Thryv Holdings, Inc. Q3 FY2021 Earnings Call

Good morning. My name is Rob and I will be your conference operator today. I’d like to welcome everyone to the Thryv Third Quarter 2021 earnings conference call. All lines have been muted to minimize background noise. After the speakers finish their remarks, we will have a question and answer session. Thank you, Cameron Lazard, Director of Investor Relations and Capital Markets, you may begin your conference.

Thank you, operator. Welcome to Thryv Holdings' third quarter 2021 earnings conference call. We issued our press release a short time ago and furnished the related Form 8-K to the SEC. The press release can be found on the investor relations section of our website at investor.thryv.com. With me on the call today are Joe Walsh, Chief Executive Officer and President; Paul Rouse, Executive Vice President and Chief Financial Officer; and Grant Freeman, Chief Customer Officer. Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements about the operations and future results of Thryv. These statements are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC, and Thryv has no obligation to update the 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 these 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, Cameron, and good morning, everyone. Thank you for joining us. As you’ve already read in our earnings release, our momentum continues as we deliver our best quarter since becoming a public company with accelerating growth in our SaaS business. And so we will once again raise our guidance. Our CFO, Paul Rouse will take you through that raised guidance in a few minutes. It was just over a year ago this week that we began our journey as a public company with our first earnings call. We introduced the company and laid out our strategy for helping SMBs harness the cloud and how we thought we were in pole position to be the category leader here. This past year has really played out in our favor, and we made significant investments in our business to scale our SaaS organization, which we felt was poised for massive growth. Sitting here today, I’m pleased to say that those decisions have borne out with very promising results. Let me walk you through the report card for the third quarter. SaaS revenue crossed 41%, building momentum over the last several quarters. Prior to going public, we were operating in a distressed debt setting and were in more of a harvest mode, delivering double-digit EBITDA margins out of our business. Our focus was on profitability rather than quick growth. Over the last year, as we shifted our emphasis towards investing in growth, we’ve progressed from 2% growth in Q3 last year to over 8% growth in Q4, followed by 17% growth, then 32% growth, and now 41% growth. These investments and our new strategy to harness the rapid adoption in the marketplace are clearly paying off. Our ARPU has risen to $340, which is an increase of 31% year-over-year. Additionally, our new acquisition channels are growing, now representing 22% of overall sales, which is double the percentage from a year ago. When looking at new clients, two thirds of all new SaaS clients are new to the company, while about one third are coming from our existing marketing services business. We’ve seen record levels of engagement within the platform, measured by metrics like time spent in the app—all key indicators are up significantly. Our retention has reached an all-time high, and now I'd like to have our Chief Customer Officer, Grant Freeman, share some insights regarding our progress in client engagement.

Thank you, Joe. I’m excited to share the progress we’re making as our clients continue to deepen their engagement within our software platform. I want to start by reiterating something I mentioned during our Q2 earnings call: our North Star for client success is engagement. We are focused on that from all angles. I have some data indicating that our underlying trends continue to improve. For instance, our daily active users year-over-year for September is up over 30%. Furthermore, the percentage of clients using three or more features of our platform is up over 50%. When we analyze specific feature usage, we see continued upward momentum. For example, the number of clients sending campaigns is up over 30%, clients sharing documents has increased by over 25%, and the number of clients using payments and estimates and invoices functionality is also up over 50%. We have continuously measured churn in several ways. Our standard churn metric for this quarter stands at 2.1%. However, we are excited to announce that when analyzing clients who have been with us for over a year, churn drops to 1.7%, which we are extremely proud of. This indicates that clients who engage more with our product become integrated into their business operations, allowing them to compete effectively. We have also seen our net dollar retention improve over the past year from 73% to 90%. For clients who have been with us for over a year, their net dollar retention stands at an impressive 95%. We also track NPS, which has shown significant year-over-year improvement. Small businesses have a unique relationship with software, and early engagement is crucial. Our team of client success managers works closely with clients to ensure they use our platform to solve their business problems. As a result, we are seeing higher engagement, lower churn, increased retention, and a rising NPS. That’s why I’m delighted to pass the call back to Joe.

