Thryv Holdings, Inc. Q1 FY2021 Earnings Call

Good morning, everyone, and welcome to this recorded management discussion of Thryv's first quarter 2021 results. By now, you should have received a copy of the company's First Quarter 2021 Earnings Release and Investor Supplement, which is also posted on our website, at investor.thryv.com. With me today are Joe Walsh, Chief Executive Officer and President; Paul Rouse, Chief Financial Officer; and Ryan Cantor, VP of Product and Marketing. Before we begin, I would like to remind you that some of our comments made on today's call and some of the responses to your questions may contain forward-looking statements. 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 this information presented on the call. Also on today's call, 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 the investor relations website at investor.thryv.com. With that introduction, I would like to turn the call over to Joe Walsh.

Thank you, KJ. Good morning, and thanks to everyone for joining us on our first quarter 2021 earnings call. Over the past few quarters as a public company, we've demonstrated Thryv's category leadership in end-to-end cloud software for SMBs. This quarter validates another point, showcasing the massive opportunity for cloud adoption within the SMB space and the strength of our strategy and execution. We're off to a strong start to the year in our SaaS business, with growth in revenue and client. Our revenue accelerated 17% year-over-year in the first quarter. This acceleration is fueled by a demand for small businesses to modernize and transition to the cloud. We feel that we're in pole position to seize this massive opportunity. We continue to penetrate our captive legacy client base, as well as activating new clients through our new channel. Even in our existing client base, more of those customers see now as the time to move to the cloud, customers we proposed this to a year or two ago are now realizing, 'Okay, this cloud is real. I need to modernize.' So, that's working really well now. And we are methodically scaling our new channel, our inbound channel, each month we add more leads at the top of the funnel, we build out more FDRs, we conduct more demos, and we close more each month; it's becoming a very large part of our sales volume. And then, of course, we sort of stumbled onto the multi-location franchise opportunity by having one chase us down and buy. That's now become a really big part of our plan, and we're doing very well with franchises in multi-location. These new channels are growing very nicely. We feel good about where we are, and as a result we're updating our guidance accordingly. Paul will walk you through that a little bit later in the call. A metric I'd like to share with you: our ARPU has continued to grow, and it's a result of that move upmarket, you'll see that in the data. Our churn is stable in the mid-2% range, which is very good for SMB churn. We're revealing today net dollar retention, which we hadn't revealed in the past. It’s a new metric for us, up 16% year-over-year to 89%. Although you may sometimes see enterprise churn over 100%, we are still a very young software company, and 89% is very strong when considering the 16% growth momentum year-over-year. As we solidify our strategy, we expect that number to continue to grow over time. We're pretty excited about the opportunity that represents for us. I'd like to compare us to enterprise-type software: we're in a much earlier inning with small businesses moving to the cloud, maybe the top of the second inning. Enterprises are probably in the fifth or sixth inning; they're much deeper into that transition. I'd like to share a customer story with you: One of our customers, Andy Robel from Tree Masters in Berlin, New Jersey, has seven staff members and they're in our app every single day, using the mobile app. They've been a customer for a little over two years, and their usage is steadily growing. Last month, they were up around 11 hours in the app. While the seven employees are in and out in a few seconds when they need to consult something, collectively, over the month, 11 hours is impressive. They signed up for ThryvPay as early adopters. We’ve seen steady and growing transaction volume from them, with over 400 transactions so far, averaging $612 per ticket. That's the kind of engagement we aim for: teams running their company within the app. This usage drives ARPU, NDR growth, and improvements we’re seeing. Engagement has been our priority for the last couple of years; we monitor it closely. We've seen really nice gains in daily and weekly active usage, and our goal was at least 20%, but we've exceeded that significantly. Logins are up; time in the app has doubled over the past year. The number of clients utilizing our core features—CRM, payments, communication, campaign management, scheduling—is on the rise. That’s part of the confidence we have moving forward, which allows us to upgrade our guidance. I feel this improvement stems from refining our onboarding process, enhancing the software, and examining the results our customers achieve. I want to bring in our Head of Product, Ryan Cantor, to share product improvements and discuss what we're doing regarding verticalization. Before I pass it over, I must touch on an announcement we made this morning regarding ThryvPay. ThryvPay has, up until now, been only available within the Thryv customer base, but as announced, we've rolled it out as a standalone app, available at no monthly charge. We do generate a small amount when customers use it, but we anticipate that it’ll significantly expand our outreach, helping us identify thousands of new small businesses interested in modernization and more efficient payment methods. Customers using ThryvPay absolutely love it. We're witnessing growth in volumes week over week and month over month, clearly driving higher engagement. This and other add-ons are boosting ARPU as well. It's still early days, but we're really excited about ThryvPay and believe that with the free app out there, it’ll only grow our brand. With that, I’d like to hand it over to Ryan Cantor.

