Thryv Holdings, Inc. (NASDAQ:THRY) Q2 2023 Earnings Call Transcript

Thryv Holdings, Inc. (NASDAQ:THRY) Q2 2023 Earnings Call Transcript August 6, 2023

Operator: Thank you for standing by. My name is Anna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Thryv Second Quarter 2023 Earnings Call. All lines have been place on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Cameron Lessard, you may begin your conference.

Cameron Lessard: Thank you, Operator. Hello and good day to everyone. Welcome to Thryv’s second quarter 2023 earnings conference call. On the call today are Joe Walsh, Chairman and Chief Executive Officer; Paul Rouse, Chief Financial Officer; and Ryan Cantor, our Chief Product Officer. A copy of our earnings press release and investor presentation can be found on our website at 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 the conference call today. 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 like to turn the call over to Joe Walsh. Joe?

Joe Walsh: Good morning, Cameron. And thank you all for joining us on our call today to discuss our second quarter results. We had another solid quarter in SaaS, most notably from a bottomline perspective, as we continue to focus on driving profitable growth, maintaining flexibility and executing efficiently. Highlights for the quarter were a 20% year-on-year SaaS revenue growth, SaaS EBITDA hit double-digit margins, client growth continues up double digits and our engagement trends continue to be very strong. One of the things that we are really excited about is, we had a goal for the year on profitability for our SaaS business, which we have reached already. So, in our fervor to get more efficient, we got a lot more efficient and that is something that we are excited about.

It did cause us to have a very narrow miss on our revenue guidance for SaaS. But we are in a very strong position with the way all the elements are coming together and we are confident enough that we are going to be raising SaaS revenue guidance for the year and EBITDA guidance for the year. So a lot of very strong momentum in the business. We just made the decision to basically sell fewer of the more expensive sales that come through our inbound channel and made a few other efficiency moves, and it’s resulted in about a 10-point swing in the EBITDA profitability from around breakeven to double-digit EBITDA. So we are really pleased with that. We think that really demonstrates the profit making power of this business and the overall control we have over the business model.

So pretty pleased with that, pretty excited about that. For SaaS, we — in the past have relied on three channels to drive our growth and I have described that as a third, a third, and a third. So a third coming from the zoo, a third coming from happy customers referring people just like them to our base and then a third coming from our inbound channel. That’s begun to get kind of out of that perfect third thing lately. Actually, the largest source of customers is the referral bucket because there are so many customers in the happy zoo bucket that are referring people, that’s well into the 40s are coming from referrals and in that well more than the third bucket is people coming out of the zoo. And year-to-date, less than 20% we now have coming from our demand gen funnels.

In fact, in the most recent period, it was more like 14%. We really have been cutting back on those more expensive sales. We love those sales less, because we have to do content marketing, in some cases, paid marketing and advertising. We are doing webinars, deminars, all these things to identify these folks and when they come through the funnel, we can’t control who they are. So, they haven’t been with us for 15 years. They are always established mature businesses. So it exposes us to a little bit more churn risk, which in the end makes it a little bit more of an expensive sale. So our ability to reduce our reliance on that has been an important element in Thryv towards efficiency and profitability. And we are going to talk in just a couple of minutes, adding now our fourth funnel to our business and we are really excited about what that will do.

We have spoken over the last year or so about our desire to implement product led growth, to generate product qualified leads, to use our product to help identify new prospects and new customers, to deliver some value to customers before we ask them for any money. And we have been at work now for several years on an important new product that’s going to allow us to do that and we are in the process right now of rolling out the beta version of our Command Center. Command Center is an opportunity for small businesses to consume some of our products, get value, sort of raise their hand and become a product-qualified lead, which can then be worked through and managed by our very powerful sales led motion. So we are not getting up on the sales led motion.

We are basically just adding a fourth very highly efficient funnel to the process and we are really excited about it. It’s a culmination of multiple year’s work and it’s really cutting-edge technology. And so without stealing any more thunder, I want to bring our Chief Product Officer, Ryan Cantor on to talk you through a little bit about how Command Center fits into our playbook and also how we are harnessing generative AI in our business model. So, Ryan?

