Thryv Holdings, Inc. (NASDAQ:THRY) Q1 2024 Earnings Call Transcript

Thryv Holdings, Inc. (NASDAQ:THRY) Q1 2024 Earnings Call Transcript May 4, 2024

Thryv Holdings, Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning. My name is Dee and I will be your conference operator today. At this time, I would like to welcome everyone to the Thryv Holdings’ First Quarter 2024 Earnings Call. [Operator Instructions] I would now like to turn the call over to Cameron Lessard. Please go ahead.

Cameron Lessard: Thank you, operator. Hello and good day to everyone. Welcome to Thryv’s first quarter 2024 earnings conference call. On the call today are Joe Walsh, Chairman and Chief Executive Officer; and Paul Rouse, Chief Financial Officer. A copy of our earnings press release and investor presentation can be found on our website at thryv.com or in the investor 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 other filings with the SEC. Thryv has no obligation to update the information presented on the conference call today.

Before we get started, I wanted to provide an update on segment reporting. Historically, we’ve provided additional detail for the U.S. and international markets within each of our reporting segments. We’re now transitioning to a two segment reporting structure, SaaS and Marketing Services, encompassing our global operations. It’s important to note that this change only impacts how we report adjusted gross margin and adjusted EBITDA for historical segments. It will not impact how we report revenue under the disaggregation of revenue section in our quarterly filings. We are streamlining our approach to offer a unified perspective which we believe will better reflect our business model and enhance clarity in understanding our business and facilitate more efficient modeling.

I will now turn the call over to Chairman and CEO, Joe Walsh.

Joe Walsh: Good morning, Cameron, and thank you all for joining us on the call today to discuss our first quarter results. For the first quarter, we delivered strong subscriber growth, ending the quarter with 70,000 clients. The year got off to a good start. We’ve got strong momentum across our SaaS business, and we’ll be raising guidance for the year. I’m excited to share some great news about our center strategy. We’re seeing significant traction. Over 8% of our clients now have two or more paid centers, up from practically zero this time last year. So we’re really making some good progress there in selling additional centers to our customers. I think it’s a really good indicator of the value proposition we’re delivering and how sticky these products are.

Another interesting stat that we’ve been looking at is our seasoned ARPU. These customers have been with us for over a year. We’re seeing really strong growth for them year-over-year in the mid-teens. And again, I think this shows loyalty and the fact that people are engaging with and using the platform. I’d like to talk a little bit about our refinancing. We recently completed a refinancing, which is going to make a big difference for us. It’s redoing our term loan and our ABL. It significantly extends our debt maturity. This provides us with financial flexibility and the runway we need to invest in growth in this business. Second, it offers us flexibility. This flexibility allows us to strategically invest in our growing and profitable SaaS business, which is really the engine that’s driving our success.

Importantly, the financing is underwritten with a strong focus on the strength of our SaaS operations as opposed to being so much focused on Marketing Services. This is really a testament to the confidence lenders have in Thryv’s future. Equally important, this new structure moves away from a legacy 100% cash flow sweep, and it frees up capital that we can invest in future revenue growth. Finally, this financing allows us to pursue shareholder initiatives. As evidenced, we announced a share repurchase authorization earlier today alongside our earnings release. While debt reduction remains our core priority, this share repurchase program provides an additional tool to enhance shareholder value alongside our ongoing debt repayment efforts. With that, I’m going to turn the call over to our CFO, Paul Rouse, to take you through the numbers.

Paul?

Paul Rouse: Thanks, Joe. All right. Let’s dive into our results beginning with SaaS. SaaS revenue was $74.3 million in the first quarter and within our guidance range, representing an increase of 24% year-over-year and slightly up sequentially. Adjusted gross margin increased 420 basis points year-over-year but decreased 130 basis points quarter-over-quarter to 68.4%. Adjusted gross margin declined sequentially, primarily due to the introductory product offerings featuring promotional pricing strategies surrounding Marketing Center at the beginning of the year. This seasonal trend is typical as the business experiences fluctuations between December and January due to the holiday effects. It’s important to emphasize that the decline in margin is not indicative of a permanent strategy to lower prices.

It’s a tool to attract customers during the seasonally slow periods of the year. In fact, adjusted gross margin rebounded significantly in March to Q4 levels. Looking ahead, we anticipate exiting the year with an adjusted gross margin exceeding 70%, driven by our focus on growing our client base with new centers and increasing spending with our existing customers. Furthermore, and as Joe mentioned, our company has a proven track record of driving more spend with existing customers after one year, which reinforces our confidence in achieving our margin targets. First quarter SaaS adjusted EBITDA was $3.4 million, resulting in a SaaS adjusted EBITDA margin of 4.6%. Right now I’m going to unpack the shortfall in EBITDA. At the onset of the year, we initiated plans to trim expenses and enhance productivity across the various fronts.

