Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) Q3 2023 Earnings Call Transcript November 9, 2023
Consensus Cloud Solutions, Inc. beats earnings expectations. Reported EPS is $1.51, expectations were $1.32.
Operator: Good day ladies and gentlemen and welcome to the Consensus Q3 2023 Earnings Call. My name is Paul and I will be the operator assisting you today. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] On this call from Consensus will be Scott Turicchi, CEO; John Nebergall, COO; Jim Malone, CFO; and Adam Varon, Senior Vice President of Finance. I will now turn the call over to Adam Varon Senior Vice President of Finance at Consensus. Thank you. You may begin.
Adam Varon: Good afternoon and welcome to the Consensus investor call to discuss our Q3 2023 financial results, other key information, and 2023 guidance. Joining me today are Scott Turicchi, CEO; John Nebergall, COO; and Jim Malone, CFO. The earnings call will begin with Scott providing opening remarks, John will give you an update on our operational progress since our Q2 investor call, and then Jim will discuss the Q3 2023 financial results and 2023 guidance. After we finish our prepared remarks, we will conduct a Q&A session. At that time, the operator will instruct you on the procedures for asking your question. Before we begin our prepared remarks, allow me to direct you to the Safe Harbor language on Slide 2. As you know this call and the webcast will include forward-looking statements.
Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include but are not limited to the risk factors outlined on Slide 3 that we have disclosed in our 10-K SEC filing as well as a summary of those risk factors that we have included as part of the slide show for the webcast. We refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements. Now, let me turn the call over to Scott.
Scott Turicchi: Thank you, Adam. It’s now been two years since our spin, I would like to make some brief comments as we look back over these past two years. As you know we spun with a go-to-market focus and product roadmap aimed at the healthcare sector. We have made substantial investments and strides in this space with more than half of our corporate revenue now coming from the healthcare sector. However, we have also seen inflation and a tight labor market impact revenue growth in this piece of our business. In fact in the past two quarters, we have seen overall corporate revenue growth of approximately 3%, down from approximately 13% in Q3 of 2022. This was driven by a slowdown in revenue generation from our healthcare customers due to stable usage slower, sign-ups, and a slow ramp of our larger customers.
Until there is a substantial relief in the labor markets, we expect these trends to continue. As we look to next year with continuing uncertainty in both the economy as well as the labor markets, we’ll be focusing our attention on EBITDA and free cash flow generation. As a result, we will reduce our capitalized investments from the level of the past two years while still investing in the business at a rate higher than prior to the spin. The record cash balances of $156 million in future free cash flow will be dedicated to repurchasing our equity and debt securities. Now, that we have cleared the two-year mark from the spin, we are able to repurchase debt and as a result the Board has authorized a $300 million repurchase program over the next three years.
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Q&A Session
Follow Consensus Cloud Solutions Inc.
Follow Consensus Cloud Solutions Inc.
This program covers both the 6% notes that mature in October of 2026 as well as the 6.5% notes due in October of 2028. These repurchases can take a variety of forms and we’ll be opportunistic similar in manner to our existing stock repurchase program. While we are early in the budgeting process, I would expect negligible overall revenue growth in 2024, with continuing decline in SoHo revenues offset by mid-single-digit growth in our Corporate channel. I would also expect greater growth in our EBITDA than in our revenue. We will be providing full-year 2024 guidance on our Q4 earnings call to be held in February. While our revenues were disappointing in the quarter there were several factors that affected the results. Within the SoHo channel, we cut a meaningful amount of marketing spend on questionable profitability channels.
I would also note that as we discussed last quarter the price change to that base is complete. On the Corporate side, in addition to the headwinds experienced in the healthcare sector, we also completed the migration of our FAXBOX customer base, but did incur customer attrition in the process. This was a legacy system that needed to be retired notwithstanding the customer and revenue loss. On the bright side, our EBITDA margin remained strong at 52.5% the midpoint of our range. And coupled with interest income on our cash balances and a lower share count, produced year-over-year growth in EPS. In addition, we generated a record $50 million of free cash flow for a full fiscal quarter post spin and more importantly $83 million for the nine months.
As usual, there are timing differences in payment of estimated taxes and cash collections of receivables. Also as we’ve noted before, due to our debt structure and interest payments, we generate most of our free cash flow in quarters one and three. I will now turn the call over to John for more detail on the quarter.
John Nebergall: Hi, thank you, Scott. As we mentioned on the last call, we held a meeting with the ECFax partners to discuss tactics for accelerating the rollout. The talks were substantive and all partners agreed that an acceleration of the overall program in 2024 would be a mutual goal. In that context, we are actively working on acceleration options and are making progress on the overall plan. While not final, we are encouraged by the direction and anticipate a favorable schedule for next year. Now that said, we have seen the hurdles that can be encountered in a project of this scope and are going to be cautious in forecasting any revenue expected from the program next year. As for the current state of the implementation, we have increased the numbers of facilities using ECFax.
And while the pure number of facilities is an improvement, the level of usage per facility varies and not every location has been fully implemented. As we have discussed, there are nearly 30 other government agencies in the pipeline and while progress is being made the threat of a government shutdown earlier this quarter and the upcoming holiday season have slowed the speed of discussions. We do not expect any measurable progress on this front, until sometime in 2024. On the Clarity front, we are in the process of implementing our first Clarity PA client, who signed last July. Clarity PA is a specifically engineered version of Clarity, aimed at the problem of prior authorization workflow. As Scott has mentioned, the slow progress in both closing the deal and implementing the customers are fully on display here.
The deal took 15 months to close and will likely require an additional 12 months to implement. In the AI market, this is a typical time frame and is what we can anticipate with each subsequent prospect engagement. Separately, we have launched the Clarity CD product, tuned for Clinical Documentation Administration and build the pipeline of interest. Our sales team is progressing through those opportunities and serious discussions are underway. On the sales front for the quarter, Q3 bookings came in at $6.4 million, which was a welcome improvement from both Q1 and Q2 results. Historically, Q3 has been the best month seasonally for sales and it appears to be holding true this year. While this result is a welcome improvement sequentially, it is still under last year’s Q3 result and year-to-date overall 2023 bookings are still lagging 20% behind our 2022 pace.