Thank you, Joe. The COVID-19 pandemic prompted Thryv to adjust our product roadmap, focusing on the essential needs of everyday small business owners. We enhanced existing functionalities and added new features to help small businesses maintain healthy cash flow. We improved estimating and invoice functionalities and how the system handles taxation and backend services. We added new capabilities to manage and sell products, and near the end of 2020, we launched ThryvPay, designed to support growing service-based small businesses needing to process large payments affordably while ensuring convenience and safety for end-consumers. ThryvPay has processed over $15 million in payments, with an average transaction size exceeding $400. Just yesterday, we announced the launch of a dedicated ThryvPay mobile app, now available in the iOS and Android stores. This app not only adds convenience for existing Thryv and ThryvPay subscribers but also is available at no monthly charge to all service-based small businesses. Our flat-rate credit card fees, cost-effective ACH options, scheduled payment features, dispute assistance services, and convenience fees are all included in our free app. We understand that not every growing business is ready for the full-priced solution yet, and we are thrilled to offer ThryvPay to those businesses, providing a safe and convenient way to get paid while planning seamless upgrades to the full-price platform when ready. Additionally, Thryv recently announced integration with QuickBooks desktop and MYOB accounting software. These improvements make it easier for small business owners to streamline their day-to-day operations and simplify their accounting and tax processes. Earlier this year, after a full year of development, we launched enhanced CRM functionalities tailored for over 20 industries, catering to complex relationships. This enhancement is already yielding positive results, with over 85% of users becoming daily active users. While some in the SMB SaaS sector deploy verticalized marketing tactics, Thryv remains committed to providing exceptional customer experiences, ensuring products are properly verticalized first to prevent post-sale disappointment. Furthermore, we have verticalized our demo experiences and will continue to elevate client experiences in our upcoming website and marketing activities. Lastly, over the past 18 months, we have strengthened our integrations with all things Google for centralization and simplification. Recently, we announced a dedicated Google My Business section within Thryv, making it easy for small business owners to claim their listing, optimize their information, and accept online appointments through Reserve with Google while managing their Google My Business posts and reviews easily in-app. Now, I’ll turn the call back over to Joe.

Thank you, Ryan. Next, I want to discuss our recent Sensis acquisition. We're off to a great start; it's only been a month and a half, and we find that the Sensis team loves Thryv. They appreciate our software, have participated in demonstrations, and many are proudly wearing Thryv gear. They're excited about their pivotal shift to become a category leader in Australia's software business. All our plumbing systems are connected, training for the team has been successful, and processes are rolling over. We’ve onboarded a couple of customers who are testing the system to ensure proper localization. We expect to start selling in the second half of the year. Historically, we've seen about 10% of the customer base transition quickly during prior acquisitions, becoming SaaS customers. We're looking forward to that happening in '22 and '23. Given that our expectations are modest for this year since we’ll only onboard a couple months before the year ends, we’re still off to a great start. We're very impressed with the next layer of management beneath John Allan and the C-level team, engaging functionally with them has been enjoyable. We’ve even created a company dictionary to bridge American and Australian terminology, contributing to high morale around this integration. We feel good about this, and we'll keep you posted on developments. Now I’d like to bring Paul Rouse back to take us through the financial results.

