Consensus Cloud Solutions, Inc. 10-K

Item 1. Business Overview Consensus Cloud Solutions, Inc., together with its subsidiaries (“Consensus Cloud Solutions”, “Consensus”, the “Company”, “our”, “us” or “we” ), is a 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. Our top 10 customers represent approximately $25 million or 7% of total revenues. Beginning as an online fax company over two decades ago, Consensus has evolved into a leading global provider of enterprise secure communication solutions. Our communication, extraction and digital signature solutions enable our customers to securely and cooperatively access, exchange and use information across organizational, regional and national boundaries. Our mission is to democratize secure information interchange across technologies and industries and solve the healthcare interoperability challenge. Substantially all of Consensus’ revenue is recurring in nature and is generated either via fixed subscription plans or usage-based contracts. Over the past decade, Consensus has progressively shifted focus towards larger commercial customers (“Corporate”). As enterprise data communication shifted toward digitization and cloud-based solutions, Consensus entered industry verticals such as healthcare, government, financial services, law and education. Our Corporate business has grown from $192 million of revenue in 2022 to approximately $200 million of revenue in 2023, representing a 3.9% annual growth rate. We currently serve approximately 54 thousand Corporate customers, generally small/medium businesses or large enterprises, to whom sales are made through e-commerce, but primarily still direct interaction with a sales person and involve specific pricing, multiple line subscriptions, API connections and/or commercial grade security. We currently serve approximately 831 thousand small office/home office (“SoHo”) online fax customers, generally consumers and SoHo users, but also single corporate users who acquire a pre-defined subscription through an e-commerce website without direct interaction with a sales person. Approximately 70% of our SoHo base have been customers for more than two years. Our SoHo brands include eFax®, jSign®, MyFax®, Sfax®, Metrofax®, and SRfax®. Healthcare represents Consensus’ largest industry vertical and has information, secure communication, management and interoperability needs. In addition to the offerings discussed above, Consensus has several product offerings that are specific to the healthcare industry. Our Consensus Unite healthcare interoperability platform, a comprehensive workflow collaboration and data exchange solutions suite, now services thousands of healthcare organizations ranging from single-provider offices to care settings with hundreds of beds in use. Our Conductor platform delivers a flexible and performant solution to healthcare organizations’ pervasive interoperability challenges, delivering support for digital Health Level Seven (“HL7”), Fast Healthcare Interoperability Resources (“FHIR”), and Direct Secure Messaging (“DSM”) technology that has been fully integrated with our enterprise cloud services offerings. The sector continues to undergo a large-scale digitization effort, with the objective to streamline workflows, increase efficiency for operators, and increase transparency for patients. In 2022, Consensus launched Clarity, an intelligent data extraction technology which uses artificial intelligence and machine learning to extract and, combined with other Consensus offerings, transform unstructured information in documents such as faxes into structured data such as HL7, FHIR, and DSM formats. In 2023, we launched pre-packaged applications of Clarity – Clarity Clinical Documentation™ and Clarity Prior Authorization™ – to tackle specific data extraction challenges in the healthcare industry. We believe our leadership in digital cloud fax, intelligent data extraction, HL7, FHIR and our deep domain knowledge and experience in the healthcare industry positions Consensus well to help healthcare providers accomplish their broader digitization and interoperability objectives. -3- Our Industry Secure Information Communication Our products and services are a component of the secure information transmission market, which is part of the broader public cloud services market, for which demand for cloud services is expected to accelerate in the future. Fax remains one of the most ubiquitous technologies to transmit documents securely. The use of fax is particularly high in industries subject to data protection laws such as the Health Insurance Portability and Accountability Act (“HIPAA”), as fax offers safety of transmission and nearly universal legal acceptance. Cloud adoption has grown quickly in secure transmission, taking share from on-premises solutions over the past decade. Key drivers to cloud adoption include: • Digitization : Key industry verticals such as healthcare, government, financial services and law have been heavily investing in digitization of information and the online fax industry has significantly benefited from the trend. • Data security and data privacy awareness: Digital cloud fax technology is demonstrably more secure than traditional email and traditional fax machines, which are vulnerable to physical security threats and retrieval problems. • Regulatory tailwinds: Because of its security, eFax® meets regulatory requirements for data security and remains ubiquitous in highly regulated industries, such as healthcare and sectors where large volumes of sensitive information is exchanged. • Cost efficiency : Cloud-based solutions often have minimal installation costs and are highly efficient to scale as the needs of the organization fluctuate. • Green initiatives: Cloud-based solutions appeal to customers engaging in “green” initiatives to