Consensus Cloud Solutions Inc

Previous wording

Consensus is a leading provider of secure information delivery services with a scalable Software-as-a-Service (“SaaS”) platform. Consensus serves approximately 900 thousand customers of all sizes, from enterprises to individuals, across approximately 46 countries and multiple industry verticals including healthcare, government, financial services, law and education. Our top 10 customers represent approximately 8% of total revenues and approximately 75% of our Small office home office (“SoHo”) customer accounts are older than 2 years. Beginning as an online fax company over two decades ago, Consensus has evolved into a leading global provider of enterprise secure communication solutions. Consensus is well positioned to capitalize on advancements in how people and businesses share private documents and information. Its mission is to democratize secure information interchange across technologies and industries, and solve the healthcare interoperability challenge. Consensus’ communication and interoperability solutions enable its customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries.

Current wording

Consensus is a leading provider of secure information delivery services with a scalable Software-as-a-Service (“SaaS”) platform. Consensus serves approximately 850 thousand customers of all sizes, from enterprises to individuals, across approximately 46 countries and multiple industry verticals including healthcare, government, financial services, law and education. Our top 10 customers represent approximately 8% of total revenues and approximately 75% of our Small office home office (“SoHo”) customer accounts are older than 2 years. Beginning as an online fax company over two decades ago, Consensus has evolved into a leading global provider of enterprise secure communication solutions. Consensus is well positioned to capitalize on advancements in how people and businesses share private documents and information. Its mission is to democratize secure information interchange across technologies and industries, and solve the healthcare interoperability challenge. Consensus’ communication and interoperability solutions enable its customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries.

Previous wording

The global economy continues to be impacted by macroeconomic uncertainty and volatility resulting from recent global conflicts, inflationary pressures, supply chain disruptions and challenges as well as labor market pressures. During fiscal year 2023 and through the first quarter of 2024, we have observed an increasingly competitive labor market. Increased employee turnover, changes in the availability of our employees and labor shortages generally have resulted in, and could continue to result in, increased costs, and could adversely impact the efficiency of our operations. We continue to actively monitor the situation and will continue to adapt our business operations as necessary.

Current wording

The global economy continues to be impacted by macroeconomic uncertainty and volatility resulting from recent global conflicts, inflationary pressures, higher interest rates, supply chain disruptions and challenges as well as labor market pressures, all of which could adversely impact the efficiency of our operations. We continue to actively monitor the situation and will continue to adapt our business operations as necessary.

Previous wording

For purposes of this management’s discussion and analysis of the results of operations and financial condition of Consensus (“MD&A”) section, we use the terms “the Company,” “we,” “us” and “our” to refer to Consensus. References in this MD&A section to “Former Parent” or “Former Parent Company” refers to Ziff Davis, Inc., collectively with its consolidated subsidiaries.

Current wording

For purposes of this management’s discussion and analysis of the results of operations and financial condition of Consensus (“MD&A”) section, we use the terms “the Company,” “we,” “us” and “our” to refer to Consensus.

Previous wording

The following table sets forth certain key performance metrics for our operations for the three months ended March 31, 2024 and 2023 (in thousands, except for percentages and Average Revenue per Customer Account):

Current wording

The following table sets forth certain key performance metrics for our operations for the three and six months ended June 30, 2024 and 2023 (in thousands, except for percentages and Average Revenue per Customer Account):

Previous wording

(2)Represents a monthly ARPA for the quarter, calculated as follows: Monthly ARPA on a quarterly basis is calculated using our standard convention of dividing revenue for the quarter by the average of the quarter’s beginning and ending customer base and dividing that amount by 3 months. We believe ARPA provides investors an understanding of the average monthly revenues we recognize per account associated within Consensus’ customer base. As ARPA varies based on fixed subscription fee and variable usage components, we believe it can serve as a measure by which investors can evaluate trends in the types of services, levels of services and the usage levels of those services across Consensus’ customers.