Thank you, Grant. Grant is our Chief Customer Officer. Under his leadership, we have methodically worked to reduce churn among our customer base and drive up engagement. So, thanks to Grant and his excellent team for their accomplishments in that area. Now, I’d like to turn to our efforts in Australia. We made the Sensis acquisition in March, and we’ve made tremendous progress since then. We’ve localized the software, trained the teams, and brought the product to market. We have many customers already using the software, and we’re experiencing strong engagement and usage. The organization in Australia has done a fantastic job of bringing our ideal client profile into the mix. We are even beginning to receive referrals from satisfied customers. While it’s still early, we are off to a strong start. We have also rebranded Sensis to Thryv Australia and are running a media campaign that has been positively received, generating significant interest and traffic to our website. We believe Australia is now positioned to build momentum moving into 2022. Additionally, I want to discuss our recent innovation, the centralized inbox feature, which enables SMBs to communicate with their customers by consolidating web chats, emails, text messages, social media messages, and more into one place. This tool streamlines communication processes for small businesses and significantly enhances their efficiency. Lastly, I want to mention ThryvPay, which has surpassed $50 million in total payments volume, an accomplishment we are very pleased with. ThryvPay is a key driver of engagement for many small businesses, which improves customer loyalty to our software. Going forward, we aim to increase our attachment rates for payments and strengthen existing client relationships. With that, I’ll turn it over to our CFO, Paul Rouse, to discuss our third quarter results.

Thank you, Joe. I will now cover our U.S. business segments starting with the SaaS segment. Third quarter 2021 SaaS revenue was $44.8 million, an increase of 41% year-over-year. This growth was driven by a steady increase in clients, an uptick in average revenue per unit (ARPU), and positive sales allowances compared to the prior year. The 41% revenue increase includes a 600 basis point improvement related to sales allowances. SaaS ARPU for this quarter was $340, reflecting a 31% year-over-year increase. This growth in ARPU is attributed to several factors, including a shift towards higher-value subscription tiers and additional sales from our marketing services client base. The third quarter SaaS churn was 1.7%, marking a 90 basis point improvement year-over-year. Our net dollar retention also reached 95% for the quarter, an improvement of 900 basis points. Moving on to the U.S. marketing services segment, the third quarter revenue was $213.2 million, which is a 2.3% increase year-over-year and ahead of our guidance. This performance was supported by a favorable print publication schedule that included a significant number of books published compared to the prior year. The overall performance in that quarter was driven by an above-expectation performance in our digital offerings. In the third quarter, marketing services billings were at $204.9 million, reflecting a decrease of 21% year-over-year, which is consistent with our previous quarters. The billings data shows a consistent decline in our marketing services segment, and we will continue to provide these insights to help investors better understand our operational performance. For Thryv International, the third quarter revenue was 53.3 million Australian dollars, which was ahead of our guidance. Adjusted gross margin for the consolidated business was 70%, and when excluding Thryv International, the adjusted gross margin was 71%, reflecting a 710 basis point improvement year-over-year. Third quarter Total Adjusted EBITDA was $102.4 million, leading to a Total Adjusted EBITDA margin of 34.4%. In terms of debt management, we repaid $35 million of our term loan in the third quarter, bringing our cumulative repayments to $123 million since the refinance associated with the acquisition in March. Now let’s update our guidance. For our U.S. SaaS business, we are raising our 2021 revenue guidance range to $169 million to $171 million. For U.S. marketing services, we are updating our 2021 revenue guidance range to $785 million to $790 million. Lastly, I’ll turn the call over to Joe.

Thank you, Paul. We were excited to receive an APPEALIE award recently. APPEALIE awards are SaaS customer success awards based on net promoter scores, user interface, product improvements, customer feedback, and third-party research analysis. We are thrilled to have received this recognition, which underscores the quality of our software. Now, I’d like to address our acquisition strategy. We’re often asked about our intentions regarding our marketing services and SaaS businesses. I want to clarify that our focus is to aggressively pursue SaaS acquisitions to enhance our capabilities and customer base. We believe this is crucial for our growth strategy. As we consider acquisitions, we prioritize SaaS companies and have been active in conversations around this. Though we don’t have any announcements at this time, this is our primary focus. In terms of marketing services, we have skills in this area and will consider acquisitions that align with our goal of building a SaaS company. We have an Investor Day planned for March and will provide registration details soon. Now, I’d like to open up the floor for questions. Operator, can you please begin the Q&A session?

