Q4 2023 Consensus Cloud Solutions Inc Earnings Call

Participants

Johnny Hecker; EVP, Operations & Chief Revenue Officer; Consensus Cloud Solutions, Inc.

Jim Malone; CFO; Consensus Cloud Solutions, Inc.

Jonathan Tanwanteng; Analyst; CJS Securities, Inc.

David Larsen; Analyst; BTIG, LLC

Anne Samue; Analyst; JPMorgan Chase & Co

Mark Zhang; Analyst; Citigroup Inc.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to consensus Q4 2023 earnings call. My name is Paul, and I will be the operator assisting you today. At this time, all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. On this call from consensus will be Scott Turicchi, CEO; Jim Malone, CFO; Johnny Hecker, CRO and Executive Vice President of Operations; and Adam Varon, Senior Vice President of Finance.
I will now turn the call over to Adam Sharon, Senior Vice President of Finance at consensus. Thank you. You may begin.

Good afternoon and welcome to the consensus investor call to discuss our Q4 and fiscal year end 2023 financial results, other key information and 2024 guidance. Joining me today are Scott Turicchi, CYO., Johnny Hecker, CRO and EVP of Operations, and Jim Malone, CFO.
The earnings call will begin with Scott. Providing opening remarks. Johnny will give an update on our operational progress since our Q3 investor call, and then Jim will discuss our Q4 2023 and year end preliminary unaudited financial results and 2024 guidance. After we finish our prepared remarks, we will conduct a Q&A 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 could cause actual results to differ materially from the anticipated results. Some of those risks and uncertainties include, but are not limited to risk factors outlined on slide 3, what we have disclosed in our 10-K SEC filing, as well as a summary of those risk factors that we have included as part of the slideshow for the webcast, we refer you to discussions in those documents regarding Safe Harbor language as well as forward-looking statements. Now let me turn the call over to Scott.

As we discussed in our Q3 call, our focus has been on EBITDA and free cash flow generation. The market dynamics have not materially changed since our last call in November, and we expect these trends to continue throughout 2024 in the health care sector. We've taken the past three months to do a rigorous examination of the business to see where costs can be optimized.
As we noted in the Q3 call, we found some spend in our SoHo channel that gave us low LTV customers. As we looked even deeper campaign by campaign, we found additional spend that was at best marginally profitable and most likely uneconomic. As a result, we have made some additional cuts against our Q4 forecast that had a slightly negative impact on revenues in the quarter, but favorably affected EBITDA productivity and margin.
On the corporate side, the revenues were impacted by the enhanced collections process that reduced our outstanding receivables, but also resulted in some account closures. This has an effect on the base coming into 2024 and will likely affect corporate revenue growth rate by approximately one percentage point. Jonathan will provide you with more details in his part of the call.
I am pleased that for the quarter we generated new our target EBITDA, notwithstanding the headwinds on the top line. Our bottom line EPS, while strong, were negatively impacted by a severe rallying of the euro against the US dollar. That resulted in a charge of $5.8 million or $2.4 million more than our forecast. I would note that these are inherently difficult to predict and are non-cash in nature. We are working on a program to mitigate this volatility in 2024.
The strong bottom line results combined with the finance team's collection efforts allowed us to be $10 million better in free cash flow versus Q4 2022. For the full fiscal year, we produced $77.7 million of free cash flow compared to $53.1 million in 2022. This allowed us to repurchase $71.4 million of our bonds through January at an average price across both tranches at 91% of par. And we ended the year with a healthy $88.7 million of cash and cash equivalents.
As we look to 2024, the biggest change from our previous November is how we are managing the SoHo channel given change in algorithms, increasing cost for advertising and an increasing amount of new sign-ups that have limited use cases. And as a result, a short life, we are cutting almost two thirds of our marketing spend in 2024 relative to 2023.
As a result, we will see a faster decline in revenue for SOHO in 2024 than previously articulated. However, the costs are declining by approximately the same amount as the revenues. As we continue to invest in our corporate channel, we have allocated a few million of additional marketing spend to support this effort. In addition, we have been seeing initial benefits from the go-to-market realignment that we implemented approximately one year ago.
We remain positive on the opportunity within the health care sector for our core fax products and interoperability solutions. We expect an increased corporate contribution exiting 2024 as a result of the strategy, and we'll continue to pursue it while we generate cash and retire our debt.
At the midpoint of our range of guidance, we expect EBITDA to grow in 2024 and margins to expand by approximately 290 basis points. We're also paring back our capital expenditures by approximately $7 million from the 2023 level, while continuing to invest meaningfully above pre-spin levels. Notwithstanding an expected higher tax rate than 2023, we still expect to generate approximately $80 million in free cash flow.
I will now turn the call over to Jonathan.

