Consensus Cloud Solutions, Inc. (CCSI) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to Consensus Investor Call. My name is Paul, and I will be the operator assisting you today. [Operator Instructions] On this call today will be Scott Turicchi, prospective CEO of Consensus; and John Nebergall, prospective COO of Consensus. I will now turn the call over to Scott Turicchi, Prospective CEO of Consensus. Thank you. You may begin.

Good afternoon, and welcome to the Consensus Investor Day. I'm Scott Turicchi, the CEO of Consensus at the time of spin, and I'm joined by John Nebergall, our Chief Operating Officer, also at the time of spin. The format will be similar to an earnings call. I will give you a brief update of the transaction and its expected timing as well as provide a high-level overview of what Consensus will look like at spin. John will then take you through an analysis of our various service offerings and customer bases. I will then return to discuss the financial profile of Consensus and the various metrics that we report, which are contained in our Form 10 filing. After we finish our prepared remarks, we will conduct a question-and-answer session. At that time, the operator will instruct you on the procedures for asking a question. Before we begin our prepared remarks, allow me to direct you to the safe harbor language on Slide 2. As you know, this call and the webcast will include forward-looking statements. Such statements may involve risks and uncertainties that would cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to the risk factors outlined on Slide 3 that we have disclosed in our Form 10 SEC filings. We refer you to discussions in those documents regarding safe harbor language as well as forward-looking statements. Turning to Slide 5. Allow me to provide an update on the transaction. As you know, we announced the spin on April 19. We are in the final stages of completing the necessary conditions to effectuate the spin. Based on the most recent Form 10 filed yesterday and the contemplated timing for the bond offering, we expect the spin to be completed around October 1. As part of the spin, J2 will distribute 80.1% of the shares of Consensus to shareholders as of the record date and J2, which will be renamed Ziff Davis, will retain 19.9%. A J2 shareholder as of the record date will receive 1 Consensus share for each 3 shares held of J2. In addition, Consensus will issue approximately $800 million of high-yield bonds in 2 tranches. Consensus will keep approximately $30 million of those proceeds for working capital and excess cash purposes. The remainder will go to J2 to pay down some of J2's existing debt. Turning to Slide 6. I am pleased that just as J2 has raised guidance twice this year, Consensus has been a contributor to the raise each time. We began the year expecting slightly in excess of $340 million of revenue. We now expect our revenues this year to be between $347 million and $353 million. We will use the midpoint of $350 million throughout the rest of the presentation. This will represent a revenue growth rate of approximately 6% this year, driven by our Corporate channel, which we expect to grow approximately 12% versus 2020. Further, we expect that our EBITDA margins fully loaded for being a public company should be around 58% this year. Our core service offerings are in the area of secure, document transport and delivery with an increasing emphasis on helping to solve the health care interoperability issue. In addition to serving the highly regulated health care sector, we also favor other regulated industries such as finance, legal, compliance and certain government agencies. Our success is driven by the real near-time or near real-time deliverability of our services that are both reliable and trusted. To that end, we have had a third-party HITRUST come in to certify certain of our solutions for the health care industry. In addition, as a global company, we are set up to provide our customers with regional data sovereignty. Although about 85% of our revenues are derived in the United States, we have a meaningful presence in Canada, Europe and the APAC region. Finally, we're a leading provider of digital fax solutions to the small office, home office or SoHo environment. Slide 7 provides a quick overview of some of the key elements of consensus. It is important to understand that we have been serving corporate customers for more than 20 years. Over that time span, we've expanded our service offerings and sales force to go after the largest companies in the U.S. We currently count 525 enterprises as our customers, including 5 of the top 10 largest companies in the U.S. As importantly, in the 4 years that we focused on the health care sector, we now have 4 of the top 10 largest health care companies also as customers. Our revenues are highly visible with essentially 100% recurring and more than 80% of our revenues coming from fixed fees. In addition, we have 100% revenue retention from our Corporate channel. Finally, I would note that unlike J2, Consensus has not historically been a heavy acquirer of assets, completing 14 transactions in the past 10 years. However, most of those have been roll-ups of small digital fax companies, which is not our program going forward. We will look opportunistically for small to midsized companies that can complement or accelerate our service road map in health care interoperability. I will now turn the presentation over to John. By way of background, John came to us a little more than 3 years ago. When we set out to look for leadership of the largest business unit in J2, we had a choice, focus on an individual steep in the productivity and secure digital transport business or one with deep health care expertise. I think that in John, we were able to get both, as you can see from his bio in the Form 10, noting his tenure at companies such as Demandforce, Orion Health and Allscripts. I credit John with building a team at Consensus has made major inroads into the health care space in a short period of time. John, please give them an overview of our various service offerings.