And your first question comes from Arjun Bhatia from William Blair. Please go ahead.

Perfect. Thank you very much and congrats on a strong SaaS growth; it’s great to see that it continues to accelerate. Gentlemen, perhaps the first one is for you. When we were going through the direct listing a little over a year ago, one of the goals was to accelerate the SaaS business to 20% to 25% growth by 2023. Now we’re sitting here at the end of 2021, two years ahead of schedule at over a 40% growth rate. How are you thinking about your medium and long-term targets in light of the current growth?

Thank you for the question. It’s a great one. One important aspect to understand about our company is that we have fundamentally changed our approach. For several years, we were owned by a distressed debt group, focusing on returning cash, thus running our SaaS business at double-digit EBITDA margins while prioritizing profitability. With a new board established just over a year ago that reviewed the quality of our software and strategized in a growth-oriented direction, we have shifted to enhancing our talent and product development. This transition is realizing positive outcomes. While we came public with the belief we could double our revenue and customer base in the medium term, the current trajectory gives us high confidence in further growth. The shift in small businesses towards cloud solutions, accelerated by the pandemic, positions us well to capture further market share as SMBs recognize their need for modern software solutions. This favorable shift has catalyzed our growth.

Thank you for that clarification. Regarding your seasoned customer metric, how do you view growth strategy in the SaaS business focusing on existing seasoned customers versus new customer acquisitions?

We believe there is significant pricing power. There’s a gradual unbundling happening in our offerings. Part of this is to extract value from our various packages while enhancing our product features. We also see many existing customers upgrading to higher tiers, which contributes to our growing ARPU. Our robust engagement with our existing customer base offers a dual opportunity for new acquisitions and upselling our services. About a third of our new customer acquisitions still originate from our existing marketing services base, and we are encouraged by the increasing demand for modernization from previously hesitant prospects. Our ongoing expansions, such as new acquisition channels, are climbing nicely and contribute to our positive revenue trajectory.

Regarding your SaaS M&A strategy, should we visualize primarily smaller tuck-in acquisitions or considering larger transactions?

Currently, due to our valuation being more reflective of a legacy phonebook business, making large SaaS acquisitions is challenging. While we’ve engaged in multiple conversations about acquisitions and come close to finalizing some deals, we haven’t identified any that align with our capability to pursue larger transactions. For now, our focus will be on smaller acquisitions that can enhance our offerings while we work towards improving our valuation in the market.

Understood. Thank you for the insights.

Your next question comes from the line of Scott Berg from Needham. Your line is open.

Hi everyone, this is John Levine on for Scott. First, just a product-related question. How’s the uptake of some of the new verticalized functionality of the CRM platform, and are you observing outsized demand from specific verticals?

This year, we made significant investments in verticalization to enhance our technology and the platform. While we have yet to see direct financial returns from this investment, we are confident that this will be realized in 2022 and beyond. Predominantly, we have seen traction with service-related businesses, particularly in sectors such as home services and legal industries, as these segments were already part of our legacy marketing services business. Therefore, we expect the financial impact to manifest in 2022.

Got it. And how are the new go-to-market motions you've implemented trending, particularly with respect to multi-location or franchise businesses?

I’d like to invite our Chief Customer Officer, Grant Freeman, to provide some insights on the performance of these channels.

Thank you, Joe. We're experiencing fantastic growth across all three channels. Sales from new acquisition channels have more than doubled year-over-year. The franchise channel, which serves as our enterprise version, has already acquired more logos this year than in the entirety of last year. We have also seen improvements within our partner channel following updates to our tech stack,and the retooling of our affiliate program is gaining positive traction. We are optimistic about the trajectory of all three channels.