Johnny Hecker

Thank you, Scott, and hello, everyone. And let me provide an update on our sales and operations, starting with our corporate business. In the fourth quarter of 2023, our corporate revenue reached $49.4 million, reflecting a steady increase compared to the previous year's $47.8 billion.
Very excited to report the continued success of our Soho upsell strategy with approximately 1,250 accounts added in Q4 and a total of approximately 4,700 accounts that shifted from SOHO throughout the year. Notably, advanced products accounted for 13% of our total new sales, a continued strategic focus for us and contributing to a 23% share for the full year.
Additionally, our FX protect offering has yielded impressive results, garnering approximately 1,000 paid customer adds in the quarter, thanks to the Q3 introduction of a new e-commerce channel, specifically tailored to corporate clients.
Moving on to SoHo, as we had anticipated and regularly communicated, there was an expected decrease in revenue during Q4 of 2023 with $38.3 million compared to the previous year's $42.2 million as we discussed in Q3, we cut some unproductive advertising as we did a deeper analysis. We made additional advertising cuts in Q4, which will continue into our 2024 budget our goal is to optimize our SEM spend with a focus on targeting the most profitable customers.
As a result of this decreased intake, we did see our total account base decrease from 859,000 to 831,000. However, it is important to note that our churn rate improved from 3.49% in the previous quarter to 3.34% in line with what we would expect to see given our more selective customer acquisition strategy.
Now let's move to some key updates that have shaped our operations. Firstly, the V. a rollout has begun its acceleration. All parties involved have worked in close alignment to adopt a new method of rollout evolving in that new format, we're ensuring a smooth and efficient implementation.
As a result, we anticipate to reach a seven digit contribution in 2024 with a promising runway beyond that in terms of our EC fax offering for the federal government. Other government agencies progress has been steady, albeit slow pipeline remains robust, with prospects remaining cautious of the ongoing federal government spending cap being a regular contentious issue.
We are closely monitoring developments as we await the federal budget resolution. It's worth noting that our commercial offering fixed corporate has proven to be a viable alternative for smaller government agencies with less demanding requirements.
Furthermore, I'm pleased to share some notable wins, including our success with MRO., a customer in the healthcare IT space and expert for the exchange of clinical data and the initiation of a partnership with Lexmark, a leading provider of printing and imaging products, software solutions and services. Our go-to-market realignment strategy has yielded positive outcomes, particularly with the earlier noted, success of FX protect our corporate e-commerce offer.
We have strategically redirected our focus towards our existing customer base, maintaining the health care industry as a gold standard for new business and product strategy. In line with this, we are actively cultivating partnerships with electronic health record and health care IT vendors. I'm happy to report that the go-to-market realignment efforts have resulted in increased operational efficiency, steady booking results, a stable sales pipeline and data-driven adjustments to our strategy.
Now let's briefly discuss our product updates. Beginning with our AI driven solution clarity, we continue to build a solid pipeline for clarity, CD. for clinical documentation and cleared EPA for prior authorizations, and we are excited to announce that we have already booked our first clarity, CV customers, new prospects and existing customers have shown great interest in adoptable AIA. and a real world solution yielding them immediate savings. Additionally, our first generation Harmony offering is now in production, marking a significant milestone in our product roadmap.
With this specific application of Harmony, the center transmits a fax document by FX and Harmony delivers it as a direct secure message, a broadly used electronic delivery protocol for health care. We are excited to announce that we are partnering closely with one of the leading cloud-based EHR and practice management solution providers for small and medium-sized medical practices on this project as we look ahead to 2024.
On the next slide, it's important to note that while we recognize the positive changes within our organization, we are maintaining a conservative outlook on our growth prospects by optimizing our marketing efforts with a focus on increased profitability, we have deliberately put an emphasis on margin and retention, while in the near term, top line growth will be moderate.
Our primary focus remains on cash generation and achieving operating profits for our SOHO business. We have implemented several strategic measures as part of our go-to-market realignment by merging the marketing departments for SOHO and corporate. We aim to leverage deeper insights from a propensity analysis indicating that a portion of our so how base processes, corporate attributes. Furthermore, we finalized the effects price increases in early 2023, allowing us to concentrate our efforts on a more engaged user base.
In 2023, we encountered some challenges related to significant changes implemented by our primary digital advertising partners. The changes were aimed at stabilizing their businesses, but they resulted in a significant increase in our customer acquisition costs, yielding less profitable customers. To navigate these challenges, we have undertaken a thorough analysis of our campaigns to identify those that yield high quality customers as reported in our last earnings call.
And consequently, we narrowed spending on campaigns targeting high-profit customers starting in Q3 of 2023 and are continuously evaluating the effectiveness of our campaigns. Our focus on the smarter ad spend project involves analyzing our subscriber base to optimize digital advertising spending.
We are closely monitoring at cost and will strategically we enter campaigns when the LTV to cap ratio meets our defined level of return narrowed spending and so allows us to shift a portion of that advertising spend to the corporate business while reducing So spent our strategy centers around prioritizing high LTV customers, which will positively influence the profitability of newly acquired SOHO customers.
Encouragingly, we are already observing positive indicators with a decrease in check, resulting from an increase in organic sign-ups and reduced overall expenses. In total, we are planning for approximately $139 billion in SOHO revenue at the midpoint for 2024 through active management, we expect this targeted reduction in revenue to allow us to maintain and possibly improve cash generation in comparison to previous periods.
Now let me address the corporate business and direct you first to our balance sheet, you'll notice a significant decrease in our accounts receivables from Q3 to Q4 of 2023. We've expanded our collections team in a short period, allowing us to focus on rigorous collections management in those quarters. Jim will go into more detail in his prepared remarks. While this effort has improved cash generation and has also resulted in an increase in customer terminations impacting both our 2023 revenues and run rate entering the new year regarding other impact in our baseline, the FoxBox migration in Europe resulted in the discontinuation of that platform retaining less than half of its space.
Also, this may seem significant from a top-line perspective, it rents justify it from a technical platform, retirement and cost standpoint. Additionally, the Summit acquisition strategically conducted for its great talent and technology continues to generate baseline revenues. But it declined in 2023 and will not contribute to growth in 2024 as we have previously discussed, slow decision-making in the previous years of 2022 and throughout 2023 did not generate the addition of new business as initially anticipated in our 2023 post pandemic plan.
Consequently, we have adopted a more conservative approach to our baseline. We see some but little change to that behavior fast, keeping our new revenue ambitions roughly flattish as well. Despite the challenges we are encountering, we are budgeting corporate revenue to $206 million at the midpoint for 2024, representing a 3.1% growth compared to 2023. In line with our recent quarterly growth rate.
So looking ahead, we are maintaining stability in new business and anticipating initial returns from the Japanese corporate launch. In response to market conditions, we have kicked off focused sales initiatives in 2024 and reallocated resources to enhance customer retention and cross and upsell opportunities in our large baseline. These initiatives position us for accelerated corporate growth in 2025 while we remain committed to cash generation.
And with that, let me hand the call over to our CFO, Jim Malone, who will provide a bit more color on our Q4 2023 and full year 2023 financial results as well as our 2024 guidance. Jim?

