# Consensus Cloud Solutions, Inc. (CCSI) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Consensus Cloud Solutions, Inc.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1866633/000186663324000004/ccs-20231231.htm
Accession: 0001866633-24-000004
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CCSI/
All MD&A years: /company/CCSI/mda/
Previous year: /company/CCSI/mda/fy2022/ (FY 2022)
Next year: /company/CCSI/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In addition to historical information, the following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements. These forward-looking statements involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed in Part I, Item 1A - “Risk Factors” in this Annual Report on Form 10-K. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Readers should carefully review the Risk Factors and the risk factors set forth in other documents we file from time to time with the SEC.

Overview

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 47 countries and multiple industry verticals including healthcare, government, financial services, law and education. 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’s communication and interoperability solutions enable its customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries.

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 2022 and through 2023, 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.

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Key Performance Metrics

We use the following metrics to generally assess the operational and financial performance of our business, including the growth of our business, the value provided by customers to our business and our customer retention that provide insights that contribute to certain of our business planning decisions. We believe these financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business.

The following table sets forth certain key performance metrics for our continuing operations for the years ended December 31, 2023, 2022 and 2021 (in thousands, except for percentages):

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["","2023","","2022","","2021"],["Revenue ($ in thousands)"],["Corporate","$","199,621","","$","192,195","","$","169,732"],["SoHo","162,916","","170,199","","182,390"],["Total","362,537","","362,394","","352,122"],["Other revenues","25","","28","","542"],["Consolidated","$","362,562","","$","362,422","","$","352,664"],["Average Revenue per Customer Account (\u201cARPA\u201d)(1)(2)"],["Corporate","$","315.51","","$","331.77","","$","308.42"],["SoHo","$","15.31","","$","14.32","","$","14.40"],["Consolidated","$","32.16","","$","29.07","","$","26.65"],["Customer Accounts (in thousands)(1)"],["Corporate","54","","","52","","","45"],["SoHo","831","","","942","","","1,039"],["Consolidated","885","","","994","","","1,084"],["Paid Adds (in thousands)(3)"],["Corporate","12","","","15","","","13"],["SoHo","274","","","364","","","411"],["Consolidated","286","","","379","","","424"],["Monthly Churn %(4)"],["Corporate","1.49","%","","1.78","%","","2.68","%"],["SoHo","3.54","%","","3.70","%","","3.37","%"],["Consolidated","3.43","%","","3.61","%","","3.34","%"]]
[[/GREPCENT_TABLE]]

(1)Consensus customers are defined as paying Corporate and SoHo customer accounts.

(2)Represents a monthly ARPA for the year calculated as follows. Monthly ARPA on an annual basis is calculated by dividing revenue for the year by the average customer base for the applicable four quarters and dividing that amount by 12 months. We believe ARPA provides investors an understanding of the average monthly revenues we recognize per account associated within the 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.

(3)Paid Adds represents paying new Consensus customer accounts added during the annual period.

(4)Monthly churn is defined as Consensus paying customer accounts that cancelled its services during the period divided by the average number of customers over the period. This measure is calculated monthly and expressed as an average over the applicable period.

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Critical Accounting Policies and Estimates

We prepare our consolidated financial statements and related disclosures in accordance with U.S. generally accepted accounting principles (“GAAP”) and our discussion and analysis of our financial condition and operating results requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K, which describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities. Actual results may differ significantly from those estimates under different assumptions and conditions and may be material.

We believe that our most critical accounting policies are those related to revenue recognition, internal-use software development costs, share-based compensation expense, income taxes, tax contingencies and impairment or disposal of long-lived and intangible assets. We consider these policies critical because they are those that are most important to the portrayal of our financial condition and results and require management’s most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Senior management has reviewed these critical accounting policies and related disclosures with the Audit Committee of the Company’s Board of Directors.

Revenue Recognition

Our revenues substantially consist of monthly recurring subscription and usage-based fees, a significant portion of which are paid in advance by credit card. We defer the portions of monthly, quarterly, semi-annually and annually recurring subscription and usage-based fees collected in advance of the satisfaction of performance obligations and recognize them in the period earned.

Along with our numerous proprietary solutions, we also generate revenues by reselling various third-party solutions. These third-party solutions, along with our proprietary products, allow us to offer customers a variety of solutions to better meet their needs. We record revenue on a gross basis with respect to reseller revenue because we have control of the specified good or service prior to transferring control to the customer. See Note 3 - Revenues of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K.

