Thryv Holdings, Inc. (NASDAQ:THRY) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Hello. My name is Chris, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Thryv Holdings, Inc. Q1 2023 Earnings Call. [Operator Instructions] Cameron Lessard, Head of Investor Relations, you may begin.

Cameron Lessard: Thank you, operator. Hello, and good day to everyone. Welcome to Thryv’s first quarter 2023 earnings conference call. On the call today are Joe Walsh, Chairman and Chief Executive Officer; Paul Rouse, Chief Financial Officer; and Elise Balsillie, our Chief Revenue Officer from Thryv Australia. A copy of our earnings press release and investor presentation can be found on our website @thryv.com or in the Investors’ section at investor.thryv.com. Please acknowledge, comments made on today’s call and responses to your questions may contain forward-looking statements about the operations and future results of the company. These statements are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC.

Thryv has no obligation to update the information presented on this conference call. Finally, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on our website. With that introduction, I would now like to turn the call over to Joe Walsh.

Joe Walsh: Thank you, Cameron, and thank you all for joining our call. I’m pleased with our Q1 performance. Our continued focus on optimizing our predictable, scalable and repeatable model to drive revenue growth, while improving the bottom line is evident in our results. Every success metric is steady or increasing year-over-year and showing solid performance versus our expectations. This gives us strong predictability and durable smart growth. Our first quarter SaaS revenue grew 24%, which was at the top of our guidance. SaaS subscribers ended the quarter at 54,000, an increase of 15% year-over-year. This is attributable to our best-in-class software platform and continued strong sales velocity. We are seeing each month yielding better results than the prior month.

Everything from qualified leads to demos to conversions, it’s all up into the right. Now I’ve mentioned in the past that we expect a balance between ARPU growth and subscriber growth. And you’ll have to forgive us, subscriber growth just sort of took off in this period and it’s just really going well and we’re having a lot of strong uptake. So there won’t always be a perfect balance between the 2, but we expect a relative balance between subscriber growth and ARPU growth. We continue to set records in user engagement on our SaaS platform. Engaged users at the end of the quarter was 45,000, an increase of 25% year-over-year and 10% quarter-over-quarter. On the bottom line, once again, SaaS EBITDA came in better than our guidance. We’ve been getting more efficient each quarter, and let me explain how.

First, there’s a big tailwind at our back. More small businesses are adopting these type of SaaS tools. We’ve mentioned before, our business comes in kind of 3 chunks. The first is making our regular rounds talking to the approximately 400,000 small businesses in our customer base, our zoo we sometimes call them. Well, more of those feel ready to modernize now and are moving forward and are beginning to adopt these tools. So sales have been very strong into our base. Secondly is referrals. Those 54,000 subscribers are bringing their friends. They’re telling their neighbor, the guy they’re in the bowling league with on Tuesday night. And we’re getting increasing referrals, and that’s a bigger and bigger piece of our pie. And that means that our cost of acquisition is low on those.

We’re not having to spend huge amounts of money to get a conversation with a new business. We’re able to work with basically friends and family. And so that allows us to have a really efficient model. Now we do still have an inbound-outbound machine like other software companies do, but we haven’t had to rely really heavily on that, and that’s part of where the great economics and the improved profitability are coming from. We’re on a journey to be a Rule of 40 company. And we believe we can continue to have very strong growth and pair that with profitability. Turning to our marketing services. Revenue came in better than expectations and we continue to see very predictable performance in billings. We’ve had success in the past of acquiring well-run marketing services businesses at fair prices and introducing our Thryv software to those clients.

This next one really fits that profile well. We’re pleased to announce that we’ve acquired Yellow Holdings Limited, known as Yellow, New Zealand’s leading marketing services company for over 50 years. Yellow has a similar history to our own, and that it’s basically come out of being the official telephone company Yellow Pages. This is the old New Zealand Telecom, now Spark, the official telephone directory of that market. And they’ve built a pretty big, pretty significant digital marketing services business. In fact, they have over 10,000 digital clients there. And so we are confident that many of these local Kiwi businesses will benefit from modernizing and automating with our SaaS products. This is a relatively small tuck-in acquisition, and our CFO, Paul Rouse, can share more about Yellow’s financial contributions in our updated guidance.