Jim Malone

Thank you, Johnny, and good afternoon, everyone. Saw in our press release and on this morning's call today, we are discussing preliminary unaudited 2023 results and 2024 guidance for fiscal 2023. Audit is still underway and will result in audited financial results filed with our 2023 10-K scheduled to be filed late next week.
Let's start with our corporate business results. Q4 2023 revenue was $49.4 million, an increase of $1.6 million or 3.3% over the prior comparable period. Q4 2023 year-over-year corporate revenue growth increased by 30 basis points versus Q3 2023 year over year.
As Tony mentioned, Q4 year-over-year revenue was impacted negatively by the cleanup initiative related to the Q4 collection efforts. Migration of FOXBOX for legacy platform and some in the second half of the year, an increased focus was put on cash collections. This effort improved collections by 9% from slow-paying customers and however, did result in terminations of nonpaying customers. Corporate all of approximately $306 was down $16 or 4.9% from the prior year, driven by the mix of paid ads at a lower offer, including Sylvo accounts.
Moving to corporate and the new FX protect initiative that Johnny mentioned in his remarks, monthly churn of 1.82% increased 33-basis points, delivering a trailing 12 month revenue retention of 99%. The churn increase was primarily due to terminations of nonpaying customers,
2023 full year corporate revenue was $199.6 million, a $7.4 million or 3.9% increase over 2022 results year-over-year. Revenue was also affected by the cleanup initiative related to Q4 collection efforts, migration of FOXBOX and it moving to Soho results.
Q4 2023 revenue of $38.3 million, a decrease of $4.1 million or 9.6% over the prior comparable period. Year-over-year decrease was within expectations given the impact of price increases in prior year and lower optimize advertising spend. His approach over the net base reduction due to fewer paydowns but potentially higher value customers, partially offset by increase for an increase in OpEx, Ofer of $15.12 increased by $0.41 year over year, benefiting from last year's price increase.
Churn declined 48 basis points to 3.34% compared to the prior period, and we're now at pre pandemic churn levels. Full year 2023, total revenue was $162.9 million from $7.3 million or 4.3% decline over 2022 results and essentially in line with our full year sales guidance range of negative 4%, negative 2%.
Moving to Q4, consolidated results revenue of $87.8 million, a decrease of $2.5 million or 2.7% over Q4 2022, adjusted EBITDA of $47.2 million and 53.8% margin was a decrease %1.8 million or 3.7% over Q4 2022,
The main drivers of the revenue flow from mentioned above planned employee related expenses, partially offset by effective cost management. EBITDA margin of 53.8% is within our guidance range of 50% to 55%. Adjusted non-GAAP net income of $21.3 million, a decrease of $1.3 million or 5.6%, driven by lower revenues, a higher tax rate offset by interest income of $1.5 million and noncash foreign exchange revaluation of inter-company accounts of $0.5 million.
Adjusted non-GAAP EPS of $1.11 was lower than the prior comparable period by 1.8% or $0.02 Q4 2023 non-GAAP tax rate and share count was 21.8% from 19.2 million shares.
Moving to 2023 full year consolidated results. Consolidated revenue of $362.6 million is essentially flat versus the prior year. Adjusted EBITDA of $186.6 million was a decrease of approximately $10 million or 5.1% compared to the prior comparable period, delivering a 51.5% margin percent within our 50% to 55% guidance expectations. The main year over year EBITDA driver and that flat revenue as planned.
Employee related expense, adjusted non-GAAP net income of $99.8 million decreased $6.8 million or 6.4%, driven by lower operating income, offset in part by interest income expense benefit of $4.2 million and lower tax expense by $2.7 million. Adjusted non-GAAP EPS of $5.9 was lower than lower in the prior comparable period by 4.5% or $0.24 to 2023. Non-GAAP tax rate and share count was 19.7% in 19.6 million shares.
