Consensus Cloud Solutions Inc (CCSI) 2025 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Consensus' Q3 2025 earnings call. My name is Paul, and I will be the operator assisting you today. (Operator Instructions)

On this call from Consensus will be Scott Turicchi, CEO; Jim Malone, CFO; Johnny Hecker, CRO and Executive Vice President of Operations; and Adam Varon, Senior Vice President of Finance.

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

Good afternoon and welcome to the Consensus Investor call to discuss our Q3 2025 financial results, other key information, and our Q4 2025 quarterly guidance. 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 Q2 2025 investor call, then Jim will provide Q3 2025 financial results and our Q4 2025 guidance range.

After we finished our prepared remarks, we will conduct a Q&A session. At that time, the operator will instruct you for asking a question.

Before we begin our prepared remarks, allow me to direct you to our forward-looking statements and risk factors on slide 2 of our investor presentation.

As you know, this call on the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to materially differ from the anticipated results. Some of those risks and uncertainties include but are not limited to the risk factors that we have disclosed in our regulatory filings, including our annual 10-K and quarterly 10-Q SEC filings.

Now let me turn the call over to Scott for his opening remarks.

Thank you, Adam. We had another solid quarter in Q3 with a slight increase in revenue over Q3 2024. Our corporate channel continued to lead the way with another 6%-plus growth quarter, despite there being a difficult comparable presented by Q3 2024. This was led once again by record usage from our customers and a record quarterly amount of net ads from our eFax Protect service. In addition, the VA also hit record high usage and revenue for the quarter.

So revenue was in line with our expectations and showed an improvement in its rate of decline from Q2 2025.

Adjusted EBITDA was slightly ahead of our expectations and generated a 52.8% adjusted EBITDA margin. In the quarter, we added key personnel that we outlined in our original guidance in February, and we expect to continue to hire Q4. As a result, due to these hires and seasonal cash costs associated with the year-end audit, we would expect a lower adjusted EBITDA margin in Q4 than we experienced in Q3.

Free cash flow in the quarter was an exceptional amount of $44.4 million, up 32% from $33.6 million in Q3 of 2024. This was due in large part to the adjusted EBITDA conversion to fresh flow coupled with an outstanding rate of collections, especially in our corporate channel, which has driven our total DSOs down to 25 days for the company as a whole.

As a reminder, we pay our interest on the bonds semi-annually in Q4 and as a result, we do not expect the quarter to generate much, if any, free cash flow. However, based on our nine-month free cash flow, we would expect the free cash flow for the year to be in excess of $95 million, which is ahead of our original expectations.

On October 15, we drew approximately $200 million of our credit facility and retired a like amount of the 6% notes. We have issued a call notice for the remaining $34 million, which will be funded with a further drop of $20 million from the credit facility and $14 million from our cash balances. This will reduce our total indebtedness from the original $805 million to $569 million and will put us very close to our target of 3 times gross debt to adjusted EBITDA.

In addition, the interest rate on the new debt will be 5.65% or 35 basis points below the cost of the notes that we are retiring. We will continue to look for opportunistic repurchases of both our debt and equity.

I will now turn the call over to Johnny to provide more operational details.

Thank you, Scott, and hello, everyone. During my remarks, I will focus on our key performance indicators such as revenue and customer metrics, and we'll discuss the go-to-market strategies for our corporate and soho business channels. I will also provide operational updates and show several key highlights from the quarter.

Our corporate channel continues to demonstrate strong execution and sustained positive momentum. In Q3 2025, revenue reached a record $56.3 million, a 6.1% increase over $53.1 million in Q3 of 2024 and a sequential increase from the $55.3 million in revenue we reported in Q2 2025.

As we noted last quarter, Q3 2024 was a particularly strong comparable, which makes this continued 6%-plus year-over-year growth even more encouraging. This growth is driven by the sustained expansion and increased usage within our upper enterprise accounts and the continued momentum in our public sector business complimented by stable growth in advanced products and strong performance in our corporate e-commerce channels.

