Consensus Cloud Solutions Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2024

There are 11 speakers on the call.

Operator

Good day, ladies and gentlemen, and welcome to Consensus Q1 2024 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. On this call from consensus will be Scott Turicchi, CEO Jim Malone, CFO Johnny Hecker, CRO and Executive Vice President of Operations and Adam Veron, Senior Vice President of Finance.

Operator

I will now turn the call over to Adam Varon, Senior Vice President of Finance at ConsenSys. Thank you. You may begin.

Speaker 1

Good afternoon and welcome to the ConsenSys investor call to discuss our Q1 twenty twenty four financial results, other key information, Q2 twenty twenty four guidance and our 2024 guidance full year. Joining me today are Scott Turicchi, CEO Johnny Hecker, CRO and EVP of Operations and Jim Malone, CFO. The earnings call will begin with Scott providing opening remarks. Johnny will give an update on operational progress since our year end 2023 investor call, and then Jim will discuss our Q1 2024 financial results, Q2 guidance and reaffirmation of our full year 2024 guidance. After we finish our prepared remarks, we will conduct a Q and A session.

Speaker 1

At that time, the operator will instruct you on the procedures for asking a 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 ks SEC filing as well as a summary of those risk factors that we have included as part of the slideshow for the webcast.

Speaker 1

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.

Speaker 2

Thank you, Adam. As noted in the press release, I'm pleased with the results of our 1st fiscal quarter. As we discussed on the Q4 earnings call, our goals for this year include the following. 1st, eliminating certain costs of the SoHo channel, especially in the area of marketing, allowing us to stabilize the base of revenue over time. 2, continuing to pursue the acquisition of customers primarily in the healthcare space for our corporate channel 3, reviewing our overall cost structure with the goal of driving EBITDA margins north of 54% and 4, continuing the repurchase of our debt to further reduce our net debt to EBITDA ratio in anticipation of the first tranche maturing in October of 2026.

Speaker 2

Johnny will provide more detail in his portion of the presentation. However, I'd like to highlight several things before turning the presentation over to him. I'm happy to report that while revenues for the SoHo channel dipped in the quarter versus Q1 of 2023, it was better than our expectation. We were able to substantially reduce our marketing spend and still generate 63,000 paid ads more than in Q4 and similar to our Q3 productivity that had higher levels of marketing spend. We continue to monitor the various cohorts and look for opportunities to possibly allocate additional marketing dollars to work above our budgeted amount later in the year.

Speaker 2

In our corporate channel, our new cloud fax product eFax Protect had strong sign ups in only its 2nd full quarter of offering. We also saw a record number of upgrades from our SoHo channel to corporate. In addition, we saw more facilities come online and a ramping of usage from the VA. All of these contributed to 4% growth, which will not to our desired long term target is an improvement over the past 3 quarters. On the AI front, we saw additional wins for clarity PA and clarity CD.

Speaker 2

We maintained our discipline on the cost side with cuts primarily coming from the SoHo marketing mentioned earlier. The result was a 6 percentage point pickup on our EBITDA margin to 54.5% and near the upper end of our long term range. The combination of improved EBITDA, strong cash collections and retirement of debt allowed us to improve our free cash flow by more than 20% from Q1 of 2023 to approximately $36,000,000 in Q1 of 2024, which is before our reduction in CapEx that begins this quarter. We were able to repurchase an additional $63,500,000 of debt during the quarter. This brings our total repurchases since launching the repurchase program in November of 2023 to 126,000,000 dollars and reducing our outstanding debt to $679,000,000 or 3.6 times our trailing 12 month EBITDA on a gross basis and 3.2 times on a net basis.

Speaker 2

I will turn the call over to Johnny, who provides you more operating details.

Speaker 3

Thank you, Scott, and hello, everyone. Let's dive into our sales and operations update starting with our encouraging performance in the corporate business. Q1 is traditionally an active quarter for us and this year was no exception. We are pleased to report revenue of $51,400,000 versus $49,400,000 last year for Q1, marking a 4% increase over the same period last year. This solid result demonstrates the continued momentum of our corporate solutions and marks another record quarter for our corporate business, underscoring the strength of our offerings.