Our international expansion is a key focus area for us. And given this announcement, I wanted to invite Elise Balsillie, Thryv Australia’s Chief Revenue Officer, on to the call today to highlight the successes we’ve had in the Australian market with the prior acquisition of Sensis Holdings. Similar to Yellow in New Zealand, Sensis Holdings, before rebranding to Thryv Australia, was a leading and highly profitable digital marketing and directory services company. We acquired Sensis at an attractive valuation and integrated the company in an effort to reshape the perspectives of SMBs in Australia by providing an easy-to-use solution to modernize their operations. Fast forward to today, Thryv Australia has been a success in one of our top producing regions for SaaS.

Elise has been instrumental in leading the Thryv Australia business. So with that, I’d like to ask Elise to join and share more about our impressive progress in Australia.

Elise Balsillie: Thanks, Joe. In March 2021, Thryv acquired Sensis in Australia. Within a matter of months, we were in market positioning the Thryv software to our Yellow Pages clients. We had strong relationships with tens of thousands of clients here in Australia. And that trust is what supported us in presenting Thryv. Building a brand in market takes time. And by leveraging our trusted position, we were able to accelerate this process. Our marketing team then worked hard in the background, building our brand and reputation more broadly across the Australian market to support us in attracting new clients. The competition in Australia was not at the same level as the United States. While some of our clients use point solutions in their business, the vast majority of them didn’t know where to start.

Every small business has problems. Problems that keep the small business owners awake at night from getting paid to managing their staff, being bogged down in admin and never getting to their son’s football game. We could finally help them and far more impactfully than just driving leads to their business. The go-to-market approach was critical. We managed the significant volume of customers and revenue in our marketing services business. Whilst we were leveraging those relationships to have drive conversations, we were not doing it at the detriment of our marketing services revenue or EBITDA. Our sales force is already proficient in selling leads through their marketing efforts. We introduced Thryv as a natural extension, enabling businesses to convert more leads into clients, improve their client experience and nurture the relationships post-sale to promote customer loyalty.

By integrating marketing and client experience, we aim to increase the client base and maximize the lifetime value of each client. We trained and coached our sales teams to identify problems and gaps in their client journeys. This approach allowed us to position Thryv as a tailored solution, addressing the most pressing needs of each business. We’re seeing strong NPS results, Net Promoter Score, coming through from our SaaS customers at all points of the customer journey and our volume of engaged users is growing each month. We’re specifically pleased with the number of engaged users, showing that our clients are truly embedding the software into the business. I’m really excited about the growing number of advocates we have and the strong feedback they’re providing, like Tyler and Eve from a popular decking business in Melbourne.

Thryv is like an employee. It’s like having another person in the business to take the pressure off us. In Q1, Thryv Australia has delivered strong performance, exceeding all key metrics. Our SaaS performance was incredibly strong, exceeding our target for the quarter. And each month, we’ve outperformed the prior by greater than 10%. The Australian region is now one of the top-performing regions globally. In Q1, we launched our partner channel here in Australia, an exciting milestone, which has given us a new channel to bring Thryv to market. We’ve seen positive results with our first partners signed on and trained and our first partner sales being secured. Working across a number of key trade expos in Australia during Q1 has helped us grow both the recognition and awareness of the Thryv brand, especially in key verticals and has resulted in many partnerships being secured.

We’re exciting marketing center will launch in Australia later this year and we’ll have an opportunity to expand the value that we’re delivering to our SaaS clients, whilst also increasing the overall customer recurring revenue. The team is primed and ready to launch these new centers in market as they delivered out. Signatures have just launched. ThryvPay being the perfect extension for the service segment. In addition to our success with building the Thryv Australia SaaS business, we’ve continued to deliver exceptional results across our marketing services revenue and reached our targets for Q1. Overall, we’re incredibly pleased with the performance of the Australian business; what we’ve been able to achieve in less than 2 years in market and what we envisage for the future.

I’ll now turn the call back to Joe Walsh.