This reaffirms our corporate go-to-market strategy in place of the foundation for our future go to market, which I will address later in my remarks.

I am pleased to announce that our trailing 12-month revenue retention rate stands at 101.9%. This is stable from 102% in the previous quarter, again, confidently meeting our greater than 100% target, up from 99.8% in Q3 2024.

Our corporate customer base expanded to a new record of approximately 65,000 at the close of Q3. This represents an increase of over 12% from 58,000 in Q3 of last year and the sequential increase from approximately 63,000 at the close of Q2. The primary driver for this growth remains our eFax Protect offering, which expanded by approximately 6,700 new customers this quarter contributing to our SMB cohort.

Corporate ARPA was $293 compared to $301 in the prior quarter and $310 in Q3 of last year. This expected trend is a direct result of two counterbalancing factors: the successful expansion of our small SMB cohort, which includes our eFax Protect product at an ARPA of around $50 balanced by strong high value performance from our large enterprise clients.

Importantly, we are proud to report strong sustained growth in our corporate ARPA net of eFax Protect for several quarters now, which demonstrates the underlying strength and growing value of our core enterprise customer base.

Our corporate performance this quarter continued to trend from recent quarters, demonstrating sustained success at all levels of the market, where effectively pairing robust revenue growth at high retention rates from our enterprise clients with steady customer base expansion in the SMB cohort. This balanced approach to growth proofs our ability to execute across the entire customer continuum and provides significant stability to our business, which is evident by continued expansion on two key metrics in our eFax network, the number of participants or endpoints and the volume of data we process across the network.

Turning to the public sector, I want to make a clear distinction. Our main revenue driver in this vertical, the VA, saw its rollout and usage remain unfazed by the government shutdown. The VA continues to set new all-time high records for usage, a clear proof of (inaudible) adoption that has persisted even during the shutdown. Separately, since achieving our official FedRAMP high impact certification, we have built a solid pipeline among other government agencies and non-government organizations.

We are successfully winning and onboarding new customers onto the eFax product. While the temporary government shutdown has led to some delayed decision making, we see this as a short-term timing impact on the conversion pace, and it does not affect our positive outlook for this new pipeline.

Moving on to our SoHo business. We recorded Q3 revenue of $31.5 million representing a strategic planned year over year decrease of 9.2% from $34.7 million in Q3 2024. This is a spike sequential decrease from $32.4 million in Q2 2025 reflecting our continued strategic focus and optimizing profitability and maximizing the efficiency of our advertising investments in this channel.

The Global SoHo comp base declined from approximately 682,000 in the prior quarter to approximately 661,000 during Q3. SoHo ARPA for Q3 2025 was $15.56 compared to $15.62 in Q2 2025 and $15.38 in Q3 of last year. Our SoHo cancellation rate in Q3 2025 was .71%, down from 3.84% in the previous quarter.

As I explained in our Q2 call, our SoHo customer acquisitions strategy led to an unusual spike in ads last quarter, which temporarily influenced the cancel rate in both Q2 and Q3. Since then, our customer acquisition had more normal pattern. Yet like all businesses that rely on digital marketing, we are actively navigating the recent changes in the search environment. This has created a near-term headwind, contributing to a slight decline in organic signups in Q3, which we believe will continue in Q4.

We are already executing a multi-step plan for cover for these impacts while we continue to manage profitability with discipline. We are determined to return our paid ads numbers to the mid-50s, which we expect several months to fully realize.

One key factor in this plan is to emphasize one of our greatest assets, our trademarked and redesigned eFax brand. This strategic focus on eFax follows a yearlong intensive brand study. From day one, more than three years ago, eFax was a pioneer and leader in digital transformation, and we have invested heavily over decades. With this brand refresh, we now better leverage that established trust proven by millions of visitors to our web assets every month to unify our advanced solutions.

That allows us to bring our entire go to market portfolio from Cloud fax to interoperability and AI and one familiar name, clarifying our evolution from a simple fax service to a comprehensive platform for secure data exchange and digital transformation. Consensus Cloud Solutions, which has also received a brand refresh, will remain the company's Nasdaq-listed brand for investor continuity, and as universal home for employees.