As mentioned in our Q3 2023 earnings call, we announced a $300 million bond repurchase program approved by the Board of Directors for Q4 2023 and the first week of January 2024, we repurchased $62.6 million and $8.7 million in face value across both tranches for $57.1 million and $7.9 million cash respectfully, we repurchased 349,001 million shares in Q4 and 2023, respectively, for a cash outlay of $8.5 million and $23.5 million. We ended 2023 with $8.7 million in cash and cash equivalents which is sufficient to fund our operations and purchase repurchases of debt and equity.
On normalized 12/31/23 cash balance would have been flat versus 9/3/23 at $156 million, excluding the $65.5 million in bond and equity purchases, 2023 full year free cash flow of $77.7 million for additional assistance. With the quarterly spread of our guidance, we will be refining additional guidance for the current quarter for the year 2024 guidance is as follows
Revenues between $338 million with $353 million with $345 million midpoint. Just in the non-GAAP EBITDA between $182 million, $194 million with $188 million at midpoint. Adjusted non-GAAP EPS, $5.08, with $5.31 with $5.20 at midpoint.
From Q1 2024. Revenues are expected to between $85 million and $89 million, with $87 million at midpoint adjusted non-GAAP EBITDA between $45 million, $48 million dollars with $46 million at midpoint, adjusted non-GAAP EPS of $1.27 to $1.33, $1.30 at midpoint estimated share count and income tax rate of 19.4 million shares and 20.5% to 22.5%.
This concludes my formal remarks. And now I'd like to turn the call back to the operator for Q&A.
Thank you. To 22.5%, it's concluded again.

Question and Answer Session

Operator

Jonathan Tanwanteng, CJS Securities.

Jonathan Tanwanteng

Hi, good afternoon and thank you for taking my questions on. I guess my first one, Scott or John, you know, when do you think the decision making labor issues impacting your corporate business will begin to resolve or begin to inflect on is a light at the end of the tunnel should we expect this to continue for the foreseeable future.

Johnny Hecker

And John, this is Johnny. Yes, thanks for the question. I think it's a I wish we didn't write down. I think the what we're experiencing is we're seeing a little bit of room more decisiveness here and there, but it's not at a trend that we would say, hey, we're seeing light and we're seeing this ending anytime soon. So for our 2024 a budget and we anticipated two to hit, not see a whole lot of improvement further.

Jonathan Tanwanteng

Okay, got it. At 3% growth and change with the VA contributing a little over something within a seven digit range.

Johnny Hecker

It does that mean corporate isn't growing without the VA or and there are the components of that on the corporate book grow, we've got 58 for sure. Yes, it's I mean, it's I mean, it's not a huge contributor, but it's part of the 3%.

Jonathan Tanwanteng

Yes, got it. Got it. Okay. Did you still see SaaS volumes growing across same customers are year on year?

Johnny Hecker

Absolutely. Yes, we see customers. I mean, I think we have a very broad spectrum of corporate customers, right? But especially on the on the upper end, on the larger customers, we see we see tremendous growth within individual customers.
Yes, absolutely.
And it's not driven by two. That's right. On the one hand, you see M&A happening within large companies, right? So they acquired are there quarter additional volumes on Secondly, you see a lot of that traffic is still on-prem. And depending on what customers you're talking about, it could be on servers. It could be on machines and there's they're still migrating a lot of these things into the cloud. So we still see a tremendous momentum within our existing customers.
And then maybe one more thing I talked about in my remarks, a lot of our larger customers are exposed to healthcare IT in the HR space. And as they grow and acquire new customers, we bring on those volumes and growth in those customers as well.

