Thryv Holdings, Inc. Q2 FY2022 Earnings Call

Good day. My name is Savannah and I will be your conference operator for today. At this time, I would like to welcome everyone to the Thryv Second Quarter 2022 Earnings Conference Call. Today’s conference is being recorded. Thank you. And I would now like to turn the conference over to Cameron Lessard. Please go ahead.

Thank you for joining us on today's conference call to discuss Thryv's second quarter 2022 financial results. With me on today's call are Joe Walsh, Chairman and Chief Executive Officer; Grant Freeman, Chief Customer Officer; and Paul Rouse, Chief Financial Officer. Before we begin, I'd like to remind you that shortly before today's call, we issued a press release announcing our second quarter 2022 financial results. We also published a Q2 Investor Presentation on our website at investor.thryv.com. Please note that information regarding our quarterly performance and guidance can be found towards the back of the presentation. I would like to remind listeners 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 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 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. With that introduction, I would like to turn the call over to Joe Walsh.

Thank you, Cameron, and thanks to everyone for joining our call today. Hopefully, you've seen our press release and the strong financial results we delivered in the second quarter which exceeded all our guidance measures. We've made tremendous progress on our strategic priorities that enabled this quarter's performance and our outstanding performance for the first half of '22. As a result, we're raising our full year guidance. Total SaaS revenue for the quarter was up 26% over last year and the $52.2 million in quarterly sales figure marked the highest in the history of Thryv SaaS. We hit 50,000 SaaS subscribers, up 11% year-over-year, with the strongest growth we've had in a couple of years. We stated for this year that we would have more of a balance between subscriber growth and ARPU growth. Both metrics are in double digits this quarter. We also meaningfully overperformed on adjusted EBITDA in SaaS. This happened in part because of some progress we made where we kind of over delivered on our ability to hire some engineers through our Vivial acquisition. We picked up a couple of excellent React developers that would have otherwise been a part of a recruiting process, which saved us money. We also have been much more efficient with our overall SaaS marketing efforts, allowing us to invest less and spend a little less than we anticipated. We initially guided to a SaaS loss of $21 million to $25 million for the year; however, we now believe the SaaS EBITDA loss will narrow, and Paul will provide updated guidance in his remarks. Marketing Services continues to show predictability and resilience in billing with high EBITDA margins. We've made significant gains in our active users of our software this year. It's been one of the big stories of the year, our Northstar. To make such a quantum jump this year is a leading indicator of how we're going to perform in the future. Now to update you on some of those recent engagement trends, our Chief Customer Officer, Grant Freeman, is with us. Grant?

Thank you, Joe, and good morning, everyone. I'm excited to be here today to update you on the progress we've made as our clients continue to increase and deepen their engagement with our software platform. As I shared before, our Northstar is an engaged client, and I'm pleased to report that we have seen a 30% increase in engaged users over the first half of the year. This has been accomplished by first, focusing on selling to the right clients, making sure that they are ready to implement our software at the point of purchase. Next, we clearly identified the problems they want to solve and helped them understand the impact these problems are having on their business. After that, we created a customized onboarding experience, ensuring we deliver a best-in-class time to first value. Finally, we deployed additional human and tech touches that encouraged deeper engagement in our software across the entirety of their journey with us. One of the great things about our client base is who we sell to. Our clients tend to be those who are always needed. For example, if you have a plumbing issue, you're likely to call a plumber regardless of economic conditions. Or if you have a dental issue, like a cavity or toothache, you're probably going to contact your dentist. We find that these businesses are more resilient to any softening of demand in the marketplace. Additionally, we see these businesses as primed for modernizing their operations so they can gain efficiencies and accelerate growth. Every Thryv prospect receives a customized demo of our software, demonstrating how our platform will solve their problems before they purchase. This approach yields higher engagement and low churn. It ensures our platform is a fit for the needs of each SMB. Delving deeper into the data, we’ve noticed increased usage of Thryv software features that help businesses be more efficient when dollars are tight. Let me share a few examples. We help businesses ensure their calendars are full. Our scheduler and automated reminder features ensure that customers of our clients show up for scheduled appointments, whether for a beauty salon or roofing estimates. We help eliminate no-shows. We offer more than just tech support; we provide coaching to our clients. We've been working with owners impacted by supply chain shortages. For example, a garage flooring company that wasn't receiving the epoxy supplies needed to run its business received our help to communicate with existing and new customers, informing them that it now provides garage cleanouts, which do not require supply chain impacted supplies. This allowed them to generate revenue and keep their crews busy while awaiting epoxy. We’ve also assisted clients with cash flow. Thanks to our integrated CRM and estimating and invoicing tools, customers can issue estimates and invoices swiftly upon completion of services, reducing outstanding balances and getting paid faster. Furthermore, if they offer Thryv pay, their customers can pay quickly and efficiently and, in many cases, save on fees that go straight to their bottom line. It’s essential to understand that our entire client success team recognizes that our onboarding and 24/7 service is a key differentiator for Thryv's model. We believe that no small business should be left behind. We coach and inspire small business owners during onboarding, focusing on solving their main issues within the first ten days. Our focus on their engagement with our software helps them succeed. A recent industry study among small businesses found that four out of five SMBs cited increased productivity, increased profitability, and a better customer experience for those businesses that shifted to cloud-based tools. That's consistent with the feedback we receive from our clients. Let me share a couple of quotes about their experiences with investing in technology: “No more repetitive reminders to staff, less phone calls to clients, more time spent giving spectacular client service.” Another shared, “From allowing potential customers to book their own appointments to receiving payments and sending follow-up confirmation messages to reviews among many aspects, I see Thryv benefiting my business in categories almost across the board.” All these efforts culminated in our highest engagement numbers to date and corresponding low churn for the first half of the year. Clients are using the product more than ever and they are staying with us because they realize that with Thryv, they have more than just a platform; they have people helping them succeed. And that’s something we are very proud of. So with that, let me turn this back over to Joe.

