Consensus Cloud Solutions, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results. Consensus provides secure information-delivery and communication services through a SaaS platform, primarily cloud fax. The company completed its spin-off from Ziff Davis in October 2021; prior-period figures are historical carve-out results, and the 2021 comparison includes discontinued non-fax operations in some cash-flow measures.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $90.9 million | $86.6 million |
| Gross profit / margin | $75.8 million / 83.4% | $72.7 million / 83.9% |
| Operating income / margin | $38.8 million / 42.7% | $51.7 million / 59.7% |
| Income from continuing operations | $18.7 million | $39.2 million |
| Net income | $18.7 million | $47.4 million, including $8.1 million from discontinued operations |
| Diluted EPS | $0.93 | $2.38, including discontinued operations |
| Operating cash flow | $49.9 million | $59.9 million |
Revenue increased 5%. Corporate revenue rose 13% to $46.5 million, including $0.8 million from the Summit acquisition; SoHo revenue declined 2.1% to $44.4 million. Gross margin edged down. Operating income and continuing income fell, primarily reflecting higher standalone-company general and administrative costs and interest expense on debt issued in connection with the spin-off. General and administrative expense was $18.8 million versus $6.0 million, including $4.4 million of share-based compensation in 2022.
Cash, debt and liquidity
- Cash and cash equivalents were $93.9 million at March 31, up from $66.8 million at year-end. Current assets were $128.1 million and current liabilities $110.1 million.
- Cash from operations was $49.9 million. Investing activities used $20.8 million, including $12.9 million for the Summit acquisition and $6.9 million for property and equipment. Financing activities used $1.4 million.
- Long-term debt was $792.5 million net of issuance costs, comprising $305 million of 6.0% senior notes due 2026 and $500 million of 6.5% senior notes due 2028. Interest expense was $13.3 million.
- A $25 million revolving credit facility, maturing in 2027, was established in March; no amounts were drawn at quarter-end. The company reported compliance with debt covenants.
- Management expects existing cash and operating cash flows to cover anticipated working capital, capital expenditures and any stock repurchases for at least the next 12 months.
Developments, outlook and risks
- On February 4, Consensus acquired certain assets of Summit Healthcare Services for stated consideration of $15.0 million; the purchase-price allocation was provisional. The acquired business contributed $0.8 million of quarterly revenue.
- The board authorized up to $100 million of share repurchases through February 2025. No program repurchases occurred in Q1; 19,922 shares were surrendered for employee tax withholding at a cost of $1.2 million.
- No formal financial forecast or numerical guidance is provided. Management described plans to pursue organic growth and opportunistic acquisitions, particularly in interoperability, and noted ongoing product-development investment.
- Risks highlighted include customer growth and retention, competition, acquisition integration, cybersecurity and system reliability, international and foreign-exchange exposure, regulation, employee costs, and tax liabilities. A potential historical sales-tax exposure for corporate customers could not be estimated; the company recorded $0.8 million of sales-tax expense for the quarter, related to its SoHo exposure.
- Management said disclosure controls were ineffective at quarter-end due to an unremediated material weakness involving accounting for aspects of the spin-off, including equity changes and discontinued-operations amounts and disclosures. Remediation work is underway; the filing says no material misstatement resulted in the periods presented.
- The company recorded a $1.9 million reclassification from equity to accrued expenses and amounts due to the former parent to correct prior-period errors involving pre-spin-off bonuses and corporate charges; management concluded the effect was not material.
Important facts for investors to verify
- Whether the material weakness is remediated and controls operate effectively after testing.
- The trend in corporate and SoHo accounts, average revenue per account, and churn: consolidated customer accounts fell to 1.073 million from 1.115 million, while consolidated monthly churn was 3.44% versus 3.45%.
- Debt-service capacity and covenant headroom, given $805 million principal outstanding and substantial contractual interest payments.
- The eventual amount and timing of any corporate-customer sales-tax liability, which the company could not estimate.
- Final Summit acquisition accounting and integration results; purchase-price allocation remained provisional at quarter-end.