While we’re delighted to report that we’ve uncovered more savings than initially anticipated, leading to an upward revision in our SaaS EBITDA guidance for the full year. Let me explain the timing impact on first quarter in more detail. The restructuring of our company wide sales commission plan aimed at incentivizing multi center sales crucial to our profitable growth, accelerated the recognition of commissions that would have otherwise been deferred under the previous plan. Consequently, SaaS expenses saw a rise of over $2 million in commissions in the first quarter. Again, this was a timing factor that will normalize and benefit us in the future. Secondly, elevated G&A costs weighed on SaaS EBITDA margins, amounting to just under $1 million.

These costs related to deferring cost reductions from Q1 to Q2 onward as we finalize our plans, which will ultimately yield greater savings than initially anticipated for the rest of the year. Once again, we firmly believe that these timing events are now behind us, which is why we are raising both SaaS revenue and EBITDA guidance for the full year. SaaS subscribers were approximately 70,000 at the end of the first quarter compared to 66,000 at the end of the fourth quarter, an increase of 30% year-over-year and 6% sequentially. SaaS ARPU was relatively flat at $369. First quarter seasoned net dollar retention was 94%, an increase of 300 basis points year-over-year. Moving over to Marketing Services. First quarter revenue was $159.3 million and above guidance.

First quarter Marketing Services adjusted EBITDA was $50.7 million, resulting in an adjusted EBITDA margin of 32%. First quarter Marketing Services billings was $136.8 million, representing a decline of 24% year-over-year. First quarter consolidated adjusted gross margin was 68%. First quarter consolidated adjusted EBITDA was $54.1 million, representing an adjusted EBITDA margin of 23%. Finally, our net debt position was $341 million at the end of the first quarter. Our leverage ratio was 1.9 times net debt to EBITDA, which is well below our covenant of 3 times. As Joe mentioned earlier, we are pleased to have successfully completed the refinancing of our outstanding term loan, resulting in a reduction of the interest rate by 175 basis points.

With the proceeds, we refinanced both our outstanding term loan and ABL facility, both of which were maturing in 2026. Additionally, we capitalized on the opportunity to swap out our ABL facility for added flexibility at a lower interest rate. The new debt arrangement extends the maturity to 2029 and incorporates amortization that steps down. Furthermore, it features a smaller excess cash flow suite, bolstering the company’s liquidity. The new credit agreement provides the company with essential flexibility to continue investing in and growing our business as well as to strategically allocate capital to maximize long-term value for shareholders. Now let’s discuss guidance for the second quarter. For the second quarter, we expect SaaS revenue in the range of $77.5 million to $79.5 million, and we are increasing our full year guidance range to $326 million to $329 million.

For the second quarter, we expect SaaS adjusted EBITDA in the range of $6.5 million to $7.5 million, and we are increasing our full year guidance range to $28 million to $30 million, which implies SaaS adjusted EBITDA margin of 9%. For the second quarter, we expect Marketing Services revenue in the range of $141 million to $144 million. And for the full year, the range is adjusted to $487 million to $494 million. For the full year, we expect Marketing Services adjusted EBITDA to be in the range of $130 million to $133 million. Please keep in mind that the print schedule and print directory’s published dates can adjust and impact Marketing Services reported revenue and EBITDA. As a helpful guide, you can model EBITDA margins around 30% in the first half of the year and mid-teens in the second half of the year.

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

Joe Walsh: Thank you, Paul. When you think about Thryv, Thryv is a category leader in a big megatrend. Small businesses are following big ones into the cloud. They’re doing it to save time, they’re doing it to save money, they’re doing it to deliver a better experience for their customers. And for us, it’s delivering strong, sustained growth as that megatrend unfolds. And we’re really excited about what we’re seeing and demand picking up the way it is. I think it’s also interesting to think about what’s happening with our platform strategy. More and more centers being bought by customers. And that trend, we believe, will really drive our future as we build out our platform. We’re very excited about our new Chief Product Officer, Rees Johnson joining our company.

Rees has a very strong background in SaaS having worked for some big well-known companies, and he’s the type of talent that can help us take our platform to a whole another level. So welcome, Rees, and we’re really excited about what that means in terms of us continue to develop our software platform. When you think about what’s happening in our company, there is a legacy — gigantic really legacy melting iceberg of our Marketing Services business. And increasingly, as we build our products like Marketing Center, we’re finding more and more traction penetrating that base. And we’re accelerating that penetration into that base. We think this is really good news for the development of our SaaS business and looking forward to really what’s going to unfold in the year ahead.

So with that, operator, I’d like to open the lineup for questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Arjun Bhatia from William Blair. Please go ahead.

Arjun Bhatia: Perfect. Thank you guys. And congrats on the nice results here. Joe, maybe to just continue on that last point, I know last quarter, you had announced this kind of accelerated shift from Marketing Services to SaaS. Can you maybe just give us a sense of how the Marketing Services, the legacy customers are receiving that? I know it’s been relatively — it’s relatively early still. But give us a sense of what kind of traction you’re getting there. And is that something that is driving the accelerated growth that we’re seeing in SaaS clients? I know that number was really strong today, but would love to hear some more color on that. Thank you.