Internal-Use Software Development Costs

We capitalize certain internal-use software and website development costs that are incurred during the application development stage, provided that management with the relevant authority authorizes and commits to the funding of the project, it is probable the project will be completed, and the software will be used to perform the function intended. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Capitalized internal-use software development costs are included in property and equipment and are amortized on a straight-line basis over their estimated useful lives. There is judgment involved in estimating the stage of development as well as estimating time allocated to a particular project. A significant change in the time spent on each project could have a material impact on the amount capitalized and related amortization expense in subsequent periods. See Note 7 - Property and Equipment of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K.

Share-Based Compensation Expense

We account for share-based awards to employees and non-employees in accordance with the provisions of FASB ASC Topic No. 718, Compensation - Stock Compensation (“ASC 718”). Accordingly, we measure share-based compensation expense at the grant date, based on the fair value of the award, and recognize the expense over the employee’s requisite service period using the straight-line method. The measurement of share-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate, dividend rate and forfeiture rate. These inputs are subjective and are determined using management’s judgment. If differences arise between the assumptions used in determining share-based compensation expense and the actual factors, which become known over time, we may change the input factors used in determining future share-based compensation expense. Any such changes could materially impact our results of operations in the period in which the changes are made and in periods thereafter. The Company estimates the expected term based upon the contractual term of the award.

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See Note 15 - Equity Incentive and Employee Stock Purchase Plan of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K.

Income Taxes

Our income is subject to taxation in both the U.S. and numerous foreign jurisdictions. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates of whether, and the extent to which, additional taxes will be due. These reserves for tax contingencies are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of a tax audit or lapse of a statute of limitations. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate.

We account for income taxes in accordance with FASB ASC Topic No. 740, Income Taxes (“ASC 740”), which requires that deferred tax assets and liabilities are recognized using enacted tax rates for the effect of temporary differences between the book and tax basis of recorded assets and liabilities. GAAP also requires that deferred tax assets are reduced by a valuation allowance if it is more likely than not that some or all of the net deferred tax assets will not be realized. Our valuation allowance is reviewed quarterly based upon the facts and circumstances known at the time. In assessing this valuation allowance, we review historical and future expected operating results and other factors to determine whether it is more likely than not that deferred tax assets are realizable. See Note 13 - Income Taxes of the notes to consolidated financial statements in Part II, Item 8 of this Form 10-K.

Income Tax Contingencies

We calculate current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the following year. Adjustments based on filed returns are recorded when identified in the subsequent year.

ASC 740 provides guidance on the minimum threshold that an uncertain income tax position is required to meet before it can be recognized in the financial statements and applies to all tax positions taken by a company. ASC 740 contains a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to evaluate the income tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. If it is not more likely than not that the benefit will be sustained on its technical merits, no benefit will be recorded. Uncertain income tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. We recognize accrued interest and penalties related to uncertain income tax positions in income tax expense on our Consolidated Statements of Income. On a quarterly basis, we evaluate uncertain income tax positions and establish or release reserves as appropriate under GAAP.

As a multinational corporation, we are subject to taxation in many jurisdictions, and the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in various taxing jurisdictions. Our estimate of the potential outcome of any uncertain tax issue is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. Therefore, the actual liability for U.S. or foreign taxes may be materially different from our estimates, which could result in the need to record additional tax liabilities or potentially to reverse previously recorded tax liabilities. In addition, we may be subject to examination of our tax returns by the U.S. Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities.

Recent Accounting Pronouncements

See Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, to our accompanying consolidated financial statements for a description of recent accounting pronouncements and our expectations of their impact on our consolidated financial position and results of operations.

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Results of Operations

Years Ended December 31, 2023, 2022 and 2021

    The main strategic focus of our Consensus offerings is to enable our customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries. As a result, we expect to continue to take steps to enhance our existing offerings and offer new services to continue to satisfy the evolving needs of our customers.

We expect our business to primarily grow organically and inorganically through the use of capital for re-investment in the business and opportunistic acquisitions that expedite our product roadmap in the interoperability space should they arise.

