Thank you for standing by. My name is Laila, and I will be your conference operator today. At this time, I would like to welcome everyone to Thryv's Second Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. Thank you. I would now like to turn the conference over to Cameron Lessard, Head of IR.

Thank you, operator. Hello, and good day to everyone. Welcome to Thryv's second quarter 2024 earnings conference call. On the call today are Joe Walsh, Chairman and Chief Executive Officer; and Paul Rouse, Chief Financial 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 this conference call. With that introduction, I will now turn the call over to Chairman and CEO, Joe Walsh.

Good morning, Cameron, and thank you all for joining us on the call today to discuss our second quarter results. SaaS revenue grew by 25% year-over-year to $77.8 million and is within our guidance range. SaaS adjusted gross margin increased 460 basis points year-over-year to 69.7%. SaaS EBITDA outperformed significantly, growing over 60% year-over-year to $10 million and ending the quarter with a 13.1% adjusted EBITDA margin. That's the highest point we've reached as a public company. I'll let Paul get more into the numbers. But now I want to dive into some exciting metrics and updates about the business. Once again, we delivered excellent subscriber growth. We were up 52%, ending at 85,000 clients as we continue to be successful in upgrading our marketing services clients to our SaaS platform. This milestone is driven by our strategic transition of legacy marketing services clients to our innovative SaaS platform. A key factor in this success is our recently launched marketing center, which empowers businesses to efficiently manage advertising campaigns, enhance their online presence, and make insightful data-driven decisions. This tool is not just a product, it's a game changer that positions our clients for sustained success in a digital-first world. Our center strategy is continuing to gain traction, with more than 10% of our current clients having two or more paid centers. This is up 200 basis points sequentially and a significant increase of 800 basis points from this time last year. This means more clients are experiencing the tangible benefits of our marketing center in growing their business. Our local sales channel and consistent referrals are effectively demonstrating the value we deliver. Turning to our product initiatives, we remain focused on enhancing our Thryv AI capabilities to further empower small businesses, building on the efficiency and time savings already realized by our clients. Our AI-enabled customer support, now accessible across all centers, is designed to assist users by answering their questions and guiding them through our software’s functionality. In addition, our social media feature in the business center generates engaging social post captions complete with relevant hashtags and emojis. This not only makes the post more relatable and engaging but also boosts their marketing signal by increasing visibility and fostering a deeper emotional connection with potential customers. We are actively developing and testing several new AI enhancements and are enthusiastic about their potential. So more on that at a later date. With that, I'm going to turn it over to our CFO, Paul Rouse.

Thanks, Joe. Alright, let's dive into our results beginning with SaaS. SaaS revenue was $77.8 million in the second quarter and within our guidance range, representing an increase of 25% year-over-year and up 5% sequentially. SaaS adjusted gross margin increased 460 basis points year-over-year and 130 basis points quarter-over-quarter to 69.7%. We are pleased with the positive impact from the sale of our higher-margin SaaS products. This progress further strengthens our expectation of exiting the year with SaaS adjusted gross margin exceeding 70%. First quarter SaaS adjusted EBITDA was $10.2 million, above our guidance and resulting in a SaaS adjusted EBITDA margin of 13.1%. Our SaaS adjusted EBITDA was favorable primarily due to the restructuring of our company-wide commission plan that we spoke of previously this year. We streamlined our sales process to prioritize and incentivize the sale of high-margin products while also enhancing efforts to boost spending from our existing customer base. SaaS subscribers grew to approximately 85,000 at the end of the second quarter compared to 70,000 at the end of the first quarter. This was an increase of 21% sequentially and 52% year-over-year as a result of the continued migration of marketing services clients to our SaaS platform. SaaS ARPU decreased to $333 due to promotional pricing discounts and the timing of billing for many customers who were onboarded in the last month of the quarter. As a result, we received only a prorated portion of their billing, which negatively impacted ARPU for the quarter. However, we expect ARPU to recover in the second half of the year as these customers are billed for the full period, and we continue to upsell additional centers to existing clients and the expiration of promotional pricing. Second quarter seasoned net dollar retention was 94%, an increase of 500 basis points year-over-year. Moving over to Marketing Services. Second quarter revenue was $146.3 million and above guidance, primarily due to the strength of digital revenue above expectations. Second quarter marketing services adjusted EBITDA was $49.1 million, resulting in an adjusted EBITDA margin of 34%. Second quarter marketing services billings were $125.5 million, representing a decline of 28% year-over-year. Our marketing services billings were impacted by the ongoing success in transitioning our marketing services clients to our SaaS platform. Second quarter consolidated adjusted gross margin was 69%, an increase of 220 basis points year-over-year. Second quarter consolidated adjusted EBITDA was $59.3 million, representing an adjusted EBITDA margin of 26%. Finally, our net debt position was $339 million at the end of the second quarter. Our leverage ratio was 1.96 times net debt to EBITDA, which is well below our covenant of 3 times. Now let's discuss guidance for the third quarter. For the third quarter, we expect SaaS revenue in the range of $82 million to $84 million. We are reiterating our full-year guidance range of $326 million to $329 million. For the third quarter, we expect SaaS adjusted EBITDA in the range of $9 million to $10 million, and we are increasing our full-year guidance range to $30 million to $32 million. For the third quarter, we expect Marketing Services revenue in the range of $94 million to $97 million. And for the full year, the range is adjusted to $485 million to $492 million. For the full year, we expect Marketing Services adjusted EBITDA to be in the range of $128 million to $131 million. As a helpful guide, you can model EBITDA margins to be in the mid-teens in the second half of the year. I'll now turn the call back over to Joe.