Thank you, Joe. As Joe mentioned, it’s been a strong start to the year, and we're excited to share the results. First, let's look at the U.S. business segment, starting with SaaS. First quarter SaaS revenue reached $37.3 million, a 70% year-over-year increase. First quarter SaaS billings stood at $40.3 million, which is a 22% year-over-year rise. Our first quarter SaaS ARPU was $304, significantly increased from $240 in Q1 of 2020. First quarter SaaS churn is 2.5%, a considerable improvement compared to 3.4% during the same period last year—even against a challenging business environment brought on by the pandemic. Now turning to marketing services for the U.S., first quarter revenue was $227.9 million, a 21% year-over-year decline. First quarter marketing services billings were $216.2 million, showing a similar decrease of 22% year-over-year. As with previous calls, we are providing billings and operational metrics to give investors clearer insight into performance. Billings data reveals a consistent decline in our marketing services segment, which has proven to be lumpier on an accounting basis due to the 15-month lifecycle of our print directories. This information can be found in our first-quarter investors' supplement available on our website. Now for profitability: the consolidated business's first quarter adjusted gross margin was 69%, a 50 basis point year-over-year increase. First quarter adjusted EBITDA hit $104.9 million, resulting in an adjusted EBITDA margin of 37%. Furthermore, the EBITDA margin for marketing services rose to 43%, nearly a five-point increase year-over-year. The acquisition of Sensis Holdings on March 1st is now incorporated into our consolidated results. Moving forward, Sensis will be reported under a new segment titled Thryv International. Now regarding guidance, starting with the U.S., given our strong first quarter results and the momentum of our U.S. SaaS business, we are raising our 2021 revenue guidance to $151 million to $153 million, implying year-over-year growth of 16% to 18%. Our previous guidance was $140 million to $145 million. For U.S. marketing services, we are maintaining our 2021 revenue guidance of $740 million to $760 million. As stated, U.S. marketing services EBITDA margins will align with prior years on an annual basis. For SaaS, we anticipate continued EBITDA margin compression due to investments in product, sales, and onboarding. For our new segment, Thryv International, we expect revenues in the range of $180 million to $200 million, measured in Australian dollars. This guidance reflects ten months of ownership since we acquired the business on March 1st of this year. Sensis is a well-run asset historically showing 40% plus EBITDA margins, and we expect to maintain strong margins. Now, back to Joe.

Thanks, Paul. It’s been a really good quarter for us, and I want to assess where we are in our SaaS business. We finished last year with 8% growth, and this quarter, we achieved 17% growth; we're comfortable guiding into the high teens for the year. Growth is accelerating. Reflecting back to last fall, we formed a new board composed of SaaS and software experts who have scaled businesses like ours in the past. Their insights encouraged us to grow this business faster by giving us the green light for additional investments to scale our new channel and enhance our engineering and product areas. This has allowed our product roadmap to progress well ahead of expectations, enabling us to improve the product more swiftly. I want to thank our new board for their guidance. I urge investors to recognize that their involvement is a significant catalyst: on September 1st, they joined us and provided that green light and direction shortly afterward. More good things are on the way as we see the benefits of these investments unfolding. Now, we're prepared to take questions. Operator?

And your first question comes from the line of Arjun Bhatia with William Blair.

Yes, thank you very much, and congrats to you guys on the great results; great to see the SaaS acceleration. Joe, one of the things that stood out to me was that the SaaS client base increased sequentially for the first time in a couple of years. I would love to hear if you’ve noticed any change in how customers view the SaaS product, whether the issues they’re trying to address have shifted as you’ve built out the product and communicated its value better? Also, is there anything you would highlight regarding organic marketing versus cross-sell from the legacy base concerning customer acquisition shifts over the last few quarters?

Absolutely, Arjun. Let's start with the first question regarding customer problems. A few years back, we were arguably early with our all-in-one approach; small businesses were just starting to warm up to the idea of using cloud tools. They were purchasing narrow point solutions to experiment, whereas we introduced an extensive solution. The pandemic highlighted the pressing need for remote work capabilities, contactless payments, and updating internet service offerings, all of which became urgent. It took some time, but the market is catching on to the necessity of these capabilities. Reflecting on sales source shifts, historically, our sales originated from traditional marketing services. Recently, we’re developing traditional channels that are common for many startup software companies: an inbound channel with set funnels for leads, FDRs, demos, and closures. This process is scaling effectively as we generate monthly leads, conduct more demos, and increase closings. Additionally, we are building out a reseller channel, actively enhancing its professionalization to improve how we manage and facilitate it. This channel is beginning to operate smoothly. Lastly, we have another channel focused on franchises, where we are signing long-term contracts, typically three years, which includes built-in escalators as their businesses grow. That’s a great fit and something we’re excited about; these new channels are significantly driving our current sales volume.

Perfect, that’s very helpful. Thank you. One thing you mentioned in prepared remarks—a customer, I believe Tree Masters—changed from Stripe to ThryvPay; can you explain the advantages of using ThryvPay compared to Stripe, Square, or other partners that you integrate with?

We designed ThryvPay specifically for our service-based businesses; they’ve always been our customers. We engaged in dialogue, asked what their ideal payment solution would be. Responsiveness to fees and knowing the status of their funds were crucial. Customers are switching from Stripe or Square to our offering. Ryan, can you elaborate on this?

