Thryv Holdings, Inc. Q2 FY2023 Earnings Call

Thank you for joining us. My name is Anna, and I will be your conference operator today. I’d like to welcome everyone to the Thryv Second Quarter 2023 Earnings Call. All lines have been muted to reduce background noise. Following the speakers' remarks, we will have a question-and-answer session. Thank you. Cameron Lessard, you may start your conference.

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?

Good morning, Cameron. Thank you all for joining us to discuss our second quarter results. We achieved another solid quarter in SaaS, particularly from a profitability standpoint, as we stay committed to driving growth, maintaining flexibility, and executing efficiently. This quarter, we experienced a 20% year-on-year SaaS revenue growth, with SaaS EBITDA reaching double-digit margins. We also saw continued client growth in double digits and strong engagement trends. We're excited to share that we set a profitability goal for our SaaS business this year, which we've already achieved. Our enhancements in efficiency have led to a very slight miss on our revenue guidance for SaaS. However, we are confident in our position and will be raising our SaaS revenue and EBITDA guidance for the year. We have strong momentum in the business, having decided to sell fewer high-cost sales through our inbound channel and implementing other efficiency measures, resulting in about a 10-point swing in EBITDA profitability from breakeven to double digits. This really showcases our business's profit-making potential and our control over the business model, which we're quite pleased about. In the past, we've relied on three growth channels, dividing them equally among referrals, happy customers referring similar prospects, and our inbound channel. Recently, this balance has shifted, with referrals becoming the largest source of new customers—now over 40%—while only 14% are coming from our demand generation funnels. We've been scaling back on the more expensive sales approaches that rely on content marketing and paid advertising. Although these methods help identify prospects, they introduce churn risk and make sales more costly. Reducing our reliance on these channels has been crucial for Thryv's efficiency and profitability. We will also discuss our fourth growth channel shortly, which we're eager to introduce. Over the past year, we have expressed our aim to implement product-led growth, generating product-qualified leads and using our product to attract new customers by delivering value before requesting payment. After several years of development, we are now rolling out the beta of our Command Center. This offers small businesses a way to engage with our products, receive support, and become product-qualified leads to be managed through our effective sales-led approach. We are not eliminating the sales-led motion; instead, we are incorporating this highly efficient funnel into our process, reflecting years of effort and cutting-edge technology. Without further ado, I'll invite our Chief Product Officer, Ryan Cantor, to explain how Command Center integrates into our strategy and how we are leveraging generative AI in our business model. Ryan?

Thank you, Joe. The launch of Command Center beta today isn’t simply a product launch. Moreover, it’s a re-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 a small business owner. Before scheduling on a calendar, they will e-mail about dates and times. Before accepting credit card payments, they will text the amount due. Conversational commerce is how most small businesses operate initially and 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 in not just 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 of clients 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 in 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 is built for small businesses and 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 small businesses, 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 owner's wants, needs, and aspirations. With Command Center, the Thryv platform can be customized to meet this need for 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 are 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 a month. It’s 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 proactive steps to ensure our users and their data remain safe and secure. 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 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 and 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.

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 anyone 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. 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, 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, and we are now selling multiple centers. So there are 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, with 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 is 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?

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 our 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 return 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.

Thank you, Paul. In the third quarter, we expect lower revenue and EBITDA due to the revenue recognition process, but our cash position remains unaffected. Earlier this year, we aimed to reduce our debt by around $100 million, which was before the acquisition of New Zealand. Currently, we have paid down $70 million year-to-date, which means we have managed to absorb the New Zealand acquisition while still making progress on our debt reduction. Our cash flow continues to be very strong, and we are on track with our plans. The revenue recognition issue is not a cause for concern. Looking ahead, we anticipate a rebound in revenue and EBITDA in the fourth quarter, with significant growth continuing into 2024. It's important to note that in the third quarter, our Software as a Service (SaaS) segment will bear a larger share of general overhead costs, including part of Paul’s and my salaries, which will be adjusted in the fourth quarter when Marketing Services takes on more overhead. We have communicated this change clearly over the past year, and those following our company should not be surprised by this temporary situation related to our transition to an 18-month financial reporting cycle. This innovation has significantly benefited our revenue and EBITDA, despite a brief dip that everyone is aware of. Now, regarding New Zealand, we acquired the business at the start of April, and they are performing according to our acquisition plan. The integration process is progressing well, and we are excited to launch our SaaS product in New Zealand next month, which has generated enthusiasm among the local team. Two years ago, we bought Australia and indicated that it would take three years of investments in EBITDA and cash flow to fully establish the SaaS business. This quarter, we are pleased to report that the SaaS business in Australia is already generating profit. For the year, it should break even, and as we move into 2024, it is expected to be profitable, ahead of our schedule. The business is thriving, with increased customer usage, heightened brand awareness, and high customer satisfaction. Our employees are highly engaged, and at times, Australia has even been our number one region, which is a fantastic achievement. We are looking forward to building on this success in New Zealand. To conclude the call, I want to share some exciting news: we have been recognized as one of the Best Companies to Sell For, ranking in the top 10 out of the top 50 list. We take great pride in fostering an excellent work environment for our sales professionals, whom we refer to as business advisers. Now, let's turn it over to the operator.

