Consensus Cloud Solutions, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; amounts below are in U.S. dollars. Comparisons are with Q1 2022 unless otherwise noted.
Business context
Consensus provides cloud-based secure information delivery services, primarily Cloud Fax, to approximately 1 million customers across about 50 countries. It reports one operating segment. Revenue is mainly recurring subscription and usage fees, recognized primarily over time.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $91.5 million | $89.3 million | Up 2% |
| Gross profit / margin | $73.9 million / 80.9% | $74.2 million / 83.1% | Margin down 2.2 percentage points |
| Operating income / margin | $34.0 million / 37.2% | $38.7 million / 43.3% | Income down 12% |
| Net income / margin | $15.5 million / 16.9% | $18.5 million / 20.7% | Down 17%; diluted EPS $0.78 vs. $0.92 |
| Operating cash flow | $38.0 million | $49.9 million | Down $11.9 million |
| Capital expenditures | $8.5 million | $6.9 million | Cash flow less capex was $29.4 million vs. $43.0 million |
| Cash and cash equivalents | $111.3 million | $94.2 million at Dec. 31, 2022 | Quarter-end balance |
| Long-term debt, net of issuance costs | $794.3 million | $793.9 million at Dec. 31, 2022 | $805 million principal; no revolver borrowings |
At March 31, 2023, current assets were $155.5 million and current liabilities were $85.5 million, a current ratio of approximately 1.82. Cash less debt principal was approximately $693.7 million. The company reported compliance with debt covenants and $25 million of revolving capacity, with an option for up to $25 million in additional commitments.
Corporate revenue rose 6% to $49.4 million, while SoHo revenue declined 2% to $42.0 million. Customer accounts were 967,000 versus 1.073 million; corporate accounts increased to 53,000 from 46,000, while SoHo accounts declined to 914,000 from 1.027 million. Consolidated monthly churn rose to 3.63% from 3.44%. Corporate monthly ARPA was $315.76 versus $339.95; SoHo ARPA was $15.10 versus $13.88.
Changes and notable items
- Revenue growth was offset by higher costs: cost of revenue increased 16%, including higher personnel and platform depreciation costs. General and administrative expense increased 22%, primarily due to professional fees, bad-debt expense and personnel costs.
- Operating cash flow declined, partly because Q1 2022 had larger increases in certain liabilities and payables. Investing cash use was $12.5 million, including $8.5 million of property and equipment purchases and a $4.0 million investment; Q1 2022 included acquisition spending.
- The company repurchased 270,192 shares for $9.2 million in the quarter. The buyback authorization had $83.2 million remaining at March 31, 2023.
- Other expense was $0.8 million, versus $0.2 million of other income, primarily reflecting higher foreign-exchange losses. The effective tax rate decreased to 24.9% from 27.5%.
Outlook, risks and contingencies
The filing provides no numerical revenue or earnings guidance. Management expects growth to come primarily from organic investment and potentially acquisitions that advance its interoperability product roadmap. Management said existing cash and operating cash generation should cover working capital, capital expenditures and potential repurchases for at least the next 12 months and the foreseeable future.
Key stated risks include macroeconomic uncertainty, inflation and labor costs; competition and customer retention; the ability to generate cash for debt service; foreign exchange exposure; cybersecurity, system reliability and fraud; regulatory and telecommunications requirements; and tax liabilities. The company had $10.1 million accrued for sales taxes at March 31, 2023 and was pursuing a voluntary disclosure process expected to conclude in Q2 2023. Management said the historical sales-tax exposure was reserved, but taxing authorities could challenge its positions or calculations. Liability for uncertain income-tax positions was $7.4 million; settlement timing could not be reliably estimated. Management did not believe current legal matters were likely to have a material adverse effect.
Material control issue: Management concluded disclosure controls and procedures were not effective at quarter-end because of previously reported material weaknesses in internal control over financial reporting, including controls over revenue recognition, bad-debt analysis, technical accounting, reconciliations, and employee-cost systems and data. Remediation steps were underway, but the weaknesses were not yet considered remediated. The filing also references revenue-recognition errors disclosed in a February 22, 2023 Form 8-K.
Important facts for investors to verify
- Progress and testing of remediation for the material weaknesses, especially revenue recognition and account reconciliations.
- Customer-account declines and churn, particularly in SoHo, alongside changes in ARPA and paid adds.
- Cash generation relative to $805 million of debt principal, interest obligations and planned capital spending or repurchases.
- Outcome of the sales-tax voluntary disclosure process and adequacy of the related accruals and uncertain-tax reserves.
- Drivers of lower margins and higher bad-debt expense, and whether those costs persist in subsequent periods.