Consensus Cloud Solutions Inc (CCSI) 2021 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Consensus investor call. My name is Paul, and I will be the operator assisting you today. (Operator Instructions)

On this call will be Scott Turicchi, CEO of Consensus; John Nebergall, COO; and Adam Varon, Senior Vice President of Finance and Accounting of Consensus.

I will now turn the call over to Adam Varon, senior Vice President of Finance and Accounting of Consensus. Thank you. You may begin.

Good afternoon, and welcome to the Consensus investor call to discuss Q3 results. Joining me today are Scott Turicchi, CEO of Consensus; and John Nebergall, our COO.

The format will be similar to an earnings call. Scott will provide some opening comments. John will give an update on the operational progress since our September 14 call. And then Scott will discuss the pro forma Q3 financial results, associated metrics and our guidance for Q4. After we finish our prepared remarks, we will conduct a Q&A session. At that time, the operator will instruct you in 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 Form 10 SEC filings 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.

Adam, thank you very much. I'd like to welcome our investors and analysts now that the spin is completed. I'd also like to thank our 450 employees who have worked diligently over the past 6 months to bring us to this point.

We are very pleased with the operational and financial performance of Consensus during a year that has had many distractions due to the spin. As a stand-alone company, we look forward to pursuing our 3 organic growth initiatives and to make the necessary investments in people, systems and hardware to enhance our opportunity for success.

In our SoHo channel, we have seen a turnaround in the performance over the past several quarters. We look to add to our marketing and advertising spend as well as promote our recently released blockchain digital signature, jSign, which John will discuss in more detail.

In our corporate channel, we look to continue to penetrate the health care space with our HITRUST certified cloud fax solution given the large volume of medical information that is transmitted via fax. We are also seeing traction with our current health care interoperability solutions, such as Consensus Unite and Consensus Signal, and look forward to the release of Consensus Clarity in early 2022 and Consensus Harmony at the end of next year or early '23.

Before turning the call over to John, I would like to provide you with an update on our search for a CFO. As you know, I currently serve as the interim CFO. We have had an active search going for the past few months, and I'm pleased to note that we have identified excellent candidates. We are now in the final stages of vetting those candidates and expect to have the role filled before year-end.

I will now turn the call over to John, who will give you a breakdown of our 2 revenue channels, recent developments on our revenue and product and an update on the progress of our service road map.

Thank you, Scott. Let's go to Slide 5. In advance of Scott's discussion on the financials, we wanted to spend a couple of minutes reviewing the profile of our customer base and sharing some key performance updates from the third quarter.

As you may recall, our customer base falls into 3 identifiable groups. While all 3 are subscription based, the revenue flows have some specific attributes. Customer acquisition efforts and the related relationship management activities vary based on client size and complexity. The percentages you see in terms of subscription versus usage revenue are general guidelines and not precise measurements. The actual percentages will vary from quarter-to-quarter, but these numbers serve as a reasonable range for the relationship between the two.

The SoHo market is characterized by a self-service approach for selecting a subscription, either a monthly or annual plan, and then a customer's credit card is auto-billed on that monthly or annual basis. Monthly planned usage limits are generally not exceeded, and subscription revenue is dominant. This past quarter, we continued refining our marketing approach in this segment and we were able to make a number of key improvements in our sales funnel and overall website environment. In implementing those improvements, we did experience some minor interruptions to inbound sales flow during the quarter, but we've addressed those, and in fact, this past week, recorded our largest single new weekly subscription growth since last May.

Additionally, churn in this account group remains well within the normal range, adding more evidence that cloud fax in our new work-from-home economy is an important business tool and we believe will continue to be a key dynamic in the SoHo space.

Small and medium businesses often require direct sales from one of our telesales staff. Leads come into our contract center through a web form fill, direct inbound call or response to an Internet campaign. We also do outbound prospecting and account-based marketing to acquire new customers. The sales cycle here is short, generally a week or less to close, and these customers will tend to exceed their plan limits more frequently than the SoHo group, but subscriptions are still the larger revenue stream with measurable variable revenue component added.