Speaker 3

Within our corporate business, the SOHO upsell strategy remains a rich source for upsells with roughly 1500 customers deciding to upgrade in Q1. This represents excellent growth, up 24% quarter over quarter and an impressive 38% increase year over year. We expect this initiative to slow down a bit in Q2 due to some operational changes we are making. Furthermore, our advanced products are regaining traction, accounting for 21% of new sales in Q1. Driven by demand for CLARITY and UNITE, this figure shows a healthy increase over Q4.

Speaker 3

Our commitment to innovation is paying off as customers embrace these powerful interoperability and AI driven solutions. The momentum for eFax Protect remains strong, and we continue to see growing adoption and positive customer feedback. The Q3 launch of our dedicated e commerce channel for corporate clients has been instrumental in driving this success. Turning to our SoHo business. Q1 revenue was $36,800,000 versus $42,000,000 previous year.

Speaker 3

Consistent with the marketing changes we announced last year, the total SOHO account base has decreased from 831,000 to 808,000. This is slightly ahead of expectations as we introduce new price plans that are net economically beneficial. These 1st month discounted plans are popular among new customers in lieu of our free trial offering. Consequently, we see ARPA decline modestly from $15.12 in Q4 to $14.95 in Q1, while the cancel rate is up slightly at 3.42% compared to 3.34% in the previous quarter. Bear in mind, that rate includes the accounts we have upgraded to the corporate product, basically making up the entirety of the increase in cancels.

Speaker 3

As discussed in our last earnings call, we have made these adjustments to improve the LTV to CAC ratio. I am pleased to say these steps have shown real promise in that area, and Q1 has seen a dramatic improvement, demonstrating the effectiveness of our smarter ad spend efforts and enhancing the profitability of our customer acquisition efforts. While it's early days, we're encouraged with these results and we'll continue to aggressively manage this key metric. Let's discuss some of the key initiatives and wins. The VA rollout is progressing at the expected pace, and we remain optimistic about its potential.

Speaker 3

We have successfully adjusted our deployment approach to streamline the process with our partners and remain confident in our ability to achieve a 7 digit contribution from the VA in 2024, laying a foundation for further growth in the following years. The uptake of our EC Facts offering continues to gain traction in the extended public sector. We remain in close contact with our existing partner, the potential opportunity for ECFAX in that growing market segment. The potential opportunity for ECFAX in that growing market segment. In Q1, we were able to form a new partnership with a leading software company specialized in document delivery and data transfer solutions.

Speaker 3

These strategic collaborations expand our capacities and capabilities to deploy our eFax and NLP AI solutions, enabling the consumption of structured data for our customers. The goal of this partnership is to provide a seamless and efficient experience for users, leveraging the expertise of both organizations to deliver innovative solutions. Furthermore, we are in the process of launching a joint go to market partnership with one of the largest revenue cycle management and electronic medical record systems in the country. This partnership represents a significant step forward, creating synergies with a major player in the healthcare technology space. By bringing our 2 leading brands together and combining the strengths and capabilities of both organizations, we aim to deliver comprehensive solutions that meet the evolving needs of the healthcare industry, enhancing patient care and streamlining administrative processes.

Speaker 3

During Q1, we attended 3 important industry events: VIVE in Los Angeles, HIMSS in Orlando and Channel Partners in Las Vegas. This provided invaluable opportunities to interact with current and potential customers as well as partners, underscoring the importance of in person connections. I'm also happy to announce that we have successfully refreshed the efax.com website. The redesigned site provides an optimized user experience and aligns with our ongoing efforts to attract and retain high value users. Overall, we're on track with the execution of our 2024 initiatives.