Thank you, Scott. Let's move on to Slide 9. Slide 9 illustrates how over the past 2 decades we have concentrated our efforts in improving and advancing the technology of secure information delivery. Looking back at the '90s, we were focused on using Internet marketing to reach a wide range of users with subscription-based Internet fax, using brands like eFax, MetroFax and Fax.com. A little over 10 years ago, we began to grow a direct sales force that penetrated the enterprise and SMB space with products that brought paperless efficiency to businesses moving away from desktop fax. The legal, financial services and real estate industries were our primary targets and delivering fax through an organization's e-mail system was the prevailing technology. Beginning about 4 years ago, we recognized a measurable demand for our products in the health care industry. Our advantage in scalable pure-play cloud technology was very attractive to these clients, and we began to develop capabilities specific to health care's need for high reliability, system integrated delivery and rock-solid security. With that health care focus, we raised the bar for ourselves in our product set. We achieved HITRUST certification, third-party validation that our environment meets rigorous standards for technical and process security. And while fax is a central component of our enterprise cloud, our product set has evolved. And this is important. We now facilitate communication via secure email, secure digital signature and secure API-to-API integration. And we have more on the way. Let's move to Slide 10 for an overview of the market. When it comes to the need for secure document transfer, there is no bigger target than health care. Health care is not just a single industry, but encompasses several important commercial areas: clinical, administrative, payment, government and social services, the list goes on. The number of players creating and storing information is huge. Evidenced by the explosion of data you see illustrated from the Stanford health research report on the lower left, the amassed repository of data is growing at an accelerated rate. Also accelerating are the reasons why this data needs to be shared and encompasses everything from sharing medical information to referring patients between providers to claims data as well as material required to go to federal and state health agencies. Delivering quality care in today's environment requires a massive amount of data sharing. Now fax is still far and away the leader in health record sharing. That dynamic puts consensus in a particularly good position to expand our share into complementary technologies as they start to gain more acceptance. As the market moves, we are already there. Now let's move on to Slide 11, where we can look at the key problem of interoperability. Health care has been struggling with the ability to exchange information for as long as the electronic health record systems have been in the mainstream. The difficulty arises from a wide range of technologies and data structures used by the hundreds of commercial health record systems in use today, resulting in incompatibility for information exchange. The effort to establish standards for information exchange in health care has been limited in its effectiveness. A standard called Health Language 7 (sic) [ Health Level Seven ], or HL7 for short, define some parameters for information exchange, but leaves a large area open for individual interpretation. There are 3 different standards right now for classifying disease diagnosis. 2 different standards are used for naming medications and 3 different data sources can be used to communicate medical terms. Physicians are still asking for a better solution and the ability to deliver information where, when and how it's needed, actionable information that integrates into their workflow is essential. Now let's go to Slide 12, where I want to spend some time on our product suite. Late in 2018, our product team architected a road map for secure delivery solutions that both address interoperability obstacles while increasing the overall market opportunity for Consensus. In Q1 of 2020, we launched Consensus Unite and began to release the solution set that leveraged our established position in cloud fax to logically extend our capabilities in health care. The Unite platform combines cloud fax, secure direct messaging, which is a closed e-mail system for health care, uses elements of HL7 of FHIR, Fast Healthcare Internet Resources (sic) [ Fast Healthcare Interoperability Resources ], and delivers workflow management tools. Unite also has the ability to actually query patient records from a geographic area. Unite enables users to send and receive messages in any manner the user prefers, secure e-mail, API or cloud fax. Early this year, we brought 2 additional products to market, Signal and jSign. Consensus Signal helps hospitals comply with new regulations mandated by the 21st Century Cures Act. By integrating with the hospital's existing EHR and using a set of data triggers, Signal automatically sends legally required notifications to a patient's primary care physician when that patient is admitted to a hospital; transferred between departments, for example, from surgery to recovery; or discharged. Building on the multi-protocol approach for Unite, actual delivery to the receiving provider is dramatically improved whether the recipient has an EHR or not. Both Unite and Signal also expand our market opportunity into new areas and build upon our existing cloud fax footprint. Also released this year is the jSign digital signature product that uses blockchain security and geolocation capabilities to authenticate legally binding signatures and securely manage the signature workflow. That workflow is a valuable tool for health care document processing. And while it's a powerful tool for health care, it's also a broad market appeal to a number of industries, legal and financial services, for example, and in the SoHo marketplace as well, where we're testing it right now. Later this year, we are on target to release Consensus Clarity, and it's an alpha stage today. This exciting technology brings sophisticated artificial intelligence and machine learning advancements to the interoperability marketplace