Our sales momentum in this account group remained strong with third quarter closed deals volume about 11% over Q3 of 2020. And revenue from new business, that is the revenue attributed to deals closed in 2021, is coming in at 16% better than Q3 of 2020.

Now the Enterprise level is the traditional large prospect sales approach: in-person selling, longer sales cycles and very sophisticated buyers. The typical agreements are 3-year contracts that then go into an annual auto-renewal model. While virtually all contracts have a subscription component, those minimum usage commitments are regularly exceeded and transaction charges make up the lion's share of our top line.

I'm happy to report that our enterprise sales team is continuing to be very effective in competing for these important customers and in Q3 have increased year-over-year bookings, measured by sold annual contract value, by 44% over Q3 of 2020.

Collectively, the SMB and Enterprise customer base is called the corporate segment. As Scott will show you in later slides, the expected performance of flat to small growth in SoHo and more robust growth in the corporate segment continues to hold true.

On Slide 6, we have a few notable items that will be important for the business as we build momentum through Q4 to hit 2022 in full stride.

First, our initial soft launch of jSign afforded us an opportunity to assess the best approach and positioning as we fully commercialize the offering. You'll recall that jSign is our blockchain-based secured digital signature product. Based on market feedback, we have built and released a multiuser capability with central administration, and as of last week, began actively selling it with our telesales group. Additionally, A/B testing performed by our e-commerce team has identified demand for jSign as a fax companion. And later this month, it will be added as a bundled offering with eFax for the SoHo market.

Finally, there is a building interest for jSign as a marketplace offering and has been added to the AppSmart marketplace with additional similar placements expected in the next several quarters.

The product team has completed work on the universal API, an offering that can streamline and minimize the number of interfaces required for a health care organization to communicate with their care networks. This offering supplies a single connection that manages communication with hundreds of HIEs, lab vendors, prior authorization suppliers and pharmacies. The universal API both stands alone as a product and is also an important component of the coming Consensus Harmony collaborative data sharing network due for release in 2022.

Central to being effective in our business is security. And this quarter, we have completed the required recertification for HITRUST. The extensive third-party audit of our systems, documentation, security practices and employee adherence to best practices for a secure environment validates the Consensus security promise and remains a key differentiator in the marketplace.

Other key developments are completion of a major product to have the capability to seamlessly integrate eFax digital cloud fax directly into the Salesforce CRM. eFax will be the only cloud fax solution available in the Salesforce Health Cloud. And now it is also -- and in addition to that, also available to all verticals.

We've also completed the work to bundle eFax into the Verizon One Talk UCCaaS VoIP solution targeted as a consolidated set of business tools for Verizon commercial customers. In addition, our Consensus business development team has begun holding training sessions for the Verizon enterprise, telesales, public, SMB and mid-market sales teams to offer eFax as part of their overall business solution set.

Finally, we have begun to roll out eFax into one of the largest diagnostic lab companies in the country in fulfillment of a deal that closed earlier this year. We anticipate that rollout to continue through early 2022.

On to Slide 7. Now Slide 7 has illustrated our development road ramp at top of the slide and the ability of our overall platform capability on the bottom of the slide. The approach remains as we have previously discussed: leveraging our position as the premier provider of digital cloud fax technology, and from that foundation, delivering additional capabilities in the transformation, enhancement and secure exchange of digital information.

To that end, in 2020, we introduced advanced interoperability solutions that include both cloud fax as well as secure direct messaging, Health Language Seven or HL7, Fast Internet health care resources or FHIR and electronic patient record query capabilities. While still only a small portion of our overall revenue, the third quarter saw great progress with our interoperability products, having a 138% increase in deals closed and a 300%-plus increase in overall revenues over Q3 2020.

So far this year, we booked over $2 million in annual contract value, and as a result of an investment in onboarding automation for identity and credential verification, have reduced implementation time by 80% and accelerated the contract to cash cycle time while improving customer satisfaction.

We previously discussed our commercialization initiative for jSign, and as we spoke about on the previous slide, are in the process of delivering the universal API component of Harmony this month.

From an operating and execution perspective, the team has been extraordinarily focused and productive, especially in the context of a major event, the spin, that could have easily been the distraction to even the most disciplined of organizations.