reduce their impact on the environment because they rely less on paper for printing documents. Healthcare Interoperability In the healthcare industry, interoperability is defined as the ability of different information systems, devices and applications (systems) to access, exchange, integrate and cooperatively use data in a coordinated manner, within and across organizational, regional and national boundaries, to provide timely and seamless portability of information and optimize the health of individuals and populations globally. In the increasingly data-driven healthcare industry, interoperability is essential to ensuring quality care delivery and safeguarding patient information. To address market demand for effective interoperability solutions, Consensus is concentrating its development efforts in tools capable of integrating with existing healthcare IT infrastructure to facilitate timely and accurate communication between providers and allow use of multiple transmission protocols within a single cloud-based platform. Our Products and Solutions Corporate Solutions eFax Corporate®: eFax Corporate® provides digital cloud fax technology enabling users to send, receive and manage faxes digitally through multiple user interfaces or seamlessly integrated in their application through a robust API. ECFax: ECFax is comparable to eFax Corporate in its features and use cases, but specifically developed for use by public sector customers with extremely high security demands. ECFax is operated and only accessible in a FedRAMP government cloud environment to meet those standards. Unite : Unite is a single platform that allows the user to choose between several protocols to send and receive healthcare information in an environment that can integrate into an existing electronic health record (“EHR”) system or stand-alone if no EHR is present. jSign® : jSign® provides electronic signature and digital signature solutions to businesses, offering document markup and end-user signing services via mobile-aware web application and enterprise API. -4- Conductor: Conductor is a r obust interface engine and complete interoperability platform that provides seamless integration technology supporting all the latest standards for connectivity and data formats (API/FHIR, HL7, Direct Secure Messaging, web services, message queues, etc.), addressing a wide range of interoperability challenges from the simple to the extremely complex. Clarity: Using Natural Language Processing and Artificial Intelligence (NLP/AI), the Clarity platform can transform unstructured documents into structured actionable data. Clarity’s intelligent data extraction allows data to be sent to the right person, at the right place, at the right time - to accelerate patient treatment across the continuum of care. SoHo Fax Solutions eFax® : eFax® is a global online faxing service with customers worldwide. In addition to eFax®, we offer a variety of brands for subscription. Customers We have a diverse set of customers globally, using cloud fax, electronic signature and interoperability products. Our Strengths Building on our position as a global provider of internet fax solutions from individuals to enterprises and across industries, Consensus is well positioned to capitalize on shifts in how we share private documents and information. We believe that our key strengths and competitive advantages include: Differentiated Product Offering Based on Scalable SaaS Platform. Our scalable and highly customizable technology infrastructure supports the transmission of a large number of documents each year. Due to our scale and capabilities, we have differentiated visibility into the trends that affect the way our customers transmit, store and manage information. Position in the Growing Enterprise Cloud Fax Market. We believe our status in the enterprise cloud fax space provides Consensus with an opportunity for organic growth and the potential to explore acquisitions that are value accretive and enhance our scale and geographic diversity. Positioned to Support Healthcare Interoperability. Because fax remains a ubiquitous electronic document exchange protocol for highly sensitive and legally binding documents, Consensus is in the healthcare communication ecosystem and our goal is to build on that foundation to become a participant in the larger healthcare interoperability solutions space. Recurring Revenue Stream. Our revenues consist of monthly recurring subscription and usage-based fees, with monthly recurring subscription revenue representing approximately 72% of our total subscription revenue for 2023. Our cancellation rates have remained relatively steady over time, and we expect this trend to continue into the future given that many of the services we provide are critical to our customers’ business operations. Global and Diversified Customer Base. Our customers are located globally across six continents. We believe that our product-line and geographic diversity, combined with our lack of customer concentration, will help us mitigate the effects of isolated downturns in various end markets. Operational Efficiency and Capital Discipline. The recurring nature of our revenue, combined with high operational efficiency, results in predictable and attractive margins and free cash flow generation. As we evaluate growth investments and expansion into new verticals, we will measure against metrics and parameters that promote efficient and prudent use of capital to generate sustained shareholder value. Proven and Experienced Management Team. Our experienced management team has a highly successful track record with regard to both business performance among its industry peer group, growing new business lines, and identifying and integrating strategic acquisitions. -5- Our Strategy Our strategy focuses on generating attractive organic