Scott Turicchi: So on the SoHo piece, as we have less spend and less sign-ups that have a higher churn rate because you recall going back not that long ago, we used to put it in there just for information purposes, you lose two-thirds of the customer within the first year of those that you market it, those that have signed up. So what happens is the cohorts get better and better as the percentage of the base is increasingly larger than the new sign-ups. So it will — you’ve already started to see it tick down from the middle of last year into Q3 into Q4. That trend will continue. I don’t have to give you more specificity in terms of the actual numbers. But I think we’re going to see it at some point tick through 3% this year.
Johnny Hecker: Yeah, it will get down to that 3%. It will probably go down between 40 and 80 basis points throughout the remainder.
Scott Turicchi: Now the corporate, the — what I talked about it, what Johnny talked about in terms of the — [Jim’s the bad guy] (ph), the aggressive account receivables collection, yes, there were some cancellations. That basically was the whole increase in the cancel rate in corporate from Q3 to Q4. And so it’s been at a fairly consistent and stable level in sort of the 1.25% to 1.5% range. And we think that is sustainable for ’24. I would note that our underlying economic assumption is that there will not be a recession in ’24, but call it a soft landing, what you want to call it, that we’ll continue to experience the various elements of the economy that we’ve seen in the last two to three quarters. Obviously, there’s some volatility with the expectation of when the Fed will cut, how much they’ll cut.
But in terms of GDP growth, we expect it to remain positive throughout the year. So we’re not [faking anything draconian] (ph). And obviously, if that would occur, we would have to rethink that assumption.
Anne Samuel: Very helpful. Thank you so much for all the color.
Operator: The next question is coming from Fatima Boolani from Citi. Fatima, your line is live.
Unidentified Analyst: Hey, good afternoon, guys. This is Mark on for Fatima. Maybe just a clarification on the timing of the VA contribution. Do you get a sense of when we should start to see that contribution? Are you — is there any contribution in the first quarter? Or is this more of a second half event? And should we sort of fix the ramp through the year to get there?
Scott Turicchi: Yes, that’s actually how we started. There’s a little small contribution in Q4. And yes, it will ramp in each successive quarter through ’24 and likely through ’25. So as Johnny mentioned, there’s been significant work done from the big August meeting. We talked about a couple of earnings calls ago when we had finished the pilot phase. And then there was a continuation of the rollout more under the same methodology that the preliminary rollout has gone through. And then I would say, towards a middle-ish — maybe early the middle-ish fourth quarter, there was beginning to be an acceleration of the rollout and also a change in the philosophy of how it rolls out. And so that will be continuing. There’s still some details to be worked out, but continuing in terms of the current rollout and that is accelerating pretty much each month.
So we’ll see — as a result, we’ve seen the traffic build each month, that will continue to build, and so it will ramp through all 12 months of this year.
Unidentified Analyst: Okay, great. That’s very helpful. And then any sense of when we should be reaching our run rate level? Is this I guess, like ’25 events or ’26 events? Any color there would be appreciated.
Scott Turicchi: Depending upon — the VA actually has certain goal and objectives which we like because it’s bringing on more traffic at a substantially faster pace than has occurred in 2023. How much of that is realizable? And by the way, we think in calendar years, they think in their fiscal year, which is in September 30, so there’s a quarter — one quarter offset. But I would say it’s clearly not we will not achieve the full ramp in ’24. I think it is unlikely even in ’25, depending on this pace of acceleration, maybe ’26 or ’27.
Unidentified Analyst: Okay, perfect. And then just last follow-up. Just on the cash flow generation this quarter, you guys essentially reaffirmed cash trend that you guys provided early reads in last quarter, which calls for low 80s free cash flow in 2024. Why should we see more upside from here given the lower CapEx, other collection efforts and really the cost efforts that really showing up in the EBITDA line? Thanks.
Scott Turicchi: Can you repeat that, Mark?
Unidentified Analyst: Yeah, sure. I was just following up on the cash generation. You guys essentially reaffirmed ’24 cash generation at the low 80s. I wanted to get a sense why shouldn’t we see more upside from here given the lower CapEx this year, better collection efforts and the cost efforts that are showing up on the EBITDA side? Thanks.
Scott Turicchi: Well, remember, we have higher taxes in ’24 than ’23. Our tax rate is going up, and those will be cash taxes. So that will be a mitigating factor against it. And I think pretty much everything else flows through. I mean, the EBITDA is going up a little bit year-over-year. EBITDA is essentially cash. Yes, you’re correct. We pick up $7 million roughly in the CapEx, but we’re going to get a couple of million back in taxes, and we’re at $77 million. You had a few million, you’re going to be $81 million, $82 million. So I think it flips.
Unidentified Analyst: Okay, great. Thank you guys so much.
Scott Turicchi: Before we go to the next question, we did have a question that came in via e-mail that is related to the free cash flow, which is in the press release, we noted that the free cash flow would be dedicated to a combination of share repurchases, bond repurchases and possibly M&A. So the question is, what’s the perceived allocation amongst the various potentiality. Look, the ones that are the most certain are clearly related to our own capital structure. So we can go into the market. We can buy bonds. We can buy equity. So I think it’s likely to assume those will consume the majority of either the free cash flow and/or the cash balances. I would say that depending on where the stock settles that may be an attractive alternative.