Joe Walsh: Thank you Arjun. Yes, 30% sub growth we think is pretty strong. And yes, it certainly was aided by going deeper into the zoo. I mentioned on previous calls that with Marketing Center, it’s a much closer leap to the reason that people bought our various Marketing Services products in the past to get more leads, to make their phone ring, to get more inquiries coming in. And so that is not as big a jump as transforming your business operations and putting a CRM in and really changing the way you run. So it’s — in many ways, it’s a shorter leap and an easier sale. It’s closer to what they were looking for. And so we’re continuing to have really strong success selling into that base. And as I mentioned, we’re also seeing really strong two center uptake.

That’s picking up. People are really buying into the concept of buying the platform and not just one of the solutions, but buying the broader platform. So we expect that to continue, Arjun. That’s part of our bullishness on the overall results for the year.

Arjun Bhatia: Okay. And then I know the — obviously, the debt refinance is an important step here. When you think broadly about your capital allocation strategy, how does this impact it? I know you announced the buyback, but maybe what are your thoughts on M&A going forward if you have a little bit more capital flexibility and where might you think about increasing investment even in the SaaS business?

Joe Walsh: Well, as we’ve discussed before, we have an active corporate debt effort looking at and talking to SaaS entrepreneurs about how they might fit into the Thryv picture. And the challenge in the past has been twofold. One is our own very, very low valuation makes acquiring a SaaS business of any size dilutive. So it sort of makes us think about having to do smaller ones because they’re typically valued as SaaS businesses, and we’re not. We’re valued like a phone book business. And so that makes it challenging. It doesn’t mean we can’t do it. We’re pretty skillful acquirers. We’re good at integrating. And we have a big sales force and a lot of ability to magnify somebody else’s results. So we’re very much out there looking at that, working on that.

The second constraint as you touched on was our prior credit facility was essentially sweeping all of our cash. So we were operating almost in the straitjacket. We really didn’t have any meaningful flexibility. And I know that you’re aware, this business throws of, I think the technical term is a metric shit ton of cash. It generates a ton of cash. And we now have some flexibility in using that cash. And so whether we use that cash to acquire SaaS businesses to build out verticals and accelerate our growth, whether we use it a little bit to buy back shares or whether we do what we’ve been doing, which is pound down the debt. I know you’ve watched carefully over the last couple of years as we’ve dramatically reduced debt by paying it down aggressively.

So any one of those I think is really good for shareholders. And we’re looking at all of them and that wind up on where you started, there are definitely some interesting SaaS targets. And I think you might see more of that type of activity in the future now that we’ve got a little bit more flexibility, Arjun.

Arjun Bhatia: Perfect. Very helpful. Thank you.

Operator: Our next question comes from the line of Scott Berg from Needham. Please go ahead.

Scott Berg: Hi, good morning, congrats on the nice quarter results here. Joe, following up on the 8% of your SaaS customers with multiple centers today, are you seeing any sort of patterns emerge in terms of I don’t know customers buying a specific center first and then adopting a specific second one or maybe it’s changing on how you land a little bit? Just didn’t know if you had any color on exactly kind of what those 8% are kind of buying today.

Joe Walsh: It’s definitely evolving. It was obviously Business Center first and then you go back and you try to add Marketing Center. Now we’re seeing, one of the most interesting patterns emerging is customers buying the whole thing right away, buying both centers. And it’s not a huge number yet, but the sales force is excited about it because they’ve had more than a handful, a big number of these kind of double sales and that bodes really well I think for the future. The other thing we’re seeing is where they buy Marketing Center first and get up and onboard onto that and then want to continue on the journey and want to buy Business Center. And that’s particularly heartening to see. Business Center is a bigger onboarding. There’s more required of you as a business and Business Center.

And you’ve got to engage more, you have to do more. You have to actually change the way you roll. Whereas Marketing Center delivers a lot of passive value. Once you’re set up on it, you don’t necessarily have to log in all the time in order for it to be helping you. So those are some of the patterns we’re seeing. It’s relatively early days, but really excited about thinking where we’ll be, let’s say, a year from now. We’ve gone in one year from negligible percent of the customers buying two centers to 8% at the end of this quarter, and it’s surging upward. And we think that, that does a lot to help with our long-range journey, which we said we thought we could go from kind of 4,000 a year per customer to 7,000 per year per customer. We could fill more of their needs and do more for them.

We believe that this supports that. We also have said that we felt like our net dollar retention would be able to reach 100% over time. And we think the ability to sell multiple centers into these customers will really support that and really drive that. And when we look at our cost of acquisition relative to our lifetime value, as these customers are growing and prospering and doing well with the software and buying more centers, it has a really favorable influence on our lifetime value and it makes the mass of our whole business work better. So it’s a pretty exciting thing. It’s kind of a not a little trend. It’s a big deal.