To summarize, we are very pleased with the quarter's performance and remain highly confident in our outlook. We will continue on our go-to-market path, which has proven to be very effective. Healthcare remains at the center of our strategy, complimented by strong execution on our automated e-commerce channel for the down market. We are expanding our efforts in the corporate SMB and upper enterprise markets which has extended into the public sector.

We expect our SoHo business to continue on its trajectory with a clear focus on profitability.

Before handing the call over, I want to express my sincere thanks to our employees for their hard work and dedication this past quarter. My gratitude also extends to our customers and partners for their ongoing trust and collaboration. We have delivered another excellent quarter, and we're focused on building on this momentum.

With that I am handing to our CFO Jim Malone, who will now provide a detailed update on our financial performance and outlook. Jim?

Thank you, Johnny, and good afternoon, everyone. In our press release and on this call today, we are discussing Q3 2025 results and guidance for Q4 2025. We expect to file our 10-Q by close of business today.

Moving to corporate. Beginning with our corporate business results, Q3 2025 was another strong for corporate with record revenue of $56.3 million, an increase of $3.2 million or 6.1% versus prior year -- versus the prior year quarter.

As Johnny just mentioned, Q3 2024 was a particularly strong comparable quarter, which makes the continued 6%-plus corporate growth even more meaningful. Our record of Q3 2025 corporate revenue delivered a trailing 12-month revenue retention rate of approximately 102%, up from 99.8% from the prior comparable period and stable sequentially.

Our corporate customer base expanded to approximately 65,00 in Q3 2025 versus 63,000 in Q2 2025, and 58,000 in the prior comparable period. Corporate ARPA was $293 versus $301 in Q2 2025 and $310 in Q3 2024.

This trend is in line with our expectations and our expanding customer base in the lower SMB cohort, primarily due to record eFax Protect paid ads, which generated an approximate $50 ARPA. Johnny stated corporate ARPA net of eFax Protect has experienced growth for several quarters, demonstrating strong performance from our core enterprise customer base.

Moving to SoHo. Q3 2025 revenue of $31.5 million compared to $34.7 million representing a strategic decline of $3.2 million or 9.2% from the prior comparable period, and a slowing decline from the Q2 2025 comparable year-over-year period of 9.4%.

Q3 2025 ARPA of $15.56 had an improvement from the prior year comparable period of $0.18 and was in line sequentially. The SoHo [cancer] rate improved sequentially to 3.71% from 3.84% in Q2 2025.

Moving to consolidated results. $87.8 million revenue was consistent with the prior year comparable period. Adjusted EBITDA of $46.4 million is a decrease of $0.6 million or 1.2% versus Q3 2024, primarily driven by planned headcount additions. We delivered a healthy 52.8% adjusted EBIDTA margin or approximately 16 basis points favorable to the midpoint of our Q3 2025 guidance range.

Q3 2025 adjusted net income of $26.6 million is a decrease of $0.2 million or 0.8% versus Q3 2024, primarily driven by lower interest expense and depreciation and amortization, offset in part by lower adjusted EBITDA and higher income tax. Adjusted EPS of $1.38 was [sustained] for the prior year comparable period. Q3 2025 non-GAAP tax rate and share count was 22.3% and 19.3 billion shares.

Capital allocation, free cash flow. Q3 2025 free cash flow was $44.4 million, an increase of approximately $11 million or 32% versus the prior comparable period driven primarily by operational performance. Q3 2025 CapEx of $7.2 million, a decrease of $0.8 million or approximately 10% versus the prior year.

Cash and cash equivalents. We ended Q3 2025 with cash of approximately $98 million, which is sufficient to point of operations and repurchases of equity and debt. 6% notes debt retirement. As noted in our 8-K filed on July 14, 2025, we executed a $225 million [three bank clump] deal including standard covenants to retire our a 6% notes to October 2026.

