Consensus Cloud Solutions, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company provides secure information delivery and communication services through a SaaS platform, serving more than one million customers in over 50 countries. It became an independent public company in October 2021; prior-year results reflect carve-out reporting and, where noted, discontinued non-fax operations.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $95.9 million | $89.2 million | $280.0 million | $263.7 million |
| Gross profit | $80.5 million | $74.6 million | $233.9 million | $220.5 million |
| Operating income | $35.0 million | $51.2 million | $114.9 million | $154.6 million |
| Income from continuing operations | $17.1 million | $41.1 million | $58.1 million | $119.2 million |
| Net income per diluted share | $0.86 | $1.37 | $2.91 | $5.13 |
Q3 revenue increased 8%; nine-month revenue rose 6%. Corporate revenue grew 19% in Q3 and 16% year to date, partly reflecting the Summit acquisition. SoHo revenue declined 3% in both periods. Q3 consolidated monthly average revenue per account was $30.84 versus $26.67; customer accounts fell to 1.025 million from 1.109 million. Consolidated monthly churn was 3.51% versus 3.21%.
Cost of revenue was 16% of revenue in both comparative periods. Operating expenses rose sharply: Q3 general and administrative expense was $25.6 million versus $8.2 million, including $8.4 million of sales-tax expense, higher standalone-company costs and share-based compensation. Q3 interest expense was $13.9 million, reflecting debt issued in October 2021; other income was $3.0 million, primarily from foreign-exchange gains.
Cash flow and liquidity: Cash and equivalents were $103.7 million at September 30, 2022, up from $66.8 million at year-end 2021. For the nine months, operating cash flow was $89.3 million, investing cash flow was negative $34.3 million, and financing cash flow was negative $8.9 million. The filing cautions that the prior-year cash-flow comparison includes discontinued operations and is not comparable. Management expects cash and operating cash generation to cover anticipated working capital, capital expenditures and possible repurchases for at least 12 months.
Debt: Senior notes had $805.0 million principal outstanding, with a net carrying value of $793.4 million. The notes bear fixed rates of 6.0% (due 2026) and 6.5% (due 2028). A $25 million secured revolving facility, with an option for up to $25 million additional commitment, was undrawn. The company reported compliance with debt covenants at quarter-end.
Total liabilities were $917.0 million and stockholders’ deficit was $289.7 million at September 30, 2022. The company repurchased 189,114 shares for $7.6 million during the nine months under its $100 million authorization.
Material changes versus the prior comparable period
- Revenue growth was led by corporate customers, while SoHo revenue and customer accounts declined.
- Operating income and continuing-operations income fell, principally amid higher standalone public-company costs, share-based compensation, sales and marketing investment, and non-income-tax expenses.
- Interest expense rose substantially because the 2026 and 2028 notes were issued after the prior-year comparative period.
- The 2021 income statement included non-fax discontinued operations, including a discontinued-operations loss; continuing-operations comparisons are more informative.
- Foreign-currency translation losses were $11.4 million in Q3 and $17.9 million for the nine months, increasing accumulated other comprehensive loss.
Outlook, risks and unusual items
- Guidance: The filing provides no specific revenue or earnings guidance. Management described organic growth and opportunistic acquisitions, particularly to advance interoperability products, as strategic priorities.
- Sales-tax contingency: The company recorded an $8.0 million accrual for corporate customer sales-tax exposure in Q3 and reported a $17.8 million sales-tax reserve at quarter-end. It began a voluntary disclosure process expected to take 6–12 months; taxing authorities could challenge its position or calculations.
- Internal controls: Management concluded disclosure controls were ineffective because of a material weakness in controls over accounting for aspects of the spin-off, including equity and discontinued-operation classifications. It reported no material misstatement for periods presented and is implementing remediation; the weakness is not considered remediated until controls operate effectively and testing supports that conclusion.
- Other risks: Management cited macroeconomic uncertainty, inflation and rising rates, competition, customer acquisition and retention, international and foreign-exchange exposure, cybersecurity and system reliability, regulation, and tax liabilities. It reported no material change to the risk factors in the 2021 Form 10-K and no legal matter currently expected to have a material adverse effect.
- Acquisition: The Summit healthcare interoperability asset acquisition contributed $5.3 million of revenue year to date. Purchase-price allocation remained preliminary.
- Spin-off matters: The company recorded a $2.6 million equity adjustment under a settlement with its former parent for spin-off transaction fees and identified immaterial prior-period classification corrections.
Investor facts to verify
- Whether corporate growth offsets continued SoHo account and revenue declines, and how churn and ARPA evolve.
- The eventual sales-tax liability, outcome and timing of the voluntary disclosure process, and any additional tax exposure.
- Cash generation, interest burden, debt covenant headroom and capacity to fund investment and repurchases.
- Progress in remediating the material weakness in internal controls, including effective operation and testing of the new controls.
- Summit integration, final purchase accounting and whether the acquisition contributes profitably.