Certainly, Joe. Service-based businesses generally exhibit low transaction volume but handle significant dollar amounts, necessitating specific product features. We launched ACH to accept electronic bank payments; for example, a $1,000 transaction through a different provider could incur a fee exceeding 3%. In contrast, our ACH service charges 1%, capped at $9 per transaction. Our customers often save $70 to $80 per transaction by opting for ThryvPay. We’ve introduced features like scheduled payments, accommodating varied configurations that assist service businesses in managing cash flows predictably. By combining these advantageous features, we see high adoption, concentrated on addressing the needs of these service-focused businesses.

Understood, thank you. And lastly, for Paul, regarding guidance: it’s great to see the raised SaaS guidance. Are you factoring in any benefits from the Sensis cross-sell for the SaaS product, or should we expect to see those impacts materialize more in 2022 and 2023?

Yes, you're correct. The current guidance does not include contributions from the Sensis cross-sell for this year. Any related sales will be minimal at this time.

Thank you, Joe and Paul, for taking my questions. I want to follow-up on Sensis acquisition. Anything more that we've learned since closing the deal? Regarding the 40% plus EBITDA margins you referenced, given the increased investments to drive Thryv, do you view 40% as a sustainable target or do you foresee a little pressure due to these investments?

Yes, they have exceptional margins; their white-page business is unique worldwide, benefiting from significant consumer usage, with government and large institutions making up the advertiser base. Their marketers pay through Telstra bills, making it a stable revenue source. This allows for lower declines compared to our segments. Given this structure, while operational investments may slightly dip margins to the 30s or so, they will still deliver margins considerably higher than our U.S. operations. As we blend revenues with Sensis, we’ll see improved marketing margins within our overall results. Revenue from Sensis aligns more as a '22 and '23 prospect due to the nature of SaaS sales.

That’s very helpful. Moving on—there’s exciting news with the rollout of the ThryvPay app. What type of attachment rates are you anticipating over time? The goal is likely to drive higher penetration of the SaaS solution alongside the ThryvPay app. Any thoughts on potential long-term conversions to the full software?

Certainly, having a free app that meets service-based small business needs will heighten brand awareness and interest in Thryv services. While we anticipate lead generation and conversions to the full software, we haven’t explicitly modeled or projected those outcomes yet. Our current revenue guidance includes our established sales channels’ expansions; hence, any future contributions from ThryvPay or Sensis are seen as icing on the cake.

Hi, guys, thanks for taking my questions. I want to discuss the SaaS ARPU rise to $304 million over a year ago—could you delve into the factors driving this increase? You cited market repositioning but is this due to new customers adopting higher-priced plans or are pricing tiers based upon company size or user numbers?

Certainly, Lance. A few years ago, we experimented with moving downmarket, selling lower-priced products. While they sold quickly, we noted higher churn with these customers. Therefore, we refocused upward, enhancing our software and eliminating lower-priced tiers. The current customer acquisition strategy prioritizes serious users. Customers who buy today choose full-priced, higher-tier options, contributing to increased ARPU. The combination of retaining fewer low-engagement clients and having enhanced product engagement drives ARPU growth.

That’s helpful. Lastly, from a broader perspective, it seems the revenue guide is set over a billion, including $150 million plus SaaS; meanwhile, the equity market cap is sub-$800 million. This scenario suggests limited valuation for the SaaS segment. Is there potential to separate the SaaS business in a few years when revenues exceed $300 million, or how do you envision this?

We are calm regarding the long-term market perspective. Our equity market cap was around $300 million six months ago—it is beginning to capture attention. We believe the combined business’ strength outweighs the benefits of a split at this time. Despite current valuation perceptions, we're committed to our growth trajectory over a 5 to 10-year outlook. We aim to be the operational platform for small businesses, not just in the U.S. but globally. Our recent awards reflect our robust position in the market. Should it take time for the market to adequately recognize our value, we are okay with that. There’s potential for future separation to crystallize value, but we're focused on coordinating efforts now for long-term success.

Thanks, Lance.

I would like to express gratitude to everyone for attending. To underscore Lance's earlier inquiry: Many have assessed our performance by questioning if we are genuinely a SaaS business, considering we previously faced quarters of flat to slightly negative subscriber and revenue growth as we refined our offerings. Despite these challenges, our focus remained on enhancing the software to improve usability and connectivity with other applications essential for small businesses. We established an app marketplace with necessary tools for users; this has generated increased engagement and usage. We witness significant improvements in user interactions with the product, alongside increasing ARPU and engagement metrics. We monitor both daily and weekly active usage closely and have achieved substantial growth in these areas. We're excited to share future updates in three months.

Goodbye.