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 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.

Current wording

Consensus is a leading provider of secure information delivery services with a scalable Software-as-a-Service (“SaaS”) platform. Consensus serves approximately 825 thousand customers of all sizes, from enterprises to individuals, across approximately 45 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 74% 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 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):

Current wording

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

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 six months ended June 30, 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 nine months ended September 30, 2024, there were no significant changes in our critical accounting policies and estimates.

Previous wording

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

Current wording

Results of Operations for the Three and Nine Months Ended September 30, 2024 and 2023

Previous wording

Revenues decreased by $8.6 million or 5% for the six months ended June 30, 2024 over the prior year comparable period. The decrease was due to a decline of $11.9 million or 14% in our SoHo business, partially offset by an increase of $3.3 million or 3% in our corporate business.

Current wording

Revenues decreased by $2.8 million or 3% for the three months ended September 30, 2024 over the prior year comparable period. The decrease was due to a decline of $5.5 million or 14% in our SoHo business, partially offset by an increase of $2.7 million or 5% in our corporate business.

Previous 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.

Current wording

Revenues decreased by $11.4 million or 4% for the nine months ended September 30, 2024 over the prior year comparable period. The decrease was due to a decline of $17.4 million or 14% in our SoHo business, partially offset by an increase of $6.0 million or 4% in our corporate business.

Previous wording

The decrease in cost of revenues for the three months ended June 30, 2024 over the prior year comparable period was primarily due to decreases of $0.7 million in data transmission expense and $0.2 million in online processing fees, partially offset by an increase of $0.7 million in depreciation associated with platform development costs.

Current wording

The increase in cost of revenues for the three months ended September 30, 2024 over the prior year comparable period was primarily due to increases of $0.9 million in depreciation associated with platform development costs and $0.8 million in network operations costs, partially offset by decreases of $0.3 million in data transmission expense, $0.2 million in personnel-related expenses and $0.2 million in online processing fees.

Previous wording

General and administrative expenses for the three months ended June 30, 2024 remained consistent with the prior year comparable period.

Current wording

Cost of revenues for the nine months ended September 30, 2024 remained consistent with the prior year comparable period.

Previous wording

The decrease in sales and marketing expenses of $10.1 million for the six months ended June 30, 2024 over the prior year comparable period was primarily due to a reduction in third party advertising spend of $10.2 million, predominantly in SoHo.

Current wording

The decrease in sales and marketing expenses of $2.8 million for the three months ended September 30, 2024 over the prior year comparable period was primarily due to a reduction in third party advertising spend of $2.7 million, predominantly in SoHo.

Previous 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.

Current wording

The decrease in sales and marketing expenses of $12.9 million for the nine months ended September 30, 2024 over the prior year comparable period was primarily due to a reduction in third party advertising spend of $12.8 million, predominantly in SoHo.

Previous wording

The decrease in research, development and engineering for the three months ended June 30, 2024 over the prior year comparable period was primarily due to a decrease of $0.1 million in computer related expense.

Current wording

The increase in research, development and engineering for the three months ended September 30, 2024 over the prior year comparable period was primarily due to an increase of $0.3 million in personnel-related expenses.

Previous wording

The decrease in research, development and engineering for the six months ended June 30, 2024 over the prior year comparable period was primarily due to a decrease of $0.2 million in personnel-related expenses, partially offset by an increase of $0.1 million in computer related expense.

Current wording

The increase in research, development and engineering for the nine months ended September 30, 2024 over the prior year comparable period was primarily due to increases of $0.1 million in personnel-related expenses and $0.1 million in computer related expense.

Previous 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.

Current wording

The decrease in general and administrative expenses for the three months ended September 30, 2024 over the prior year comparable period was primarily due to decreases of $0.7 million in non-income related tax 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 and six months ended June 30, 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 nine months ended September 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 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.

Current wording

Interest expense. Our interest expense is due to outstanding debt and is reduced by any capitalized interest. Interest expense was $9.8 million and $12.6 million for the three months ended September 30, 2024 and 2023, respectively, and $24.6 million and $38.0 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease between periods was primarily due to the partial extinguishment of debt, resulting in a gain of $0.1 million and $6.7 million for the three and nine months ended September 30, 2024, respectively.

Previous 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.

