Business context and reporting period
Consensus Cloud Solutions, Inc. filed this Form 10-K for the fiscal year ended December 31, 2022, with quarterly results also provided. The company supplies subscription- and usage-based secure information delivery services, primarily cloud fax, to approximately 994,000 customer accounts in about 50 countries. It reports one operating segment, Cloud Fax. Healthcare interoperability is a strategic growth area, but related offerings beyond online fax remain an immaterial share of revenue.
In February 2022, Consensus acquired Summit Healthcare Services for approximately $12.2 million, adding healthcare interoperability capabilities. The 2021 comparative period includes the company’s October 2021 separation from Ziff Davis and discontinued operations; some year-over-year comparisons are therefore not directly comparable.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Revenue | $362.4 million | $352.7 million |
| Gross profit / gross margin | $300.5 million / 82.9% | $294.7 million / 83.6% |
| Operating income / operating margin | $151.9 million / 41.9% | $175.1 million / 49.7% |
| Income from continuing operations | $72.7 million | $121.2 million |
| Net income | $72.7 million | $109.0 million |
| Operating cash flow | $83.1 million | $233.7 million |
| Cash and cash equivalents at year-end | $94.2 million | $66.8 million |
Revenue increased 2.8%. Corporate revenue rose 13.2% to $192.2 million, including $6.8 million from Summit, while SoHo revenue fell 6.7% to $170.2 million. Corporate customer accounts increased to 52,000 from 45,000; SoHo accounts declined to 942,000 from 1.039 million. Consolidated monthly churn rose to 3.61% from 3.34%.
Operating expenses increased 24.3% to $148.6 million, with higher standalone-public-company costs, share-based compensation, advertising, corporate sales investment, and sales-tax expense among the drivers. Interest expense was $51.4 million, versus $14.3 million in 2021, primarily reflecting a full year of interest on the notes issued in October 2021. The effective tax rate was 26.5%, up from 24.8%.
Operating cash flow fell substantially, principally reflecting lower income after noncash adjustments, changes in long-term liabilities, and higher accounts receivable. Investing cash outflow was $43.3 million, including $30.0 million in property, equipment and capitalized software purchases and $12.2 million for acquisitions. Financing cash outflow was $10.6 million, including share repurchases and shares withheld for employee taxes.
At year-end, principal debt was $805 million: $305 million of 6.0% senior notes due 2026 and $500 million of 6.5% senior notes due 2028. Net carrying value was $793.9 million. The company had no borrowings on its $25 million revolving facility, which has an option for up to $25 million of additional commitments, and reported compliance with debt covenants. Management said cash and expected operating cash generation should cover anticipated needs for at least 12 months from the filing date. The filing does not provide a formal earnings or revenue outlook.
Fourth-quarter 2022 revenue was $90.2 million, gross profit was $74.4 million, and continuing-operations net income was $16.9 million, or $0.85 per diluted share. The filing states that fourth-quarter usage and sign-ups are traditionally marginally lower than average.
Material changes and notable items
- Corporate growth was offset by continued SoHo revenue and customer-account declines.
- Sales and marketing expense increased 20% and general and administrative expense increased 27% year over year. Share-based compensation expense rose to $20.1 million from $2.5 million.
- Consensus recorded $9.4 million of 2022 sales-tax expense related to SoHo and Corporate sales, and reported a $13.1 million sales-tax liability at year-end. A voluntary disclosure process for historical liabilities was underway.
- The company repurchased 189,114 shares for $7.6 million under a $100 million authorization running through February 2025. It has no present intention to pay dividends.
- Annual goodwill testing found no impairment in 2022. A $5.5 million out-of-period correction increased goodwill and the cumulative translation adjustment; the company stated it was not material to 2022 or prior periods.
Guidance, risks and contingencies
Management’s strategy is to grow Corporate secure information exchange, develop healthcare interoperability, optimize SoHo, invest in products, and pursue selective acquisitions while emphasizing profitability and cash flow. No quantified forward guidance was provided.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2022. The auditor issued an adverse opinion on internal control, while giving an unqualified opinion on the financial statements. Material weaknesses covered the control environment and monitoring, revenue recognition, significant unusual transactions, balance-sheet reconciliations, and access and segregation of duties. The company also restated its Q3 2022 report and revised Q1 and Q2 2022 quarterly results for revenue-related errors. Remediation was underway and not yet considered complete.
- Business concentration and market evolution: Cloud fax constitutes substantially all revenue and operating income. Declining fax use, healthcare-sector changes, slow interoperability adoption, technological shifts, and strong competition could impair results.
- Leverage and liquidity: Debt service, restrictive covenants, refinancing needs, and limited flexibility are significant risks. Contractual obligations include $268.4 million of future note interest, in addition to $805 million of principal.
- Tax and legal exposure: Historical sales-tax assessments remain subject to taxing-authority review; uncertain tax positions were $6.7 million. The company said existing legal proceedings were not expected, based on current knowledge and accrued liabilities, to materially affect its financial position or results.
- Operational and regulatory risks: Cybersecurity, data privacy and HIPAA compliance, dependence on telecommunications and cloud providers, billing and payment processing, international operations, and potential changes to communications regulation could affect operations and costs.
- Separation-related matters: Tax indemnities and other obligations to Ziff Davis, transition arrangements, and restrictions intended to preserve tax-free separation treatment may constrain transactions or create liabilities.
Important facts for investors to verify
- Review the restated and revised 2022 quarterly figures and assess the status and effectiveness of remediation for the disclosed material weaknesses.
- Reconcile the $9.4 million 2022 sales-tax expense, $13.1 million year-end liability, and progress and outcome of the voluntary disclosure process.
- Assess whether Corporate growth can offset SoHo revenue and customer attrition, including churn and customer acquisition trends.
- Evaluate debt-service capacity, covenant headroom, cash generation, and the effect of required interest payments on investment and buybacks.
- Track Summit integration and measurable adoption and revenue contribution from healthcare interoperability products.