Current wording

(2)Represents a monthly ARPA for the quarter or year-to-date period, calculated as follows: Monthly ARPA on a quarterly basis is calculated using our standard convention of dividing revenue for the quarter by the average of the quarter’s beginning and ending customer base and dividing that amount by 3 months. Monthly ARPA on a year-to-date basis is calculated by dividing revenue for the year-to-date period by the average customer base for the applicable period and dividing that amount by the respective period. We believe ARPA provides investors an understanding of the average monthly revenues we recognize per account associated within Consensus’ customer base. As ARPA varies based on fixed subscription fee and variable usage components, we believe it can serve as a measure by which investors can evaluate trends in the types of services, levels of services and the usage levels of those services across Consensus’ customers.

Previous wording

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2023 Annual Report on Form 10-K filed with the SEC on February 28, 2024. During the three months ended March 31, 2024, there were no significant changes in our critical accounting policies and estimates.

Current wording

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our critical accounting policies are described in our 2023 Annual Report on Form 10-K filed with the SEC on February 28, 2024. During the six months ended June 30, 2024, there were no significant changes in our critical accounting policies and estimates.

Previous wording

Results of Operations for the Three Months Ended March 31, 2024 and 2023

Current wording

Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023

Previous wording

Revenues decreased by $3.3 million or 4% for the three months ended March 31, 2024 over the prior year comparable period. The decrease was due to a decline of $5.3 million or 13% in our SoHo business, partially offset by an increase of $2.0 million or 4% in our corporate business.

Current wording

Revenues decreased by $5.3 million or 6% for the three months ended June 30, 2024 over the prior year comparable period. The decrease was due to a decline of $6.7 million or 16% in our SoHo business, partially offset by an increase of $1.4 million or 3% in our corporate business.

Previous wording

The decrease in cost of revenues for the three months ended March 31, 2024 over the prior year comparable period was primarily due to a decrease of $0.7 million in data transmission expense compared to the prior year comparable three month period.

Current wording

The decrease in cost of revenues for the six months ended June 30, 2024 over the prior year comparable period was primarily due to a decrease of $1.4 million in data transmission expense, partially offset by an increase of $1.0 million in depreciation associated with platform development costs.

Previous wording

The decrease in sales and marketing expenses of $4.3 million for the three months ended March 31, 2024 over the prior year comparable period was primarily due to a reduction in third party advertising spend of $4.7 million, predominantly in SoHo, partially offset by an increase of $0.3 million in personnel-related expenses due to continued investment in the corporate sales team.

Current wording

The decrease in sales and marketing expenses of $5.8 million for the three months ended June 30, 2024 over the prior year comparable period was primarily due to a reduction in third party advertising spend of $5.5 million, predominantly in SoHo, and a decrease of $0.4 million in personnel-related expenses.

Previous wording

The decrease in general and administrative expenses for the three months ended March 31, 2024 over the prior year comparable period was primarily due to decreases of $1.2 million in professional fees and $1.0 million in personnel-related expenses.

Current wording

The decrease in general and administrative expenses for the six months ended June 30, 2024 over the prior year comparable period was primarily due to a decrease of $2.0 million in personnel-related expenses.

Previous wording

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2024 and 2023 (in thousands):

Current wording

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2024 and 2023 (in thousands):

Previous wording

Interest expense. Our interest expense is due to outstanding debt and is reduced by any capitalized interest. Interest expense for the three months ended March 31, 2024 and 2023 was $6.2 million and $12.6 million, respectively. The decrease between periods was primarily due to the partial extinguishment of debt in the first quarter of 2024, resulting in a gain of $4.9 million.

Current wording

Interest expense. Our interest expense is due to outstanding debt and is reduced by any capitalized interest. Interest expense was $8.7 million and $12.8 million for the three months ended June 30, 2024 and 2023, respectively, and.$14.9 million and $25.4 million for the six months ended June 30, 2024 and 2023, respectively. The decrease between periods was primarily due to the partial extinguishment of debt, resulting in a gain of $1.7 million and $6.6 million for the three and six months ended June 30, 2024, respectively.

Previous wording

Interest income. Our interest income is generated from interest earned on cash and cash equivalents. Interest income was $0.9 million and zero for the three months ended March 31, 2024 and 2023, respectively. Interest income was higher in 2024 compared to the prior year comparable period due to investments in money market funds that began in the second quarter of 2023.