and represents a truly game-changing solution to the problem of transforming unstructured data to structured data. Using natural language processing technology, Consensus Clarity can extract data from a document and format it to be consumed into a contemporary database like an electronic health record system. In simple terms, Clarity can allow for a provider to send the fax and for the hospital's EHR to receive structured data, eliminating manual entry and significantly enhancing workflow efficiency. Looking forward to next year, the team is currently developing Consensus Harmony, more accurately described as a capability rather than a product. Harmony leverages an existing Consensus strength and commercializes it in a valuable way. In hospital systems and health care organizations across the country, IT departments spend literally billions of dollars in hardware and labor to maintain secure connections called interfaces, which are secure links to partners that they trade information with in their ecosystem. An individual hospital can have hundreds of these interfaces to maintain secure connections with their partners. Because Consensus connects many thousands of health care entities, offices, clinics, labs, pharmacies and the list goes on, our network itself is a natural hub for secure communication. Harmony will deliver a single connection HITRUST network solution that can diminish or even eliminate the need for continued use of individual interfaces. We're very excited about this innovation, and we look forward to releasing it in 2022. Let me call your attention to the bottom of this slide, though. More than a collection of products, our Consensus cloud platform brings disruption to an industry that's become accepting of single-point solutions in either or choices. I'd like to say that Consensus democratizes health care information sharing, not suggesting a single protocol can solve the interoperability problem and creating this either or choice, but by framing the discussion and narrative, incorporating a variety of complementary technologies that will work as a unified set of capabilities. Cloud fax, secure e-mail, HL7, FHIR, send, receive, sign, query and transform brought together in a single HITRUST platform with essential technological capabilities like action triggers, workflow tools, EHR integration, event notification and natural language processing that collectively are unique in the industry. No one has come at the interoperability challenge as comprehensively as Consensus. Just last month, at the Health Information Management Systems Society conference, the HIMSS conference in Las Vegas, we put the power of what consensus can do on display. At the interoperability showcase attended by over 3,000 health IT professionals, we executed a live demonstration using the technologies just discussed. This actual use case combined individual product capabilities into a single flow and illustrated the unique value brought by Consensus. In the demonstration, the Consensus platform moved essential health care information between 3 different care settings, home health, an acute facility and a skilled nursing facility, using 3 different protocols, cloud fax, HL7 and secure email across 2 separate EHR systems, an EPIC system and a MatrixCare system, applying clarity to transform unstructured data into a structured message while supporting an automated discharge summary workflow with a valid digital signature. All of this done in a secure end-to-end HITRUST-certified HIPAA-compliant communication framework. Beginning with the foundation in secure communication protocols, we built an innovative set of intelligent tools and a scalable, HITRUST secure enterprise cloud environment that can be used either as a stand-alone solution or integrate it into other networks, EHRs or systems of record. We believe that this is the winning approach. And as a result of our existing cloud fax footprint, we are already in a position to capture the market. Now let's move to Slide 13 for some information on how our customer revenue streams were. Our customer base itself falls pretty naturally into 3 identifiable groups. While all 3 are subscription-based, the revenue flows have some specific attributes. Customer acquisition efforts and the related relationship management activities vary based on a clients' size and complexity. The small office/home office or SoHo market is characterized by a self-service approach for selecting a subscription, either monthly or an annual plan and then the customer's credit card is auto build on that monthly or annual basis. In this revenue stream, monthly plans are often not exceeded and the subscription revenue is the dominant stream. Small and medium businesses often require direct sales from 1 of our telesales staff. Leads come into our contact center through a web form fill, direct inbound call or response to an Internet campaign. We also do outbound prospecting and account-based marketing to acquire new customers. The sales cycle here is usually quick, a couple of phone calls and less than a week to close. The contracts are both monthly and annual agreements. Now these customers will tend to exceed their plan limits more frequently than the SoHo group but subscriptions are still the larger revenue stream with a measurable variable revenue component added. At the Enterprise level, you have a much more traditional big entity sales approach with field sales reps and longer sales cycle. Competition is always a factor and customers in this space are very sophisticated buyers. Prospects are developed through thought leadership, marketing, sales referrals and channel relationships. Typically, these are 3-year contracts that then go into an annual auto-renew model. While virtually all contracts have a subscription component, those minimum usage commitments are regularly exceeded and transaction charges make up the lion's share of our top line. Collectively, our SMB and Enterprise or corporate customers, are quite sticky with year-over-year revenue retention, what you might think of as same-store sales at 100% plus with growth driven by volume increases as new customers ramp their use and as existing customers send more messages. And now I'll hand it back to Scott for a bit more detail on the business' key metrics.