Speaker 3

With customers and partners understandably focusing on cost consciousness and ROI, we haven't witnessed any significant changes in the market or customer behavior. There remains a high level of interest in our solutions, but clients continue to be slow in decision making and remain resource constrained. We don't expect this to change anytime soon. Now let's delve into product updates. Our AI powered solution, Claroty, continues to generate a strong pipeline, and we're seeing increased demand for other document types than facts.

Speaker 3

We're actively onboarding first customers and building the POC backlog. The ongoing interest in Clarity remains very encouraging. For our flagship brand, eFax, we launched the integrated portal, providing an enhanced user experience and laying the foundation for future consolidated offerings. Our investment in security, including HITRUST and FedRAMP efforts, continues to pay off. While the recent cyber attack disruptions in the healthcare industry were horrific, we were pleased that our digital Cloud Fax solution was a fallback lifeline for some of the impacted parties.

Speaker 3

This resulted in some increased volume and project triggers. Security is paramount and consensus offers high quality solutions with a strong focus on secure information exchange. In summary, we made solid progress in Q1 2024 with record revenue in the corporate business and significant progress on key initiatives. We are successfully executing our strategy to focus on profitability, cash flow generation and the optimization of our customer base. And now, I'll hand the call over to our CFO, Jim Malone, who will provide further details about our financial results and guidance.

Speaker 3

Jim?

Speaker 4

Thank you, Johnny. Hello, everyone. In our press release and on this earnings call today, we are discussing Q1 twenty twenty four results, Q2 twenty twenty four guidance and reaffirming full year 2024 guidance. We expect to file our 10 Q today. Let's start with our corporate business results.

Speaker 4

Q1 2024 revenue was a record $51,400,000 and an increase of 2,000,000 or 4% over the prior year comparable period and ahead of our expectations. Corporate Opera of $3.16 is up slightly from the prior comparable period. Monthly customer churn was 1.92 percent for the quarter. Let me remind you that this metric is based upon account cancels and the vast majority of customers are biased towards the lower end of our customer continuum representing primarily e commerce to SMB accounts. The trailing 12 month revenue retention was 98%.

Speaker 4

Moving to SOHO, Q1 twenty twenty four revenue of $36,800,000 is a decrease of 5,300,000 dollars or 12.6 percent over the prior comparable period and again better than expectations. The year over year decrease was primarily driven by planned reduced advertising spend in the current period and the year over year base reduction due to fewer paid ads. ARPA of $4 sorry, ARPA of $14.95 decreased 1%, primarily as a result of shifting to price plans with a discounted 1st month versus a free trial period resulting in higher paid ads in the quarter. As Johnny mentioned, these plans are net beneficial to us. Churn declined 34 basis points to 3.42 percent year over year.

Speaker 4

As we accelerate the movement of SoHo customers to corporate, this will have an effect on the SoHo cancel rate. In the quarter, that movement of customers accounted for about 6 basis points of the churn. Moving to Q1 consolidated results, Revenue of $88,100,000 is a decrease of $3,300,000 or 3.6 percent over Q1 2023 and better than expectations. Adjusted EBITDA of $48,100,000 54.5 percent margin was an increase of $3,800,000 or 8.7 percent over Q1 2023. The main drivers were our focus on cost structure, most notably the reduction in SOHO marketing spend as well as other operating savings.

Speaker 4

EBITDA margin of 54.5% is near the higher end of the range presented in our annual 2024 guidance and an increase of 6 percentage points over the prior year comparable period. Adjusted non GAAP net income of $29,800,000 is an increase of $7,800,000 or 35.6 percent over the prior year, driven by items I mentioned above I mentioned plus benefits from non cash foreign exchange on revaluation of intercompany accounts and net interest expense and a modestly lower share count. Adjusted non GAAP EPS of $1.55 higher than the prior comparable period by 40.9% or $0.45 Q1 twenty twenty four non GAAP tax rate and share count was 21.3% 19,200,000 shares. Moving to our capital allocation strategy. As mentioned in our Q3 2023 earnings call, we announced the $300,000,000 3 year bond repurchase program approved by our Board.