Jonathan Tanwanteng

Understood. Thank you. And I was wondering when do you expect the impact of the lower spend in the solar business to level off and from a I guess, sequential decline perspective and will that take most of the year, but what does the slope look like?

Johnny Hecker

The level of the spend or the revenue component associated?
I'm not sure I understand the question.

Jonathan Tanwanteng

The revenue and user component of that that's associated with a decline in spend.

Johnny Hecker

Now that will continue. That will continue at the current level of budget spend that will continue throughout the year and could even continue into next year. One of the issues that we will be monitoring where exactly is that sweet spot around the budgeted numbers, it could be $2 million or $3 million higher. It could be couple of million dollars lower.
So as we look at the various campaigns and we monitor them and we look at their lifetime value expectation, how they behave against other cohorts that will influence the level of spend, which will then give greater clarity to the answer to your question as we enter 2025. But I think clearly in 2024 you should expect for each of the four quarters a decline in the base from predecessor QUARTER.

Jonathan Tanwanteng

Got it. And is there any point where you have enough remaining high quality customers and high-quality acquisitions that business can eventually grow at some point or stabilized to flat? Or is it going to be your expectation that that just could declines at a slower pace once you know,

Johnny Hecker

I actually think when you swap off the call, but rental customers fire, but we're getting some feedback with those customers. They essentially have signed up within the last 12 to 15 months and have and a portion of them have short life remaining doing themselves out of the system. While it is truly will have a lower revenue than 2023, it will also be much easier to stabilize that number on a go forward basis.
I would still would not look for the SoHo channel the way we are managing it to be a growth vehicle. But I do think there's a point that it's not entirely clear shape is not the issue to be clear that there will be stability or can be stability in that channel revenue.

Jonathan Tanwanteng

Got it. Thank you.
I'll jump back in queue.
Thank you.

Operator

David Larsen, BTIG.

David Larsen

Hi. Can you talk a little bit about clarity, Jay sign, high trust and Harmony. Tom, maybe if you could please comment on pricing some revenue contribution? And just broadly speaking, what these what these products do and how they will benefit your hospital clients on longer term?

Johnny Hecker

Thanks very much and the current thinking on solar. So let me start with that down with clarity. Clarity is our AI. and IP. based solution that helps to extract and data from unstructured documents and images, life science and including data that is handwritten are difficult to be read by the by the human eye and turn it into structured data.
So it can be easily processed or better be fast to be processed with in other systems like electronic health record system. And it's really a technology platform that we have built out that word that we are now developing individuals applications for specific use cases on top.
So the clarity, CD. platform for clinical documentation, it helps extract certain demographic data. So a document that is being ingested can be processed quicker and filed within the EHR system and deliver it to where it really matters in a block in a faster manner than the way it has traditionally done, which is by manual labor, some of looking at the document and then with the most selective filing it.
So we are accelerating that process and no data has to be keyed into the system manually anymore on the prior authorization application of unclarity, we do a similar process, but specifically the system is trained on prior authorization documents. So we can accelerate that process.
And with the recent developments with the rules from the CMS, that will definitely sounds not only help providers, but primarily payers to accelerate the turnaround of prior authorizations, which will pay will be required to do within a certain time limits in the future.
On the Jay Stein application is a healthcare specific or directed, but not exclusive application for electronic signatures. So on basically comparable to a technology like you would find from DocuSign on. And we know there's a lot of the documents that we process for our customers now by fax do require some kind of digital or some kind of signature process and before they already returns.
So that's why we view the J Sand application as a natural extension of our current offering for just transporting documents, but then going more into that into the workflow piece, certainly on the on the Harmony product or platform, this is really where we see those technologies come together as a and on a platform level where customers then can get up, pick and choose technologies and transportation protocols as they wish.
And need.
And the first product that we have out there is, like I said in my remarks, and we are receiving documents by fax for our customers. And then we're extracting certain data, and we're forwarding it as direct secure message. So the recipient doesn't really receive a fax anymore, but a secure message. And there will be other protocols like fire HL7, we will bring in the Clarity technology that all come together in that and the Harmony platform.

David Larsen

Okay. On the that's great. What is the what's the revenue contribution from these products? And what is like the current, we'll call it like penetration rate, what is the upsell potential? Just pricing? Any color there? What kind of lift can we expect to see from these products? .