The following table sets forth information derived from our Statements of Income as a percentage of revenues for the years ended December 31, 2023, 2022 and 2021. This information should be read in conjunction with the accompanying financial statements and the Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["","2023","","2022","","2021"],["Revenues","100%","","100%","","100%"],["Cost of revenues","19","","17","","16"],["Gross profit","81","","83","","84"],["Operating expenses:"],["Sales and marketing","18","","18","","15"],["Research, development and engineering","2","","3","","2"],["General and administrative","20","","20","","17"],["Total operating expenses","40","","41","","34"],["Income from operations","41","","42","","50"],["Interest expense","(13)","","(14)","","(4)"],["Interest income","1","","\u2014","","\u2014"],["Other (expense) income, net","(1)","","\u2014","","\u2014"],["Income before income taxes","28","","28","","46"],["Income tax expense","7","","7","","11"],["Income from continuing operations","21","","21","","35"],["Loss from discontinued operations, net of income tax","\u2014","","\u2014","","(3)"],["Net income","21%","","21%","","32%"]]
[[/GREPCENT_TABLE]]

Revenues

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","2023","","2022","","2021","","Percentage Change 2023 versus 2022","","Percentage Change 2022 versus 2021"],["Revenues","$","362,562","","","$","362,422","","","$","352,664","","","\u2014%","","3%"]]
[[/GREPCENT_TABLE]]

Consensus revenues primarily consist of revenues from “fixed” customer subscription revenues and “variable” revenues generated from actual usage of our services.

Revenues remained consistent for the year ended December 31, 2023 over the prior comparable period. Total revenues increased by $0.1 million as a result of an increase in corporate revenues of $7.4 million due to organic growth in customer usage and new customer acquisitions, partially offset by a $7.3 million decline in SoHo.

Revenues increased $9.8 million for the year ended December 31, 2022 over the prior comparable period. Total revenues increased primarily due to organic growth in customer usage and new customer acquisitions in corporate revenues of $15.6 million, as well as acquired revenue of $6.8 million from our acquisition of Summit Healthcare Services, Inc. (“Summit”), partially offset by a $12.2 million decline in SoHo and $0.4 million in other revenue.

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Cost of Revenues

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","2023","","2022","","2021","","Percentage Change 2023 versus 2022","","Percentage Change 2022 versus 2021"],["Cost of revenues","$","68,319","","","$","61,951","","","$","58,000","","","10%","","7%"],["As a percent of revenues","19%","","17%","","16%"]]
[[/GREPCENT_TABLE]]

Cost of revenues is primarily comprised of costs associated with personnel costs, data transmission, online processing fees, network operations as well as capitalized software amortization and equipment depreciation.

The increase in cost of revenues for the year ended December 31, 2023 over the prior comparable period was primarily due to increases of $4.1 million in personnel-related expenses and $1.8 million in depreciation associated with platform development costs compared to the prior comparable period.

The increase in cost of revenues for the year ended December 31, 2022 over the prior comparable period was primarily due to an increase in revenues, compensation for additional acquisition and organic headcount and higher software licensing and infrastructure / database hosting costs as a result of moving our data storage from physical storage into the cloud.

Operating Expenses

Sales and Marketing

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","2023","","2022","","2021","","Percentage Change 2023 versus 2022","","Percentage Change 2022 versus 2021"],["Sales and marketing","$","65,084","","","$","64,413","","","$","53,648","","","1%","","20%"],["As a percent of revenues","18%","","18%","","15%"]]
[[/GREPCENT_TABLE]]

Our sales and marketing costs consist primarily of internet-based advertising, personnel costs and other business development-related expenses. Our internet-based advertising relationships consist primarily of fixed cost and performance-based (cost-per-impression, cost-per-click and cost-per-acquisition) advertising relationships with an array of online service providers. Our sales personnel consist of a combination of inside sales and outside sales professionals.

The increase in sales and marketing expenses of $0.7 million for the year ended December 31, 2023 over the prior comparable period was primarily due to an increase of $4.4 million in personnel-related expenses due to continued investment in the corporate sales team and a $0.6 million increase in computer related costs, partially offset by a reduction in third party advertising spend of $4.5 million, primarily in SoHo.

The increase in sales and marketing expenses of $10.8 million for the year ended December 31, 2022 over the prior comparable period was primarily due to an increase in third party advertising of $4.7 million, primarily in SoHo, as well as an increase of $5.0 million in personnel expenses due to continued investment in the corporate sales team.