Thank you, John, for that comprehensive overview. I hope you can all see why we're so excited about the Consensus opportunity as we spin out of J2. I would now like to spend the next few slides discussing our financial results and our 2 revenue streams, the various KPIs that we will report for each stream of revenue and the pro forma financial results for consensus. Let's turn to Slide 15. We will start with our Corporate channel, which we expect to hit $164 million of revenues this year, providing a 9% CAGR since 2018. But I would note earlier 12% growth this year from 2020. This has been driven by the conversion of on-premise fact solutions to the cloud and our penetration into the health care sector. On the right, we will present 4 KPIs for each reporting period. We will report with the total number of customers at period end, which we expect this year to be 46,000 customers similar to the end of 2020 due in large part to a system migration that will expunge about 3,500 customers representing only $120,000 in annual revenue. The next metric is the annual revenue that these customers produce each month, trending close to $300 per month. The increase in the past 2 years is not due to price increases but rather additional larger customers added to this channel and increased usage or variable base revenue as we onboard these customers and they experience growth in their data and document flow. The third metric are the paid ads generated during the period, about $12,000 per year. And finally, the monthly raw cancel rate based on accounts, meaning that all paid customers that cancel are included with no exclusions, including the 3,500 customers that I just mentioned from the system migration. However, as I noted at the beginning of the presentation, our Corporate channel has 100% or better revenue retention, which we believe is the better way to understand the resiliency of this channel. The bulk of our account cancels occur within the SMB portion of this channel, which have a much more modest revenue contribution per account. Slide 16 is an overview of our SoHo channel, which produces about $186 million of revenue annually. As John pointed out earlier, this revenue stream goes back to the early days of the company. In the past few years, it had modest organic declines in revenue. However, based on management changes, the evolving nature of how people work and introducing additional marketing channels, such as social media, we have seen this channel return to modest revenue growth of between 1% and 2% the past 4 quarters. I am optimistic that as we experiment with additional forms of marketing as well as adding new services to this channel, such as jSign, that it will continue in a positive trajectory. As for the metrics, the base is stable at just shy of 1.1 million customers who produce about $14.24 in revenue per month. You can see that in 2020, and this year, our additional marketing efforts are paying off as we are bringing in more new paying customers than in previous periods. Our cancel rate is a monthly cancel rate without any exclusions similar to what I just discussed for the Corporate channel. However, I would note that 2/3 of our cancels come from customers aged less than 1 year. These are people that use the service for a specific project or find that their business is not sustainable. Note that the precipitous drop in cancel rate to less than 1.5% per month for those aged more than 1 year. On Slide 17, we show the revenue performance by channel for the most recent quarter and the 6 months. Our Corporate channel has had very strong growth of 19% in Q2 and 16% for the first half. I would remind you that we did see some headwinds in our variable usage from health care customers in the first half of last year due to the pandemic, about $2 million spanning from Q1 into Q2 of 2020. Our SoHo business has been between a 1% and 2% grower, giving us 9% total growth in Q2 2021 versus Q2 2020 and 8% growth for the 6 months. We have gross margins consistent with SaaS companies in the 83% to 84% range. Below, we have provided you with pro forma EBITDA for the quarter in the 6 months. In each case, adding 3 or 6 months of stand-alone public company costs which are estimated to be approximately $10 million annually. For both Q2 and the 6 months, our pro forma EBITDA grew 9% to $50 million and $101 million, respectively. Our pro forma EBITDA margin is expected to be approximately 58% this year. I would note, however, that we intend to make additional investments in our R&D efforts as well as sales and marketing and therefore, target an approximate 55% EBITDA margin in the near to intermediate term. We are currently on track to produce $202 million of pro forma EBITDA this year at the midpoint of our revenue guidance. Slide 18 shows on a non-GAAP pro forma basis what our trailing 12-month P&L would look like. The key additional pieces of information below EBITDA are depreciation and amortization, which is $12 million on a GAAP basis and $6 million on a non-GAAP basis, which would exclude amortization of intangibles due to M&A. Interest expense of approximately $51 million, the elimination of stock-based compensation of $1.3 million, an estimated tax rate of 24% and a share count of approximately 20.2 million shares. I would note that post spin, there will be a review of the stock-based compensation program with the expectation that there will be additional grants made. Slide 20 is our longer-term target ranges for revenue and EBITDA. As our Corporate channel overtakes our SoHo channel sometime next year, we expect our revenue growth to accelerate such that we should be between 5% and 9% organic growth. We expect our EBITDA margins to be between 50% and 55%. In the next couple of years, I would expect our EBITDA margin to be at the high end of that range. As we look into 2024 and beyond, we expect additional investment opportunities will present themselves that would accelerate organic revenue growth in the future. We do not want to be limited to making such investments for the sake of a few points in margin. Finally, we generate a fair amount of free cash flow even after taking into account our new leverage. We expect to generate approximately $100 million or more in free cash flow annually. This will be used to pursue opportunistic M&A, reduce our debt and subject to certain conditions, stock repurchases. Finally, on Slide 21, I would like to introduce the rest of our senior management team. You've had the opportunity to listen to John and myself today. Jeff, our CTO; Donna, our CRO of Enterprise; and Bret, our SVP of Inside Sales, come from the consensus business unit and have been key players aiding John, in achieving the results that we've discussed today. Coming to us from the cloud corporate team are Vithya, who will be our General Counsel; and Lynn, who will head up HR. Before turning the call back to the operator for questions, we do have additional information in the appendix as well as various GAAP to non-GAAP reconciliations. I would now ask the operator to instruct you how to queue for questions.

