Consensus Cloud Solutions, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results. Consensus provides secure information delivery through a SaaS platform, principally Cloud Fax, serving about one million customers across approximately 50 countries. It reports one operating segment.
Financial performance
| Metric | Q3 2023 | Q3 2022 | First nine months 2023 | First nine months 2022 |
|---|---|---|---|---|
| Revenue | $90.6 million | $91.8 million | $274.8 million | $272.2 million |
| Gross profit | $73.7 million | $76.4 million | $223.2 million | $226.1 million |
| Operating income | $38.9 million | $32.7 million | $111.8 million | $111.9 million |
| Net income | $24.0 million | $15.4 million | $60.5 million | $55.8 million |
| Diluted EPS | $1.22 | $0.77 | $3.07 | $2.79 |
Margins: Q3 gross margin was approximately 81.4% versus 83.2%; operating margin 43.0% versus 35.6%; and net margin 26.5% versus 16.8%. For the first nine months, gross margin was approximately 81.2% versus 83.1%, operating margin 40.7% versus 41.1%, and net margin 22.0% versus 20.5%.
Cash flow and liquidity: Nine-month operating cash flow was $112.1 million, up from $89.3 million. Investing cash outflow was $32.7 million, including $28.7 million of property and equipment purchases and a $4.0 million investment. Financing cash outflow was $14.1 million, principally reflecting share repurchases and employee tax withholding. Cash and equivalents were $155.7 million at September 30, up from $94.2 million at year-end 2022; $144.9 million was held in money market funds.
Debt: Outstanding note principal totaled $805.0 million: $305.0 million of 6.0% notes due 2026 and $500.0 million of 6.5% notes due 2028. Debt carrying value was $795.3 million after deferred issuance costs. The $25 million revolving facility was undrawn; the company reported compliance with debt covenants. Stockholders’ deficit was $199.3 million.
Changes versus comparable periods
- Q3 revenue fell 1%, as SoHo revenue declined 6% to $40.1 million, partly offset by 3% corporate growth to $50.4 million. Nine-month revenue rose 1%, with corporate growth offsetting a smaller SoHo decline.
- Q3 operating income increased despite lower revenue, supported by lower operating expenses, particularly general and administrative costs. Q3 G&A fell 25%, partly because non-income-related tax expense was $7.1 million lower than in the prior-year quarter.
- Cost of revenue rose 9% in Q3 and 12% year to date, reflecting personnel costs and depreciation associated with platform development. Management attributed lower R&D expense partly to greater capitalization of internally developed software costs.
- Corporate customer accounts increased to 54,000 from 47,000, while SoHo accounts declined to 859,000 from 978,000. Consolidated monthly ARPA rose to $32.54 from $29.51 in Q3; paid adds fell to 67,000 from 90,000. Consolidated monthly churn improved to 3.37% from 3.51%.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance is provided. Management expects growth primarily from organic investment and potentially acquisitions, and says cash and operating cash generation should cover anticipated working capital, capital expenditures and possible repurchases for at least the next 12 months.
- Management cites macroeconomic uncertainty, inflation, elevated interest rates, labor costs, competition, customer acquisition and retention, technology and cybersecurity, foreign exchange, regulation, and tax liabilities among risks.
- Disclosure controls and procedures were reported ineffective at quarter-end because of previously identified material weaknesses in financial reporting controls. Remediation and testing were underway, but management said the weaknesses were not yet fully remediated.
- Historical sales-tax exposure remains a contingency. The voluntary disclosure process was substantially completed in Q3; the company recorded no additional prior-period sales-tax expense in the quarter. The recorded sales-tax liability was $7.4 million at September 30, 2023.
- On November 9, 2023, after the quarter, the board authorized a debt repurchase program covering up to $300 million of combined 2026 and 2028 note principal, through November 9, 2026. Timing and amounts are discretionary.
- The company repurchased 490,953 shares for $15.1 million during the first nine months of 2023; $77.4 million remained under its $100 million stock repurchase authorization at September 30.
Important facts for investors to verify
- Whether revenue trends, particularly declining SoHo accounts and paid adds, stabilize and whether corporate growth continues.
- Progress in remediating and testing the material weaknesses in internal controls, including controls over revenue, bad debt, reconciliations and internally developed software.
- Cash generation and capital spending trends, including the extent to which software development costs are capitalized.
- Debt repayment plans and liquidity impact of any purchases under the newly authorized debt repurchase program.
- Whether the sales-tax reserve is adequate and whether any taxing authority challenges the company’s positions or estimates.