Speaker 4

In Q1 2024, we purchased $63,000,000 face value for $58,000,000 of cash. Program to date, we have purchased $126,000,000 face value for $115,000,000 cash. We have approximately $174,000,000 in bond repurchases remaining on this plan. You'll see in the deck that we have distributed a new slide, debt to EBITDA leverage. As mentioned by as I mentioned and as Scott has, we have purchased $126,000,000 of debt program to date.

Speaker 4

The schedule depicts our gross and net debt to EBITDA leverage from spin to Q1 2024. As we were not able to repurchase any debt until the 2nd anniversary of the spin, which was October 2023. The repurchase activity began in Q4 of 2023. As of Q1 2024, our net debt to EBITDA ratio has decreased to 3.2, solid progress towards a debt burden of less than 3 times. We ended Q1, 2024 with $61,500,000 in cash, which is sufficient to fund our operations and repurchase of debt and equity.

Speaker 4

This decrease from our year end balance of $89,000,000 is primarily due to the repurchases. Q1 2024 free cash flow is 35,800,000 dollars 21.6 percent versus prior comparable period. Q1 2024 CapEx of 8.9 $1,000,000 is consistent with the prior comparable period. Moving to guidance, we are reaffirming our full year 2024 guidance. In addition, for assistance with the quarterly spread of our guidance, we are providing guidance for the current quarter.

Speaker 4

For the full year, our guidance revenue between $338,000,000 $353,000,000 or $345,000,000 at midpoint. Adjusted non GAAP EBITDA, dollars 182,000,000 to $194,000,000 with $188,000,000 at midpoint. Adjusted non GAAP EPS of $5.08 to $5.31 with $5.20 at midpoint. Our estimated share count and income tax rate are 19 point 4,000,000 shares at a tax rate of 20.5 to 22.5. For Q2, twenty twenty four guidance, revenues are expected between $84,500,000 $88,500,000 with $86,500,000 at midpoint.

Speaker 4

Adjusted non GAAP EBITDA between $46,000,000 49,000,000 with $47,500,000 at the midpoint. Adjusted non GAAP EPS, dollars 1.30 to $1.36 with $1.33 at midpoint. Our estimated share count and income tax rate are 19,300,000 shares and 20.5 to 22.5 tax rate. This concludes my formal remarks, and I'd like to turn the call back to the operator for Q and A. Thank you.

Operator

Thank you. We will now be conducting a question and answer session. And the first question today is coming from Jon Tanwanteng from CJS Securities. Jon, your line is live.

Speaker 5

Hi, good afternoon. Thank you for taking my questions. I was just wondering, looking at the midpoint of the Q2 guidance, it's a little bit down sequentially on an EBITDA basis. And I'm wondering on what's going on in that number and kind of what the puts and takes are. I know that Soho, you're bleeding off a little bit, but is there increased expenses?

Speaker 5

My understanding was that Soho was maybe a low to no margin business, the customers that you were running off.

Speaker 2

No, John. Remember, the revenues are down sequentially from Q1 to Q2. So that puts pressure on us, you're going to make up that difference. Customers that cancel can actually are very profitable. Remember they're on the margin, they're paying us something in some prior period whether it's the last quarter or the last month.

Speaker 2

Where there are customers that are less or not profitable is a function of the marketing issue that we discussed both in the call and previously and what type of customer is signing up and are they taking advantage of the free trial period and as a result not making any payment to us, but yet we've expended marketing dollars or they stay for a very short period of time. And that's it's a different question, but that's really the shift in introducing a new plan which has you pay upfront albeit at a discounted amount. But all customers that we lose or substantially all that we lose in Soho are profitable to varying degrees because remember those marketing costs have already been expensed in some prior period. So we have to make that up. So I actually think that the midpoint shows an improvement in margin and a similar level of EBITDA.

Speaker 5

Got it. That's helpful. If I could sneak another one in there, I was wondering about the changes you mentioned about that would impact the upsell amount in Q2 and kind of what's going on there?

Speaker 2

John, I take that. Yes. Yes.