Thanks, Paul. You will have noticed that our ARPU was down a little bit this quarter. I want to just mention that that's a part of the choppy metrics we see as we're transitioning this business from one business to another. Some things happen in clumps, so you can't always draw a perfect straight line on these things. But we have a defined process for growing these customers, where they're getting tech touch, they're getting automated follow-ups, they're getting sales contacts, and we are, in fact, seeing our seasoned customers grow in the mid-teens, and that's happening because they're using the product and with usage comes more seats, buying more signature packs, and more add-ons by upgrading the higher levels of software so they can access more of the AI elements. So we are seeing a steady conveyor belt of growth once our customers get in and embedded down. And we have a defined kind of automated process that's working it. It's not happening by chance. So please don't worry about ARPU. ARPU, we've guided was going to go from about $4,000 a year to about $7,000 a year. All that's still in place. We're still tracking with that sort of result even as the number bounces around a little bit. And I think even this year, you'll see it begin to trend back up. So also, part of the reason that we're able to upsell customers is that we have more products to sell them. We've been building and improving the products, adding more packs. And you can expect that as we finish this year going into next year, we're adding more products. So there will be even more product to sell as we move forward. Another question we're often asked is, might we do any M&A. And frankly, with our prior debt structure, we were really constrained. The new one does begin to breathe some flexibility into our world as time goes by. And we believe that M&A is at least now doable, and we've been able to begin to look at some things. So that could add some interest going forward. So just to wind up here, we had a really strong start to the year, and we are on track for our SaaS revenue to account for over 40% of our consolidated revenues in 2024. And as I've said previously, as we look forward to 2025, it will be more than 50%. And so during 2025, our SaaS business will actually be bigger than our Marketing Services business. So we're pretty excited about getting to that milestone. With that, I'll turn it over to the operator for questions.

Thank you. Your first question comes from the line of Arjun Bhatia with William Blair. Please go ahead.

Hi, thank you and very nice to see the accelerated transition from Marketing Services. Wanted to start out with, Joe, I think usually when I look at your SaaS performance in any given quarter, it would come in above the midpoint of your guidance range and I think we were slightly below this quarter. Was there anything outside of the ARPU dynamics and the transition that surprised you this quarter in terms of the SaaS performance?

These metrics can be a bit unpredictable as we navigate through. You've asked about the current environment, and I would say we primarily serve a different type of customer. Our customers are those engaged in challenging tasks, focusing on essential repairs rather than optional enhancements. They are definitely feeling the pressure of the current situation, yet we are experiencing strong sales volume due to the increasing adoption by small businesses. When faced with options ranging from good to best, customers tend to choose the more affordable alternatives. This is beneficial for us as it allows us to attract them to our platform, increase our subscriber base, and implement a structured approach to grow these customers. For our long-term customers, we are observing significant growth in average revenue per user. Although the overall climate isn't great, we are targeting more established businesses, either from our existing customer base or referrals from them, rather than startups. It's not a highly enthusiastic market where everyone is eager to purchase the top-tier products. Instead, customers are proceeding with more caution. Nonetheless, we continue to make steady progress in acquiring new subscribers, and this trend is evolving.

Alright. Yes, that makes sense. I appreciate that. As these customers transition and you notice an increase in the number of SaaS clients, I assume many are entering marketing centers, as you've indicated. When you consider their first-year mark and a growth of 15%, regarding expansion, do you want them to increase their usage of the marketing center and enhance their engagement with a specific product? Or do you want them to explore the business center? What are your expansion priorities as you experience this significant influx of customers on the SaaS side?

Yes, I think the best scenario is they add another center because that comes with a lot of margin and a lot of additional engagement with the company. So adding another center is the primary goal. But there are lots of little milestones before the big one, where maybe they begin to use our signatures and maybe they start getting involved with our team chat. SaaS center is the key focus. And as I think we pointed out in the information here, we're seeing robust month-over-month growth in additional centers. I know you understand this well. The cost of acquiring that customer for the first time and getting them set up, as you might call it, has a big upfront cost. But as time goes by, adding additional centers brings real operating leverage. And that's the shift we are now making. We've got another center coming later this year, and as we look at next year, customers are not just on a single center, but on two or three in some cases, that's where things really start to ramp for us. And I know you've followed other companies in the space that have similar strategies and have seen each new addition lead to further growth and higher margins.