Ryan Cantor: Thank you, Joe. The launch of Command Center beta today isn’t simply a product launch. Moreover, it’s a weak architecture of the entire Thryv platform into a modular and easily expandable user experience built for the average small business owner. The need for Command Center arose out of three primary drivers. Number one, our close relationship to our users identified that even before payments, communication tools are the most primal and initial needs of small business owner has. Before scheduling on a calendar, they will e-mail about dates and times to me. Before accepting credit card payments, they will text the amount due. Conversational commerce is how most small businesses operate initially and how most continue to operate today.

Command Center meets these business owners where they are, not just where we want them to be. Command Center supports native integrations to Gmail, Outlook, Microsoft 365, IMAP e-mail, Facebook, Instagram, Native Phone, Voicemail and Texting, along with a free Webchat client. It covers all the ways today that a business communicates with their customers, unified not only in a single inbox, but in a single conversation. Number two, we wanted to reduce the time to first value and eliminate friction for the small business owner to get started with the Thryv platform with less disruption to their day-to-day business. Thryv’s Business Center CRM is magnificent with thousands and thousands purchasing, adopting and integrating it into their day-to-day with commitment.

We see the results our products have on these business owners every day. But for every business owner who has this commitment and drive, we have identified others who simply need a simpler entry path. Command Center takes just a few minutes to set up, a simple sign up using existing logins for Gmail or Facebook, and you are communicating with your customers in less than a couple of minutes. Multiple threads and different channels are seamlessly combined into a single conversation with each customer, bringing an aha moment to the user. This entices them to continue to connect more channels, more e-mails and more accounts. Every context, every conversation is suddenly building a robust Business Center CRM for them in the background, ready to be unlocked when they are ready.

Number three, Business Center had a growing inbox, and it was often the first feature to be adopted and it carried the most usage of any feature with over 7 million conversations happening in 2022 and 4 million already year-to-date in 2023. Yet, like all growing platforms, it had challenges and needed an overhaul to operate seamlessly with Native E-mail and include features and capabilities commonly found in other e-mail clients or messaging applications. To meet our users feature requests, Command Center was born. Command Center brings Native E-mail into a chat like experience. It brings pinning and labels founded other platforms inside our inbox. It creates a visual experience with attachments and centralizes all of the files both sent and received across any channel into an iPhone media gallery like experience.

Command Center presents an inbox that looks like Gmail, operates like an iPhone with the convenience features of Slack and all built for the small business and it is available for free forever in an all-new freemium model. Paid plans are available per seat to properly scale with the financial size and maturity of the small business and those plans start at $20 and $30, respectively, in the United States per seat for a Plus and a Professional plan with these plans offering additional channels, more call minutes and even more features. The Command Center beta program is available in the United States, Canada, Australia and New Zealand. Command Center turns virtually all facets of customer communication into the rhythm and convenience of the text messages you get on your phone.

So imagine you are a business and you open your phone, you open up messages and it isn’t just a text, it’s any prospective customer trying to contact you all in one easy place presented in a uniform chat like experience. This is a modular approach. Since you have been following the company, we frequently state that each small business owner is unique with individual needs. The reimagined Command Center navigation enables the Thryv platform to grow and be customized to meet each business owners wants, needs and aspirations, and with Command Center, the Thryv platform can be customized to meet this need of individuality and improve personalization. By focusing on reducing friction of use, pricing it on a per seat model and creating easy avenues for expansion and customization, we believe the launch of Command Center and the platform re-architecture presents a clear path to sustained net dollar retention improvement in the coming period as volume materializes against the overall size of our existing business.

Furthermore, we believe the frictionless adoption of Command Center via online channels presents a potential force multiplier for our professional sales force who can be made more efficient by reducing the time they spend sourcing new business themselves and replacing it with qualified users in their local community ready for a local representative and to upgrade their experience. Beyond just Command Center, we are seeing the pace of innovation and platform improvements increase nicely. In the first half of 2023, on average three new major improvements were released every week. After slowly rolling Marketing Center out in the first part of 2023, more Marketing Centers were sold in June than in all of Q1 combined and we will soon have a couple of thousand active Marketing Center sales.

Marketing Center is a single platform that helps small businesses navigate all the complexities of modern day marketing, websites, Google business profiles, paid advertising campaigns, offline call tracking and more. These are all just various ways consumers seek out and find small businesses and Marketing Center helps each business owner know in real time, which of these efforts is working and which ones aren’t. Sales are also accelerating due to additional product enhancements. We launched integrations with Nextdoor, YP.com, Yahoo! and Yelp to enable paid profile enrichment that is fully integrated and controlled inside the platform. We also just announced expansion of Marketing Center into both Canada and Australia, coupled with the addition of a new higher tier of Marketing Center at $299 a month.