Thank you. Your first question comes from the line of Arjun Bhatia from William Blair. Your line is open.

Thank you. I appreciate the opportunity to ask questions. Joe, I’d like to start with you. Considering the current state of the business, can you discuss the inbound marketing challenges you're experiencing? It appears these challenges have contributed to the SaaS revenue falling short of your forecasts, even as you've raised your full-year guidance. Could you share your insights on what you're observing in Q3 and Q4 that leads you to expect an uptick in net new revenue from the SaaS side? What gives you confidence in this outlook?

Thank you for the question, Arjun. We are transitioning from selling one center in one country to opening up sales for three centers across all our countries, and we're experiencing significant acceleration. Let me explain. We introduced Marketing Center at the end of last year, just before Christmas, and initially sold it in a limited way. We actually intended to ramp up sales faster, but we weren't completely satisfied with the feedback from early customers who identified some edge cases that needed attention. Our sales force was still getting accustomed to it. However, over the past few months, we have resolved those issues, and Marketing Center has gained considerable momentum, as we noted in our prepared remarks. Just last month, it was running at an annualized rate of about 4,000 and is growing quickly. We are confident that this growth in Marketing Center alone will help us exceed our revised guidance for the year, which we have actually increased. Remember, we were only selling Marketing Center to Business Center customers in the U.S. and in a very curated manner. Now that we have this momentum and the product refined, it can be offered to anyone, not just Business Center customers, and we can sell it in Australia, Canada, and soon in New Zealand. We have truly opened that up. Additionally, we have introduced Command Center, which has already attracted hundreds of sign-ups in the short time since launch and is generating sales. One of my aspirations is to have sales happening even while I sleep, and that is already taking place. We are witnessing this influx. The trends for Business Center continue to be robust, and despite some noise in the numbers, Business Center is performing slightly better than we planned. Thus, we are very confident in our ability to meet this updated guidance for the year, and we are proud of the profitability we have achieved, which we believe is crucial for our bottom line at this time.

Got it. Thank you, Joe. Sorry, can I ask one more question? Joe, the news about the Command Center is quite intriguing in relation to the go-to-market and product-led growth strategy, which is something new for you that we are observing. If it proves successful, would you think about implementing a freemium go-to-market strategy for the Business Center and Marketing Center to increase sales more effortlessly?

Great question. That's my dream while I am sleeping at night. We created this innovative product, and you're going to see it tomorrow during a demo. We structured this product as a freemium model, as the starting point. It took over three years to develop, involving more than 100 engineers and product specialists, and it has been a significant effort. I believe when you see all the elements come together for a customer, you will be impressed, if not blown away. Business Center is much larger; it’s a CRM and much more challenging to provide for free, as it requires considerable effort from both the small business and Thryv to set up and onboard, including populating the CRM. It necessitates a change in business processes. So, it significantly impacts the business; if you commit to it, it should pay off, but it’s not feasible to just offer it for free as a trial. People won't invest the time to input the necessary data into the CRM. However, the new Command Center, once you accept it and start using it, effectively begins to build your CRM because it accumulates all the incoming data, creating a record of your customers. It serves as an excellent starting point. Therefore, we are not planning to introduce a freemium or product-led growth approach to the other centers at this time. The entry point into the product will be the Command Center. This approach will transform what used to be a two-lane highway into a massive ten-lane interstate, greatly expanding the number of potential conversations we can have.