Current wording

Interest income. Our interest income is generated from interest earned on cash and cash equivalents. Interest income was $0.6 million and $0.7 million for the three months ended June 30, 2024 and 2023, respectively, and $1.5 million and $0.7 million for the six months ended June 30, 2024 and 2023, respectively. Interest income for the three months ended June 30, 2024 was consistent with the prior year comparable period. Interest income was higher for the six months ended June 30, 2024 compared to the prior year comparable period due to investments in money market funds that began in the second quarter of 2023.

Previous wording

Other income (expense), net. Our other income (expense), net is generated primarily from foreign currency and miscellaneous items. Other income (expense), net for the three months ended March 31, 2024 and 2023 was $3.9 million and $(0.8) million, respectively. The change between periods was primarily attributable to exchange rate fluctuations on inter-company balances between periods in foreign subsidiaries that were in functional currencies other than the U.S. Dollar.

Current wording

Other income (expense), net. Our other income (expense), net is generated primarily from foreign currency and miscellaneous items. Other income (expense), net was $0.7 million and $0.6 million for the three months ended June 30, 2024 and 2023, respectively, and $4.6 million and $(0.3) million for the six months ended June 30, 2024 and 2023, respectively. The change between periods was primarily attributable to exchange rate fluctuations on intercompany balances between periods in foreign subsidiaries that were in functional currencies other than the U.S. Dollar.

Previous wording

The provision for income taxes for the three months ended March 31, 2024 and 2023 was $9.9 million and $5.1 million, respectively.

Current wording

The provision for income taxes was $8.6 million and $6.2 million for the three months ended June 30, 2024 and 2023, respectively, and $18.5 million and $11.3 million for the six months ended June 30, 2024 and 2023, respectively.

Previous wording

The Company’s effective tax rate for the three months ended March 31, 2024 and 2023 was 27.3% and 24.9%, respectively. The increase in our effective income tax rate for the three months ended March 31, 2024 was primarily attributable to the change in the geographical mix of income and an increase in the valuation allowance.

Current wording

The Company’s effective tax rate was 26.5% and 22.7% for the three months ended June 30, 2024 and 2023, respectively, and 26.9% and 23.7% for the six months ended June 30, 2024 and 2023, respectively. The increase in our effective income tax rate for the three and six months ended June 30, 2024 was primarily attributable to the change in the geographical mix of income, an increase in the valuation allowance, and an increase in state taxes on foreign earnings not permanently reinvested.

Previous wording

At March 31, 2024, we had cash and cash equivalents of $61.5 million compared to $88.7 million at December 31, 2023. The decrease in cash and cash equivalents resulted primarily from cash used for debt repurchases, capitalized expenditures and common stock repurchases, partially offset by cash provided by operations. As of March 31, 2024, cash and cash equivalents held within domestic and foreign jurisdictions were $33.0 million and $28.5 million, respectively.

Current wording

As of June 30, 2024, we had cash and cash equivalents of $49.2 million compared to $88.7 million as of December 31, 2023. The decrease in cash and cash equivalents resulted primarily from cash used for debt repurchases, capitalized expenditures and common stock repurchases, partially offset by cash provided by operations. As of June 30, 2024, cash and cash equivalents held within domestic and foreign jurisdictions were $34.3 million and $14.9 million, respectively.

Previous wording

On March 4, 2022, the Company entered into a Credit Agreement with certain lenders party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as agent (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided Consensus with a revolving credit facility of $25.0 million (the “Credit Facility”) with an option held by the Company to obtain an additional commitment of up to a maximum of $25.0 million. The final maturity of the Credit Facility will occur on March 4, 2027. As of March 31, 2024, no amount has been drawn down on the Credit Facility.

Current wording

On March 4, 2022, the Company entered into a Credit Agreement with certain lenders party thereto (collectively, the “Lenders”) and MUFG Union Bank, N.A., as agent (the “Agent”). Pursuant to the Credit Agreement, the Lenders have provided Consensus with a revolving credit facility of $25.0 million (the “Credit Facility”) with an option held by the Company to obtain an additional commitment of up to a maximum of $25.0 million. The final maturity of the Credit Facility will occur on March 4, 2027. As of June 30, 2024, no amount had been drawn down on the Credit Facility.