The loan consists of $150 million delayed drawn term loans plus of $75 million revolving credit facility. The interest rate is [sulfa], plus an applicable margin based on total net leverage ratio. Subsequent to the quarter end on October 15, 2025, or equal of $200 million of our 6% notes at par, leaving $34 million outstanding. We utilized our $150 million delayed drawn term loan, plus $50 million on the revolver.

We didn't retire the entire $234 million as our secure lean capacity under our bond indentures was $200 million based upon our June 30, 2025, cash balance. The borrowing cost will be approximately 10 to 35 basis points lower than our current 6% rate. We have notified our trustee, and we were called the remaining balance of the 6% notes, $34 million on or about November 10, with a combination of $14 million balance sheet cash and $20 million of the remaining revolver.

Equity repurchases. In February 2025, the Board approved an extension to the previously approved program for another three years and up to $67 million. In Q3 2025, we repurchased 121,000 shares for $2.7 million, bringing the total equity purchases to date of approximately 1.8 million shares for approximately $47 million. There were no bond repurchases in Q3 2025.

Moving to guidance. We are providing Q4 2025 guidance as follows. Revenues between $84.9 million and $88.9 million with $86.9 million at the midpoint. Adjusted EBITDA between $43.1 million and $46 million, with $44.5 million at the midpoint. Adjusted EPS of $1.27 to $1.37, with $1.32 at the midpoint.

Estimated Q4 2025 share count is approximately 19.4 million shares with a tax rate between 20.5% and 22.5%, with 21.5% at the midpoint. Please remember that as previously mentioned, our 2025 guidance and actual results exclude foreign exchange gain or losses on revaluation of intercompany accounts.

That concludes my formal remarks. I'd like to turn the call back to the operator for Q&A. Thank you.

(Operator Instructions) David Larsen, BTIG.

Hi, congratulations on the good quarter. Can you maybe talk a bit about the VA and corporate sales, and I think I heard you say that the VA had their highest usage rate yet. Just any sort of color in terms of incremental growth going forward? And any other thoughts there would be helpful. Thank you.

Great, yeah, I'll turn it over to Johnny.

Yeah, thank you, David. Good question. So what we're seeing increased usage in the existing base, but we're also continue to roll out to new facilities. We still haven't rolled out the solution to the entire base of facilities and sites within the VA. That is an ongoing process which we know it's going to continue throughout 2026 to do that.

But we also think there is room for expansion and increased adoption within the existing base. We see that happening, we see growth with within the usage and existing sites. So basically, same store sales.

But also, with new site coming on and as I stated on the call, we do see record highs in usage on weekdays, and overall, the volume is growing as well. So that is very encouraging and we expect that growth to continue into 2020.

How many VA sites are you in now and what is the total potential or from a scale of 1 to 10, 10 being 100% penetrated across all potential VA sites, what number would you put yourself at now?

I think there's two elements to that. So one is we're more than 50% in the absolute raw number of sites deployed. But not all sites are equal, so that's one element. But the other element is even in the sites where we are deployed, we do not yet have in many instances, all the traffic. And there are some reasons for that, such as incumbent contracts that have to burn off before we'll capture some traffic.

In some instances, the site didn't fully appreciate all the different ways in which faxes could be either sent or received or outbound is easier to do, so you've got to port the numbers before you get the inbound traffic.

So that's why I tagged on to what Johnny said, which is, we're on the $5 million-plus pace for this year in terms of actual revenue. And we'll meet that goal. We'll go somewhat north of $5 million. And then what we're citing is the exit run rate going into '26. That'll give us a book of business based on the number of pages processed on average per business day peak volumes.

And then the exercise we're going through now from a budgetary standpoint is what is the pace at which we pick up incremental traffic in the sites where we're already deployed but don't yet have all of it?

So it's all of those pieces together, but if you don't bind it to a given year and I understand kind of where you're headed because people are looking trying to build '26 models, but if you could look out over say a 2-to-3-year time frame, it leads us to believe there are multiples of revenue available to what we've booked in 2025. How many multiple? That's what's still under discussion.

So could the $5 million turn into $10 million or $20 million?