[Operator Instructions] And the first question is coming from Daniel Ives from Wedbush.

Congrats to the whole team on the initiatives and the Consensus sort of next chapter.

Thank you, Dan. Really appreciate it.

Great. Great. So kind of hitting on that, Scott. What -- like when you think about growth initiatives, let's just forget about cash flow and margins, the growth initiatives, and what are the 3 priorities in the first year or almost in order just to kind of frame it in terms of how we should think about that from a growth perspective?

Absolutely. Thanks, Dan. Thanks for joining the call. And it's one of the reasons I'm excited in joining Consensus out of J2. It's a business that I've had a long history with. But certainly, in the last 3 or 4 years, not as directly involved, John has been running the business. I've been up sitting up at corporate. So when I started to really look at the business, three things, I think, really intrigued me, and I give John his team a lot of credit for bringing the company to this point. So first and foremost, in terms of those growth opportunities. I think we have a big opportunity to own the cloud fax piece of the market in health care. It's about a $100 million revenue business for us today, if you take the 50% that we have in corporate and the roughly 20% we have in the SoHo. But as John showed you, it's a $2 billion TAM. The vast majority of that is on-prem, we are right to take that business and move it to the cloud. It's what we've been doing. It's what's been driving the corporate growth. I think that we need to continue to pursue that and accelerate. It also sets up the next piece, which is by building this base of health care customers in a really key core competency like cloud fax, we then can come back and offer these interoperability solutions that John mentioned. Now to be fair, they're very nascent, only a couple have been released. Things like Clarity and Harmony are still in development. But I think if you look out beyond 2022, those become key growth drivers. And then finally, even though we look at the SoHo channel, we can say, it's only a 1% to 2% grower, there's some initiatives there as well. One is, I think, we can inject and certainly should trial some additional marketing dollars. Historically, the SoHo channel was very limited, very efficient in spend but limited to basically SEO and SEM. John made some changes in leadership probably a little over a year ago, introduced a broader base form of marketing, including social media. It's part of the reason you've seen the improvement in that channel. But what I'm more excited about than just injecting more marketing dollars in it, which if they pay off, we'll do, is for the first time really in that channel's history, being able to offer additional services to those customers. Historically, it has been solely a digital fax solution. Take a number. As I mentioned, if you give those customers over a year, they become essentially lifers. But we have people that rent the solution. They need it for a short-term project. So bringing jSign in, a digital signature using blockchain technology is a nice complement. And what we'll be looking for is additional services, some of which may come from the technologies being developed for health care, others may be services that we go about and actively partner with because I think that is a very fertile base that 1.1 million customers is a very fertile base where we should be looking to get either more ARPU through an upsell of additional services or through a bundling concept, more paid ads and reduce churn. So those are the 3 initiatives as we go into 2021 -- '22, I should say. Not all of them will be immediately contributory in '22. But I think that's kind of the groundwork. Then as we go into '24 and '25, I think more and more of that will be corporate being an increasing share of the business, health care being an increasing share of our overall revenue profile and products and the services that are not even yet disclosed on our road map...

And then also...

John, would you like to share any additional thoughts with Dan and the group?

No, Scott. I think you hit all the important points, and that's certainly the direction we're taking.

And then, Scott, any M&A obviously fits into any of those buckets, right?

Absolutely. Absolutely. And as I said in the prepared remarks, you don't think of Consensus going forward is one that's going to roll out digital fax companies even if we can buy them right and they have great economics and great payback. I think that would actually be a distraction for our team. Remember, we're a small company at spinout. We're going to be 400-some employees. We're going to add some over time. But we're 450-ish, say, pro forma. So we have to really pick the areas we're going to concentrate or not so much our dollars. We've got a lot of dollars, but our time and attention. And so the M&A has got to squarely fit in with the vision that John is articulating in terms of our approach into the health care space, and particularly since we've got all the solutions as it relates to digital fax, in these other areas of interoperability, data extraction from documents, secure movement of that information, moving it from unstructured to structured data, using natural language processing, artificial intelligence, do it. That's we will be looking for acquisitions to supplement and complement those activities that we've laid out on the road map.

And the next question is coming from Shyam Patil from SIG.

Congrats again on the spinout. I wanted to follow up on the previous question and your answer, Scott. Any further color you can just give on when you think about expanding vertically within health care, IT, like what makes sense -- I mean it sounds like there's some low-hanging fruit in terms of tangential services. But it seems like there's also probably larger areas that are maybe not necessarily entirely tangential that could make sense within health care? And then just horizontally, how you think about expansion as well? Obviously, health care is a big opportunity, but are there other verticals, other professional verticals where it could make sense to kind of double down and expand over kind of a 5-year road map?

Shyam, I love your enthusiasm. We've got to -- you got us running the 100-yard dash here in about 5 different directions, which is great because I think all of those are legitimate opportunities. But let's take a step back. I think the next -- the first 2 years post spin are really important. And I think we've got to solidify in those first 2 years is obviously the release of some of the interoperability services that John mentioned that have not yet been released. Some of them will come at the end of that 2-year period or at least halfway through and really the effective sales and marketing of those broadly based in health care. All of these solutions are broadly based. They don't necessarily focus in or narrow down to a specific subsegment. John gave you a number of those. And yes, there are add-ons. There are tangents that could be of interest. But I think before we explore those, let's nail the core. That's my view. Now in doing that and developing some of these technologies, you are correct that -- and this reason we like regulated industries because when you cut through all of the regulations, whether it's for finance or legal or health care. At their core, what these regulations are all about is the secure private transmission of sensitive information. That's the bottom line. So if you can develop them and it meets the standard for the health care industry, which would generally be at a high level, then it does make sense to us that we can take those services, and there may be some R&D needed to adapt them to these other verticals. You have, by the way, in corporate. Half of it is health care, but what's the other half. Finance is a strong vertical. Legal and compliance is a strong vertical. Accountancy is a strong vertical. So as we look to developing these technologies, we will be looking to how we can adapt them into these other industry sectors. And I would say mostly those that operate under some degree of regulation. Now John, in terms of Shyam's first part of the question, are there areas you'd like to address in terms of some of these things that we could think about maybe as we get into '23 and '24?

Yes. And thank you, Shyam, for the question. I think that what we want to be able to do is to stick to the knitting around secure communication. I think that you often see companies in this space start to get excited about going different directions into things like data collection, into things like engineering, into actual EHRs or other kinds of systems of record, like, for example, a sales force or something like that. What we really want to do is concentrate on what we do really well and be able to put that in a position to really drive value into the marketplace and put ourselves in a position to be successful as an organization.

And the next question is coming from Rishi Jaluria from RBC.