With our HITRUST recertification complete, the universal API release, our jSign commercialization plan and momentum in corporate sales for both cloud fax and interoperability solutions on top of the improvements in our e-commerce web environment, we view Q3 as a very successful step forward in delivering life's essential data when, where and how you need it.

Now to look at the financial results in detail, I'll hand it back to Scott.

Thank you, John, for that update. I would now like to review our pro forma results for Q3. As you know, since the spin was completed in Q4, Ziff owns the results for Q3. And we will present on a pro forma basis to include our stand-alone cost, capital structure and tax rate and exclude the cybersecurity and martech business units that were distributed to Ziff immediately prior to the spin. Please refer to our 8-K filed today that carves out on a pro forma basis the Consensus financials and provides reconciliations regarding certain non-GAAP measures to the nearest GAAP equivalent.

Turning to Slide 9. Our corporate channel had another strong quarter with $42.3 million of revenue, up 13.1% from $37.4 million in Q3 2020, which was a strong comparable quarter after some variable revenue impact from the early stages of COVID in Q2 2020. While the metrics show a modest decline year-over-year in accounts, 46,000 to 45,000, I would remind you that we cleaned up approximately 4,000 accounts in Q2 and Q3 due to a systems migration with modest revenue impact. Our monthly revenue per account grew 13% from Q3 2020 to north of $311 per account per month due to increased traffic and the addition of larger customers versus the attrition of lower revenue customers. We added 3,000 new accounts in the quarter, similar to Q3 2020.

Finally, our monthly account churn was up due to the account cleanup due to the systems migration previously mentioned. More importantly, our latest 12-month revenue retention for corporate was approximately 104%. And exclusive of the account cleanup, the cancel rate was 1.74% for the quarter.

Slide 10 is an overview of our SoHo channel, which produced $46.8 million of revenue, up 0.5% from Q3 2020. This is the SoHo channel's fifth consecutive quarter of year-over-year revenue growth. The accounts were down about 2% versus Q3 2020 due to lower paid adds of 10,000 and cancels on legacy brands which we no longer support. The average revenue per account increased to $14.39 per month, up from $14.18 a year ago.

Our cancel rate for Q3 had a difficult comp as the Q3 2020 cancel rate was an 11-quarter low. Our monthly cancel rate of 3.17% in Q3 2021 was consistent with our average monthly cancel rate over the past 11 quarters. I would note that 2/3 of our cancels come from customers aged less than one year. These are people that use the service for a specific project or find that their business is not sustainable. Note the precipitous drop in cancel rate to less than 1.5% per month for those aged more than one year.

On Slide 11, we begin with the revenue performance by channel for the most recent quarter as well as consolidated for the company. Combining the revenue performance by channel that we just discussed, the company's total revenue grew 6% to $89.1 million, up from $84 million in Q3 2020. I would note that the revenue growth is all organic.

Pro forma EBITDA for the quarter inclusive of the 3 months of stand-alone public company costs and certain costs that were previously provided by various departments of Ziff Davis, which are approximately $20 million annually. For Q3 2021, pro forma EBITDA grew 3% to $51.2 million versus $49.7 million in Q3 2020.

The EBITDA margin for Q3 2021 was 57.5% compared to 59.3% in Q3 2020, which was unusually high due to measures taken in reaction to the COVID-19 pandemic, including reduction in marketing and hiring freezes.

I would note that we intend to make additional investments in our R&D efforts as well as sales and marketing and therefore target an approximate 55% EBITDA margin in the near to intermediate term.

In order to obtain our non-GAAP net income, we have provided you with non-GAAP depreciation and amortization, pro forma interest expense and taxes at an assumed rate of 24%. This yields $27 million of pro forma non-GAAP net income or $1.34 in earnings per share for Q3 2021 compared to $26.8 million of pro forma non-GAAP net income and $1.33 in earnings per share for Q3 2020.