Previous wording

Our long-term contractual obligations generally include our debt and related interest payments, noncancellable operating leases as well as other commitments. As of March 31, 2024, we had outstanding $679.0 million in aggregate principal amount of indebtedness (see Note 7 - Long-Term Debt of the Notes to the Condensed Consolidated Financial Statements) and total minimum lease payments of $18.2 million, which had a weighted average remaining lease term of 6.5 years. As of March 31, 2024, our liability for uncertain tax positions was $10.5 million. Due to uncertainties in the timing of the amounts and timing of cash settlement with the taxing authorities, we are unable to make a reasonably reliable estimate of the timing of payments.

Current wording

Our long-term contractual obligations generally include our debt and related interest payments, noncancellable operating leases as well as other commitments. As of June 30, 2024, we had outstanding $649.3 million in aggregate principal amount of indebtedness (see Note 7 - Long-Term Debt of the Notes to the Condensed Consolidated Financial Statements) and total minimum lease payments of $17.4 million, which had a weighted average remaining lease term of 6.3 years. As of June 30, 2024, our liability for uncertain tax positions was $11.2 million. Due to uncertainties in the timing of the amounts and timing of cash settlement with the taxing authorities, we are unable to make a reasonably reliable estimate of the timing of payments.

Previous wording

On November 9, 2023, the Board of Directors approved a debt repurchase program, pursuant to which Consensus may reduce, through redemptions, open market purchases, tender offers, privately negotiated purchases or other retirements, a combination of the outstanding principal balance of the 2026 Senior Notes and 2028 Senior Notes (“Debt Repurchase Program”). The authorization permits an aggregate principal amount reduction of up to $300.0 million and expires on November 9, 2026. The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant. Any gains or losses on extinguishment of debt are recognized in interest expense on the Condensed Consolidated Statements of Income. As of March 31, 2024 the Company has retired an aggregate of $126.0 million in principal of its senior notes under this program.

Current wording

On November 9, 2023, the Board of Directors approved a debt repurchase program, pursuant to which Consensus may reduce, through redemptions, open market purchases, tender offers, privately negotiated purchases or other retirements, a combination of the outstanding principal balance of the 2026 Senior Notes and 2028 Senior Notes (“Debt Repurchase Program”). The authorization permits an aggregate principal amount reduction of up to $300.0 million and expires on November 9, 2026. The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant. Any gains or losses on extinguishment of debt are recognized in interest expense on the Condensed Consolidated Statements of Income. As of June 30, 2024 the Company had retired an aggregate of $155.7 million in principal of its senior notes under this program.

Previous wording

On March 1, 2022, the Company’s Board of Directors approved a share buyback program. Under this program, the Company may purchase in the public market or in off-market transactions up to $100.0 million worth of the Company’s common stock through February 2025. The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant. The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans and during the three months ended March 31, 2024 and 2023, the Company repurchased 42,962 and 270,192 shares, respectively, at an aggregate cost of $0.7 million and $9.2 million, respectively, under this program, inclusive of excise tax of zero in both periods. Cumulatively as of March 31, 2024, 1,071,624 shares have been repurchased under this program at an aggregate cost of $32.0 million (inclusive of excise tax of $0.2 million). The excise tax is assessed at 1% of the fair market value of net stock repurchases after December 31, 2022.

Current wording

On March 1, 2022, the Company’s Board of Directors approved a share buyback program. Under this program, the Company may purchase in the public market or in off-market transactions up to $100.0 million worth of the Company’s common stock through February 2025. The timing and amounts of purchases will be determined by the Company, depending on market conditions and other factors it deems relevant. The Company entered into Rule 10b-18 and Rule 10b5-1 trading plans under this program. There were no shares repurchased during the three months ended June 30, 2024 under this program. During the three months ended June 30, 2023 the Company repurchased 68,362 shares under this program at an aggregate cost of $2.1 million, inclusive of excise tax of $0.1 million. During the six months ended June 30, 2024 and 2023, the Company repurchased 42,962 and 338,554 shares, respectively, at an aggregate cost of $0.7 million and $11.3 million, respectively, inclusive of excise tax of zero and $0.1 million, respectively. Cumulatively as of June 30, 2024, 1,071,624 shares have been repurchased under this program at an aggregate cost of $32.0 million (inclusive of excise tax of $0.2 million). The excise tax is assessed at 1% of the fair market value of net stock repurchases after December 31, 2022.