Just had a question in terms of metrics and disclosures. So I appreciate the higher level of granularity. Since you're going to be a much more focused company than you were under J2, can you give us a sense for what we should expect you to disclose kind of on a regular basis, what sort of new insights do you think we can get over time? And maybe alongside that, with one of the new metrics that you disclosed today was the churn rate at the corporate side. Just wanted to get a sense, I mean, you're talking about something a 2.2% monthly account churn, about 25% annualized so far or this year based on estimates. Why is that number where it is? And if we were to disaggregate enterprise versus SMB, how would those numbers look differently?

Great. You asked a lot, Rishi. So stay on the line, in case I don't remember all of them. But I actually think this point is really important. And I think it's important for Ziff going forward as well as for Consensus is one of the reasons for spin. Obviously, it gives each company the ability to have their own airtime. But being part of a division where you're trying to have metrics that are homogenized with other business units that do have degrees of similarity but are different. I think has historically been a challenge. So when the separation was contemplated, that was kind of one of the early questions put on the table is we have as a smaller company. But what would be useful to investors. Now I can chuckle because we're giving a lot more information he's really given and you've already raised some points and I got a question by e-mail about, well, why not break out the SMB from the Enterprise And corporate? So we're already not even our own public company. We're already in the -- can we do even more. But let's start with where we're going to go in the first phase, which is I think it's important to understand that we do have these 2 revenue streams that have different behavioral patterns. Obviously, they have significantly different ARPUs in what they produce in terms of customers per month. They have different cancel rate characteristics. They have different growth rates as a result. So we felt it was important that people understand this is what's going on in Consensus, here's the 2 different streams of revenue. It may very well be, and my own inclination would be that as the corporate channel gets larger, it may very well make sense to break out SMB from Enterprise. I don't think we're there yet, just to give you a sense of that $164 million, about $110 million is SMB, about $50-ish million -- $54 million would be Enterprise. That's our best estimate for this year. So stay tuned on that because that may very well occur. I think right now, let's get these metrics out, let's get an actual quarter reported as an independent company. The other thing that allows us to do is I hope you'll find it's easy to build your models because you've got customer counts, you've got adds in the period. You've got ARPU, you can do cancel rate by accounts. And I will say that I think in the case of corporate, retention rate, retention, revenue retention is a better metric than cancel rate because this is going to argue against me keeping them together, that most of the cancels come from the SMBs in the Corporate channel. They tend to have lower ARPU. So they're biasing the cancel rate on an account basis, but they're not impacting revenue very much. There's very little cancel at the mid- to larger enterprises. In fact, the only time we generally see cancel there is if our client is acquired through an acquisition or a merger and the acquiring company has a different vision, different technology they're using. So the reason why the corporate cancel rate on an account basis is around 2% per month is because of it's biased by those SMBs that are in there, which is part of that channel. But it is a continuum from SoHo all the way up to Enterprise. And certainly, I think you're going to get a lot of color commentary in our quarterly calls. We're not going to be shy about giving you the SMB versus the Enterprise breakdown, how some of those pieces may be influencing the aggregates. But let us get out, let us get, as they say, standing on our own feet, get these metrics out there, but not dissimilar for J2. We're going to be very open to listening to shareholders and analysts of things that would make your jobs easier. And to the extent that it makes sense to us, we comply and we don't think it's divulging sensitive information, we'd be inclined to do it.

[Operator Instructions] The next question is coming from James Breen from William Blair.

Just had a couple on the balance sheet side. So it sounds like you're going to raise about $800 million in some form of debt. Given your experience in that market, do you anticipate that the interest expense is going to stay around the same around that $50 million mark. I guess it'd be like a 6.5% yield or something like that. And then...

Yes, finish your question.

Over time, how do you view the balance sheet and the leverage ratios, right? You're 4x levered at the start. Is there a range you're trying to get to as you sort of balance that $100 million plus cash flow and a little bit of M&A, give or take, over the next few years?

Yes. Thank you very much. So you're correct. As part of the transaction, we're raising $800 million of debt. It looks like it will be in 2 tranches. A lot of this is structured to accommodate the tax-free nature of the spin. So we're estimating a 5-year tranche of debt and a 7-year tranche, 2-year non-call, 5-year non-call. Now if somebody asks me go raise $800 million of debt, I wouldn't necessarily raise it in this structure. I would want certainly for the 5-year debt, a more flexible paydown schedule and probably introduce bank debt. But because of the tax-free nature of the spin and certain elements surrounding it, we at Consensus cannot pay down a certain amount of debt for 2 years and another amount of debt for 5 years. So at the moment of spin, we'll be levered on a gross debt basis 4x. However, I believe net debt is actually the right metric to look at since we're not anticipating taking the free cash flow, which should be at or in excess of $100 million a year and plowing it back into M&A. So it is very possible in the first couple of years, a significant amount of cash will accrue to our balance sheet. And then in year 2, we will look at the then interest rate environment and see if it makes sense to pay down in part some of the 5-year debt and refinance the remainder, but possibly in a different market. And the same would be true if we hit the fifth year. Our goal is to get down to 3x gross debt to EBITDA. So that, I think, will be a combination of the growth in EBITDA over time, but actually paying down or refinancing less than a full $800 million over the first 5 or 6 years. Now the excess cash that we generate to the extent it does not stay on the balance sheet, we will look for the opportunistic M&A that we've discussed that some of the questions have hinted at, we're going to be very selective. So as I said, I don't expect to do a deal, but once maybe every 18 to 24 months. And then we have certain limitations coming out of the spin, but we will also look when we can opportunistically at share repurchases. There is no dividend in consensus and there's no contemplation of paying dividends.