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Research, Development and Engineering

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","2023","","2022","","2021","","Percentage Change 2023 versus 2022","","Percentage Change 2022 versus 2021"],["Research, development and engineering","$","7,727","","","$","10,018","","","$","7,652","","","(23)%","","31%"],["As a percent of revenues","2%","","3%","","2%"]]
[[/GREPCENT_TABLE]]

Our research, development and engineering costs consist primarily of personnel-related expenses.

The decrease in research, development and engineering costs for the year ended December 31, 2023 over the prior comparable period was primarily attributable to increased capitalization of personnel-related expenses due to our continued focus on internally developing our platform, products and solutions as well as a reduction in external development costs. The increase in capitalization resulted in a decrease in personnel-related expenses of $2.1 million.

The increase in research, development and engineering costs for the year ended December 31, 2022 over the prior comparable period was primarily attributable to our continued focus on developing our platform, products and solutions to primarily support corporate revenue growth as well as additional personnel from our Summit acquisition.

General and Administrative

[[GREPCENT_TABLE]]
[["(in thousands, except percentages)","2023","","2022","","2021","","Percentage Change 2023 versus 2022","","Percentage Change 2022 versus 2021"],["General and administrative","$","74,203","","","$","74,122","","","$","58,228","","","\u2014%","","27%"],["As a percent of revenues","20%","","20%","","17%"]]
[[/GREPCENT_TABLE]]

Our general and administrative costs consist primarily of personnel-related expenses (inclusive of share-based compensation), professional fees, depreciation and amortization, bad debt expense and non-income related tax expenses.

General and administrative expense remained consistent for the year ended December 31, 2023 over the prior comparable period. The $0.1 million increase is primarily due to increases in the following: $4.5 million in bad debt expense, $1.7 million in professional fees and $1.3 million in computer related equipment costs, partially offset by a decrease in non-income related tax expenses of $7.4 million.

The increase in general and administrative expense for the year ended December 31, 2022 over the prior comparable period was primarily due to increased expenses related to operating as a standalone public company, included increases of $26.6 million in salary and benefits (inclusive of $15.7 million of share-based compensation) and $6.3 million in professional fees, partially offset by a $4.8 million reduction in bad debt expense and the absence of $11.5 million in non-recurring expenses related to the spin-off from Ziff Davis in 2021.

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Share-Based Compensation

The following table represents share-based compensation expense included in cost of revenues and operating expenses in the accompanying Consolidated Statements of Income for the years ended December 31, 2023, 2022 and 2021 (in thousands):

[[GREPCENT_TABLE]]
[["","Years ended December 31,"],["","2023","","2022","","2021"],["Cost of revenues","$","1,400","","","$","874","","","$","72"],["Operating expenses:"],["Sales and marketing","1,679","","","988","","","92"],["Research, development and engineering","379","","","746","","","(19)"],["General and administrative","14,705","","","17,447","","","1,711"],["Continuing operations","18,163","","","20,055","","","1,856"],["Loss from discontinued operations, net of income tax","\u2014","","","\u2014","","","602"],["Total","$","18,163","","","$","20,055","","","$","2,458"]]
[[/GREPCENT_TABLE]]

Non-Operating Income and Expenses

Interest expense. Our interest expense is due to outstanding debt and is reduced by any capitalized interest. Interest expense was $45.4 million, $51.4 million and $14.3 million for the years ended December 31, 2023, 2022 and 2021, respectively. The decrease in 2023 from 2022 is primarily due to the partial extinguishment of debt, resulting in a gain of $4.8 million, as well as an increase in capitalized interest of $1.2 million. Interest expense for the year ended December 31, 2022 compared to 2021 increased primarily due to twelve months of interest associated with the 2026 and 2028 Senior Notes compared to three months in 2021.

Interest income. Our interest income is generated from interest earned on cash and cash equivalents. Interest income was $3.7 million for the year ended December 31, 2023. Interest income was not material for the years ended December 31, 2022 and 2021. Interest income was higher compared to the prior comparable periods due to investments in money market funds starting in 2023.

Other (expense) income, net. Our other (expense) income, net is generated primarily from foreign currency and miscellaneous items. Other (expense) income, net was $(2.4) million, $(1.6) million and $0.2 million for the years ended December 31, 2023, 2022 and 2021, 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.

Income Taxes

Significant judgment is required in determining our provision for income taxes and in evaluating our tax positions on a worldwide basis. We believe our tax positions, including intercompany transfer pricing policies, are consistent with the tax laws in the jurisdictions in which we conduct our business. Certain of these tax positions have in the past been, and may be challenged in the future, and this may have a significant impact on our effective tax rate if our tax reserves are insufficient.

