Consensus Cloud Solutions, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; filed November 15, 2021. The statements are unaudited carve-out financials for J2 Cloud Services as constituted at September 30, not the standalone cloud-fax company after separation. They include businesses later sold or retained by Ziff Davis, so they are not directly representative of post-spin Consensus.
Business context and separation
J2 Global completed the spin-off on October 7, 2021. Consensus retained the cloud-fax business; Ziff Davis retained or received certain other businesses, including cybersecurity and SMB enablement. Ziff Davis retained 19.9% of Consensus. Consensus began trading on Nasdaq as CCSI on October 8. The business described in the filing served more than one million customers in over 50 countries, with subscription revenue as its principal source.
Financial performance
Amounts below are in millions of dollars. Margins are calculated from reported figures.
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $182.1 | $170.2 | $528.9 | $507.1 |
| Gross profit / margin | $141.4 / 77.6% | $131.8 / 77.4% | $413.0 / 78.1% | $390.9 / 77.1% |
| Operating income / margin | $57.5 / 31.6% | $62.5 / 36.7% | $143.0 / 27.0% | $180.3 / 35.6% |
| Net income / margin | $27.2 / 14.9% | $58.9 / 34.6% | $102.1 / 19.3% | $133.3 / 26.3% |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $196.4 | $160.3 |
Q3 revenue increased 7% year over year; nine-month revenue increased 4%. Management attributed growth mainly to acquisitions and organic growth, partly offset by declines in some businesses. Q3 subscription ARPU was $15.53 versus $13.98; the reported cancel rate was unchanged at 2.1%.
Q3 operating expenses rose to $83.9 million from $69.3 million. Sales and marketing increased 33% to $38.4 million and research, development and engineering increased 69% to $8.3 million, primarily reflecting acquired businesses and increased advertising, sales and engineering costs. Nine-month results included a $32.6 million goodwill impairment related to B2B Backup. Q3 also included a $24.6 million loss on the B2B Backup sale; Q3 2020 included a $17.1 million gain on sale. Lower interest expense and lower tax expense partly offset these items, while other income declined substantially year over year.
Segment revenue in Q3 was $114.6 million for Fax and Martech, up from $98.0 million, and $67.5 million for Voice, Backup, Security and Consumer Privacy and Protection, down from $72.2 million. Nine-month operating income in the latter segment was a loss of $4.2 million, versus income of $33.2 million in 2020; the filing attributes much of the deterioration to the impairment and disposition activity.
Balance sheet, cash flow and debt
At September 30, cash and cash equivalents were $297.8 million, compared with $128.2 million at December 31, 2020. Current assets were $367.3 million and current liabilities $177.8 million. Total liabilities were $340.1 million and total equity $1,236.7 million. The September balance sheet reports no debt balance; interest expense was zero in Q3 and $0.2 million for the nine-month period. These are pre-separation balances and do not reflect the standalone company’s post-spin financing.
Nine-month operating cash flow was $196.4 million. Investing cash outflow was $37.8 million, including $28.3 million of capital expenditures and $56.8 million for acquisitions, partly offset by $48.9 million of proceeds from business sales. Financing cash inflow was $14.4 million, including $21.2 million of Parent contributions. Cash increased by $169.6 million over the period.
After the quarter, Consensus issued $305 million of 6.0% senior notes due 2026 and $500 million of 6.5% senior notes due 2028. It paid approximately $269.6 million to Ziff Davis and issued the $500 million 2028 notes to Ziff Davis as part of the separation arrangements. Interest is payable semiannually. Management stated that financing arrangements, future operating cash and capital-market access were expected to fund future needs.
Outlook, risks and unusual items
Management expected 2021 revenue to exceed the prior year, assuming a stable or improving economic environment; it provided no specific numerical guidance. The filing notes some seasonal revenue weakness in the fourth quarter and says acquisitions remain part of the growth and capital strategy, though their pace and effect on margins are uncertain. Pre-separation management expected existing cash and operating cash flow to cover needs for at least 12 months; the filing cautions that post-spin liquidity depends on standalone cash generation and capital-market access.
Key risks include customer acquisition and retention, competition, technology change, system failure or security breaches, international and currency exposure, telecommunications and privacy regulation, acquisition integration, debt service and covenants, and tax liabilities. The company had a $23.5 million reserve for indirect taxes and $50.9 million of uncertain income-tax liabilities; additional indirect-tax expense could be material. IRS, California and New York tax audits were ongoing, and the company said the outcome and potential changes to reserves could be material but could not be estimated. Management did not consider pending litigation outcomes likely to have a material overall effect based on current knowledge, and had not accrued material litigation losses.
Other notable items include $2.2 million of lease-asset impairment during the first nine months, primarily from exiting office space as remote or hybrid work continued, and $13.6 million of nine-month foreign-currency translation losses in other comprehensive income. Management said disclosure controls were effective and reported no material change in internal controls during Q3.
Most important facts for investors to verify
- Review post-spin filings to reconcile the carve-out results with the cloud-fax business retained by Consensus, including the businesses transferred to Ziff Davis.
- Confirm post-separation cash, debt, interest obligations, covenants and liquidity after the $805 million note issuance and $269.6 million cash payment.
- Assess the sustainability and organic contribution of revenue growth, ARPU improvement and segment trends, apart from acquisitions and divestitures.
- Track the effect of the B2B Backup impairment and sale, and whether reported earnings and cash generation normalize after those unusual items.
- Monitor indirect-tax reserves and income-tax audits, including any material changes in exposures or cash settlement timing.