Great. And then just given the ownership structure, the 81%, 19%, is there any -- will there be some sort of commitment by you to buy back that ownership over time?

No. In fact, we can't that would jeopardize the tax-free nature of the spin. So J2 or Ziff going forward has up to 5 years to monetize or dispose of the stake, although there are certain incentives within year 1 to do so, they can do it on a tax-free basis if they were either to distribute those shares to existing Ziff shareholders in the future or offer debt holders the equity to give Consensus in exchange. So they did a debt for equity exchange, that would be tax free or if they distributed the equity to Ziff Davis shareholders. What decisions Ziff will make will be a great question, I think, for them in future earnings calls for Ziff post spin. My sense is that they're going to see how the 2 companies trade or maybe a quarter or 2. If they don't like the price of the Consensus, they'll hold the stock is my sense because they have the 5 years to dispose of it, but we cannot be a party to that transaction.

Great. And then just one last question. Because of the ownership structure, is there any kind of view to shift some of that cash flow, $100 million plus back to Ziff all stay in-house?

No, all stay in-house. Our only relationship, I think it's a good question indirectly. The only relationship we'll have with the Ziff going forward is for however long down, 19.9%, but that's a pure economic interest in Consensus. And the second is that we have a transition services agreement that runs for 1 year. Most of that transition services agreement will be in the continuing systems deaggregation from J2 Cloud Services that has been ongoing for several months, and we'll probably take a few months more before we complete. I would note in the somewhat ironic way that J2 Cloud Services will also need certain services from Consensus because if you go far enough back in the history of Consensus, it essentially was the parent company of what is now known as J2 Global, Inc. So there are relationships that go back and forth. We'll have to collaborate and collaborate with each other. It's not intended that there'll be any material payments between the 2 companies. Our agreement is only when there are hard external dollar costs incurred to pro forma the TSA or those chargeable back to the other company.

I would now like to hand the call over to Scott Turicchi for some written questions. Scott, over to you.

Thank you, Paul. So we've received some questions via e-mail, which we always encourage you to do. So I thought it would be appropriate at this time before we go back to the live questions that we take some of these. I think they're pretty straightforward to answer. Some we may have already answered, so I apologize if we're being repetitious here. First question I had to do with the increase in the corporate cancel rate or churn rate that we project for 2021, versus '19 and '20. That is biased by those 3,500 accounts that I mentioned earlier that are being cleaned up in a system migration. We are not pro forming those out. So we're allowing those to flow through the cancel rate. As a result, it ticks it up about 45 to 50 basis points, and it also flattens the total number of accounts end of year 2020 to our estimate end of year 2021. Question number 2 is about the increase in the corporate ARPA. I think we've addressed this. This is primarily driven by the onboarding of new customers, particularly Enterprise customers, who bring usage to us over time as they decommission their existing systems. It does not happen at a moment in time and then the actual underlying growth of their data and the volumes of the transactions they bring to us. I want to be very clear because this has come up several times. There is nothing to do and is not driven by the price increases. This is not a price increase either in the SoHo channel or the Corporate channel planning. This is based on bringing in new customers and based on usage. Next question is quantify the incremental investment expected in '22 versus '21, for our various go-to-market initiatives that we've talked about, including in the SoHo channel and to address health care interoperability. SoHo channel, as we touched on earlier, maybe there's another million dollars of experimental marketing that we'll put to work in '22. To the extent we find nuggets that work and they meet our ROI criteria, we will further invest behind that. As I mentioned earlier, I'm very interested in what we can do with additional services and technologies, either through a bundling or through a cross-sell/upsell program. But I think the investment in '22 is probably $1 million or less. On the health care interoperability, most of our investment there is in R&D. That's going to be primarily the hiring of additional people. Most of it will appear next year as capital expenses because these people will be writing the code. And so their costs will be capitalized until those services are released. We expect CapEx this year to be about $80 million, and I would expect it would go up $4 million to $5 million next year, primarily based on the investment we're making. Now ultimately, those costs will be depreciated and amortized when the services are released and then those people will flow into OpEx in future periods. Question on the share count. So I know it's a little -- it can be a little confusing. You'll notice in the Form 10 for purposes of EPS and other purposes. 20.1 million shares are the outstanding, but you'll also notice that there's another number of 16.1 million. The difference between the 2 are roughly 4 million shares held by J2. That's the 19.9%. So our total share count at spin will be 24.1 million shares, 16.1 million of which will be owned by existing J2 shareholders as of the record date, 4 million shares held by J2/Ziff going forward. And then the last question I had to do with the $800 million of debt we're raising in terms of the use of those proceeds. In essence, we're keeping $30 million of that, which is basically excess cash and a modest amount of working capital. The other $770 million in various forms will find its way back to J2, and J2 will use that to retire some of its existing current $1.7 billion of debt. So in essence, when the day is done, J2 should have $1 billion or less of gross debt once those proceeds come over and they do their debt repurchases and/or debt retirements. Okay. I'd ask Paul to come back. Let's go back to live questions.

