Digital fax company Consensus Cloud Solutions (NASDAQ:CCSI) has gained 54.53% over the past six months and is trading 27.15% below its 52-week high of $31.82. Despite revenues falling 5.7% (YoY), CCSI is a hold as it continues to deleverage while reducing costs and adding new customers in H2 2024.
Fair Quarterly Earnings and Progress into 2025
Consensus Cloud Solutions reported Q2 2024 earnings with revenues at $87.5 million, a record low from a high of $92.792 million in Q2 2023. The company attributed this to a 15.7% (YoY) decline in its Small office home office (SoHo) network business revenues. Notwithstanding, there was a 2.7% (YoY) increase in CCSI’s corporate business by $1.4 million, leading to a 13.27% (YoY) rise in net profit at $23.9 million.
Even more interesting is that CCSI lowered its debt by 18.96% (YoY) to $657 million from a high of $810.7 million reported in Q2 2023. About $29.7 million of long-term debt was retired in Q2 2024, representing a decline of 4.3% (QoQ) and up to $154.1 million from November 2023 a decrease of almost 20% from that period.
Strategic shift
At the beginning of 2024, CCSI reiterated its managerial strategy that included identifying and upselling its SoHo clientele to revamp the corporate segment and debt repurchase. However, into the second quarter of the year, it became imperative for the company to organize its capital allocation program so that it could repurchase shares and reduce debt levels. To me, this allocation (at the moment) appears better than growth-focused spending.
It posted higher adjusted EBITDA margins at an upside of 56.1% (YoY) at $49.1 million propelled by higher income margins from operations. Free cash flow in Q2 2024 stood at $15.809 million, an increase of 295.8% (YoY) from a low of $3.994 million. CCSI’s management intends to restructure its operations by tightening payments and lowering inventories to raise free cash flow into 2025. In the 6 months ending on June 30, 2024, CCSI’s FCF grew 54.34% (YoY) meaning that a 50% increase in H2 2024 will push the FCF to the range of $100 million into 2025.
The company had promised back in 2022 that it would execute a $100 million share repurchase program by February 2025. Under this plan, it already remains with $68.21 million worth of stock for repurchase after mopping up $31.79 million worth of shares. CCSI has a market cap of $464.87 million with its total common shares outstanding at 19.3 million indicating an average share price of $24.09. Upon execution of this repurchase program, CCSI will reduce the outstanding share balance by about 3 million shares.
Overall, having repaid $154.1 million of its debt into H2 2024, CCSI posted a net debt against adjusted EBITDA of 3.1X (on a 12-trailing month basis) into 2025. Higher debt repayments against increasing adjusted EBITDA by the end of 2024 will mean a stronger refinancing potential of CCSI that will enhance the share price by H1 2025.
Growth initiatives
I expect CCSI’s initiatives in health, SoHo, and corporate business to respond with some growth into 2025. After October 2021, when it was spun out of its parent company J2 Global, CCSI has expanded its eFax business and the general SoHo business. In 2022, CCSI began to grow corporate relationships with large companies (thereafter customers) that used MetroFax, MyFax, and Fax.com within its business. It also advanced the concept of secure interoperability within the healthcare segment, which has been its biggest customer. The digital cloud fax market was estimated at $3.46 billion in 2023 and is expected to reach $6.50 billion by 2029, growing at a CAGR of 11.06% within the forecast period.
CCSI has been consistent in adding more government agencies to its digital cloud fax program. Through the eFax technology, CCSI is customizing Enterprise Cloud Fax (ECFax) solution for government agencies. It stated that it was on course to getting authorization from FedRAMP, as the “sole cloud fax solution” for Federal agencies. This approval will help the company access contracts from other sectors such as law enforcement, finance, and even defense (alongside healthcare).
Speaking of customers, Consensus Cloud announced additional clients (from the Federal government) added through the Veteran Affairs (VA) digital cloud service in partnership with Accenture Federal Services. While releasing its Q2 2024 earnings, CCSI’s management stated,
The implementation of EC Fax at the VA is proceeding as planned, and our enthusiasm for its potential remains unwavering. We are observing steady growth in line with our projections, and we confidently confirm that we forecast more than $2 million in revenue from the EC Fax program in 2024 and expect continued growth in the coming months and years as we move forward.”
By Q2 2024, CCSI had incorporated more customers in its corporate channel, raising its corporate revenue by 2.7% (YoY) while SoHo’s revenue slumped by 15.67% (YoY). Still, there exists an interrelationship between these two segments since its new e-commerce solution, eFax Protect (an upgrade from the SoHo channel) helped to add new clients to the corporate channel.
CCSI has operated within the premise of scalability and innovation since it went public. In Q2 2024 the management underscored the impact of its new artificial intelligence (AI) offering, Clarity AI. This is an intelligent data extraction solution that retrieves data from an unstructured fax document, and it is more of an advanced eFax system that incorporates AI and machine learning (ML). I believe this is the next frontier in the healthcare sector as it attaches a patient’s chart with unstructured documents (like referrals, demographics, and even consent forms) in hospitals and providers’ offices without the use of a middleman. It matches this information and sends it to a physician’s email for scrutiny and execution. As it expands, CCSI is looking to provide more turnkey solutions that are data-centric while operating on autonomy.
Risk
Most of CCSI’s corporate/ SoHo business is in the US. I believe the company has yet to take advantage of other jurisdictions where it has subsidiaries. In its Q2 2024 Sec Filings, CCSI stated that it is required to file returns in Japan, Netherlands, Ireland, France, the US, and Hong Kong. However, very little information is available on current activities in the international sphere. The company also realized lower revenues in the SoHo business segment as compared to the corporate business.
Secondly, the company indicated its commitment to fulfilling the $100 million share buyback program by February 2025. Failure to honor this commitment may hurt the stock. Further, it should continue with its debt repurchase, which requires a reduction of up to $300 million by November 2026. It has already retired half this amount (about $154 million as of June 30, 2024) and should be on course to fulfill the rest within the stated period. However, the total debt stands at $657 million against a cash reserve of $49.20 million, showing the company has a positive net debt status.
Valuation
CCSI’s forward price-to-earnings ratio sits at 5.14X against the industry average of 29.28X (representing a difference of -82.45%). This ratio shows the stock is undervalued, and we may see an upside into 2025. The company’s strategy of lowering its costs while growing EBITDA margins in the range of 50% to 55% may also work to increase the share price.
Takeaway
I have argued in this article that Consensus Cloud Solutions is a hold as it prioritizes the repurchase of shares and debts into 2025. CCSI has already repurchased half of the $300 million (first tranche) debt due in November 2026 and the share price is trading at a discount having declined 27.45% (YoY). Still, the company is facing some downside with the SoHo business segment after its sector revenue dropped 15.7% (YoY). It also has a positive net debt status, with its total debt at $657 million against a cash reserve of $49.20 million.
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