growth, achieving solid margins and free cash flow generation, pursuing value-accretive acquisitions and delivering high value to our shareholders. Our strategy includes: • Continuing to grow in Corporate secure information exchange; • Solving healthcare interoperability challenges; • Optimizing eCommerce (SoHo) revenue streams; • Leveraging our technology to enter new markets (e.g., government); • Positioning the business for sustained growth through continued focus on profitability and cash flow generation; • Focused investments in our products and capabilities; and • Complementing organic growth investments with targeted acquisitions. Patents and Proprietary Rights We regard the protection of our intellectual property rights as important to our success. We aggressively protect these rights by relying on a combination of patents, trademarks, copyrights, trade dress and trade secrets. We also enter into confidentiality and intellectual property assignment agreements with employees and contractors, and nondisclosure agreements with parties with whom we conduct business in order to limit access to and disclosure of our proprietary information. Through a combination of internal technology development and acquisitions, we have built a portfolio of numerous U.S. and foreign patents. Several of our U.S. patents have been reaffirmed through reexamination proceedings before the United States Patent and Trademark Office (“USPTO”). We intend to continue to invest in patents, to aggressively protect our patent assets from unauthorized use and to generate patent licensing revenues from authorized users. We seek patents for inventions that may contribute to our business or technology sector. In addition, we have multiple pending U.S. and foreign patent applications, covering components of our technology and in some cases technologies beyond those that we currently offer. Unless and until patents are issued on the pending applications, no patent rights can be enforced. We have obtained patent licenses for certain technologies where such licenses are necessary or advantageous. We own and use a number of trademarks in connection with our services. Many of these trademarks are registered worldwide, and numerous trademark applications are pending around the world. We hold numerous internet domain names and we have filed to protect our rights to our brands in certain alternative top-level domains such as “.org”, “.net”, “.biz”, “.info” and “.us”, among others. Like other technology-based businesses, we face the risk that we will be unable to protect our intellectual property and other proprietary rights, and the risk that we will be found to have infringed the proprietary rights of others. For more information regarding these risks, please refer to the section entitled Risk Factors contained in Item 1A of this Annual Report on Form 10-K. Government Regulation We are subject to a number of foreign and domestic laws and regulations that affect companies conducting business over the internet and, in some cases, using services of third-party telecommunications and internet service providers. These include, among others, laws and regulations addressing privacy, data storage, retention and security, freedom of expression, content, taxation, numbers, advertising and intellectual property. For information about the regulations to which we are subject and the risks we face with respect to governmental regulation, please see Item 1A of this Annual Report on Form 10-K entitled Risk Factors. -6- Seasonality General economic conditions have an impact on our business and financial results. From time to time, the markets in which we sell our products, services and solutions experience weak economic conditions that may negatively affect sales. We traditionally experience marginally lower than average usage and customer sign-ups in the fourth quarter. Our revenues are also impacted by the number of effective business days in a given period. Research and Development The markets for our services are evolving rapidly, requiring ongoing expenditures for research and development and timely introduction of new services and service enhancements. Our future success will depend, in part, on our ability to enhance our current services, to respond effectively to technological changes, attract and retain engineering talent, sell additional services to our existing customer base and introduce new services and technologies that address the increasingly sophisticated needs of our customers. We devote significant resources to develop new services and service enhancements. For more information regarding the technological risks that we face, please refer to the section entitled Risk Factors contained in Item 1A of this Annual Report on Form 10-K. None of our employees are represented by collective bargaining. Human Capital Resources As of December 31, 2023, we had 559 employees, with slightly more than one-quarter of the employees located outside of the United States. Our ability to continue to attract, retain and motivate our highly qualified workforce is very important to our continued success. Our Culture We have a strong enterprise-wide culture that focuses on our core values – strive for excellence, demonstrate empathy, embrace innovation, foster open communication, focus on solutions, and be driven by data as we make decisions, and in turn, deliver solid business results. Our mission is to be the trusted global source for the transformation, enhancement and secure exchange of digital information. Our vision is to deliver life’s essential data when, where and how you need it. Diversity, Equity & Inclusion Our cloud fax users and employees are diverse – gender, race, ethnicity, age, orientation, geography, education, background, interests, and more. We recognize that each employee’s unique