Speaker 3

So it's this is an important program for us as it adds to the number of cities, but as you are new customers. But as you know, this is on the lower end. So we expect the impact to not be dramatic. We're going through some changes prioritizing some of the positioning of the people that we have in that program towards more lead generation upmarket. So and then we will be backfilling those positions, but it will lead to a little bit of a decline and not be as strong in Q2 as it was in Q1.

Speaker 5

Got it. Thank you for the detail.

Operator

Thank you. The next question is coming from David Larsen from BTIG. David, your line is live.

Speaker 6

Hi. This is Jenny Shen on for Dave Larsen. Congrats on the quarter and thanks for taking my question. It was helpful to hear that advanced products made up 20% of new sales. Can you just provide some more color there?

Speaker 6

What opportunities you're seeing from Clarity and Unite? How receptive prospective clients have been and also the potential revenue and margin impact there? Thanks.

Speaker 7

Yes.

Speaker 3

Thanks for your question. So what we're seeing is obviously what we've seen we've been strong with Unite sales in the past. This is a suite that offers more than just faxing to mainly smaller physician offices and smaller clinics and offers a more broader suite of interoperable products than just facts.

Speaker 2

And we're seeing

Speaker 3

continued interest in that product and we have a very focused sales initiative on that product line and that has really paid off in Q1 on the strong sales. Secondly, your question with regards to clariti, as I mentioned in the call, we've won our first customers for the clariti platform. We're in the process of rolling that out. So,

Speaker 2

find I think increasing use cases. And there's some proof of concepts going on that are beyond the prior proof of concepts in certain areas that we've talked about say the last couple of quarters. So there is an expanding interest in what clariti can do as a platform and it's iterating around either new use cases for it or derivatives of some of our existing use cases, which would be in clinical documentation prior authorization. In terms of your question on the margin, I would say certainly in the aggregate Clarity, Unite, really almost all the advanced services would in general be consistent with our margin structure. Some depending upon how they're deployed could have a slightly higher contribution margin.

Speaker 2

Some might be slightly lower, but as a basket I'd say they're in line with where we operate today. And when I say that I'm talking about operating contribution margin, so before things like G and A and whatnot. So higher than the 54.5 percent EBITDA margin that we reported which includes all of those G and A costs.

Speaker 3

Yes. On the overall revenue mix though the vast majority is just based on the large baseline that we have in the fax business, obviously still our fax revenue and it will take some time for those advanced products to catch up since we're still growing in fax as well, right. So the vast majority of our revenue maintains and continues to be fax. On the new sales side, we're excited that we're able to book a substantial part of our bookings in with Advanced Products.

Speaker 6

Got it. That's very helpful. And if I can sneak in a quick follow-up here. I'm not sure if I missed it, but did you guys report a bookings number? And if not, can you just provide some general comments around your visibility and the pipeline?

Speaker 6

Thank you.

Speaker 2

So, yes, the bookings you're correct. It was never a formal metric in our presentation. It is something that for a number of quarters we would talk about in the operational section. Our view was that it was not terribly helpful because it was not you could not extrapolate from the booking numbers to a future say quarter or a year worth of revenue. And it's a fairly volatile number.

Speaker 2

So you can have like with the VA comes in a very big increase, but that may spread out over a number of years. So that is not something that we currently book or track or report and don't intend to. But I think Johnny can give you sort of a feel for in terms of the sales activity and what's going on in terms of both in the core fax business and I think he's already addressed the advanced interoperable what we're seeing there.

Speaker 3

Yes. Maybe to add to that Scott, right. I think a few quarters back I presented the continuum the customer continuum, right. And it shows very clearly on the lower spectrum of that customer continuum with the smaller customers, we have a very fast and ramp time and customers basically bill almost immediately no later than the month after we book or close that deal. On other customers, it can take up to 6, 8, sometimes a year, 12 months until they start contributing substantial revenue.