Slide 12 shows on a non-GAAP pro forma basis what our trailing 12-month P&L would look like. The key additional pieces of information below EBITDA are depreciation and amortization, which is $12.5 million annually on a GAAP basis and $7.2 million on a non-GAAP basis, which excludes amortization of intangibles due to M&A.; interest expense of $51.6 million; the elimination of stock-based compensation expense of $1.2 million; an estimated tax rate of 24%; and a share count of 20.1 million shares for purposes of calculating EPS. I would note that we were reviewing our stock-based compensation program with the expectation that there will be additional grants made before year-end.

Slide 13 is our guidance for Q4. This includes the one week of operations that are owned by Ziff Davis in this fiscal quarter. We expect our revenues to be between $87.6 million and $89 million, pro forma adjusted EBITDA to be between $49.5 million and $50.5 million and pro forma adjusted non-GAAP EPS to be between $1.30 per share and $1.33 per share. I would note that Q4 has fewer business days than other quarters due to the holidays. Each business day is worth about $400,000 of variable revenue. We are losing approximately 3 business days from Q3 2021 and approximately 1.5 business days from Q4 2021.

On the right-hand side is the full year pro forma guidance as if we had been a stand-alone company since January 1. This shows a revenue range of between $351 million and $352.4 million, adjusted EBITDA between $201.3 million and $202.3 million and pro forma non-GAAP EPS between $5.39 per share and $5.42 per share.

Before turning the call back to the operator for questions, we do have additional information in the appendix, notably metrics by channel of revenue by quarter from Q1 2019. In addition, the various non-GAAP to GAAP reconciliations are provided in the appendix as well as in the 8-K that I referenced earlier today.

I would now ask our operator to instruct you how to queue for questions.

(Operator Instructions) And the first question is coming from Daniel Ives from Wedbush.

And congrats, Scott, to you and the team. So when we think about sort of the strategic split, what's been the thing that surprised you maybe on the positive in terms of whether strategically or just in terms of from customer feedback or internal? And then maybe like what do you think is maybe like the biggest challenge over the coming months that the team is working on as part of the sort of strategic transformation?

Yes. Thanks, Dan. In some respects, I think both are interrelated from my perspective, and I'd ask John to chime in. One of the things that is both the big opportunity that we talked about during the 6-month process of the spin are things that we'd be able to do that just didn't make sense or work in the J2 system by being a portfolio company. So once we spun on October 8, we immediately began to implement a plan to beef up our R&D efforts. A lot of that is relating to hiring additional personnel, some of which has already occurred in Q4 in the month of October. And that's important because while we feel comfortable in the product road map we released and the time frames that we discussed, there's a lot more to come. And if we can accelerate that time frame, so much the better for us as an independent company.

Now the flip side of that is trying to hire people in a very difficult labor market. So I'd say, in some respects, it's 2 sides of the same coin. The other element is that when you do a spin, you don't come necessarily fully staffed. As I noted in the prepared remarks, there's about $20 million a year that Consensus, when it was part of J2, either was serviced by J2 or Ziff Davis or now needs to bear those costs incrementally as a stand-alone public company. Many of those are employee-related, but not all.

So we have -- in addition to our program to expand our R&D group, we also need to fill in certain spots in G&A that are encompassed in that $4.8 million per quarter number you see in our pro forma financials. These are things like additional finance people, the CFO, additional people in our legal department, our HR department. You can pretty much go down every department, tax. And while we took people from Ziff Davis and there was a split of the department that I think it was done very fairly, there weren't enough people and enough expertise such that we would have a full complement as we spun out.

So hiring people, I'd say, has been my biggest concern as we have spun, although I have to say our HR department has done a fantastic job as we've been hiring, notwithstanding the challenges of this labor market. So right now, I'd say we're on plan what we want to accomplish in Q4. You'll see a little bit downward pressure in the Q4 pro forma EBITDA margin versus Q3. Almost all of that relates to hires, hires that we hope to make. Some of which have already occurred in October, but we're still on a fairly strong pace of hiring in November and December.

That's super insightful.

And -- okay. I was just building on what Scott was saying. Certainly, the degrees of freedom to be able to spread our wings in the interoperability space and be able to bring to market the products and services that we have specific to solving that problem with interoperability is also a big upside in being able to have the kinds of opportunities we have as a spun company.

The next question is coming from Ian Zaffino from Oppenheimer.