Johnny Hecker

So from a revenue perspective, I mean, it's very clear that the majority of our revenues still coming from the from the fax platform, right? But we are we're looking to extend and we're finding adoption on the new technologies. And they are they are price depending on technology, but similarly to how customers are used to pay for the fracturing technology, which is mostly on a per document or per page level. And depending on that, on the protocol, it can be a per transaction costs, but there's going to move and continue with our subscription and usage-based pricing models for all of these technologies?

Yes, I think that yes, I think you also have a high trust. So Evercore effect service and more recently, Jay signs have been high trust certified at this point, although it is in Q4 this year, clarity is not yet in Harmony is really at its very early infancy stages so if you take all of them together, Harmony is not contributing any revenue in 23 and not expect to contribute much in 2024. There's low single million of revenue for all the clarity.

David Larsen

Gentlemen, that's very helpful. Thank you. And then can you maybe just talk a little bit more about the EMRs like Epic and Cerner and Meditech in particular are you working with those EMR vendors? Are you the Equifax platform within any of those or but do they have their own and are you competing with them? Thanks very much.

Johnny Hecker

So there are some EHR vendors of EMR vendors that we are the default contacts platform for. And we integrate basically with all of them through our API technology can connect any EMR to our Tower Cloud platform, and we have customers on all of the technologies that you have.
Okay.

David Larsen

And just one last quick one for me. You had mentioned a 65 hospital health system win, I think last quarter with 107 skilled nursing facilities and 25 urgent care centers. Was that the VA or is that a different hospital system and what kind of revenue contribution we see from that client? And when would that start to roll on the books?

Johnny Hecker

That was non-VA?
That was a nonprofit even on that size customer, you can probably expect it's definitely a seven digit contribution. It's started to ramp. We're in the rollout. But as you can expect with that many facilities and we very much dependent on the efficiency of their IT teams and their partners. Usually, these companies have 80 partners or have outsourced their IT, and we worked closely with them to that level, but we expect that rollout to be and a lot faster than the VA The VA has, I believe, over 2000 paying 200 variability exists for them. So it's a lot. It's a lot larger.
Okay.

David Larsen

Thanks very much. I'll hop back in the queue.

Operator

Anne Samuel, J.P. Morgan.

Anne Samue

Thanks for taking the question. I was hoping maybe you could speak to what your conversations have been like with your hospital customers right now around demand. I mean, so we've heard some mixed commentary from others in this space that there have been some green shoots just given improving margins, but labor still remains a real pressure play. But you do help alleviate some of that pressure.
So you don't have it recession more along the lines of not now? Or is it more of a longer term home spending?
Yes.

Thank you. Again, I think so I would get in line with the green shoots, right? We're seeing hospitals coming around and saying, yes, now it's time to tackle these projects as of today. The we do see some that are still under economic pressure and others that see improvements in cash flow. But what we do not see is site I'd be hugely successful in hiring IT talent. I think there is still a very, very tight labor market, and that's what we depend on us. We can definitely help with our products to take some pressure off of their nursing staff and their administrative staff. So they're interested in talking about these things, but you still have to get on the priority list.
Right? And as we're successful here and there, but it's not at the rate that we would like to see it obviously always being a patient from the sales side. But I agree there are some green shoots and we're able to close a deal here and there now if they healthcare things as super-fast moving space, I know they're not they're slow in decision making by nature. And it's almost like the government, but slowly, but surely, we're penetrating this space more and more.

Anne Samue

That's really helpful color. Thank you. And then just maybe one on the margins you're doing a really nice job holding the margins despite the revenue shortfall.
I was hoping you could speak to maybe where you see the biggest opportunities to be lean, you know, is it just advertising or there are other areas that you can take a look at it, much of that cost containment is long term versus just related to the near term revenue shortfall,

I would say actually in most of it would be in the area of advertising marketing, as I mentioned to the previous questioner. But to John's level, there will be some flex in that based on how various programs perform and maybe we can add a little bit to it. But the philosophy in terms of the social channel revenue is a strategy so not a one year event.
And then we expect that we'll spend double next year. Not this is a permanent shift in the thinking of how to treat that stream of revenue and in fact, take some of the historic marketing dollars that went to SOHO and shift them over to the corporate clients. It always had an element of marketing, but that's going to be probably a little bit less than double this year. And I would expect that we'll grow even again next year in 2025. So that has been the primary bulk of it.
Now, as I mentioned, we go through all lines of the P&L. So others little savings in our telecom costs. There's a lot of nickels and dimes that also add up. But the vast majority of it certainly as we look at 2024, would be in the marketing budget now enrolled at 2025, which I know still a long way away. There probably won't be as much delta, if any, to the marketing costs. And we'll continue to fine-tune some of the other areas that would be say in our COGS file. So that but that's zero many months away.

Anne Samue

That's helpful. Thank you. And then just one final one for me. As we think about your revenue guidance for next year, what level of churn, are you embedding within that?