Speaker 3

So that's why we were not that was more of a confusing number that was really helpful, which is why we've taken it out. On the pipeline, we're doing well. We continue to build pipeline. We continue to close deals. I mentioned in the call, we don't see a lot of change in behavior in the market.

Speaker 3

We're still confronted with slow decision making in large accounts and but are confident that we will continue to close, but don't see a lot of change in the pace.

Speaker 2

And you can see that in Johnny's presentation, the driver for the new ads in the corporate channel were primarily from the upgrades from the solo channel, which was good. But they come at obviously in this continuum a lower ARPA and also the relatively new effect protect.

Speaker 6

Got it. Thank you and congrats on the quarter. Thank

Speaker 7

you.

Operator

Thank you. The next question is coming from Ann Samuel from JPMorgan. Ann, your line is live.

Speaker 8

Great. Congrats on the quarter, guys. I was hoping you could provide a little bit more color on the partnership that you mentioned with the revenue cycle management vendor and what that entails?

Speaker 3

Yes. So that is a large provider of a solution, healthcare IT provider in that space. And we're jointly going to market to market our products to their existing customer base and closely connected and then delivering documents into their systems. So those are many, many thousands of customers that they currently serve and we're going to do joint campaigns. Their teams are going to reach out to their existing customers.

Speaker 3

So this is really an exciting opportunity for us to work with them.

Speaker 8

Yes, that sounds great. Maybe just one follow-up. Last quarter you had noted that the VA partnership had started to contribute to revenue. I was just hoping you could provide an update on the rollout there and contribution in the quarter?

Speaker 3

Yes. So the rollout is continuing at a government pace, let's call it that, right? So it's contributing at the rate that we were expecting. There's ups and downs in that rollout, but it's growing now at a steady and continued pace.

Speaker 7

Yes.

Speaker 9

I mean we're up to

Speaker 2

a few 100 facilities in terms of the rollout. That doesn't mean that all the facilities are fully contributory. In fact, they are not. But that's a fairly substantial increase versus where we were 2 or 3 quarters ago, which I think was in the neighborhood of 100. And of course, not all facilities in the VA are of equal relevance, prominence, size or contribution.

Speaker 2

And I would say that there's we're still at the at most, I'd say in the lower quartile to maybe slightly above the mid in terms of the size. The big behemoth ones have not come online. And so there continues to be a lot of opportunity in terms

Speaker 7

of how it rolls out,

Speaker 2

but then also deeper penetration within those for which the rollout has already occurred. And some of this has to do with we've talked about on prior calls. There's many different flavors of how the faxing is done within a given facility. So you have servers, you have in some cases physical devices, think of multifunction printers, you have embedded applications within software and combinations thereof. And so what we're and you have inbound and outbound.

Speaker 2

And the inbound is relevant because that requires the porting of telephone numbers, outbound does not. So in order to really capture all of the traffic of a given facility, you need to capture all 5 of those elements. And I would say in most of the facilities, we don't have all 5 today. And there's various reasons for that. Sometimes porting of numbers are slow.

Speaker 2

Sometimes there's contracts that haven't expired yet. So it's not in that facilities or that region's interest to yet disconnect from a multifunction device. So all of these things will over time roll off and accrue to our benefit as well as continue to roll out. As to your specific question, no, we're not going to give the VA specific contribution.

Speaker 8

Okay. Thank you.

Operator

Thank you. The next question is coming from Fatima Boolani from Citigroup. Fatima, your line is live.

Speaker 7

Hey, guys. This is Mark on for Fatima. Thanks for taking our questions. Maybe just wanted to touch on the SOHO to corporate conversion momentum. It seems like the upgrade reached 1500 accounts this quarter, which was actually higher than your usual cadence of, call it, around the 1200 mark.

Speaker 7

Is this, number 1, ahead of your internal expectations for this quarter? And any sort of changes you're seeing in momentum there? Is it more several customers seeing better budgets to actually do these upgrades or just seeing recognizing the value of the corporate product? Thanks.