I mean, I guess the questions would be as far as the new product offerings, like a Clarity or a Harmony, have you been speaking to customers -- or current customers or potential customers now about these products? Are we -- do they have an idea of when they might be rolling out? And what's been the general feedback so far on those?

Great. Thanks for the question, Ian. Yes, we have been talking with current customers and prospects about these. In fact, I think I had mentioned on an earlier call of the demonstration, a live demonstration, of the capabilities of the system, specifically Clarity, that we did at the HIMSS conference in Las Vegas in August.

And the feedback has been tremendous. There is a solid interest. We're very excited to bring these to market. We think, as Scott mentioned, will be an early release of Clarity in 2022 and a late 2022 release of Harmony, although what we're doing is incrementally releasing pieces of the overall solution that can stand alone in addition to being part of the larger solutions.

So for example, in the release of the universal API, we are going to market with that. And we expect to have some interest in pipeline built for the universal API component of Consensus Harmony, we expect that this year. And what we're very mindful of trying to ensure that we can commercialize these larger solutions in digestible sort of bits for the -- our customers to consume as we walk towards the full built-out solution, which are going to be released early and late next year.

And the next question is coming from Shyam Patil from SIG.

This is Jared on for Shyam. Congrats on the solid quarter and the successful spin-off. I know that you provide some outlook for the fourth quarter. Just at a high level, how are you thinking about the setup into next year and the key drivers that you're looking at there?

And following up on that, is there anything to call out as you're thinking about revenue and EBITDA seasonality into the next year? And is there anything that you'd point to as a solid benchmark there?

Sure. So by the way, Jared, please feel free to reask your question if we don't hit them all. So I think in terms of the first element, as you know, the September 14 call that John and I hosted, we talked about ranges of revenue and EBITDA growth not limited to the current year, in fact, actually really post spin, of between 5% and 9% and EBITDA margins between 50% and 55%. And we clarified that by saying we think in the intermediate term, 55% EBITDA margins are the target. That doesn't mean for Q4 because you'll see actually, if you look at our guidance, it's higher than that.

But as we go into next year, as we build out the complement of our staff across all these different departments, that's kind of the margin that we see. We're still early in budgeting. It's not a formal guidance, but I think that, that's realistic. It allows us to make the investments in people, in sales and marketing. And I think that is a fair EBITDA margin into the foreseeable future.

I think in terms of revenue growth, obviously, we've been clocking in at around a 6-ish percent all organic. Right now, I'm not contemplating there would be any M&A that would supplement 2022 because, as I mentioned previously, I think that our M&A will be, from time to time, maybe once every couple of years we'll do a deal. So I think that 5% to 9% range that we talked about holds as we are going through our budgeting. And obviously, in February, we will actually disclose the full complement of guidance for 2022.

In terms of seasonality, relative to when we were part of Ziff, we really didn't look like we had any seasonality. But as a stand-alone company, as I referenced in the remarks, it's important to understand the dynamics of Q4. And our services are both sold and used primarily on business days. So clearly, Monday through Friday, they are not holidays, count as business days. But as you get into December, depending on when Christmas and New Year's falls, you get a lot of vacation traditionally being taken. We have what we call a lot of fractional business days.

So Q4 is generally 2 to 4 business days lighter than, say, Q3 if you're looking at the business sequentially. Because of the various mixes of revenue that John talked about and the fact that as we move upstream, it's more variable versus fixed, that $400,000 a day is relevant when you take a look at the sequential performance of the business from Q3 into Q4. In this particular year, and it does matter when Christmas and New Year's falls, we're down about 2.5 business days sequentially or about $1 million from Q3 to Q4 if the business were just stable, flat, no growth. So that is the seasonality that you need to appreciate.

That reverses out in Q1, to some degree. Usually, Q2 and Q3 are similar and they are at the peak, anywhere from 64 to 65 business days in either Q2 or Q3, but it's very much a function of looking at the calendar each year, counting the Monday through Fridays, making judgments around fractional or partial holidays like the day after Thanksgiving. Good news is we have years of accumulated data. So our estimates tend to be, I think, fairly well honed at this point. Other than that, no, there's no major seasonality.