We are now offering both a Plus at $199 and a Professional version at $299 month. It is important to state that our focus on centers will also bring an expected higher gross margin as each center is being designed to deliver north of 75% gross margin. Across the rest of the platform, innovation also continues. Earlier this year, we launched our integrated signatures app And since then thousands of e-signatures have been sent and signed. Thryv Pay got mobile device readers and tap-to-pay. This helped deliver 30%-plus quarter-over-quarter growth in Q2 and about 60% year-over-year growth year-to-date. We aren’t just focused on usable features, but as engagement in the Thryv platform continues to grow, it is equally important that Thryv takes the proactive steps to ensure our users and their data remain safe and secure.

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In Q2, we successfully rolled out and have universally enforced that every user inside the platform is now protected by multifactor authentication. The other area Thryv has been focusing on is generative AI. Through the end of 2022 and early parts of 2023, the product team invested hours and hours in speaking with our users about practical ways generative AI tools could improve the product and to help them in their day-to-day. Our focus initially is when to use generative AI and using AI to help create the right content blocks at the right time. Today, we are leveraging generative AI to create ad copy, headlines, keywords and ad groups inside Marketing Center. AI is used in the creation and publishing of our professionally designed websites.

In the near future, we are excited to bring AI to our social media module, aiding small businesses in the creation of better content. We plan to bring it to our review management section to help small businesses with suggestions on how best to respond to online reviews and to our new inbox to aid in response times. Many of these items are in various stages of development and testing, but our most important guiding light is never to simply use AI for the sake of AI, but instead to ground each improvement, each dedication of resources towards a capability that will make a difference to the benefit of our small business users. We have an exciting road map ahead with continual improvements to all of our centers and apps and I look forward to sharing with you in future periods.

With that, I will turn it back over to Joe.

Joe Walsh: Thank you, Ryan. Command Center is our new front door. It’s how you will enter our company. It’s how you will enter our product. It’s the idea of a platform with multiple products. The entry point is Command Center. So, if you have a Business Center, you will also have a Command Center. If you have Marketing Center, you will also have a Command Center. And what it does is, it frees us up now to sell Marketing Center to anybody. We can use it as an opening product. Up until now, we have been very deliberately, very carefully ramping Marketing Center and only selling it really to customers that already have a Business Center. And it’s moving along nicely. We are at about 4,000 Marketing Center annual run rate in the most recent months.

It’s building nicely. But the sort of velvet ropes come down now and rather than only being able to sell into the Business Center universe, you can now sell anybody, a Marketing Center with the advent now of Command Center at our new front door. So Command Center is multiple years of work coming to fruition today going out in the market right now and we think that it really is transformative in terms of using the product to prospect for ideal customers. And then based on their usage behavior, they identify themselves as people that we want to spend time with and assist in their digital journey and that will be a really good use of our sales force’s time. We will call these product qualified leads as they reach a certain point of value consumption.

So really pleased with this fourth funnel, that’s very efficient fourth funnel that we are adding to our machine and it’s part of how we see growth accelerating as we go into 2024, because rather than selling one center in one country, we are now in multiple countries, we are now selling multiple centers. So there’s many more vectors of growth that will allow us to lean into that and expand our growth. We have talked before about we see ourselves as a Rule of 40 company. This is part of how we get there, these additional products, which have been multiple years in development that are finally there. Last comment I will make, Ryan touched on generative AI. We have approximately 3,000 employees. So we have all kinds of different functions and departments across our business.

Our leadership team are looking to leverage generative AI right across our business and find additional efficiencies and find additional services and superior products and superior service delivery that we can give to our customers and we are seeing it in little and big ways right across the business. So it will help us become more efficient as we look forward. I think it’s time to get into the numbers, let’s hear from Paul Rouse. Paul?

Paul Rouse: Thank you, Joe, and good morning to everyone on the call. As a reminder to listeners, we are going to focus on our two 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 details between domestic and international for each segment can be found in the Appendix section of the investor presentation. Okay, let’s jump into the results beginning with our SaaS segment. In the second quarter, we continued to execute on the plan we announced on our fourth quarter call to gear towards efficient growth in our SaaS business. Said differently, we want to grow profitably. Second quarter revenue grew by $2.5 million sequentially to $62.5 million or 20% year-over-year and just below our guidance range.