Speaker 3

Yes. So, like I mentioned, I think we're super excited about the success of this program and being even above the 1500 mark in Q1. Key success really is here operational excellence. I think we've really learned over time to optimize and identifying the most promising customers in that Zoho base and serve them up to the team that does this upsell program. It's a question of routine as well.

Speaker 3

I think it's taken it takes reps to ramp and to really get in a rhythm there and we've been able to accomplish that over the course of about 3 almost 4 quarters now. So I think those are the key drivers that we're really picking the right accounts to upsell into. And we see what patterns there are within our SoHo base of customers that are most interested in this product, which is why we're now we've learned a lot and we're confident in maintaining this program, which is why we can make the changes during Q2 that we plan to do.

Speaker 7

Got it. No, that's very helpful. And then maybe if I could sneak in a quick follow-up too. Any sort of presentation to the free cash flow performance this quarter, fairly strong? And then any updates to the full year outlook for free cash flow specifically?

Speaker 7

I know last update was, call it, low 80s for the year. Any updates post this year this quarter's performance? Thanks.

Speaker 2

Yes. Look, you're correct. It was a strong free cash flow quarter. Obviously, it starts with the EBITDA. So the EBITDA outperforming generally our EBITDA is primarily cash.

Speaker 2

So the outperformance in EBITDA relative to our expectations and certainly to the prior year is the key driver. Really taxes I don't think came in to play in a material way one way or the other. As you can see the CapEx is relatively flat year over year as those decelerations really begin now in Q2. So it's primarily that EBITDA generation. I would also say too as we bought into debt, there are less expenses we have associated with the whole capital structure, but that's very much on the margin certainly in the Q1 free cash flow.

Speaker 2

I think in terms of the full fiscal year, probably it's fair to say the gains that we bank in Q1 should be sustained through the fiscal year. So it moves us up from the low 80s to probably the mid 80s. But there's a lot of volatility that goes into free cash flow when you look at the 4 quarters. Timing of tax payments is 1, obviously working capital is another. So but the success in Q1 and all the things that we are doing particularly on the operational side, those should be sustainable benefits.

Speaker 2

So if there's not a surprise in the tax rate or really not too much the tax rate, but the timing of our tax payments. So they too often have some gap between what we approve as a tax rate and the actual timing of the payment. If there's no material change there, then we should be pretty good in that sort of the I think close to the mid-80s

Speaker 9

for this

Speaker 7

year. Great. Thank you so much.

Operator

Thank you. And we did have a follow-up coming from Jon Tanwanteng from CJS Securities. Jon, your line is live.

Speaker 5

Hi, thanks for the follow-up. I was just wondering if you had any early communication with Accenture. And if you did, are they committed to your partnership with Cognizantay? And if or maybe do they have other fax partners in their tech stack? And if they are committed, how does that improve your opportunity over the long run-in the public sector?

Speaker 3

Yes. So I think it's too early to say, right? The deal is in progress. It hasn't closed yet. We're actually excited about and bullish about this deal.

Speaker 3

I think the footprint that Accenture has in the federal government is far larger than the very focused approach that Cognizante had. So it's really a good addition to the Accenture offering because they complement each other very well and offer us the expansion more broadly. We haven't talked to them yet as the deal isn't closed. But our I think our offering right now in the federal government space at the security level that we're at is fairly exclusive. So we're confident that we can actually benefit from this merger.

Speaker 5

Okay, great. And then can you just go into the ARPA in corporate in Q1? It was up sequentially and I didn't catch why. If you could dive into that and tell me what you expect going forward, that would be helpful.

Speaker 10

So the ARPA in the quarter, we had some items last quarter that we mentioned with respect to cash collections and terminations of customers. So it's a mix of that. And basically the quarter over quarter increase in our number and our revenue for the quarter. When you look at it sequentially versus Q1, Q2 and Q3

Speaker 5

of last

Speaker 10

year, it's very comparable.