Very helpful. Thank you.

Hi, everyone. Thanks for taking the question here. I have two here. First of all, Joe, you sound really excited about selling the new modules and the new product impact on your base and obviously, new customers. How do we think about how you are going to prioritize the marketing spend to do that? I know you pulled back on the marketing for some of the new inbound channels in the quarter, but knowing that some of these products probably require a little bit spend in those channels. How do we think about kind of your priorities are on marketing those new modules versus just selling the core platform today? Thank you.

Yeah. Well, let’s start with Command Center, which rolled out two days ago, I guess, in beta, and we have had hundreds of sign-ups and we have had some people upgrade already. It’s off to a really good start in the dark without really any promotion. It is just our employees telling people about and sharing the thing. Our plan is to run it in beta briefly and then do a bigger kind of market launch after Labor Day with some earned media, promotion, and advertising to kick it off and get the word out there. We do believe it’s a sort of a self-discovery product that has the potential to really go viral, to be honest with you, because it delivers so much value for no money. I mean, the key element here is, it’s the best available product in the marketplace, and it doesn’t cost anything. And so you could get in there and accomplish a lot for your business without spending any money at all. So we think that that is really the key; it’s not a real marketing-heavy thing. As far as Marketing Center goes, we are experiencing stronger and stronger demand, the better the sales force understands this, and we have had Australia ringing the bell, screaming, give it to us, and so we have done that now this week, given it to Australia, and they have got a backlog of people that are interested in it. So we think we will see a nice surge in sales from there as well. Overall, if you think about it from a modeling standpoint, we are not going to spend any more than we have budgeted or planned for the year. We are going to redirect some of those resources into some of these messaging around these new elements, but that was our plan all along to be honest with you.

Got it. Very helpful. And then, Paul, from a follow-up question, your recent churn did tick up 2 points, as you noted. One quarter certainly not a trend, but your churn over the previous four quarters, five quarters was amazingly consistent, especially as the macro changed a little bit. How should we read that 2-point change? Is that just something specific in the quarter? Should we expect it to bounce back? Maybe it’s macro. Obviously, we are all seeing the macro, so don’t need to make too big a deal out of the macro necessarily, but just try to help us understand that maybe small difference here in the quarter? Thank you.

The season churn is stable. I think that’s the concern you’re trying to address, right?

Paul, I think he’s going for net dollar retention.

Yeah. I am trying net dollar retention. Yeah.

I believe this situation is temporary, as we experienced a slight delay in the ramp-up of Marketing Center. This caused a minor setback. However, Marketing Center presents a significant opportunity to introduce additional products, especially with Command Center acting as the new entry point. We anticipate that net dollar retention will quickly approach 100% with this new innovation. We expect it to improve and are not worried about its current state. This is not a trend, and in fact, we foresee it reversing and moving in a positive direction.

I would add. You can sort of mark it down and circle it on your calendar. This quarter is sort of the beginning now of our net dollar retention journey, because if you think about it, other than some very small add-ons, we didn’t really have anything else to sell to a small business. When we went in, we were using an expensive sales channel with a big demo, and we were making the entire sale at the time of the sale. So there wasn’t really a lot to add on, and in soft economic periods, people weren’t buying as big; there were even a handful of downgrades of people that would buy maybe the good, better, best, and they would buy the best and then downgrade a little bit out of economic fear reading all the headlines. So we had a little bit of headwinds there. You start now and you look at our business, we now have the ability to go in and make an initial sale and then go back and add additional meaningful very high margin software centers, not just little signature packages or other small add-ons. This is a very significant change. So from here forward, you are going to see our net dollar retention rise to that 100% that we have guided you all along on. We now have the products to sell.

Excellent. Joe, I am marking on the calendar. I look forward to the follow-up. I appreciate you on that. Congrats and talk to you very soon.

Good morning, everyone. Thank you for taking my question. You often discuss the SaaS business, and I appreciate the insights you provided in your prepared remarks concerning growth and ARPU. I would like to explore this further. I've noticed that ARPU growth has slowed again this quarter, and I'm interested in understanding more about customer buying patterns and any changes since last quarter. Are you experiencing a greater macro impact on spending, or are customers being slower to upgrade? Any additional insights on this would be helpful.