Despite slightly lower revenue, adjusted EBITDA increased by $6.4 million sequentially, way outperforming our guidance range of $1 million at the midpoint. As Joe laid out in his opening remarks, the improvement in SaaS adjusted EBITDA was driven primarily by optimization of operating expenses, particularly sales and marketing expenses, associated with our new acquisition channels. Our SaaS adjusted gross margin was 65.1% versus 64.2% in the prior quarter, representing a 90-basis-point improvement as a result of our focus on selling to higher margin Marketing Center to our installed base of Business Center clients. With Marketing Center, now freely sold on a standalone basis with the launch of Command Center, we do expect to see incremental gross margin improvement in our SaaS business as we move into 2024.

SaaS subscribers totaled approximately 56,000 at the end of the second quarter, an increase of 12% year-over-year. SaaS ARPU increased to $377 in the second quarter and represents 5% growth year-over-year and relatively flat on a sequential basis. As we have communicated on the previous call, we are experiencing some new clients activating at lower price points. We feel strongly this allows the company to drive additional spend and NDR expansion per client as the client grows with us and we can attach additional centers to each client. Second quarter season net dollar retention was 89%, a decline of 200 basis points versus the prior quarter. With the rollout of new products like Marketing Center and Command Center, Thryv is on a path to achieving 100% NDR by providing our subscribers with a better experience, additional centers will boost customer satisfaction and loyalty.

This can lead to more clients renewing their subscriptions, upgrading to higher value packages and referring to software to their network of 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. Second quarter revenue was $189 million, matching the midpoint of our guidance. Second quarter Marketing Services adjusted EBITDA was $63.2 million, resulting in an adjusted EBITDA margin of 33%. Second quarter consolidated adjusted gross margin was 67%. Second quarter consolidated adjusted EBITDA was $69.4 million, representing an adjusted EBITDA margin of 28%.

Finally, our net debt position was $430 million in the second quarter. Our leverage ratio for the second quarter in accordance with our credit facility was 1.6 times net debt to EBITDA and well below our covenant of 3 times. The company generated an additional $16.5 million in free cash flow in the second quarter and paid $17.5 million towards our term loan. Now let’s turn to guidance. We are raising our full year SaaS revenue guidance in the range of $258 million to $260 million. We are also raising our full year SaaS EBITDA guidance in the range of $7 million to $8 million. For the full year of 2023, we are maintaining our outlook for Marketing Services, which is revenue in the range of $653 million to $663 million and adjusted EBITDA in the range of $187 million to $190 million.

For the third quarter 2023, we are guiding SaaS revenue in the range of $66.5 million to $67 million and SaaS adjusted EBITDA loss in the range of $3.5 million to $4 million. Please note that the SaaS business will be carrying more overhead in the third quarter due to operating expense allocations as a result of lower Marketing Services revenue due to the timing around print revenue recognition. As you can see from our full year guidance, SaaS EBITDA returns to positive levels as the operating expense allocations returned to normalized levels for the fourth quarter. For the third quarter 2023, we expect Marketing Services revenue to be in the range of $114 million to $118 million and Marketing Services to deliver $8 million to $9 million in adjusted EBITDA.

I will now turn the call back over to Joe.

Joe Walsh: Thank you, Paul. Q3 will have optically lower revenue and EBITDA, because of the revenue recognition, but cash is not affected. We said at the beginning of the year, we would pay down about $100 million of debt for the year. That was before we bought New Zealand. As of this moment, we paid down $70 million year-to-date. So we absorbed the New Zealand acquisition, paid down $70 million of the $100 million. And in Q3, cash will continue very, very strong. So, we are having a really good year on cash. Cash is right on plan and the revenue recognition anomaly isn’t something you should be concerned about. When you think about the balance of the year, in Q4 revenue and EBITDA start roaring back and then in 2024, they really roar back.

One item just to make a note of is that in Q3, SaaS will carry more of the general overhead, a portion of Paul’s salary and mine, a little bit more general overhead, and then, in obviously Q4 and as we go into next year, Marketing Services comes back and carries more of its share of the overhead. I want to be clear about this. We have meticulously communicated this over the last year. I don’t think there’s anybody that follows this company that doesn’t expect this little air pocket that was made up of our transition to 18-month books. That innovation has been genius for us in terms of delivering revenue and EBITDA. It’s been incredibly good for the environment. It’s good in all ways, except for this little air pocket and everyone knows about it.