So I mean, we say next year, you mean 2024, right presume, right. That's exactly in place. So on the solvency, as we have less spend and less sign-ups that have a higher churn rate because you'll recall going back not that long ago, we put it in there just for informational purposes that you lose two thirds of the customer within the 1 year of those that you marketed those that have signed up.
So what happens is the cohorts get better and better as the percentage of the base is increasingly larger than the new sites. So it will you've already started to see it tick down from the middle of last year into Q3 into Q4 that trend will continue. I don't have to give you more specificity in terms of the actual numbers, but I think we're going to see, as you know, at some point tick through three percentage?

Jim Malone

Yes, I'll get down to that 3%, right? It will probably go down between 40 basis point and 80 basis points throughout the remainder of now the corporate, the what I talked about it with Johnny talked about in terms of the.

Yes, the bad debt, the aggressive account receivables collection, yes, there were some cancellations that basically was the whole increase in the cancel rate in corporate from Q3 to Q4. And so it's been a fairly consistent, stable level in sort of a one quarter to 1.5% range. And we think that is sustainable for 2024. I wouldn't note that our underlying economic assumption is that there will not be a recession in 2024 fed, call it a soft landing where we want to call that. We'll continue to experience the various elements of the economy that we've seen the last two to three quarters.
Obviously, there's some volatility with the expectation of when the Fed will cut how much they'll cut. But in terms of GDP growth, we expect it to remain positive throughout the year so that we're not taking anything draconian. And obviously that would have occurred, we would have to rethink that assumption.

Anne Samue

Very helpful. Thank you so much for all the color.
Thank you.

Operator

[from Citi, 13 airlines]

Mark Zhang

Hey, good afternoon, guys. This is Mark on for 15, but thanks for taking our questions or maybe just a clarification on the timing of VA, the VA contribution on change of QIAsymphony or when we should start to see that contribution, are you is there any contributions in the first quarter or is it more of a second-half event? And should we sort of expect a ramp through the year to get there?

It actually started this little small contribution in Q4. And yes, it will ramp in each successive quarter through 2024 and likely through 2025. And so as John mentioned, there's been significant work done from big August meeting. We talked about a couple of earnings calls ago when we had finished the pilot phase and then there was a continuation of the rollout more under the same methodology that the preliminary rollout has gone through.
And then I would say towards the Middle East, maybe really the middle of the fourth quarter, it was beginning to be an acceleration of the rollout and also a change in the velocity of how it rolls out. And so that will be CONTINUING. There's still some details to be worked out, but continuing in terms of the current rollout and that is accelerating pretty much each month. So we'll see as a result, we've seen the traffic build each month that will continue to build. And so it will ramp through all 12 months of this year.

Mark Zhang

Okay, great. That's very helpful. And then any sense of when we should be reaching a run rate level, is this yellow I guess about 2025 of them are 2026 such events of any color there would be appreciated.

On the Lee actually have certain goals and objectives of which we like because it's bringing on more traffic at substantially faster pace than has occurred in 2023 of how much of that is realizable. And by the way we thinking calendar years, they think in their fiscal year, which ends in September 30, close of quarter one quarter, offset by some I would say it's clearly not we will not achieve the full ramp in 2024. I think it is unlikely even in 2025 depending on this pace of acceleration, maybe 2026 or 2027.

Mark Zhang

Okay.
Perfect. And then just saw last follow up on just on the cash flow generation. This quarter essentially reaffirmed cash trend that you guys provided early reads and last quarter, which calls for a low 80s free cash flow in 2024 home. Why should we see more upside from here given the lower CapEx further collection effort and really the cost per se really showing up in the EBITDA of Italy.
Thank you.

Can you repeat that Mark?

Mark Zhang

Yes, you're on. I'll just some just following up on the cash generation. You guys essentially reaffirmed our 2024 cash generation to the low 80s on one is just on your Why shouldn't we see more upside from here given the lower CapEx this year, further collection effort and the cost efforts that are showing up on the EBITDA side?