I want to share some insights based on recent feedback from the market. In the first half of the year, we observed more cautious behavior from our small business customers. They were hesitant to make purchases, focusing more on savings and value, which led to a trend where they opted for basic offerings instead of premium options. This shift was evident in our data, particularly in new sales and their reluctance to add additional features. However, during a recent discussion with our wholesale leadership team, we noted a positive shift. Small business sentiment and expectations for the future are improving compared to the last nine months. Many are optimistic as they notice signs of stability, such as the potential end of interest rate increases, a decline in inflation, and better supply chain conditions. The morale among our sales team serving small businesses is also showing improvement. I spent time with customers recently and gained valuable insights. One business owner shared that they are experiencing growth and have found our marketing tools to be transformative for their operations. While challenges remain, the overall sentiment is that conditions are improving, and we are receiving more positive feedback from the market.

I appreciate that. That’s very good detail. I really appreciate that. Also, a follow-up question. Just congrats on the new Command Center offering. It sounds like this could be a really nice catalyst for the Marketing Center. So just as we think about your investment opportunities, how do you internally view the trade-off between investing in additional centers and marketing existing centers relative to driving international expansion and potential M&A efforts? Just any color in that would be pretty helpful.

That's a great question and reflects the choices we have ahead of us. We have communicated our plan to deliver one center annually, and we remain on track for an important center next year. We are making significant progress in planning another center as well. This timeline is considered in our spending and investment priorities. For the past three years, we have focused our investments mainly on engineering and product development, as those needs must be prioritized. We are leading the market for small businesses, recognized as the gold standard brand with the lowest churn, highest client satisfaction, and a wide array of service offerings. We aim to maintain this superiority by continuing to invest in innovation. Regarding our Business Center, we have made substantial improvements, including a major overhaul of our invoicing technology, which has seen a 70% increase year-to-date. We've also enhanced our payment systems, leading to over a 50% year-over-year increase in payments. Our focus is firmly on engineering and product development. The next priority is international expansion, which we are committed to pursuing. We've appointed an international President and have been preparing for this significant push by addressing essential requirements like GDPR compliance. By 2024, we will accelerate our efforts in new geographies. On the marketing front, our Chief Marketing Officer, Tami Cannizzaro, has been exceptional at achieving results efficiently, without massive spending. In her first year, she has greatly improved our marketing effectiveness, and we have high expectations for her contributions as we expand into international markets. Our success in Canada has been significantly influenced by our skilled marketing team.

Great. I appreciate all the color, and thanks for taking my questions.

Hi. Good morning and thanks for taking my questions. Joe, can you just talk about the SaaS adjusted EBITDA improvement here in the quarter? I mean, what was really driving the decision to pull back on some of that marketing spend and see that efficiency really flow through? And now that you have additional products to offer, how does that change your approach to some of your inbound marketing efforts as you go forward from here?

Look, we have been a three-funnel business, and we have talked about it ad nauseam, the zoo, referrals, and the inbound-outbound motion. We have just added the fourth funnel, the most efficient funnel, and that’s allowing small businesses to discover our tool, download it, and get real value from it, like meaningful value from it, without ever talking to us, no demo, no explanation, no meeting, no marketing, no nothing. And then after they have experienced a lot of value from us, they can then self-upgrade and just right within the tool, they can go ahead and upgrade themselves. We have had a couple of do it already, just in the beta, that we are already seeing those sales flow in. Not sure if I was asleep or not; I have to check, but definitely coming in. So we think this fourth funnel is the most important thing that we have done in the last four years or five years, adding this fourth funnel, and we think it opens up the marketplace to us in a really important way. As far as delivering EBITDA out of our SaaS business, for better words, you guys know that, as you know, all of our work, we are a SaaS company that actually carries a little bit of debt, and debt became a little bit more expensive lately. And I have Paul Rouse working with me, who is very conservative; he loves his cash. And so there is a real drive toward efficiency in our organization and making sure that everything we do is profitable and shifting our emphasis towards higher and higher margin activities. And that, I think, showed great promise. I mean, how many companies do you follow that have a 10-point swing at the EBITDA line? We are pretty proud of that, and we hope that you are impressed by it and you can see the profit-making power of this business.