Perfect, very helpful. Thank you.

Thank you, Arjun.

Your next question comes from the line of Scott Berg from Needham & Company. Please go ahead.

Hi, everyone. Nice quarter. Thanks for taking my questions here. I guess I got a couple starting on the customer acquisitions or the SaaS additions in the quarter. Obviously, it was a really large jump quarter-over-quarter. I think we probably all assume, and I think Joe, you commented on most of them are coming aboard as marketing center customers. But did you see customers come aboard maybe more in any of the other centers as well or is it really all just kind of marketing center-driven?

Marketing centers have eclipsed the business center as our fastest-growing product. It's not the biggest product because the business center has been around for a long time, but sales coming in day over day, week over week, we're seeing the marketing center just grow rapidly. As I mentioned in the past, it's a much smaller leap from purchasing marketing and advertising services from the legacy company to buying a business tool for growth. We're asking them to incorporate a significant change to their business and switch to a CRM and begin to utilize all the functions available in the business center. We've humorously said, that's kind of like asking them to eat the broccoli. It's good for them. It will improve their business. But marketing centers are like French fries; they bring in more business. And so there's just been a lot of enthusiasm and energy surrounding the marketing center. So it's currently the hot product.

Fair enough, good thing I like my broccoli, I guess. I am cool with that. To kind of follow-up on the SaaS additions in the quarter, Joe, you gave a lot of color around the monthly ARPU number and in this environment, you can certainly understand promotional pricing to get customers on board. How do we think about that trending? Is that a 90-day price, is that a 60-day, maybe 180-day price? How do you expect that pricing to trend for those customers over the year and do you expect to run similar promotional opportunities through the end of the year?

I want to be clear. I think the biggest impact was when they came in because the way our billing works is sort of a prorated credit system. Some of them moved over very late in the quarter, even late in the month, so we only picked up partial billing. I think you're going to see it correct right away. It's really a bit anomalous this quarter. It isn't like we threw in some significant discount. We are easing customers over to make it easy for them. And honestly, that's going to provide us scope for future rate increases. We will gradually migrate them to the full rate over time and that will generate additional revenue when we look ahead to the year. To answer your question, there will be more promotional activity as we continue this transition. We have a significant customer base that we're targeting, and we're finding a much higher level of interest in making the move over with the marketing center. Additionally, I want to emphasize that the decade of small business SaaS has progressed, and it's much more evident to people that they should be making this move now than it was even two or three years ago.

Very helpful. Thanks for taking my questions.

Thanks, Scott.

Your next question comes from the line of Daniel Moore from CJS Securities. Please go ahead.

Thank you. Good morning, Joe, good morning, Paul. Joe, you touched on a few of these in the prepared remarks, but can you elaborate on some of the examples of AI that you've implemented there and maybe some of those you're developing and are those tools more critical as a selling tool or retention tool from your perspective?

Well, those are great questions. So what we've done is we are trying to make it easier for our base. Our base consists of service-oriented individuals like plumbers and electricians. Many of them are quite busy doing the work they specialize in, and when faced with a blank page to create content about their services or products, they often struggle to move forward. Thus, one of the simplest enhancements we're implementing is using AI to assist them in developing content for their landing pages, promotional offers, product descriptions, and notably for their social media posts. In today's environment, active posting has become essential for small businesses, and we provide our pro editor and other services that guide and support them through this process. This takes away the challenge of facing a blank page. It's a lot easier for them. This has proven to be a significant value-add at the point of sale. Furthermore, customers who adopted this enhancement a while ago have seen an increase in their satisfaction scores and improved engagement on the platform. They are getting more value from it even if they adopted prior to the launch of this feature. So we like to say, 'Your Thryv just got better.' And this has been a positive addition for us.

Helpful. Just a quick housekeeping, I assume the tweaking guide slightly higher profitability in SaaS, slightly lower in marketing services. Is that simply a function of your concerted push to convert more customers or is there anything else going on there?

I think that's a big piece of it. The margin lift is largely coming from when we sell a new customer, you have all this upfront cost. But when you just add an additional center to a standing account, it brings great leverage. You're seeing that now. And I think what you're going to be writing about a lot in 2025 is this platform strategy is playing out beautifully for us. It’s enabled us to drive profitability and margins significantly. I've always said we're working hard to be a Rule of 40 company, and we think we can achieve that strongly in our EBITDA line. We're already scaling a bit, and our SaaS business has been profitable for many quarters, and that's beginning to show strong growth as we add further centers. We have another center set for release before the year's end, which will provide even more products to sell as we move into next year.