Speaker 2

I would say the last 5 quarters have been within a fairly narrow band that are you can move up a 300 and some dollar base, a few dollars positive or negative off of that. And I would argue that kind of goes into just things happen throughout the quarter. So I wouldn't make a lot about it other than I would say the ARPA has been stable within a tight range for 5 quarters.

Speaker 5

Understood. Thanks.

Operator

Thank you. There were no other questions from the lines. And Scott, over to you for any Internet questions.

Speaker 2

Sure. We do have a couple that have come in by email. One is really I think a guidance question, which how to think of corporate revenue growth going forward given the 4% growth in Q1 and the acceleration of the 3% we've seen the last preceding 3 quarters. I would have a couple of comments. 1, 1 quarter in itself does not make a trend.

Speaker 2

So I think from a broader guidance standpoint, I would still be guiding people from a revenue and EBITDA towards the midpoint of our ranges. On EPS, I would be closer to maybe even above, but closer to the higher end of the range. As Jim and others mentioned, at the bottom line, there are these FX revaluations that are non cash but were positive in the quarter. Of course, in Q4 they were heavily negative. We think we're getting close to mitigating that volatility, but so far on a year to date basis certainly for the 3 months and I could probably include April now, they are definitely to the positive.

Speaker 2

So that's adding probably $0.15 $0.16 to the bottom line. Certainly in the quarter, dollars 0.16 is probably $0.15 $0.16 for the year right now. But I wouldn't be breaking out our corporate and extrapolating or the inference of the question might be well if it's 4% this quarter it can be 5% and 6% and 7%. No, I don't we're not there yet. Let's see how Q2 goes.

Speaker 2

Let's see how the book of business builds, some of the things that Johnny talked about how they contribute both in the quarter and the balance of the year and then we can revisit that on the Q2 call. The second question had to do with the SoHo business and whether the full impact of the marketing spend strategy has been realized in Q1. And the answer is no in the sense that there was a ramp down. So there wasn't the full quarter benefit if you will of the savings. It goes actually back to the earlier question of if you can be down 1.6 dollars in revenue sequentially from Q1 to Q2, how do you have your EBITDA not quite but close to flat?

Speaker 2

And that's because there are some marketing dollars to come out that as we went through the 1st 3 months of Q1 there was a ramp down. So as you go into Q2 it's at a lower level should be an average lower level in Q2 than in Q1. Having said that, we found some very good opportunities where to spend money and some very good LTV to CAC. So something that we are evaluating and something I mentioned in my opening remarks is, are there opportunities to put a few more dollars to work at some very attractive economics? And if the answer to that question is yes, then there may be some incremental dollars added to the core budget or to the baseline.

Speaker 2

But in general, I think you should assume somewhat less marketing spend in Q2 than in Q1 based on sort of that midpoint of the guidance which would have a little bit of downward pressure on the net adds, but that would be more than offset by the savings from the marketing dollars not spent. And those are all the questions we have via email. Before we conclude, I would just like to let you all know that we have 4 upcoming investor conferences. Tomorrow Oppenheimer has a virtual conference. There is no formal presentation.

Speaker 2

It is 1 on 1 only. So at this point, I think if you have not signed up, it's probably too late. On Tuesday of next week, Goldman Sachs has a high yield conference that we'll be participating in. Once again, that's a 1 on ones only no formal presentation. But on June 5, we'll be at the Jefferies Global Healthcare Conference.

Speaker 2

There will be a presentation and it will be webcast. We will also be available for 1 on ones. And then a week later on June 13, we'll be at the Goldman Sachs Healthcare High Yield Healthcare Conference Equity Conference. And once again, there will be a presentation and that will be webcast and will also be available for 1 on 1. The next formal call in terms of discussing Q2 results will be in August.

Speaker 2

Look for a press release within a few weeks sometime in July to give you the exact date and time. And we appreciate your participation for this call to go over our Q1 results.

Operator

Thank you. This does conclude today's conference. You may disconnect at this time and have a wonderful day. Thank you for your participation.

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Earnings Conference Call
Consensus Cloud Solutions Q1 2024
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