Understood. And my one follow-up question is really just around the dynamic for customer growth versus ARPU expansion. I know customer growth has really been kind of a stronger portion here in the first half of the year. But how do you anticipate that, that dynamic will really sort of normalize as we go over kind of the next 12 months to 18 months?

It’s funny. These things never run perfectly in sync. What I would anticipate is, you are going to see ARPU take the baton and jump back in front a little bit going forward. I think, as we begin to have multiple centers to sell people, we have more to sell now. I mean, it was hard for our six-figure earning professional sales force to really make a very big sale of our software before because we really just had one software element and a handful of small add-ons. We now have the ability with what Ryan and his incredible product team have created to go in and sell a pretty big suite of software into these customers, and there are even more add-ons to sell them. So you can actually make a bigger sale today. So it may not be instant; it may not hit in one quarter. But when I think about looking out over 2024, I would expect that ARPU will catch a bit and start to really move now because we have something to sell.

Got it. Well, thanks for taking my questions, and best of luck for the rest of the quarter.

Thank you, and good morning. Joe and Paul, you covered a lot of ground, but could you discuss the key differentiating features behind the freemium version of the Command Center and the professional plans that could initially add $20 to $30 in revenue per seat?

Well, thanks for that question. I was hoping somebody would ask some detailed questions. Ryan Cantor, our Head of Product, is with us. I am going to ask Ryan to sort of tease out what’s different between the free version and what you get when you start to upgrade. Ryan?

Sure. Thanks, Daniel. Our freemium version is fully functional in a free forever plan. The main limitations between freemium and paid plan starts with a number of channels you can connect. So our current free offering available online allows you to connect up to three channels. So someone could activate phone and SMS as one channel, add their Gmail as a second channel, and even add video for video calls and video meetings as a third channel. But if they want to add that fourth channel, it could be e-mail, Facebook, Instagram; that would prompt them to upgrade to one of the paid plans. So channel count is one primary limitation. On our TeamChat capabilities inside Command Center, we focus on message retention. So 30 days retention is included. So for real-time collaboration with your team members, what’s going on right now in this period, no problem, TeamChat is a great collaboration tool. If you want to unlock historical messages, you would need to upgrade to one of the paid plans. Lastly, we included an allotment of minutes. Currently, we provide 60 minutes of voice and video calling per month. It’s important to note that someone does have the capability of buying additional minutes without having to upgrade their plan. Our pricing studies suggested that minutes alone weren’t going to be a catalyst enough for people to upgrade to a paid plan, but that becomes another revenue opportunity for us as well. And again, we think from a freemium perspective that the single largest fleet that we are focusing on with freemium is getting someone from free to paid using a variety of low friction methods to do that. So hopefully that answers your question, Daniel, but there are a couple of different avenues inside of Command Center that will drive them to upgrade.

No. That’s helpful. As we said, hopefully, you are going to see that in action tomorrow. And then, the other for me is, obviously, the longer-term guide that you laid out at the Analyst Investor Day and looking back, it implies a meaningful inflection in higher growth. Is fiscal 2024 with the rollout of Command Center and Marketing Center, is that where you expect to see that inflection point from teens, 20s to something much more meaningful?

Yes. Like just, yes, like, that you got it exactly right. I mean, we spent a lot of time with you. I know you understand the story. This is the moment where Thryv upshifts into a higher gear, where we are not selling in one country one product; we are selling in many countries, many products. And so it gives us both real scope to grow ARPU. It gives us real scope to grow net dollar retention. Now we have something else to sell, and it gives us a very sharp point on the spear with this very broad application of the freemium Command Center, which lets us meet tens of thousands of new businesses who are interested in modernizing, but not necessarily ready to dive in for full business transformation. They are not out looking for a CRM; they are just trying to kind of inch their way along. And we were reaching for a pretty high piece of fruit on the tree when we were going after selling the CRM as the first sale. We now have got a lower hanging fruit, we can go get, which we think will really broaden the funnel of people coming in. So, resoundingly, yes. We see ourselves as a Rule of 40 company. We see our growth, which for this year is circa 20%. We see that really meaningfully reaccelerating into higher levels as we go forward. And we see us continuing to run the business as a positive EBITDA business. So you start doing the math on that and you can easily see how you can get the Rule of 40 or into that zone, and we don’t think that that’s years away; we think that’s 2024 as this stuff beds down and gets going.

All right. Look forward to seeing details marked. Thanks again.

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