The fact we have fewer selling days in Q4 doesn't really impact revenue because those customers come ratably over the quarter and they're going to only partially impact Q4 because you're going to get basically at most 1/2 benefit. That's the variable revenue that we key in on when we lose business days more than the fixed amount or the selling dates, which are also limited because our services are sold based on business days.

And the next question is coming from Greg Burns from Sidoti & Company.

Congratulations on completing the spin. Just had a question about jSign solution. How are you positioning that in the market versus competing solutions in terms of maybe from a pricing and feature standpoint?

Thanks for the question. I appreciate it. jSign, I think, is really being positioned as a complement to the other products that we have. And we've identified in health care workflows the need for a digital signature to be integrated into a process that leads to communications. So we see jSign fitting in nicely there.

At the SoHo level, we see jSign as a strong companion to fax and our A/B testing has shown it to be exactly that. So we're excited to be able to offer jSign as an addition to our fax purchasers, and we are certainly going to remarket our existing base.

And at the mid-market level, we think jSign is a strong performer, both with fax and also for the mid-market. For SMB, in particular, an attractive opportunity when you think of the larger solutions that are out there, jSign can be cost competitive. It's not quite as feature-rich, and that's by design. It's a value play. And we've gotten very good feedback in our initial week of selling it directly to that SMB segment. That doesn't necessarily need all the big bells and whistles you get with some of the other players in this space, but more of a bare bones approach that's for affordable, and we had a pretty good first week.

So what is like the typical ARPU for the solution?

We have a range of subscriptions starting from as low as $10 a month going up to multi-users, as many as 500 users, in a multiuser single administrator kind of model. So we really have to find our feet here to say what is the ARPU going to look like after we have a few months of sales data under our belt. But we're hopeful that it's going to be at least as strong as the ARPU we have for eFax.

Okay. Great. And then just lastly, on the corporate side, have all the accounts been cleaned up? Or is there more kind of cleanup that could happen over the next couple of quarters that might impact churn?

Yes. No, they've all been cleaned up. And I just want to add a note on that, Greg, that they were pretty much evenly split between Q2 and Q3. So if you look at the trailing 12 months ended 9/30 or if you look at the 9 months of this current year, all 4,000 accounts are dealt with from a metric standpoint. But they were split basically 2 and 2 between Q2 and Q3 of this year.

(Operator Instructions) The next question is coming from James Breen from William Blair.

Scott, can you just talk about what the balance sheet looks like pro forma? And then what you saw this quarter in terms of free cash flow, flow-through from the EBITDA line?

Yes. Well, we don't only have a free cash flow this quarter. Remember, if you look at the 8-K we filed, and the reason we filed an 8-K as opposed to a press release is that, what was spun was the old J2 cloud services. So the financials associated with it, including the free cash flow statement, include items and businesses that were not spun as part of Consensus such as, as you may recall, the cybersecurity business and the martech business that Ziff Davis still owns. So there isn't a solid free cash flow.

However, I would say that they've been -- given our capital structure, which is the $805 million of debt that we issued just prior to spin, and our level of CapEx, what we've been using is sort of EBITDA minus CapEx because those are cash costs, minus interest, those are cash, minus taxes, those are cash, it would come in about $25 million. Now we didn't pay an interest expense this quarter. So this quarter would actually be somewhat higher than that because we only make those interest payments twice a year, about $25 million in the October, and I believe, April time frame.

So this quarter we're in now will be the first quarter we'll have a true free cash flow statement for Consensus. I can tell you though that by looking at the weekly cash balances, they've grown very nicely from the date of spin and all of that cash generation is ours. You had one other question, Jim?

Just the balance sheet structure, which you talked about in terms of the debt you issued.

The balance sheet structure is -- yes, so the balance sheet -- the core of the balance sheet is we have 2 tranches of debt. So we have $305 million of 5-year notes, 2-year non-call at 6%. We have $500 million of 7-year notes, 5-year non call at 6.5%. So that's $51 million a year roughly of cash interest expense for the debt combined.