Joe Walsh: Thank you, Elise, and thank you for the amazing job you’ve done on leading Thryv Australia. There’s — each time we enter a new market, enter one of these new international markets, we expect 2 to 3 years of investment as we get that market set-up and Australia is no different. We’ve been investing in the last 2 years there. We expect in 2024, Thryv Australia will be contributing positive EBITDA, positive cash flow. And so we’re just about at the end of the investment period. And the losses they’re making this year are actually relatively small. I’m going to turn and broaden the international just a little bit to talk about Canada. In Canada, we didn’t make an acquisition. We’ve gone in just greenfield building. And so there will probably be a full 3 or so year investment cycle there.

We’re talking single-digit millions, not huge amounts of money that we’re investing. And the profitability of the U.S. is able to carry that small investment. And similarly, with New Zealand, there will be an investment for a couple of years as we get it set-up, but it will be reduced because we made the acquisition of Yellow, which gives us a zoo to hunt in and will give us lower CAC and make it a more efficient market entry. So with that, I’d now like to turn the call over to our CFO, Paul Rouse, to discuss our first quarter financial results.

Paul Rouse: Thank you, Joe. As a reminder to listeners, we are going to focus on our 2 segments, SaaS and marketing services, which includes results from domestic and international operations. We feel this is more beneficial in modeling and understanding the business. Additional detail between domestic and international for each segment can be found in the appendix section of our investor presentation. Let’s jump into the results, beginning with our SaaS segment. SaaS revenue was $59.9 million in the first quarter, representing growth of 24% year-over-year and at the top of our guidance. SaaS subscribers totaled approximately 54,000 at the end of the first quarter, an increase of 15% year-over-year. SaaS ARPU increased to $379 in the first quarter and represents 8% growth year-over-year.

Turning to the bottom line. First quarter SaaS adjusted EBITDA was negative $204,000 and ahead of our guidance. As Joe described in his previous remarks, we have been emphasizing productivity in our SaaS business and [champion] efficient growth by managing our spend in our new acquisition channels. I’m excited to announce that our U.S. SaaS business has achieved positive EBITDA for the past 4 quarters. Additionally, negative EBITDA contribution in our international markets came in better than expectations, which resulted in our overall EBITDA being near breakeven. We are encouraged by the strength we are seeing in the U.S. and by the success of our international investment efforts and believe we are on the path to becoming a Rule of 40 software company.

We are confident that our strong growth and profitability will continue to drive our success in the years to come. First quarter seasoned net dollar retention was 91% and unchanged versus the prior quarter. As a reminder, seasoned net dollar retention represents clients that have been with us for over 1 year. With the rollout of our additional centers like Marketing Center, the company is on the path to achieve 100% NDR. By providing our subscribers with a better experience, additional centers can help to increase customer satisfaction and loyalty. This can lead to clients renewing their subscriptions upgrading to higher value packages and recommending the company to their friends and colleagues. We also believe by addressing these factors, we will keep churn low, while generating new revenue streams via new centers to offset the cost of customer acquisition, which leads to higher NDR.

Moving over to marketing services. First quarter revenue was $185.6 million, which came in better than expectations due to timing and shipment of publications from Q2 into Q1 in both our U.S. and Australian markets. First quarter marketing services adjusted EBITDA was $58.7 million, resulting in an adjusted EBITDA margin of 32%. First quarter marketing services billings was $193.4 million, representing a decline of 21% year-over-year. Please note, this metric now includes billings for our Vivial Holdings for 2022 comparative period. First quarter consolidated adjusted gross margin was 66%. First quarter consolidated adjusted EBITDA was $58.5 million, representing an adjusted EBITDA margin of 24%. As previously discussed, these measures were impacted by revenue recognition in our marketing services segment around the timing and shipment of our print product.

Finally, our net debt position was $451 million in the first quarter. Our leverage ratio for the first quarter, in accordance with our credit facility, was just under 1.5x net debt to EBITDA and well below our covenant of 3x. The company generated an additional $27.2 million in free cash flow in the first quarter and paid $35 million towards our term loan. Now let’s turn to guidance. We are reaffirming our prior full year SaaS revenue guidance in the range of $257 million to $259 million, but upgrading our profit outlook for the full year as follows. For the full year 2023, we now expect SaaS EBITDA in the range of $2.5 million to $3.5 million, which we previously guided to as turning profitable or breakeven. For the full year 2023, we are increasing our outlook for marketing services.