$10 million or $20 million. I think $10 million is a highly confident number, and it's the number we talked about when this contract was originally won, but I think we have good reason to believe it's a higher number than that, but the question is how much higher than $10 million? And in order to get confidence in that number, we need to be in conjunction with the VA, do some additional analytical work and then see what is a reasonable time frame over which that traffic can be captured.

Now, all of which is in our control. It's all it has to do with the VA. Some of it has to do with the way they roll things out and as I said, existing contracts that carried over that need to expire.

So I think it is probably (technical difficulty)

Okay, great. And then another quick one, if you don't mind. The SoHo, yearly revenue growth was down 9%. What would you expect that like deceleration rate to be, let's say, in 2027 or 2028, when are we going to see that sort of level off?

Yeah, I think that's a good question, but it's very difficult to predict. I don't think we can give guidance in that direction two years out at this point. We've been talking about it for a year and a half now and where is that, at one point is it going to like reach that steady base and then the decline will go into the low single-digits, but it's very difficult to monitor.

There are so many moving parts to this business. We've seen it slow down over time, but I don't think we can give you a clear number on '27 just yet.

Look, it's clearly -- even if the accelerating pace, it's not going to happen in '26, probably depending on where your goal is, it's not going to happen in '27, so it's '28 or later and the input factors that are relevant to us are as the base ages, how we see that cancel rate come down.

You saw it come down sequentially from Q2 to Q3, about 13, 14 basis points. It's negatively influenced by certain excess customers that were acquired in Q2, which could [operate] quickly, but they're very cheap acquisition costs. So we're actually looking and studying the various cohorts to see where is that stabilized base of cancel as that base ages. So that's one element of the equation.

And the other element is not only how many gross ads you bring in, meaning new net customers and they get, well, what kind of customers do you bring in?

Attractive LTV to CAC, but they might only be around two, three, or four months, or are they longer costs because there's a whole range of use cases that will dictate the life of the customer. For us, it's really a matter of the right expense against their life, not so much whether their life is 4 months or 12 months or 18 months, but what are you paying to get that stream of revenue?

So all those things are going in, we will be crunching those models as we go through our budgeting process, which has commenced, but it's still early stage.

Okay. And just one more quick one, can you talk a little bit about the advanced products upsells into corporate? Just any color there on the use of AI, RCM acceleration. Thanks very much.

Yeah, I can comment on that, David. It's a couple of things that we saw accelerate in Q3. One of them, Clarity adoption and Clarity bee, which is that AI product that strikes data turns that unstructured data into structured data so I've commented on it, I think on the last call, a little bit, but that is one of the key -- was one of the key drivers.

And the other one was in combination with that really our integration into business right where we customers connect their EHR systems to provide that interoperability. That has also been performing quite well and the combination of those, with the connectivity to our eFax network is what's driving the revenue there.

(Operator Instructions) Gene Mannheimer, Freedom.

Congrats on the good numbers. Question on that SoHo paid ads, I know Johnny, you talked about that at $50 million. It's the lowest in a while and just so for my justification, that was due to a spike last quarter around promotional pricing or is there also some level of conversion of the SoHo customers to enterprise that was a factor?

No, I think well, we mentioned, Gene, thanks for the question. Yeah, what we mentioned was last quarter we had a little bit of a spike, because of an acquisition channel for our new customers that was commercially very interesting for us. But as Scott mentioned earlier, those customers come on at a low price, but they also fall off fairly quickly, so they burn off, they have a shorter lifetime.

We did see a little bit of a decline in our paid ads this quarter. There was multiple factors to it, the change in search that we're, seeing. A little bit of headwind in the in the organic, but we have put some measures in place and we already seeing some recovery of that we're getting, additional signups and, reverting back to that to that mid-fifty number. I think it's going to happen overnight.

I don't think we will see, we will probably not reach that by the by the end of this quarter. Q4 is usually a slow quarter for SoHo anyways, but we're expecting it The first few months of the next year to get back to that number.