Previous wording

-28- satisfy the employees’ tax withholding obligations that arise upon the vesting of restricted stock. As a result, the number of shares issued upon vesting for these awards is net of the statutory withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases in the Company’s condensed consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the Company’s share repurchase program described above. During the three months ended March 31, 2024 and 2023, the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 15,340 shares and 11,418 shares, respectively.

Current wording

At the time of certain vesting events related to restricted stock units or restricted stock awards that are held by participants in Consensus’ Equity Incentive Plan, a portion of the awards subject to vesting are withheld by the Company to satisfy the employees’ tax withholding obligations that arise upon the vesting of restricted stock. As a result, the number of shares issued upon vesting for these awards is net of the statutory withholding requirements that the Company pays on behalf of its employees. Although shares withheld are not issued, they are treated as common share repurchases in the Company’s condensed consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting. These shares do not count against the authorized capacity under the Company’s share repurchase program described above. During the three months ended June 30, 2024 and 2023, the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 21,567 shares and 21,538 shares, respectively. During the six months ended June 30, 2024 and 2023, the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 36,907 shares and 32,956 shares, respectively.

Previous wording

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was $44.7 million and $38.0 million for the three months ended March 31, 2024 and 2023, respectively. Our operating cash flows resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services and employee compensation. The increase in our net cash provided by operating activities in 2024 compared to 2023 was primarily attributable to increased income after excluding noncash items. In addition, contributing to the increase in cash provided by operating activities, there was an increase in income tax payable in 2024 compared to 2023, and less of an increase in accounts receivable in 2024 compared to 2023. These sources of cash flow were partially offset by a lower increase in accounts payable and accrued expenses in 2024 compared to 2023.

Current wording

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was $69.1 million and $52.1 million for the six months ended June 30, 2024 and 2023, respectively. Our operating cash flows resulted primarily from cash received from our customers offset by cash payments we made to third parties for their services and employee compensation. The increase in our net cash provided by operating activities in 2024 compared to 2023 was primarily attributable to increased income after excluding noncash items. In addition, there was an increase in cash flows from changes in our net working capital in 2024 compared to 2023, most notably the change in the balances of our accounts payable and accrued expenses and accounts receivable over the presented periods.

Previous wording

Net cash used in investing activities was $8.9 million and $12.5 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, net cash used in investing activities consisted of capital expenditures associated with the purchase of property and equipment (including capitalized labor). Capital expenditures remained consistent from 2023 to 2024, however in 2023 the Company purchased an investment, which increased the net cash used in investing activities in 2023.

Current wording

Net cash used in investing activities was $17.5 million and $22.7 million for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, net cash used in investing activities consisted of capital expenditures associated with the purchase of property and equipment (including capitalized labor). Capital expenditures remained consistent from 2023 to 2024, however in 2023 the Company purchased an investment, which increased the net cash used in investing activities in 2023.

Previous wording

Net cash used in financing activities was $58.8 million and $9.6 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024, net cash used in financing activities was primarily attributable to cash outlays the Company used to repurchase a portion of its outstanding senior notes debt facilities. For the three months ended March 31, 2023, net cash used in financing activities was primarily attributable to cash used to repurchase common stock. For the three months ended March 31, 2024 and 2023, net cash used in financing activities also included the payment of employee income tax obligations related to the net settlement of equity awards.

Current wording

Net cash used in financing activities was $86.1 million and $11.5 million for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 2024, net cash used in financing activities was primarily attributable to cash outlays the Company used to repurchase a portion of its outstanding senior notes debt facilities. For the six months ended June 30, 2023, net cash used in financing activities was primarily attributable to cash used to repurchase common stock. For the six months ended June 30, 2024 and 2023, net cash used in financing activities also included the payment of employee income tax obligations related to the net settlement of equity awards and cash inflows related to the issuance of common stock under the Company’s employee stock purchase plan.