We now expect revenue in the range of $653 million to $663 million and adjusted EBITDA in the range of $187 million to $190 million. This upgraded guidance for marketing services reflects our recent acquisition in New Zealand, which we believe will contribute around $10 million in reported revenue. You can find additional information related to our 2023 guidance in our press release and investor presentation available online. As communicated on our last earnings call, we expect to ship fewer print publications in the third quarter of 2023. And due to the accounting treatment, it will impact our third quarter results. However, this does not impact free cash flow and our ability to retire debt and we expect a very high cash flow conversion in the third quarter.

For this reason, we want to point investors to our marketing services billing performance and operational metric in our investor presentation, which shows steady performance for our many historical periods. We realized the non-linearity of our print is a bit complicated and we try to provide as much information as possible to be transparent. I’ll now turn the call back over to Joe.

Joe Walsh: Thank you, Paul. So I guess as sort of the headlines here from today’s call, I’d like to underscore a couple of things. The profitability of our SaaS business is coming along a little faster and a little stronger than we expected, and that’s really owing to our great model. The fact that we’ve got 400,000 existing customers that want to talk to us that we’re able to have a conversation with and help make this journey in modernizing their business, and they’re bringing their friends. They’re introducing us to referrals at an ever faster pace. As our subscriber base gets bigger, they’re introducing more and more referrals. So it’s sort of a self-regenerating model. Our Marketing Center launch is going well. We’re just in the early days of that.

Obviously, we just began at the very end of last year. But sales are coming along nicely. Our sales organization is really learning how to talk about the product and how to do it the best possible way. We’ve got some early successes from customers that are excited about what they can do with Marketing Center. So more to come on that later, but that seems to be percolating along really nicely. I guess, sort of the final couple of takeaways that I would offer you is, our North Star is an engaged user. And more and more small businesses are running their businesses on Thryv. And you can see it in the huge gains we’re making in engagement. And that is a great leading indicator of what revenue is going to look like in another year or 2. The dogs are eating the dog food.

This is working. And I think the final proof point of that is look at subscriber growth. 15% subscriber growth. They’re coming in almost as fast as we can sign them up and get them onboarded. I mean, it’s really outstripping our expectations even. It’s been very good. And that’s because the software is so excellent and making such a big difference for small businesses. So with that, we’ll wrap the call up, and I’ll turn it over to the operator.

Q&A Session

Operator: [Operator Instructions] Our first question is from Rob Oliver with Baird.

Operator: The next question is from Arjun Bhatia with William Blair.

Operator: The next question is from Robert Rally with Needham & Company.

Operator: The next question is from Zach Cummins with B. Riley Securities.

Operator: The next question is from Dan Moore with CJS Securities.

Operator: We have no further questions at this time. I’ll turn it over to Joe Walsh for any closing remarks.

Joe Walsh: Thank you very much, Chris. Appreciate that. Well, thanks everyone for attending today, listening to the call. My kind of big thoughts at the moment on our business are that swinging the business to profit is a big milestone. We have been profitable in the past, but we were then not profitable for however many 8 or 9 quarters, whatever it was, and we’re back to profitability. We’ll never go back the other way. Our SaaS business is profitable. And as we start new markets, new centers, new countries, we will continue to be a profitable business and use kind of the businesses’ own juices for the growth and expansion. And we’re fortunate we have this very big base of high NPS score, highly engaged customers that we think can propel us along.

We have a really great model. And I’d like to say that we’re an excellent management team, but we really do have an unfair advantage. I mean, having 400,000 customers that have been with us for 15 years, I like you and trust you and want to hear what you have to say. Nobody else has that, and that makes us special. Marketing Center, we’re super excited about. And some of you guys might have expected it would come out and just be another business center overnight, but it is developing beautifully and we’re happy with how it’s coming along. And I do think you’ll see that as a big lift to our business as we get to the back half of the year. The engaged users are what make me happy every day. When I turn my computer on, I’ve got an Internet site that scrolls by and shows me how many engaged active users we have, and that number is steadily going up and that’s driving the subscriber growth.

And I think if you want to confirm what’s the health of Thryv, look at what’s happening in the subscriber growth. I mean, it’s just melting up. So thank you all for your attention today. Really appreciate the support. And I look forward to updating you again soon. Thank you.

Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.