Okay, yeah, that helps out. Thanks, Johnny. And then just my follow-up is on the on the vision, getting from say $10 million in revenue to to $20 million or whatever the number happens to be, is that can be accomplished based on the scope of the agreement you have in place today, or would it involve selling additionals into the into the VA.

That's a good question. I think we are, right now we're just talking about the fax platform, right, about the ECA platform that is that Rem high certified There's obviously potential to upsell other solutions into the VA. They would have to go through, as the fax platform to be certified on the FedRAM platform or environment.

I think we've learned a lot, so it wouldn't take us as long as it did for eFax, but what we're talking about right now is really only the fax platform we're not adding in any additional products into that potential Within the be under a different contract. Within the be under a different contract.

Before we go to more like questions, we've got a question email So one has to do with capital allocation. Our thoughts really as we look forward to 2026. Between retirement of debt and share repurchases. As I noted in my opening remark, I think both are going to be opportunistic in nature. Right now there's no mix that we've set between the two as it relates to balances or free cash flow generated in 2026.

One of the things that we're going to be looking at is as we get into '27 and we look at the 65. What is sort of the right level of debt as we think about that. So that may influence some retirement of debt which could be a combination of either the continuation of buying the 6.5% in the open market, but as I've noted before, the volume there has been limited because we've taken about $150 million out over the last couple of years, but we do have the ability to generate cash to take our revolver down.

And I think if we're going to prepay or repay any bank debt or credit facility, it would be in the revolt because that We can reborrow The delayed drop term loan by its terms does have some mandatory prepayments per quarter of slightly under $2 million per quarter, so you will see about a little under $8 million come out next year just for the delayed draw a term loan, but if we do have excess cash and we can't buy bonds and we don't like the stock price. We can't get enough stock.

We could pay down revolver and then if we have needs in the future, we could reborrow the. All. So that's kind of how we got it now as I mentioned, we're still in the relatively early stages of budgeting, so things like how much free cash flow and Based on our current balances, what kind of capital is available is also a question of the jurisdictional issue of where that cash sits, not only at 12:30, 125, but as it's earned over ' 26.

Clearly there'll be an amount in the US, but there also are amounts in foreign jurisdictions and so we'll have to look about how much of that cash we can bring back home to the US because both Stock repurchases, debt and debt retirement, whether it is up follow another life (inaudible).

I've got another email question.

Okay, so the second email question that came in, how to do, I think I can interpret this in terms of its quote it stated the marketing related disruption we mentioned in So, which I think is really what Johnny commented both in his prepared remarks but also in response to Gene's question. Is that likely disrupt the improvement year over year going into Q4 and 26.

If you mean the weight of the declining, it may very well impact Q4 somewhat. In other words, we've been seeing on a pretty much sequential basis, the rate of decline coming down, so it went from 9.4 to 9.2 from Q2 to Q3, break trend modestly in Q4.

We'll have to see because I think, as Johnny mentioned, it's probably going to take up to A few months, which will take us into early 26, possibly through Q1 to get that normalized base back to around 55,000 net ads For port so you could see a little bit of friction in Q4 might carry haven't done to say enough budgeting and enough quaization of that to know what kind of fact there might be.

But I think, yeah, you should expect the boys in Q4, possibly in Q1 as well. Paul will open up if there's any further live questions.

There were no further questions from the line, Scott. I will, hand it back to you for closing remarks.

Great, thank you. Appreciate everybody for joining us today for our Q3 call. We will be at a couple of conferences, I think more high yield market than the equity market between now and our next earnings call, so stay tuned for those activities, we will also We'll also be putting out a release probably in late January early February in terms of timing for the Q4 release, at which time we will give full year 2026 guidance at this point we would intend, as we've done in the past, to give a range of revenues adjusted Ibada and adjusted net earnings per share.

So obviously it'll be a call that'll look back to '25, report the quarter the full FY what we're seeing as we look forward to 2026, and that obviously if there's any question that you have between now and then feel free to reach out. And contact Laura or any one of us, and we can either arrange a call or if it's a fairly straightforward question answered by email.

Thank you, and this does conclude today's conference. You met this time and have a wonderful day. Thank you for your participation.