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 bases 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. 

As of December 31, 2023 and 2022, the Company has interest expense limitation carryovers of $30.4 million and $23.4 million, respectively, which last indefinitely. The Company has no federal net operating loss or capital loss limitation carryforwards as of December 31, 2023 or 2022. As of December 31, 2023 and 2022, the Company has $1.3 million and $0.5 million, respectively, of foreign tax credit carryforwards that begin to expire in 2031, and $1.8 million and $1.0 million, respectively, of state research and development tax credits carryforwards that can be carried over indefinitely.

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Income tax expense amounted to $25.9 million, $26.2 million and $39.9 million for the years ended December 31, 2023, 2022 and 2021, respectively. Our effective tax rates for the year ended December 31, 2023, 2022 and 2021 were 25.1%, 26.5% and 24.8%, respectively.

The decrease in our annual effective income tax rate from 2022 to 2023 was primarily attributable to a decrease in tax expense relating to the lower amount of certain non-deductible expenses incurred in the year, such as stock based compensation, officer’s compensation, a decrease in the foreign income currently taxed in the U.S. and the impact of the change in the geographical mix of the income, partially offset by an increase in the reserves for uncertain tax positions.

The increase in our annual effective income tax rate from 2021 to 2022 was primarily attributable to an increase in tax expense relating to certain non-deductible expenses incurred in the year, such as stock based compensation, officer’s compensation, an increase in the reserves for uncertain tax positions and foreign income currently taxed in the U.S., partially offset by increased tax credits and change in the geographical mix of the income.

Quarterly Results of Operations (Unaudited)

The following tables contain selected unaudited Statements of Operation information for each quarter of 2022 (in thousands, except share and per share data). The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the period presented. The operating results for any quarter are not necessarily indicative of results for any future period. This data should be read in conjunction with our consolidated financial statements included elsewhere in Part II, Item 8 of this Form 10-K. Historical results are not necessarily indicative of the results that may be expected for the full fiscal year or any other period.

[[GREPCENT_TABLE]]
[["","Year ended December 31, 2022"],["","Fourth Quarter","","Third Quarter (1)","","Second Quarter (1)","","First Quarter (1)"],["Revenues","$","90,232","","","$","91,777","","","$","91,115","","","$","89,298"],["Gross profit","74,391","","","76,358","","","75,528","","","74,194"],["Net income from continuing operations","16,902","","","15,370","","","21,921","","","18,521"],["Net income from continuing operations per common share:"],["Basic","$","0.85","","","$","0.78","","","$","1.10","","","$","0.93"],["Diluted","$","0.85","","","$","0.77","","","$","1.10","","","$","0.92"],["Weighted average shares outstanding"],["Basic","19,814,405","","","19,791,019","","","19,928,316","","","19,921,375"],["Diluted","19,939,806","","","19,873,137","","","19,968,340","","","20,035,827"]]
[[/GREPCENT_TABLE]]

(1) The quarterly results for the third quarter of 2022 reflect the restated amounts in the Q3 Form 10-Q/A filed on March 31, 2023. The quarterly results for the first and second quarters of 2022 reflect the revised amounts presented within the Q3 Form 10-Q/A filed on March 31, 2023.

Liquidity and Capital Resources

Cash and Cash Equivalents

At December 31, 2023, we had cash and cash equivalents of $88.7 million compared to $94.2 million at December 31, 2022. The decrease in cash and cash equivalents resulted primarily from cash used to repurchase our debt, an increase in repurchases of our common stock in 2023, as well as continued investment in our internally developed software, partially offset by an increase in cash provided by operations. As of December 31, 2023, cash and cash equivalents held within domestic and foreign jurisdictions were $14.5 million and $74.2 million, respectively.

On October 7, 2021, the Company issued $305 million of 6.0% senior notes due in 2026 (the “2026 Senior Notes”), in a private placement offering exempt from the registration requirements of the Securities Act of 1933. Consensus received proceeds of $301.2 million, after deducting the initial purchasers’ discounts, commissions and offering expenses. The 2026 Senior Notes are presented as current portion of long-term debt and long-term debt, net of current portion, both of which are net

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of deferred issuance costs, on the Consolidated Balance Sheets as of December 31, 2023 and 2022. The 2026 Senior Notes bear interest at a rate of 6.0% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, which commenced on April 15, 2022.