Your next question comes from Rob Oliver from Baird. Your line is open.

Good morning, everyone. Thanks for taking my question. Joe, nobody’s asked about the SMB macro. On one hand, you’ve delivered outstanding SaaS growth, while there’s been a sequential decline in dollar retention and customer ads. Could you comment on these trends and how they might impact the outlook as we approach year-end and into 2022?

Certainly. The surge in activity during the summer, referred to as a YOLO summer, experienced some challenges due to the Delta variant, but sales and business activity substantially improved post-Labor Day. Our sales numbers are robust, indicating that small business confidence is mixed primarily due to concerns about inflation and political uncertainties, but this hasn’t impacted our growth. The urgent desire for software solutions is driving us forward, and we are poised to capitalize on SMBs transitioning to the cloud.

Thank you, Joe. Paul, regarding the marketing services business, could you clarify the dynamics between declining billings and rising revenue, as reported in this quarter?

Absolutely. The historical banding of revenue and billings shows variability based on print publication cycles. We had a strong quarter driven by a significant number of directories published, resulting in increased revenue. However, that may not sustain through the remainder of the year as the publication schedule shifts. The billings data will provide a more accurate tracking of long-term trends and performance expectations.

Thank you both for that insight. I appreciate it.

Your next question comes from Daniel Moore from CJS Securities. Your line is open.

Good morning, and thanks for the additional color today. Beyond ThryvPay, what are the key functionalities that are driving engagement and product expansion, thereby influencing retention?

That’s a great question. I’d like to let our Chief Product Officer, Ryan Cantor, offer his perspectives on engagement trends.

Thank you, Joe. The centralized inbox feature has been a significant advancement, enhancing the platform's overall communication capabilities. This allows SMBs to manage incoming messages from various sources easily. The real-time messaging functionality further strengthens engagement. Payments have also been a prominent focus. We’re observing strong growth in features concerning payment management, contributing to engagement and retention.

Great. And on your international initiatives, particularly in Australia, can you comment on the uptake and whether you believe that initial 10% penetration is still achievable in the medium term?

Absolutely. We remain confident in our ability to penetrate the market. The early signals are incredibly promising, and we expect to accelerate efforts moving into 2022 as we establish stronger outbound sales processes. Although we prioritized a solid integration at the outset, the prospects look strong in terms of leveraging our existing customer base for future growth.

Appreciate the insights, Joe. Thanks for the detail today.

Your next question comes from Zach Cummings from B. Riley Securities. Your line is open.

Good morning, and congrats on the strong results. Joe, regarding your strategic investments in the SaaS business as implied by the adjusted EBITDA guidance, what key focus areas are you targeting with these investments?

Our primary focus is on engineering and product development. We have a comprehensive roadmap to enhance our software, which is becoming increasingly nuanced and sophisticated based on customer feedback. We intend to expand our engineering team and bolster product capabilities to ensure we meet the needs of our customers effectively. This growth strategy is expected to yield results primarily in 2022. We’ve adapted our approach from focusing solely on sales-driven growth to prioritizing product development support.

Thanks, Joe. And for Paul: gross margin performance in this quarter was impressive. Can you discuss the factors contributing to that strong gross margin?

The key driver of the improved gross margin this quarter can be attributed to the profitability of our print business, which tends to scale positively alongside publication volume. A strong quarter for print production correlates with a stronger gross margin performance.

Definitely well noted. Thank you.

Your final question comes from Ryan MacWilliams from Barclays. Your line is open.

Hi, thank you. Given the strong momentum you’ve achieved, could you elaborate on the primary characteristics you are considering for SaaS acquisitions going forward?

That’s a comprehensive question. We’re evaluating acquisitions along various dimensions: geographical reach, product functionality enhancements, and talent acquisition. We’re particularly looking at companies that could significantly bolster our capability to serve specific verticals or improve customer engagement. We also see potential with companies that have developed capabilities that align with our strategic objectives. All these factors are crucial as we evaluate opportunities for acquisitions. Our approach may initially focus on smaller acquisitions but could expand as our market valuation improves.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.