Thank you, Grant. You and your team have done an excellent job of helping our customers find time to first value and getting them onboard smoothly, which has contributed to strong usage. That engagement is a forward indicator of our future performance and how we're going to do on net revenue retention going forward because as those customers become more engaged and succeed, they tend to buy more. Growing the ARPU, increasing revenue per customer, and having those add-on sales are key parts of our product roadmap going forward into the future. So, thank you for that and thank you for all the efforts. Next, I'd like to turn to Paul Rouse, our CFO. Paul?

Thank you, Joe. As a reminder, we're going to focus on total SaaS and total Marketing Services results, which includes both domestic and international operations. This has been how we provided guidance at the start of the year and will continue to do so. We feel this is important for modeling the business. Let’s talk about our second quarter results, starting with our SaaS business. Second quarter total SaaS revenue was $52.2 million, ahead of our guidance range. This represents an increase of 26% year-over-year and 8% quarter-over-quarter. Fueling this increase in revenue was a balance between ARPU and subscriber growth, both increasing 11% year-over-year. Annualized spend per client was approximately $4,300 for the second quarter. Second quarter SaaS adjusted EBITDA loss was negative $2.2 million, better than our outlook. As Joe mentioned in his remarks, the reason for the overperformance was due to key engineering talent we acquired in the Vivial acquisition and more efficient and effective marketing efforts, particularly in new acquisition channels. Seasoned net dollar retention was 91% in the second quarter. Just as a reminder, seasoned net dollar retention represents clients that have been with us for over one year, and monthly churn remained stable this quarter. Moving over to Marketing Services, second quarter total Marketing Services revenue was $281.8 million, ahead of our guidance. The overperformance was due to stronger-than-anticipated digital revenue and the addition of Vivial. When we acquired Vivial back in the first quarter, we anticipated a higher level of client churn as we integrated the sales and client success teams. This did not happen. In fact, we have seen better renewal rates for Vivial products than our original expectations. Vivial contributed $30 million to Marketing Services revenue in the quarter. Second quarter total Marketing Services adjusted EBITDA was $118.2 million, resulting in an adjusted EBITDA margin of 42% due to a strong print publication quarter. Second quarter total Marketing Services billings, excluding Vivial, was $216.4 million, a decline of 17% year-over-year and within our expectations, which have been consistent for many years. As reported in prior earnings calls, we are providing billings as an additional operational metric to give our investors better insight into our operational performance. The billings data shows a very consistent and steady decline in our Marketing Services business, which is shown to be lumpier on an accounting basis, given the extended life cycles of our print directories. This is provided in our second quarter investor presentation available on our Investor Relations website. Turning to profitability and leverage for our consolidated business, second quarter consolidated adjusted gross margin was 71%. Second quarter consolidated adjusted EBITDA was $116 million, representing an adjusted EBITDA margin of 35%. Finally, our net debt position was $542.4 million in the second quarter, and our leverage ratio for the second quarter in accordance with our credit facility is 1.5x net debt to EBITDA, well below our covenant of 3x. Our pension obligation is now $115.7 million. Now, let’s discuss updated guidance for 2022. For the second quarter 2022, we expect total SaaS revenue in the range of $53.7 million to $54.2 million and an adjusted EBITDA loss in the range of $4.8 million to $5.3 million. For the full year 2022, we are raising our guidance for total SaaS revenue in the range of $209.5 million to $211 million, representing growth of 23% year-over-year. We are updating our SaaS EBITDA loss outlook to the range of $16 million to $19 million, which is an improvement from our previous guidance of a $21 million to $25 million loss. For the full year 2022, we are also raising our guidance for total Marketing Services revenue in the range of $955 million to $970 million and raising our adjusted EBITDA in the range of $335 million to $340 million, representing an EBITDA margin of 35%. Now back to you, Joe.

