a modest sequential improvement to 3.38%, compared to 3.49% in Q3 of the previous year.
Johnny Hecker: Looking ahead, we remain focused on executing our strategy for the Soho business, maintaining profitable stability, and optimizing current operations and resources.
Johnny Hecker: Rather than pursuing aggressive growth strategies, we aim to leverage our existing strengths and offerings to ensure the long-term sustainability of our business in this market.
Johnny Hecker: Our smarter ad spend strategy designed to enhance customer acquisition profitability has delivered sustained success. We've maintained a focus on automating and optimizing this program resulting in marginal outperformance across all brands compared to our projected outcomes.
Johnny Hecker: The synergy between our digital advertising strategy and SEO initiatives has been instrumental in optimizing our LTV to CAC ratio.
Johnny Hecker: By integrating these channels, we have achieved a holistic and comprehensive approach to digital marketing, effectively reaching our target audience and driving profitable customer acquisition.
Speaker Change: In closing, I'd like to provide an update on the current market conditions.
Speaker Change: While they remain less than optimal, we've been successful in navigating around the challenges and building a sales pipeline resulting in closing new customers across our customer spectrum.
Speaker Change: particularly multi-location and specialty health care as well as state and local government have shown promising results.
Speaker Change: Although some positive signs are emerging, macroeconomic uncertainties persist. Despite these, we stay committed to our strategy, prioritizing cash generation and profitability.
Speaker Change: Our go-to-market efforts will continue to focus on driving growth within the corporate business.
Speaker Change: With that, I want to extend a heartfelt thank you to our employees for the extraordinary commitment and to our customers and partners for their continued collaboration and trust. And now I'll hand the call over to our CFO, Jim Malone, who will provide an update about our financial results and guidance. Over to you, Jim.
Thank you, Johnny, and good afternoon, everyone.
Jim Malone: In our press release and on this earnings call today, we are disclosing Q3 2024 results plus Q4 2024 and 2024 full-year guidance.
Jim Malone: Let's start with our corporate business results. Q3 2024 revenue was a record $53.1 million, up $2.7 million or 5.3%, versus prior year and performing better than expectations.
Jim Malone: Corporate offer of $310 was essentially flat with the prior quarter and in line with the last several quarters ranging from $305 to $320.
Q3 2024 Customer Churn of 2.61%
Jim Malone: increased 112 basis points year over year and 32 basis points sequentially primarily driven by customer churn at the lower end of the customer continuum.
Jim Malone: Normalize or Efax Protect, the cancel rate would have been approximately 2%.
Notwithstanding this, these customers are net economically beneficial.
Speaker Change: I would also like to repeat Johnny's comment that our cancel rate is calculated on a per account basis. A better measure is revenue retention which came in at 100% over the trailing 12 months and 1% improvement sequentially.
Speaker Change: Soho results, Q3 2024 revenue of $34.7 million is a decrease of $5.5 million or 13.6% over the prior year and in line with expectations.
Speaker Change: As mentioned previously, this decrease is driven by our planned reduction in advertising spend and the corresponding year-over-year base reduction due to lower paid ads.
Speaker Change: ARPA of $14.88 decreased 2.8% year-over-year as a result of the shifting to price plans with a discounted first month versus a free trial.
These plans are net economically benefit.
Speaker Change: It should be noted that year-over-year paid ads were flat, amid an approximate 40% lower spend as we continue to optimize our advertising campaigns.
Speaker Change: Churn declined 11 basis points to 3.38% year-over-year, and 2 basis points sequentially, in line with expectations.
Moving to consolidated results.
Speaker Change: Q3 revenue of $87.8 million is a decrease of $2.8 million, or 3.1% over Q3 2023. Again, in line with expectations.
I just leave it all.
Speaker Change: of 46.9 million, a decrease of 0.6 million or 1.2% over Q3 2023.
was ahead of expectations.
Speaker Change: and driven by lower revenue, partially offset by cost structure optimization, primarily in the area of SOHO advertising.
Speaker Change: Adjusted EBITDA margin of 53.5% was 100 basis points better than the prior year comparable period, delivering a solid EBITDA margin and continued cost optimization.
Speaker Change: Just the net income of $25.5 million is a decrease of $4.2 million over the previous year.
Speaker Change: over 14.3% over prior year driven primarily by a 5.8 million non-cash foreign exchange revaluation of intercompany balances.
Speaker Change: partially offset by lower interest expenses on the success of our bond repurchase program and lower income taxes.
Speaker Change: Trusted EPS of $1.31 is lower than the prior year by 13.2% or 20 cents driven by the items previously mentioned and a modestly low share count.
Speaker Change: Q3 2024 non-cap tax rate and share count was approximately 19% and approximately 19.4 million shares.
Speaker Change: As mentioned in our Q3, November 2023 earnings call, we announced a $300 million three-year bond repurchase program.
Speaker Change: In Q3 2024, we repurchased $31.1 million face value for $30.6 million cash.
Speaker Change: Program to date, we have repurchased $187 million face value for $173 million cash and have approximately $113 million in bond repurchases remaining under this program.
Speaker Change: With the debt repurchases just mentioned, total debt to adjusted EBITDA is 3.2 times, and net debt to adjusted EBITDA ratio is 2.9 times. We're getting very close to achieving our total debt to adjusted EBITDA target of 3 times.