On October 7, 2021, Consensus issued $500 million of 6.5% senior notes due in 2028 (the “2028 Senior Notes”), in a private placement offering exempt from the registration requirements of the Securities Act of 1933. In exchange for the equity interest in J2 Cloud Services, LLC, Consensus issued the 2028 Senior Notes to Ziff Davis. Ziff Davis then exchanged the 2028 Senior Notes with lenders under its credit agreement (or their affiliates) in exchange for extinguishment of a similar amount indebtedness under such credit agreement. The 2028 Senior Notes are presented as current portion of long-term debt and long-term debt, net of current portion, both of which are net of deferred issuance costs, on the Consolidated Balance Sheets as of December 31, 2023 and 2022. The 2028 Senior Notes bear interest at a rate of 6.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, which commenced on April 15, 2022.

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 December 31, 2023, no amount has been drawn down on the Credit Facility.

Material Cash Requirements

Our long-term contractual obligations generally include our debt and related interest payments, noncancellable operating leases as well as other commitments. As of December 31, 2023, we had outstanding $742.4 million in aggregate principal amount of indebtedness, total minimum lease payments of $18.9 million and a liability for uncertain tax positions of $9.7 million (see Note 9 - Long-Term Debt, Note 10 - Leases and Note 13 - Income Taxes of the notes to the consolidated financial statements in Part II, Item 8 of this Form 10-K, respectively). 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.

We currently anticipate that our existing cash and cash equivalents and cash generated from operations will be sufficient to fund our anticipated needs for working capital, capital expenditures and stock repurchases, if any, for at least the next 12 months from the issuance of this Annual Report on Form 10-K and the foreseeable future.

Debt Repurchase Program

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 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 Consolidated Statements of Income. As of December 31, 2023 the Company has retired $62.6 million in principal of its senior notes under this program.

Common Stock Repurchase Program

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 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 years ended December 31, 2023 and 2022, the Company repurchased 839,548 and 189,114 shares, respectively, at an aggregate cost of $23.7 million (inclusive of excise tax of $0.2 million) and $7.6 million, respectively, under this program. Cumulatively as of December 31, 2023, 1,028,662 shares have been repurchased at an aggregate cost of $31.3 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.

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Vested Restricted Stock

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 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 years ended December 31, 2023, 2022 and 2021 the Company withheld shares on its vested restricted stock units and restricted stock awards relating to its share-based compensation plans of 61,878, 71,509 and zero shares, respectively.

Cash Flows

The year ended December 31, 2021 includes cash flows from discontinued operations of the non-Consensus business and is not comparable to the years ended December 31, 2023 and 2022.

Our primary sources of liquidity are cash flows generated from operations, together with cash and cash equivalents. Net cash provided by operating activities was $114.1 million, $83.1 million and $233.7 million for the years ended December 31, 2023, 2022 and 2021, 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, employee compensation and lease payments for our offices. The increase in our net cash provided by operating activities in 2023 compared to 2022 was primarily attributable to increased income after excluding noncash items, partially offset by a net decrease in our working capital accounts. The decrease in our net cash provided by operating activities in 2022 compared to 2021 was primarily attributable to decreased income after excluding noncash items, a decrease in other long-term liabilities in 2022 compared to an increase in 2021, and an increase in accounts receivable. Our prepaid tax payments were $3.7 million and $8.0 million at December 31, 2023 and 2022, respectively.

Net cash used in investing activities was $40.5 million, $43.3 million and $42.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. Net cash used in investing activities in 2023 included capital expenditures associated with the purchase of property and equipment (including capitalized software development costs) and cash paid for investments. Net cash used in investing activities in 2022 was primarily comprised of capital expenditures associated with the purchase of property and equipment (including capitalized software development costs) and business acquisitions. Net cash used in investing activities in 2021 was related to business acquisitions and capital expenditures associated with the purchase of property and equipment (including capitalized software development costs), partially offset by proceeds from the sale of businesses.

Net cash used in financing activities was $81.7 million, $10.6 million and $247.8 million for the years ended December 31, 2023, 2022 and 2021, respectively. Net cash used in financing activities in 2023 primarily relates to the repurchases of debt and common stock. Net cash used in financing activities in 2022 included the repurchase of common stock and shares withheld to cover employee income taxes. Net cash used in financing activities in 2021 included distributions to the Former Parent, partially offset cash inflows related to the issuance of debt in 2021.