Current wording

Interest income. Our interest income is generated from interest earned on cash and cash equivalents. Interest income was $0.7 million and $1.5 million for the three months ended September 30, 2024 and 2023, respectively, and $2.2 million and $2.2 million for the nine months ended September 30, 2024 and 2023, respectively. Interest income for the three months ended September 30, 2024 decreased compared to the prior year comparable period as the Company decreased its investment in money market funds in order to repurchase long-term debt. Interest income for the nine months ended September 30, 2024 was consistent with the prior year comparable period.

Previous 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.

Current wording

Other (expense) income, net. Our other (expense) income, net is generated primarily from foreign currency and miscellaneous items. Other (expense) income, net was $(2.1) million and $3.7 million for the three months ended September 30, 2024 and 2023, respectively, and $2.5 million and $3.4 million for the nine months ended September 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

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations (including those related to transfer pricing) and different tax rates in the various jurisdictions in which we operate. The tax basis of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

Current wording

Our effective tax rate is based on pre-tax income, statutory tax rates, tax regulations and different tax rates in the various jurisdictions in which we operate. The tax basis of our assets and liabilities reflect our best estimate of the tax benefits and costs we expect to realize. When necessary, we establish valuation allowances to reduce our deferred tax assets to an amount that will more likely than not be realized.

Previous 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.

Current wording

The provision for income taxes was $6.1 million and $7.5 million for the three months ended September 30, 2024 and 2023, respectively, and $24.7 million and $18.9 million for the nine months ended September 30, 2024 and 2023, respectively.

Previous 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.

Current wording

Our effective tax rate was 22.5% and 23.9% for the three months ended September 30, 2024 and 2023, respectively, and 25.7% and 23.8% for the nine months ended September 30, 2024 and 2023, respectively. The decrease in our effective income tax rate for the three months ended September 30, 2024 was primarily due to the change in the geographical mix of income. The increase in our effective income tax rate for the nine months ended September 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

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.

Current wording

As of September 30, 2024, we had cash and cash equivalents of $54.6 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 September 30, 2024, cash and cash equivalents held within domestic and foreign jurisdictions were $29.3 million and $25.3 million, respectively.

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 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.

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 September 30, 2024, we had outstanding $618.2 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 $18.0 million, which had a weighted average remaining lease term of 5.9 years. As of September 30, 2024, our liability for uncertain tax positions was $11.9 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 June 30, 2024 the Company had retired an aggregate of $155.7 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 September 30, 2024, the Company had retired an aggregate of $186.8 million in principal of its senior notes under this program. In connection with the Company’s Debt Repurchase Program (see Note 7 - Long-Term Debt), the Company paid $9.2 million, which includes accrued interest, to repurchase $9.1 million in principal of its senior notes subsequent to the period ended September 30, 2024.

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 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.

Current wording

-29- under this program. There were no shares repurchased during the three months ended September 30, 2024 under this program. During the three months ended September 30, 2023 the Company repurchased 152,399 shares under this program at an aggregate cost of $3.8 million, inclusive of excise tax of $0.1 million. During the nine months ended September 30, 2024 and 2023, the Company repurchased 42,962 and 490,953 shares, respectively, at an aggregate cost of $0.7 million and $15.1 million, respectively, inclusive of excise tax of zero and $0.1 million, respectively. Cumulatively as of September 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

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.

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 September 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 3,489 shares and 2,412 shares, respectively. During the nine months ended September 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 40,396 shares and 35,368 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 $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.

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 $110.6 million and $112.1 million for the nine months ended September 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 decrease in our net cash provided by operating activities over the prior comparable period was primarily attributable to a decrease in our net working capital accounts of $3.4 million, partially offset by increased income of $1.9 million after excluding noncash items.

Previous 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.

Current wording

Net cash used in investing activities was $25.5 million and $32.7 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 30, 2024, net cash used in investing activities consisted of capital expenditures associated with the purchase of property and equipment (including capitalized labor). The decrease in our net cash used in investing activities over the prior comparable period was primarily attributable to less cash used for investments and capital expenditures associated with the purchase of property and equipment (including capitalized labor).

Previous 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.

Current wording

Net cash used in financing activities was $116.8 million and $14.1 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 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 nine months ended September 30, 2023, net cash used in financing activities was primarily attributable to cash used to repurchase common stock. The change in net cash used in financing activities over the prior comparable period was primarily attributable to an increase in cash outflows related to the repurchase of our debt in the current period, which was absent in the prior period, partially offset by a decrease in the repurchases of the Company’s common stock.