CCSI - Consensus Cloud Solutions: Steady Business With An Underlying Call Option

Summary

• Fax is still one of the most secure ways to securely transmit documents and CCSI has a leading position in this industry.
• eFAX segment provides highly recurring revenues which can be used to reinvest into its growth business.
• Valuing CCSI based on its core business suggests that it is fair valued today. Any additional upside would need to come from its interoperability segment.

Overview

Consensus Cloud Solutions ( CCSI ) is fair valued if we value its core business only. CCSI has two parts to it, a steady core business with high recurring revenue and a growth business that has more than 2x the TAM of its core business. The steady core business - Fax business - should continue to grow along with the industry as the world becomes more digitalized, and the cash produced would be reinvested into the growth business.

I believe the right time to invest in CCSI is when we have more visibility into the growth business potential and when it will start having an impact on the P&L.

Business description

CCSI is a provider of information delivery solutions for a wide range of industries as well as small and home offices. The company serves two markets: online fax addressable and healthcare interoperability.

CCSI primary segment is its eFax solution .

Fax is still one of the most secure ways to securely transmit documents

Even today, faxing is a popular option for confidential document transmission. When it comes to sectors governed by privacy regulations like Health Insurance Portability and Accountability Act [HIPAA], fax is a clear winner. This is significant because it ensures secure transmission and is generally recognized by the law. While the rest of the world is moving into the digital realm (the cloud), fax has endured and adapted to stay current. Since the mid-1960s, when the first dedicated fax machines appeared, the vast majority of faxes have been sent using dedicated hardware. While fewer of these gadgets are in use now than they once were, they are still widely used. To keep up, businesses in the faxing industry began adopting a service-based deployment model and launching online fax services, which allow users to send and receive faxes over the internet instead of using traditional fax machines connected to a phone line. Standalone fax machines were initially replaced by on-premises fax servers. The introduction of cloud faxing is a relatively new phenomenon.

Similar to the rapid adoption of cloud computing in other software categories, cloud fax transmission has surpassed on-premises solutions in the last decade. Increased savings, a more flexible pay-as-you-go pricing structure, and a shorter rollout time are the main advantages of cloud fax. In fact, estimates place the value of the global online fax market at $3 billion by 2027, up from $2 billion in 2021. To put it another way, this amounts to a CAGR of about 7%. I think there are a few major factors at play here.

The advent of digital technology is the main impetus. There have been substantial investments in information digitization from essential industries - like healthcare, legal, and financial services. As a result of this shift, the online fax industry was able to capitalize by integrating its solutions with enterprise IT infrastructure to facilitate the elimination of paper documents and the automation of workflow processes. This has led to substantial time and money savings when compared to conventional fax methods. With more and more companies moving to a remote work model in response to the global COVID-19 pandemic, there has also been a rise in the number of employees who require access to traditional office resources from the comfort of their own homes.

In addition to the first, data privacy and security regulations are a driving factor. HIPAA and the Data Protection Act are just two examples of the growing body of legislation emphasizing the need for secure data transmission. Still widely used in sectors where large volumes of sensitive information are traded, faxing satisfies compliance requirements regarding data security thanks to its security. It's important to note that faxed signatures are legally binding for many types of business documents. People are becoming more and more aware of the dangers of cyberattacks as their dependence on digital information increases. When compared to conventional email and fax machines, which can be compromised by physical intruders or have retrieval issues like lost documents, digital cloud fax technology is clearly the safer option.

CCSI is a leading provider in this growing eFax industry

When compared to the total global eFax market size of $2 billion, of which Consensus holds about 18% (based on fiscal year 21 revenue divided by TAM), CCSI has a leading position. As was previously stated, fax remains a vital part of business processes because of its many advantages, including its low cost, wide availability in a wide variety of settings, and high level of security and reliability. CCSI's size and resources give it a distinct perspective on the factors shaping the ways in which its customers transmit, store, and manage data. In addition, CCSI has spent a lot of money upgrading its IT infrastructure, which allows the company to send more documents at a faster rate and at a lower cost.

eFAX segment provides highly recurring revenues for reinvestment

CCSI generates its income primarily through subscription and usage-based fees, with the former representing a sizable share of the latter. The unit economics are also very impressive. Compared to 3Q19, CCSI's average revenue per account has increased by 8% CAGR, going from $24.18 to $30.84. In addition, CCSI has approximately 1 million customers at present, with monthly churn averaging around 3+%. Since many of CCSI's services are indispensable to their clients' daily operations, we expect this growth to persist. This segment should continue to generate cash for eFAX to reinvest into its growth business unit.

Healthcare interoperability is a call option today

Over the recent years, healthcare has become increasingly data-driven, making interoperability between systems and the safeguarding of patient data more important than ever. There has been a lot of work put into trying to achieve healthcare interoperability, but it has been a tough road. With thousands of systems and information exchanges all operating in different environments, it is still a work in progress to ensure that those who need access to this information are able to gain it. The widespread use of disparate communication protocols in the transfer of such sensitive data, as well as the reluctance of software vendors to permit data to transfer among competing platforms, are at the heart of this issue.

Only recently has CCSI begun to explore the $8 billion TAM for interoperability, which is more than double its current TAM. Although the potential financial rewards have not yet materialized, this call option has the potential to be extremely valuable if CCSI is successful.

Forecast

CCSI, in my opinion, is being fairly valued. My model predicts that it will be worth $61.88 in FY23, a 10% increase from now. The business is divided into two parts, and I believe the market values CCSI on its fax business, which is expected to grow in tandem with the industry. A shareholder may benefit from CCSI successfully penetrating the additional $8 billion interoperability TAM. As of today, I have no solid visibility into CCSI's ability to win in this market; thus, I value CCSI based on its core business.

CCSI is expected to generate around $420 million in revenue and $123 million in net income in FY24, according to consensus estimates. CCSI is worth $61.88 in FY23, or 9% more, if we assume the same forward PE multiple.

Key risks

Recession/back macro

The utilization of CCSI's solutions is affected by the financial stability and number of employees of both SoHo (small office / home office) and Corporate customers. Due to the usage-based nature of the company's cloud fax solutions, small and medium-sized businesses may cancel their subscriptions and large businesses may reduce their usage during economic downturns and periods of high unemployment.

Competition

The interoperability market is growing rapidly, and CCSI is a new player in this space. CCSI may not be able to capture a large portion of this $8B TAM if it is unable to execute as expected. The demand for CCSI may also decrease as major electronic health records vendors introduce inter-vendor communication capabilities, as this trend has recently begun to dominate the interoperability space.

Conclusion

The fax industry has adapted to the digital age by moving to a service-based deployment model and launching online fax services, allowing users to send and receive faxes over the internet rather than using traditional fax machines. The global online fax market is valued at $3 billion by 2027, with a CAGR of about 7%. This is driven by the advent of digital technology, as industries invest in information digitization, and the rise of remote work due to the COVID-19 pandemic. Additionally, data privacy and security regulations are a driving factor for the continued use of faxing as it satisfies compliance requirements for secure data transmission. CCSI's core fax business is steady and should continue to grow along with the industry, while the growth business holds more than 2x the TAM of its core business. The right time to invest in CCSI would be when there is more visibility into the growth business potential and when it starts having an impact on the P&L.

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