At the time of spin, we were left with about $30 million of cash in the company. That turns out there was a little bit more cash left than was intended. There will be a true-up with Ziff prior to year-end because we need to return that cash to them. And also, we have an agreement of how we're sharing various fees and expenses of the spin. So once all those expenses are known, we will then have a true-up. My suspicion is we'll end up writing a check to Ziff to return the money they left in plus probably some additional amount for a sharing of the fees and expenses.

But basically, assume we have about $30 million of cash at spin and an expectation of generating $100 million of free cash flow in the next 12 months ensuing period. So if we did nothing with the cash, we'd end up with $130 million by sometime of October of 2022.

And the next question is coming from Jon Tanwanteng from CJS Securities.

And congrats on the successful spin to you and your team. Scott, I was wondering, in your spending plan as you go forward, working down from 58% and 57% EBITDA margin towards 55% and perhaps 50% in the target model, I was just wondering what portion of that is allocated to R&D versus marketing versus corporate spend? And kind of how you guys are modeling the returns on those investments as you go forward, whether it's increasing growth or something else you're using as a metric.

Yes. So let's start with where the margins are at, because you're correct that if you look in the Form 10 for the 6 months and you look for the 9 months, you're going to see higher margins. One of the things that bias those margins up on a trailing 12-month basis is that Q3 and Q4 of a year ago were extraordinarily high margins even pro forma, in the 58%, 59% range. And the reason for that is that, as part of the pandemic that started in the March time frame of 2020, there are a variety of things that were implemented in large part to preserve cash and EBITDA.

So in the case of the Consensus business unit, there was a hiring freeze. So as people left, they were not replaced. There was a reduction in marketing spend. And all of those things had the effect of boosting the Q3 and Q4 EBITDA margins that, quite frankly, are not sustainable and were not sustainable. And so if you look at the more granular level, the real starting point for the margins is really about 57% EBITDA margins. So the 57% to 55% bridge, that 2 points, most of which you're calling the corporate is already embedded in the pro forma analysis.

Now it is the case, yes, there'll probably be a few more people hired than was contemplated in the pro forma. And yes, in this labor environment, some of those people may be more expensive than contemplated. So there's a little bit of degradation in margin of filling out the corporate staff. The larger 2 pieces though will be the R&D staff enhancement, some of which will be capitalized and will appear in CapEx. Some of which will flow through as OpEx and hit the margins.

And then the other piece will be in sales and marketing. The sales and marketing piece is probably the easier of the two to ROI because we spend a lot of money in advertising, we have the ability to look on the margin if we launch a new program, like, for example, jSign what's in the SoHo channel and SMB channel marketing dollars. So we can look, and we will measure how effective that spend is. If it's not effective, we won't perpetuate it. But if it is, we will continue it. The R&D one is more a longer-term play because running on -- in the portfolio concept of J2 or Ziff, I think that it was a group that was very, very lean. And so there's sort of a multi-fold effect of what we intend to accomplish by beefing up that staff. Part of it is the external service product road map and releasing those services. And to the extent they meet our expectations, there will be a very good return on that investment.

But there's also a portion of those costs that are allocated for internal purposes. The systems migration, and I don't mean things that are related to the actual physical running of the businesses. I'm talking more about our ERP system. You may recall that in Ziff we had implemented Oracle Fusion at the cloud and the inc level over well -- went live basically October 2020. So when we spun from Ziff, we inherited an instance of Oracle Fusion.

But that was never the end. Whether we were a spun company or we remain part of J2, there was a Phase 2, which has to do with cleaning up some legacy systems. Well, we need staff and personnel to do that as a stand-alone company. And then there's even a Phase 3 and Phase 4, which is what kind of external modules should we add to Oracle Fusion? There are HR modules. There's tax modules. There's pretty much a module for every department you can imagine.

So some of the personnel that Jeff, our CTO, was hiring, goes into that area, which is really for our own benefit and efficiency, timeliness of getting information, quality of the information we get for both operational purposes for John and his team, but also as a public company for external reporting.

Got it. That's a lot of detail and great color. And just to touch a little bit more on the inflation that you're seeing in the labor markets. I assume that the corporate and R&D side are going to be a little bit harder to fill out there. Are you seeing any challenges just in terms of getting the right people, number one; and number two, how much that impacts your cost going forward and maybe if there's ability to pass that pricing through?

