Consensus Cloud Solutions, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Consensus provides cloud-based secure information delivery services, primarily Cloud Fax, to approximately 1 million customers in about 50 countries. Financial statements are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $92.8m | $91.1m | $184.2m | $180.4m |
| Gross profit | $75.5m | $75.5m | $149.5m | $149.7m |
| Operating income | $38.8m | $40.6m | $72.8m | $79.2m |
| Net income | $21.1m | $21.9m | $36.5m | $40.4m |
| Diluted EPS | $1.07 | $1.10 | $1.85 | $2.02 |
| Operating cash flow | Not separately presented for the quarter | $52.1m | $52.2m |
- Q2 gross margin was approximately 81.4%, down from 82.9%; operating margin was 41.9%, down from 44.5%; and net margin was 22.7%, down from 24.1%.
- Q2 revenue grew 2% year over year. Corporate revenue increased 3% to $50.4m; SoHo revenue increased 1% to $42.4m. For the first half, Corporate grew 5% to $99.8m while SoHo declined 1% to $84.5m.
- Q2 operating income declined 4% and net income declined 4%. Higher costs of revenue, sales and marketing, and general and administrative expense more than offset revenue growth.
- Cash and equivalents were $112.0m at June 30, 2023, versus $94.2m at year-end 2022. Current assets were $155.8m and current liabilities $65.0m. Six-month capital expenditures were $18.7m; share repurchases used $11.2m of cash.
- Debt principal was $805.0m: $305.0m of 6.0% notes due 2026 and $500.0m of 6.5% notes due 2028. Reported long-term debt, net of issuance costs, was $794.8m. Cash less principal debt was approximately negative $693.0m. No revolving credit facility borrowings were outstanding; $25m was committed, with an option for up to $25m additional commitment. The company reported compliance with debt covenants.
Material changes and operating indicators
- Cost of revenue rose 11% in Q2 and 13% for the first half, driven mainly by personnel costs and depreciation on platform development.
- General and administrative expense increased 10% in Q2 and 16% for the first half. Management cited higher bad-debt expense, personnel costs and, for the first half, year-end audit-related professional fees. The six-month provision for doubtful accounts was $3.1m, versus $0.2m a year earlier.
- Research and development expense fell 36% in Q2 and 28% for the first half, primarily reflecting greater capitalization of personnel costs for internally developed software and lower external development costs.
- Corporate average revenue per account (ARPA) was $316.55 in Q2, down from $354.99; SoHo ARPA was $15.69, up from $13.87. Customer accounts declined to 943,000 from 1.048m, including SoHo accounts of 889,000 versus 1.002m. Consolidated monthly churn improved to 3.44% from 3.79%.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects cash on hand and operating cash generation to cover working capital, capital expenditures and potential repurchases for at least the next 12 months and foreseeable future.
- Management identifies economic uncertainty, inflation, elevated interest rates, competition, customer acquisition and retention, usage and payment declines, international currency exposure, cybersecurity and system risks, regulation, and the ability to fund debt service and investment while meeting covenants as key risks.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of previously reported material weaknesses in internal control over financial reporting. Weaknesses involve the control environment and monitoring, revenue recognition and bad-debt controls, technical accounting documentation, account reconciliations, system access and employee-cost controls. Remediation is underway; testing was planned for Q3 and Q4 2023, but management said remediation is not complete until controls operate and are tested effectively.
- Historical sales-tax exposure remains a contingency. The company reported a $6.9m sales-tax liability at June 30, down from $13.1m at year-end, and expected its voluntary disclosure agreement process to conclude in Q3 2023. It recorded no additional prior-period sales-tax expense in Q2; taxing authorities may still challenge its position or calculations.
- Liabilities for uncertain income tax positions were $8.2m, up from $6.7m at year-end; timing of any payments is not reasonably estimable. No material litigation was identified based on management’s current knowledge.
- The company repurchased 338,554 shares for $11.2m during the first half. The $100m authorization runs through February 2025; approximately $81.2m remained available at June 30. The company does not currently pay dividends.
Investor verification priorities
- Track revenue mix, customer-account declines, Corporate and SoHo ARPA, and churn to assess the durability and quality of growth.
- Review bad-debt expense and receivables collectability, given the marked increase in the provision and higher G&A costs.
- Monitor cash generation, capital spending and repurchases against $805m of debt principal and scheduled 2026 and 2028 maturities.
- Check progress and independent evidence of remediation and testing of the material weaknesses in financial reporting controls.
- Verify completion and final settlement outcomes of the sales-tax disclosure process, and changes in uncertain tax-position liabilities.