So if it’s any kind of a surprise to you, you haven’t been paying attention. Let me turn and talk about New Zealand. We acquired New Zealand at the beginning of April. They are right on track. They are performing to plan that we had in the acquisition. Integration is moving along at a nice pace, integrating them into the greater Thryv. And next month, we launch SaaS in New Zealand. So we are really excited about that and the local folks in New Zealand are really excited about getting going there. Two years ago, we bought Australia and we said at that time that there would be three years of investment, investment of EBITDA, investment of cash flow to get that SaaS business up and fully scaled. And those of you that pay close attention will notice that Australia is actually making money on the SaaS business this quarter.

I mean, it’s already coming along. So for the full year it will be closer to a push and as we finish up this year going into 2024, it will be making money, so about a year ahead of schedule actually delivering at the bottomline. That business is going amazing. Customers are using the product, it’s scaled up significantly now and brand awareness is high, customer satisfaction is high. Our employees are really engaged. There are periods where Australia is our number one region now. It’s incredible how well it’s going there. So really pleased with that and feel like we can build on it in New Zealand. I’d like to wrap the call by giving one final little fun news item. We were recently named Best Companies to Sell For. There’s a top list — top 50 list.

We are in the top 10. So we keep climbing higher and higher in this list. And we are really proud of the fact that we create an amazing environment for sales professionals, we call them business advisers to practice their craft within our company and that’s something that we are super proud of. So, with that, let’s turn it over to the operator. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Your first question comes from the line of Arjun Bhatia from William Blair. Your line is open.

Arjun Bhatia: Okay. Thank you. Hey, guys. Thanks for taking the questions. I — Joe maybe I will start with you. So the first one, just when we think about where the business is today, where you are seeing maybe some inbound marketing challenges. It seems like that was the big driver behind the SaaS revenue coming in a little bit lighter than you had forecasted, but you raised full year guidance for the year. Can you give us a sense for what you are seeing in Q3, Q4 developing that we should see that net new revenue on the SaaS side picking up? What’s giving you the confidence there?

Joe Walsh: Thanks for the question, Arjun. Well, we are going from selling really one center in one country to kicking it wide open, selling three centers in all of our countries and we are seeing a really strong acceleration. So let me walk you through it. We brought out Marketing Center at the very end of last year, right before Christmas and we began selling it in a fairly limited way initially. And we had — honestly, we had planned to ramp sales a little more quickly. But we weren’t satisfied with the feedback we were getting from those very early customers who were finding a couple of edge cases and things we needed to work on. Our sales force was still kind of getting it dialed in. But over the last number of months, we have cured all that and Marketing Center has really caught a lot of momentum, and we mentioned it in the prepared remarks, as recently as this last month, running at more of like a 4,000 annual run rate and ramping quickly.

So we are confident that the ramping that’s going on in Marketing Center alone will carry us over the revised guidance for the year where we actually raise guidance for the year. Keep in mind that we were only selling Marketing Center to Business Center customers and only in the U.S. and on a very kind of curated basis very, very carefully. Now that we have the momentum that we do, we have the product where we want it to be, you can sell Marketing Center to anybody, it doesn’t have to be a Business Center customer, it can be the lead product and you can also sell in Australia, Canada and, in 30 days, in New Zealand. So we have kicked that wide open. Now we add on to that Command Center, which hundreds of sign-ups have come in already, just in the very brief period that we have rolled the data out, it’s already been sales.

One of my dreams is to have sales while I am sleeping and that’s already happening. We are already seeing these things come in. So and the trends for the underlying Business Center continue to be very strong, and I guess, hidden a little bit in the noise of the numbers, Business Center is actually a little bit ahead of our plan. So, we are very confident that we are going to be able to deliver this raised guidance for the year and we are really proud of the profitability that we have generated. We think that, that is a really important thing to deliver at this point at the bottomline.

Arjun Bhatia: Got it. Thank you, Joe.

Operator: Your next question…

Arjun Bhatia: Sorry, can I just squeeze one more. Joe, the announcement around the Command Center is really interesting in the go-to-market, product led growth dynamic there, something newer for you that we are seeing. If that’s successful, would you consider doing a freemium go-to-market motion across Business Center, Marketing Center and drive this — get more sales in your sleep?