Yes. I was originally concerned it would affect the first part of your question, which is the ability to find the right people. And the right people aren't just those with the right skill sets, but it's also those who fit our culture. I think this is a very important element because it's a twofold criteria. Yes, you need the skills to fulfill your job function, but you also need to fit into our vision -- our mission, vision and values, which we spent a lot of time on during the pendency of the spin, revealed them shortly after we spun to the current 450 employees of Consensus. And so we really want, as we bring people on, irrespective of what position they are, they've got to buy into these. And so that's going to disqualify some candidates.

As I mentioned though, we had a very good hiring in October, really only over 3 weeks. So we're finding the right people, both from a cultural and skill standpoint. In some cases, you're correct, given the areas that we are pursuing, they're coming in somewhat higher than our previous expectations, maybe 5 -- 4%, 5%, 6% higher. So we're taking a very hard look at that as we think about 2022 and the overall budget.

But we're too early in the budgeting process to have any definitive conclusions. But I'm expecting that, yes, there's going to be some upward pressure in the cost structure for employees, which is our #1 cost structure. That's 450 and growing, that's going to be the #1 cost component within Consensus.

And the next question is coming from Joe Goodwin from JMP Securities.

Great. On a question on product development, can you talk about just kind of how you're engaging with customers as you're rolling out these new products on the product road map and kind of how much that implies? I guess how much implication these customer engagements are that actually kind of informs your guys' product road map?

And then kind of off of that, with Harmony coming out next year, do you already have kind of early adopters lined up to actually be leveraging that product and actually kind of using it as a communication network? Any color there would be great.

Sure. Great question, Joe, and I appreciate it. The product development team is very connected to our sales team. Our marketing team uses the feedback that we have from both our current customers and the prospects that we talk to in order to make sure that we're hitting the mark with what we're bringing to market and making the kinds of changes and adjustments as we go through the development process to ensure that we're honing ourselves to what the market need is.

The feedback that we have been getting on the products themselves as we brought them to market has been very positive because I think the way that we think about it is in terms of natural extensions rather than just trying to bring something out of left deals into the marketplace that doesn't relate to what we already are.

So I think our DNA has a very secure, very reliable, very robust and scalable platform for information sharing is really the knitting that we're sticking to and the kind of products that we're developing are -- all stay in that arena. And because of that, what we're -- our concept here is that we're bringing alternatives to a marketplace that can communicate a number of different ways. Depending on who they're talking to, it can find the best route or the best protocols in order to do that.

And when you're thinking about our potential for, I think, beta adoption of things like Harmony and Clarity, I'd say we're further down the path on beta adoption in Clarity, but that's just by happenstance of where we are in terms of the overall product road map.

And with Harmony, the real idea that putting out parts of the Harmony product that can stand alone, the universal API is a great example of that, which we are building pipeline for and have feedback on market desire for, that kind of thing is giving us the ability to have some traction with a major product launch that we have in the future with the components of it early on so that we're doing 2 things: number one, accelerating the ability for us to generate revenue from new products that are in the marketplace that we serve; and also getting early feedback about what customers like and what customers don't. So in the process of developing that larger product for full release later on down the line, we've made the right adjustments, listened to the market and made sure that the product that we release is the product that is going to fit what our customers need.

And there were no other questions in the queue at this time. I would like to hand the call back to Scott Turicchi for any closing remarks.

Thank you, Paul. We appreciate it. Thank you all for participating today in our investor call.

When we report Q4 results, it will be more traditional. And then we'll have a press release with the pro forma results out. Technically they will be pro forma because we're going to add that one week in October that is owned by Ziff.

We do have a conference or 2 between now and that earnings call. We put out a release on the one coming up next week at RBC. So we'd asked you if you have interest to join us. There'll be a fireside chat that John and I will participate in. We'll also be doing some one-on-ones. I believe there's a CJS conference we'll be at virtually in January.

And then we would expect that we would report Q4 results and provide 2022 guidance sometime in the mid-February time frame.

So thank you once again for your participation and for your support as the spin has now officially been completed.

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