The next slide question is coming from Cory Carpenter from JPMorgan.

I think my first one, I think, it's for John. Just hoping you could talk about the success of some of your recent product launches and just the adoption you've seen around Unite and I guess, Signal more recently? And then I think for Scott, you kind of alluded to this in answering your last question. So it kind of makes you wonder just how do you think about the potential to take more price in the future and just how you're thinking about balancing ARPU growth versus account growth to kind of reach your long-term revenue target?

Absolutely. I'll let John go first, and I'll take your question after John.

Great. And thanks for your question, Cory. We are very excited about the launch of Unite. We had put a lot of time and effort into how we were going to launch it. We had targeted it to be launched at the HIMSS Conference 2020. And just 2 days before the HIMSS Conference was actually going to be held the COVID shutdown hit and our whole kind of marketing program around that had to be changed on the fly. I think given what we had to struggle through at the launch point we're pleased with the level of sales that we've gotten so far with consensus Unite. We've consistently been placing somewhere between 80 and 100 new systems, new Unite systems on a monthly basis, I'd say, from midyear last year on. So that's gotten a lot of traction. Signal is a bit of a longer sales cycle. So right now, it's pipeline and some sales are advancing towards closure. We expect to be able to have some actual live sites up in Q4 of this year.

Yes. Cory, could you repeat your question again?

Yes. Just how you think about kind of the balance of ARPU growth and account growth to reach your long-term targets? And then, I guess, specifically on ARPU just curious how you think about the potential to take more price in the future?

Yes. And first of all, let's bifurcate to the 2 channels. So it was the case, although it's been a number of years that we raised prices in the SoHo channel. I think the last price raise was '07,'08. So shockingly, it was going into the Great Recession, now we've got the pandemic. There haven't been really any price increases subsequent to that. Now when we did some of those roll ups historically, we would find customer bases we felt were not appropriately priced. After migration, we might price adjust those. But that's really not been what's been going on for at least a decade in the SoHo channel. What I'm thinking in the SoHo channel is less about raising prices on a raw basis and more providing additional value add and the question becomes the format in which we do that and does that come through an enhanced bundle that comes at a higher price versus an ala carte upsell or add on. Those are things that are still very much under discussion. But I don't want to anticipate what I think I've heard from others, which is just an outright price increase for the same service. Now in the corporate channel, there really have not ever been price increases. It is a competitive market. I think here, like in the SoHo channel, but even more so it's all about delivering an additional value add, additional services. And given that as you move upstream into the enterprise, it becomes more volume-based, gaining additional traffic through adding new customers and particularly the space like health care, where traffic is growing. That, I think, will be the ARPU movers in the Corporate channel. I think in the SoHo, it will be additional services and the question is just going to be, is it bundles that we sell? Or is it going to be upsell, cross-sell or some combination thereof.

And there were no other questions from the line. I would now like to hand the call back to Scott Turicchi for any closing remarks.

We actually do have another 2 questions via e-mail from Jon at CJS Securities. So first question, I'll take, I'll give John the second question, which is he wants to know if there's going to be any partnerships between Consensus and Ziff Davis going forward? And the short answer is no. So even though Ziff Davis has Everyday Health, and other properties in the health care digital media space, there are no relationships at spin, none are contemplated. As I mentioned earlier, the only 2 relationships that exist would be the ownership for as long as that exists of Ziff into Consensus and the TSA, which will expire inside of 1 year or at least no longer than 1 year. And then the second question, John, has to do with our launch of jSign and how it differs from DocuSign. And is that a bigger market you can take on over time.

Yes. The launch of jSign, I'd call it a soft launch. We have been marketing and placing jSign for about the last 5 months now. It does differ from some of the other leading technologies that are out there in that, number one, it was built and based completely on blockchain security technology. Using that approach, I think, is unique in the industry and gives us a level of security that is pretty special for the kind of product that it is. Second, I think that we were very thoughtful about how we planned, architected and executed the product. So but I think we can be very price competitive, which is going to be attractive in the marketplace as well. And then finally, I think that being able to integrate it as a package with some of our other technologies, specifically with fax with secure direct messaging makes it a much more powerful offering than just a Signal -- a single digital signature because I think when you think of these things, things you signed, you really think of them in some kind of context of being able to get work done within a workflow. And the way that we're packaging this, I think we're going to have some advantages over the competition, especially in those areas that are workflow-centric with what they do and how they do it.

Great. So thank you, Paul. I assume there's no one else in the queue. Is that correct?

There are no other questions from the line, Scott.

Okay. Well, we thank everybody for joining us on the first Consensus Investor Call. We look forward to many more of these, I would say, look to the J2 Global website or press releases that we'll announce the actual record date and the date of distribution. Preceding that, Consensus will be going on the road to raise the $800 million of debt that we referenced here. And then we'll look forward to any of your questions you have either between now and spin. You can e-mail them either to myself at [email protected] or [email protected]. We'll try to get back to you as expeditiously as possible. And then certainly, we look forward to talking to you post spin as an independent company and continuing the dialogue. Thank you very much.

Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time.