Thanks, Paul. A few more items before we go to Q&A. We hired Tami Cannizzaro as our Chief Marketing Officer. Tami comes to us with a proven track record of over 20 years of experience building tech companies and category leaders within the SaaS space. She will play a pivotal role in our growth strategy going forward. I wanted to comment on Marketing Center. We rolled that out in the spring, indicating that we were doing centers as a strategy and that we would have a Marketing Center coming out later in the year. Well, the beta has gone very well. We learned a lot through direct contact with customers on the product. We now have a couple of limited sales teams selling Marketing Center. Our plan is to roll out Marketing Center to the wholesales organization before the end of the year. So 2023 should be when you see Marketing Center come to life and start generating revenue from that; we are looking forward to additional centers beyond just Marketing Center. I want to talk a little about growth. There's ongoing debate in the market about growth, speed of growth, and cash utilization. We are disciplined stewards of cash and careful with our capital. This is our moment. Every dog has its day. This is the perfect company for the current climate. We have a significant edge with 400,000 standing accounts that have, on average, been with us for over 10 years. These are long-established companies delivering vital services in their community. This is about fundamental needs, like air conditioning repair. Our customers are resilient, which is part of why our Marketing Services business performs steadily, benefiting our SaaS operations. The SaaS business has the ability to have conversations with this vast array of customers, resulting in more and more conversions. There's no way to reverse the transition taking place where small businesses are following larger ones into the cloud. This transition is ongoing. You can see from our year-to-date results that we are performing well, and you’ve observed the guidance Paul has outlined for how we will continue to perform this year. Now let's turn it over to Q&A. Operator?

Our first question will come from Arjun Bhatia with William Blair.

Perfect. Joe, maybe I want to start with you. Obviously, one of the benefits that you have is that you have a pretty broad platform that can serve as an operating system for your customers. As you’re talking to customers and observing trends in this macro environment, are you starting to see customers consolidate their spending on Thryv more because they trust you, or is that something that you anticipate will happen in the future as they eliminate some of these point solutions they may be using?

Yes, Arjun, there's definitely a bit of that happening. If I reflect on a couple of years ago, almost all the customers we worked with were what I call 'unclouded'; they had little in the cloud, and we were introducing them to it for the first time. There is still some of that, but increasingly we're finding customers that have made initial steps into the cloud, using one or two point solutions, asking whether there’s a more integrated and complete solution. They want a single platform instead of managing multiple sticky notes and logins for different tools. We are indeed seeing more customers using point solutions come to us, and then, over time, consolidating with us. One of Thryv's positives is our app marketplace within the platform, where many commonly used tools are already integrated. So if a customer tells us they're using Mailchimp, QuickBooks, or any other platform, we can seamlessly integrate those, allowing for smooth data sharing. There have certainly been instances where we’ve observed point solutions being dropped. While it’s not a massive trend yet, our broad application and inherent labor-saving features make Thryv an attractive option when customers need to cut costs or improve efficiency.

Got it. That’s very helpful. And then just one more, if I can. In terms of your customer acquisition motion, you mentioned the 400,000 accounts that have been with you for a decade. When you consider your customer acquisition going forward, do you feel you might lean more into that Marketing Services base and try to transition those customers faster, or are you still maintaining your current strategy?

As of this moment, we're still running the same strategy. I’ve seen predictions of doom about the market, which could push us to dive deeper into our established base. But so far, we haven't observed any adverse conditions. We're continuing with our balanced approach, and things are doing very well right now. Additionally, if market conditions tightened, some of the SaaS companies that are currently losing money may scale back their competitive efforts, allowing us to capture more interest from potential customers.

Joe and Paul, congrats on a great quarter. Joe, I wanted to start on the customer growth in the quarter. Your subscriber additions were positive; you mentioned double-digits in the quarter. Are you seeing any different trends in terms of the types of customers you’re attracting? Perhaps in terms of initial size of customer, landing cadence, or even geographic differences?

Not hugely, but you've asked an important question. As we innovate our software, our roadmap accelerates. We're making improvements to usability and interoperability with other tools. Our power users, who skew slightly larger, indicate a gentle upward movement in our target market. We’re starting to attract slightly larger customers than before, which bodes well for upselling and increasing ARPU in the long run. Please understand, I’m not referring to enterprise-level clients, but rather slightly larger small businesses.