We clearly have stated now for several calls running a desire to deleverage if we can continue to get the bonds at a discount, that is an attractive investment. And on the acquisition side, there’s, I think, a narrow step that would be of interest to us. But I think it’s a narrow set, not a broad set. Valuations continue to be generally challenging. So I would say it’s not probably a high probability that we would do acquisitions. But certainly, it is within our field of view. And I think we’re more interested in doing an acquisition that would have a more meaningful impact than a small tenant. So if that would be the case, we would reprioritize the allocation away from shrinking owned internal capital structure towards the M&A transaction, and that would be the cash balances we have were a substantial portion of free cash flow.
And then I’ll also remind everybody, we do have a modest line of credit that can be expanded up to $50 million. So we can do something that is triple digits in terms of acquisition purchase price. As I said, I’m not sure that, that is a high probability, but it’s certainly within the field of view. Next question.
Operator: The next question is a follow-up from Jon Tanwanteng from CJS Securities. Jon, your line is live.
Jon Tanwanteng: Hi, my question was answered. Thank you.
Operator: No problem. And the next question is from Arun Seshadri from BNP. Arun, your line is live.
Arun Seshadri: Yes, hi, thanks. Just most of my questions answered. Just wanted to understand, is there — within the — within SoHo, is there a set of accounts or a proportion of the total customers that you think is a very stable account base. And then most of the attrition is coming from a portion of that account base. Is there any way to segment that customer base for us? So if you can get a sense for when that attrition is coming towards an end.
Scott Turicchi: Well, I think we go back to the earlier question that I answered. So there’s been for a couple of years now, this phenomenon that you get a fair amount through the marketing programs, to what I call the renters, people who have limited use cases. And as a result, they churn generally within a 12-month period, been as the — we reported before, about two thirds of the finance that will churn out within a year. So as you decrease the marketing expenditure, decrease the gross sign-ups, the net add, then as you march out over time, 12 to 18 months, you start to get to that, what I’ll call, more core base of SoHo customers. Now I’m not — it’s a little unclear where that point is, I mentioned earlier, because a portion of it will be a function of what are the marketing programs in ’25 to ’26 and also studying the more near-term cohort behaviors versus the ones that we’ve got to go back as far as 10 years.
But there absolutely is a stable core base within there. And I think it’s not reasonable to believe that sometime within that two- to three-year window, you probably find stability. But there’s a lot of variables that go into it. So it’s not something that can be definitively answered right now.
Arun Seshadri: Got it. So it’s hard to say of your total customer base, this number or like half the number is staying stable over time. It’s a changing cohort?
Scott Turicchi: There’s change in cohorts with each — depending how you want to look at it, and certainly, each year, each set of sign-ups has its own cohort behavior pattern, ages a certain way and then you accumulate it all. So I’m not going say any more. I think that’s kind of the math behind it, and then you look at the behavior of the new sign-ups and how they mirror previous cohorts. And then part of it is where you drew the line. You’re talking about customers, it will be around five years or more, three years or more, 10 years or more, that would also give you a different answer of where in the current $831,000 is that cutoff.
Arun Seshadri: Got it. Understood. And then secondly, on the corporate side, the new customers that you’re adding appear to be at a lower ARPA. Does that — is that ARPU trend line, the sort of like ads and where you’re adding them, that just continues at similar levels is the expectation?
Scott Turicchi: Yeah. So there’s a couple of reasons. First of all, I think we’ve reported on that we’re converting SoHo customers into corporate and were really mining that base. And we’re attracting customers that are more trending towards corporate. So it’s really converting a low-end customer into that upper market base. I think that’s the main driver. I think last year, we saw with the FaxBox migration that we talked about some churn or some customers actually were positive for our ARPA lease. So that gave us some additional pressure. But with adding from the SoHo base, it’s creating a little bit of ARPA pressure on the corporate. But I mean ARPA is a difficult KPI for the corporate field, right? We have customers across the spectrum from $50 a month all the way up to hundreds of thousands of dollars a month, right? So it’s — yeah…
Johnny Hecker: Yes. If you take — mix someone like the VA and they ramp — or are you — your customer they’re going to bias the ARPA up, and that’s what we face with the customer continuum.
Arun Seshadri: Got it. Understood. Thank you very much.
Operator: Thank you. And that concludes today’s Q&A session. I would now like to hand the call back to Scott Turicchi for closing remarks.
Scott Turicchi: Great. Well, thanks, everyone, for joining us on the Q4 call and to give insight in terms of our 2024 outlook. We will put out releases when there are upcoming conferences in terms of reporting the first fiscal quarter, that will be in the early part of May. I don’t have the calendar in front of me, but 7, 8, 9 roughly in that time frame. And obviously, if you have any questions between now and then, reach out to us or Hinson for IR, and we’ll get your questions answered. So thank you very much, and we’ll talk to you soon.
Operator: Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.