experiences, perspectives and viewpoints add value to our ability to create and deliver the most innovative work environment for our employees and the best possible service to our diverse customers. To this effect, we have employees throughout the organization who form our Diversity, Equity and Inclusion (“DEI”) Council to promote thoughtful discussion, implement product and onboarding training to create community and events. The aim of the DEI Council is to foster respectful awareness of diversity, equity, and inclusion in our workplace environment and create a community where each employee feels they belong and can contribute to the overall success of the Company. Hiring We reinforce our culture and our values by seeking out candidates, that align well with our organizational priorities, values, mission and vision. Employee Compensation & Benefits Compensation is an important consideration for all of our employees and we strive to pay competitive compensation packages that reflect the success of the business and the individual contributions of each colleague. We are committed to fair pay practices; roles are periodically benchmarked to help inform where adjustments may be needed. We provide our employees with benefits we believe are effective at attracting and retaining the talent critical for our success and, more importantly, promoting their day to day well-being. Those benefits include comprehensive health insurance -7- coverage and covering 85% of health insurance premiums for covered U.S. employees and their families, an employee stock purchase program, share based compensation, flexible time off, sick time, up to 16 weeks of paid parental leave for birth parents, up to 10 weeks of paid parental leave for secondary caregivers and 24 hours annually of fully paid volunteer time off. Health and Wellness Creating a culture where all colleagues feel supported and valued is paramount to our corporate mission. We continue to evolve our programs to meet our colleagues’ health (physical, mental and financial) and wellness needs, which we believe are essential to attract and retain employees of the highest caliber, and we offer a competitive benefits package focused on fostering work/life integration. Competition We face competition from, among others, online fax-providers, traditional fax machine or multifunction printer companies, electronic signature companies, healthcare interface companies, health information service providers and robotic process automation companies. Our solutions relate to online faxing and compete primarily against traditional fax machine manufacturers, which are generally large and well-established companies, as well as publicly traded and privately-held providers of fax servers and related software and outsourced fax services. Some of these companies may have greater financial and other resources than we do. As we pursue our expansion into expanded secure information delivery services and healthcare interoperability services, we compete against other providers of secure information delivery services, including providers of electronic signature solutions. We believe that the primary competitive factors determining our success in the market for our services include financial strength and stability; pricing; reputation for reliability and security of service; breadth and depth of product functionality; intellectual property ownership; effectiveness of customer support; sign-up, service and software ease-of-use; service scalability; customer messaging and branding; geographic coverage; scope of services; currency and payment method acceptance; and local language sales, messaging and support. For more information regarding the competition that we face, see “Risk Factors—Risks Related to Our Business—The markets in which we operate are highly competitive and our competitors may have greater resources to commit to growth, superior technologies, cheaper pricing or more effective marketing strategies”. Consensus Cloud Solutions, Inc. Spin-Off On October 7, 2021, J2 Global, Inc. (now known as "Ziff Davis”, “Former Parent Company” or “Former Parent”) completed its previously announced plans to separate into two leading publicly traded companies: one addressing healthcare interoperability and comprising the Cloud Fax business, which does business as Consensus Cloud Solutions, Inc., and one that will continue the Former Parent’s strategy of building a leading internet platform focused on key verticals, including technology & gaming, shopping, health, cybersecurity and martech, which will do business as Ziff Davis. We refer to the transactions that resulted in the separation of Consensus and Ziff Davis into two separate publicly traded companies as the “Spin-Off” or “separation and distribution.”). -8- Available Information We file Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) with the Securities and Exchange Commission (the “SEC”). Such reports and other information and amendments thereto filed or furnished by the Company with the SEC are available free of charge on the Company’s website at www.consensus.com as soon as reasonably practicable after we file such reports with, or furnish them to, the SEC’s website. The information on our website is not part of this report. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding our filings we file electronically with the SEC at www.sec.gov . Our Board has adopted a Code of Business Conduct and Ethics that applies to all of our directors and employees. The Code is posted on the corporate governance page of Consensus’ website, and can be accessed at http://investor.consensus.com . Any changes to or waiver of our Code of Business Conduct and Ethics for senior financial officers, executive officers or directors will be posted on that website, to the extent required under Nasdaq or SEC rules. -9-