Well, remember we have higher taxes from 24 to 23. Our tax rate is going up and those will be cash taxes. So that will be a mitigating factor against that. And I think pretty much everything else flows through. I mean, field EBITDA going up a little bit year over year.
EBITDA is essentially cash.
Yes, you're correct. We picked up a $7 million roughly in the CapEx for when you get the company back in taxes and we're at $77 million you have hoing to be $81 million - $82 million. So I think it puts.
Okay, great. Thank you, guys so much.
Before we go to the next question, we did have a question that came in by e-mail that is related to the free cash flow, which is in the press release, we noted that the free cash flow would be dedicated to a combination of share repurchases, bond repurchases and possibly M&A.
So the question is what's the perceived allocation amongst the various potentiality for the ones that are the most certain are clearly related to our capital structure. So we can go into the market, we can buy bonds, we can buy equity.
So I think it's likely to assume gold will consume the majority of the free cash flow and or the cash balances. I would say that depending on what stock settle that may be an attractive alternative, we clearly stated now for several calls running a desire to deleverage if we can continue to get the bond at a discount that is an attractive investment.
And on the acquisition side, there's I think, a narrow set that would be of interest to us. But I think it's a narrow set, not a broad set of valuations continue to be generally challenging. So I would say it's not probably a high probability that we will do acquisitions, but certainly it is within our field of view, and I think we're more interested in doing an acquisition that would have a more meaningful impact than a small tuck-in. So if that would be the case, we would reprioritize the allocation away from shrinking own internal capital structure towards the M&A transaction.
And that would be the cash balances we have or a substantial portion of the free cash flow. And I will also remind everybody we do have a modest line of credit that can be expanded up to $50 million. So we did do something that is triple digits in terms of the acquisition purchase price, as I say, I'm not sure that that is a high probability, but it's certainly within field here.
Next question has to go back into London.

Operator

Next question is a follow-up coming from Jon Tanwanteng from CJS Securities.
John, your line is live.

Jonathan Tanwanteng

And my question was answered.

Operator

Thank you.
No problem and the next question is from Arun Seshadri from BNP room. Your line is live.

Yes, hi, thanks. Just most of my questions answered. Just wanted to understand, is there within the within SOHO, is there a set of accounts or a proportion of the total on customers that you think is a very stable account base and then most of the attrition is coming from, you know, us a portion of that account. Is there any way to segment that customer base for us so we can get a sense for when that attrition is coming towards an end?

Well, I think it was back to the earlier question that I answered. So there's been for a couple of years now. This phenomenon that you get a fair amount through the marketing programs are what I call the renters. People have limited use cases. And as a result, they churn generally within a 12 month period.
Then I think we reported before about two-thirds of the science that will churn out within a year. So as you decrease the marketing spend decreased the gross sign-ups, the net adds. Then as you march out over time, 12 to 18 months. You start to get to that, what I'll call more core base of several customers now that it is a little unclear where that point is I mentioned earlier because a portion of it will be a function of what other marketing programs, 2025 and 2026 and also studying the more near term cohort behaviors versus the ones that we've got to go back as far as 10 years.
But there absolutely is a stable core base within there. And I think it's not unreasonable to believe that sometime within that two to three year window, you probably find stability, but there's a lot of variables that go into it. So it's not something to be definitively answer right now.

Got it. So it's hard to say of your total customer base this number, like half the number is staying stable over time. It's a changing cohort.

There's changing cohorts with each depending I look at it, certainly each year reset of sign-ups has its own Cohort B cohort behavior pattern age in a certain way and then accumulate at all. So I'm going to say more than I think that that's kind of the math behind it. Then you look at the behavior of the new sign-ups and how they mirror previous cohorts and then as part of that is versus what the one you're talking about, customers that will be around for five years or more three years or more 10 years or more that would also give you a different answer of where in the current, you know, 831,000. Is that kind of.

Understood. And then secondly, on the on the corporate side on the new customers that you're adding appear to be at a lower RPU on it. Does that is that our trend line from the sort of like ads and where they are, where you're adding them, that just continues similar levels is the expectation.

Johnny Hecker

And so there's a couple of reasons. First of all, I think we've reported on that. We're converting several customers into corporate and are really mining that base. And we're attracting customers that are more trending towards corporate. So it's really converting a low end customer into that into that upper. It's a tough marketplace, as I said, that that's the main driver. And I think last year we saw with the FoxBox migration that we have you talked about some churn or some customers actually.
Yes, we're positive for our fleet. So that gave us some additional pressure, but down and with adding from the SOHO base. It's creating a little bit of pressure on the corporate, but I mean our base that is a difficult KPI for the corporate fuel rate. We have customers across the spectrum from $50 a month, all of them to hundreds of thousands of dollars a month, right. So on.
If you tell your mix somewhat like the VA and they ramp back or you longer than the larger customer there that are going to bias to our site, and that's what we face with the customer continue.

Understood. Thank you very much. Thank you.

Operator

And that concludes today's Q&A session. I would now like to hand the call back to Scott Turicchi for closing remarks.

Right. Well, thanks, everyone, for joining us on the Q4 call as we give insight in terms of our 2024 outlook, we will press releases when there are upcoming conferences by in terms of reporting the first fiscal quarter that will be in the early part of May. I don't have a calendar in front of me, but 789 roughly in that timeframe. And obviously if you have any questions between us then reach out to us, for instance, for IR, and we'll get your question answered. So thank you very much, and we'll talk to you.
So thank you.

Operator

This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.