So the title of my note is Thryv Moves Into The Large Enterprise. I like that. Kidding, obviously. And then as a follow-up, I know Arjun asked earlier about becoming stickier. I know there’s anxiety about software vendors selling to smaller businesses given the macro backdrop. How do you assess the payments business right now? You’re still seeing nice growth. But as you think about payments on a per-customer basis, how is the ARPU trend for customers on payments trending? Is it a valid metric to consider for the health of their business?

Yes. I see our transaction trends daily—at noon, I receive an automated report detailing the number of transactions that occurred in the last 24 hours. I can see how external events, like Independence Day, affected transactions; typically, there’s a noticeable slowdown leading up to and following the holiday. However, the overall trend for us remains strongly up. Our payment tool is being adopted more by businesses, leading to a continuous rise in transactions. Even if we are unaware of broader market trends, our growth speaks for itself.

Maybe sticking with the SaaS theme, if you could just update us on your verticalization efforts? With the accelerated net new customer growth, are any specific verticals standing out where you’re having more success?

Our verticalization program continues. We’re advancing Thryv in home, health, and legal sectors with product managers in place. We customize the experience based on client vertical once we identify it. While we have many engineering priorities, verticalization is increasingly being tuned to specific needs. I'm pleased with our progress. We perform particularly well in service-based businesses, especially in home and personal services. This is why we're confident in our resilience amidst potential market challenges because we don’t deal in optional services; people will seek dental care regardless of the economy. We haven't noticed significant changes in which verticals are leading, but the Vivial acquisition is helping us penetrate that base.

Very good. And maybe just one more from me. Regarding the updated EBITDA guide, can you talk about free cash flow expectations for the remainder of the year? Have they increased in line with projected EBITDA, working capital factors, etc.?

Yes, thank you. We’re pleased with the trend in free cash flow, which is moving positively along with our guidance.

Congrats, Joe and Paul on another strong quarter here. Joe, since you mentioned the Vivial acquisition, can you provide an update? It seems to be off to a great start, so what have you seen, and what opportunities are still available on the SaaS side?

Yes. It's gone really well. Vivial wasn't a huge acquisition, but we integrated quickly. Most integration is complete, with some elements rolling out now. We've been pleasantly surprised by the talent we acquired, including business advisers who brought their relationships and customers over. They're having great success transitioning those clients to Thryv. We view this as a new source of growth for us, especially with the Vivial customer base still being penetrated.

Understood. And final question from me. Can you share more about your international strategy? It seems like everything with Sensis is going well. With a new President in place, what can we expect in terms of entering new markets?

Thryv Australia has been performing exceptionally well. The Marketing Services aspect has exceeded all our plans and expectations, yielding strong EBITDA and cash viability. Our brand is solid, and we're seeing an increase in SaaS uptake and growth in Australia. In early 2023, we entered Canada online, and we're seeing steady traction there as well. We have plans to ramp up our presence, and while I can’t announce other new markets yet, you can expect future entries as our international endeavors grow.

You’ve mentioned the macro environment, but can you elaborate on your efforts to improve net dollar retention toward 100% over time? Also, what drives your ARPU, and how could these metrics be impacted in a macro slowdown?

That's a great question. Our net dollar retention has been somewhat fluctuating, with seasoned churn remaining stable for five quarters now. Our core seasoned churn is around 1.7%, which is quite good. With our focus on new subscriber acquisition driving double-digit growth, we’re excited about our progress. We believe we can reach 100% net dollar retention through our center strategy, adding more capabilities for our customers. We are on track for gradual ARPU growth, reflecting our established SMB customers growing more satisfied with Thryv.

And that will conclude today's question-and-answer session. I would now like to turn the call back over to Joe Walsh for closing remarks.

Thank you, Savannah. I appreciate that. So thank you to everyone for your attention today and listening. We are really proud of our results this quarter and even more excited about looking ahead to 2023 and the momentum we're gathering. I mentioned during the questions that we have several new growth vectors gaining traction for the upcoming year, instilling confidence in our ability to deliver solid growth without excessive spending. We acknowledge the market's desire for a path to profitability. We consider our EBITDA losses minor overall. As we look forward, we don't foresee launching costly new ventures. I expect our investments to yield returns, aligning us on a clear path to profitability. Our 400,000 customer base, with many relationships lasting over a decade, positions us strongly in a transition towards cloud-based solutions. We’re confident in our potential for future growth, and with our positive cash generation, we have no plans to seek additional capital. We appreciate your support and look forward to discussing our progress in the future. Thank you.

And that will conclude today's conference. Thank you for your participation, and you may now disconnect.