Speaker Change: We ended Q3 2024 with $55 million in cash, which is sufficient to fund our operations and repurchases of debt and equity.
Speaker Change: Q3 2024 free cash flow is $33.6 million versus $49.9 million in the prior comparable period.
Speaker Change: This decrease was primarily due to a foreign tax refund and the deferral of Q2 and Q3 2023 federal income tax payments under the California Disaster Recovery Relief Act.
which were subsequently paid in Q4 2023.
Speaker Change: Q3 2024, CapEx of $8 million is down $2 million or 20% versus the prior year.
Now let's talk about guidance going forward here.
Speaker Change: Q4 2024 Guidance Revenues between $83 million and $87 million, with $85 million at the midpoint.
Speaker Change: Just at EBITDA between $42 million and $45 million with $43.5 million at the midpoint.
Speaker Change: adjusted EPS of $1.14 to $1.24 with a $1.19 at the midpoint
Speaker Change: Q4 estimated share count and income tax rate are 19.5 million shares and 19.5 to 21.5 tax rate.
Speaker Change: Moving to full year, our revenue in adjusted EBITDA range has been narrowed within previously provided guidance based on year-to-date Q3 2024 performance plus our Q4 2024 guidance range.
Speaker Change: Revenues between $346 million and $350 million. Adjusted EBITDA between $186 million and $189 million.
Adjust the EPS between $5.45 to $5.55
Speaker Change: Therefore, we are narrowing the full year 2024 revenue and adjusted EBITDA guidance while maintaining adjusted EPS range.
Speaker Change: of $5.45 to $5.55. Our estimated share count and non-GAAP income tax rate
Speaker Change: are 19.5 million shares and 19.5 to 21.5 percent tax rate. That concludes my formal comments. Now I'd like to turn the call back to the operator.
Speaker Change: 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 1 on your telephone keypad.
Speaker Change: A confirmation tone will indicate your line is in the question queue. You may press star 2 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.
Speaker Change: And the first question today is coming from David Larson from BTIG. David your line is live
Speaker Change: Hi, this is Jenny Shen on for Dave. Congrats on the quarter and thanks for the question.
Speaker Change: I'm just doubling down on the hospital environment right now. I know...
Speaker Change: The general consensus has been that it's kind of a two-sided coin with some hospitals doing better than others. Just broadly speaking, what are you guys seeing in terms of the labor and inflation trends for hospitals?
Speaker Change: and also whether you think the recent election or even CMS's recent physician fee schedule will have any impact on your hospital customers if they've said anything yet so far. Thanks.
Thank you. Thank you.
Speaker Change: Hi Jenny, and thank you for the question. This is Johnny.
Speaker Change: I think it's a really good question and you partially answered it already, right? Some hospitals are doing well, others are struggling.
Speaker Change: I think we've, I mentioned it in the call, right, we see the green shoots actually growing and converting. So, I think we've found a way, especially in the specialty healthcare space, in the multi-location healthcare providers.
where we can find customers with
Let me call it accelerated interest and and conversion so
Speaker Change: While we still, you know, have some very large clients that take their time and we we still see, you know, continued, you know,
you know.
headwinds in that area, we have found ways to...
to convert and actually ramp new customers.
Speaker Change: Like you said, it's a diverse environment out there, and some customers are really accelerating, which is encouraging. Even more encouraging that we find them and can engage with them, and others continue to be slow.
Speaker Change: From the question about the administrative change and the new rules from CMS, we don't see any particular impact on our business at this point.
I don't know, Scott, if you want to...
Scott: No, I think you had a third question which was about the election and any impact it might have.
Scott: specifically on customer acquisition. My guess is generally the answer is going to be no. Obviously there's a lot of unknowns at this point. There's still an undecided house race and so I think you know if you listen to even Chairman Powell today on the interest rate cut and his commentary going forward
Scott: Two things. One, there's a lot of unknowns because we don't have a settled Congress. And two...
Scott: A lot of the policies that have been talked about and maybe, you know, implemented are probably still months in the future in terms of getting through.
Scott: even a unified Congress and then actually getting implemented. So, it's obviously something we will watch. There's all kinds of different pieces to it. Obviously, how does it affect the economy generally?
Scott: interest rates, you know, see already moving around, tax implications. There's a whole myriad of things, but I think it's too early to call. But in general, I would say that elections and, you know, the different parties that can be in control or divided government.
Scott: It doesn't have a huge impact on our customer acquisition, go-to-market strategy. Clearly, if things either give an accelerant to the economy or a headwind, that could have an impact, but in terms of the direct correlation, I'd say it's generally weak.
Got it. Thank you.
Speaker Change: And there were no other questions from the lines at this time. I will now hand the call back to Scott Tariqi for closing remarks.
Scott Tariqi: Great. Well, thank you very much for joining us today. It was obviously a very busy day to report earnings, so if any of you in listening to the replay or reading the transcript have questions, please feel free to do so.
Please feel free to reach out to us
Scott Tariqi: We will have probably one or two conferences between now and our next reporting period which will target for the third week of February. Of course on that call we will discuss not only the Q4 results but we'll release 2025 guidance on you know revenues, adjusted EBITDA, non-GAAP earnings per share much as we've done this year.
Scott Tariqi: So we look forward to talking to you in the interim and then giving you that update in about
Thank you.
Speaker Change: Thank you. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.
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Speaker Change: Okay guys, apologies, let me just turn off my alarm here.