Still my last question, which is just an update on timing of potential rollout of the next new center and whether there's likely to be a freemium option for that, at least early on as well? Thanks again for the color.

Yes. I don't have exact details to share today regarding timing. What we've guided is that we'll get it out before the end of the year, and I can confirm that will happen. As for your second question, we are slowly learning about this freemium model and how to effectively implement it. We're planning to allow customers to benefit from this new offering on a trial basis, allowing them to experience it without a full upfront cost. This strategy helps establish a positive relationship right from the start as they see value before making any payments. We're excited about how this will unfold.

Alright, thanks again.

Thank you.

Your next question comes from the line of Rob Oliver from Baird. Please go ahead.

Great, thanks, good morning. Joe, yes, the standard strategy appears to be playing out nicely for you guys. I was just wondering if we can get an update on Command Center and also as you think about the cadence of center rollouts over the next couple of years, how should we think about that? I mean, I know you spent a lot of time with customers, and you're pretty in tune with the opportunities there, there must be certain elements within the platform that are emerging that have your team excited. So how should we consider the cadence of incremental center rollouts? And then I had a follow-up to involve Paul in this conversation here.

Yes. So I think the biggest takeaway is that we definitely have significant demand in the market from our customers for more functionality. Some of that they can achieve in our app store and our marketplace through integrations and partnerships, but we are focused on addressing more of their needs and have been working on those for the past couple of years. One such product is poised for launch soon, while another is also far along in development. We remain optimistic about our previous rollout forecasts. However, these opportunities are not all equal—some will be larger than others, and we expect varying pricing models for each. Regarding the Command Center, which we launched late last year, I would describe the initial rollout as Version 1. We are diligently iterating and refining it into subsequent versions. Initial interest has been strong; however, similar to many new software products, it hasn't immediately gained traction like we hoped. It requires some time to dial in both the product itself and our marketing approach. We're currently navigating through this cycle just as we've seen with our marketing center. I expect that, like the marketing center, Command Center will eventually prove to be a key growth product, expanding our customer base. We'll be positioning it as a first experience with Thryv that allows users to engage without a full purchase upfront—a try-then-buy model aimed at attracting new users. I wanted to clarify that the concern noted earlier about running out of customers is addressed with this Command Center initiative, as they represent a future growth avenue.

It does. Yes, that's great color. Thanks, Joe, I appreciate that. Paul, a question for you. Just to go back to the ARPU topic. I know Joe told us not to worry about it, but I guess our job is partially to worry a little bit. So you did mention that you expected ARPU would be better in the second half. It's been down four quarters in a row, and it kind of accelerated down this quarter. You do have some, I think, some easier comps coming up, but just wanted to get a sense for what gives you the confidence that we should see the ARPU start to head back up? Thank you.

Yes. There are a number of factors like Joe mentioned. A lot of the drive we are working to move these customers over. We've made a change in our commission plan to drive the number of center sales, and you're witnessing the effects here with several ads that we've done recently. A large number of them came in partially during the last month of the quarter which set us up for a strong billing period in subsequent months. Therefore, as we transition through July to September, ARPU is expected to naturally rebound. We are confident that this was a temporary decline, and we anticipate ARPU to trend upward as we move into the second half of the year.

Great, thanks guys. I appreciate it.

Thank you.

Your last question comes from the line of Zach Cummins from B. Riley Securities. Please go ahead.

Hi, good morning Joe and Paul. Thanks for taking my questions. Joe, I just really had a question around the potential leverage we could see in the SaaS segment. I mean, it's nice to see the adjusted EBITDA guidance raised there for this year. But how are you thinking about that potential leverage as you exit this year and move into 2025? It seems like we're potentially entering an inflection point where adjusted EBITDA on a consolidated basis could remain steady or potentially increase from these 2024 levels?

Well, that's such a good question because you are an astute observer of the industry, and so am I. If you look at some of these other companies that have platform strategies and have seen significant growth by adding additional products, you begin to see comprehensive margin improvements. We’re experiencing something similar in our SaaS business right now. While I cannot provide precise guidance, I’d like to emphasize that the growth in EBITDA from our SaaS business will effectively offset the gradual decline stemming from marketing services. We are at that stage now. Furthermore, as we move into next year, the SaaS business is expected to become our primary revenue source. We are looking forward to potentially joining the ranks of exceptional publicly-listed SaaS companies and standing out with competitive metrics. Our net dollar retention is currently in the mid-90s and will be ramping up towards 100 over the medium term due to the successful selling of additional centers. Our growing gross margins strengthen our position even further. I truly believe that we could be seen as a strong Rule of 40 type of company, and when we eventually make it to those SaaS rankings, I believe we’ll leave a positive impression.

Got it. That's very helpful. And then my one final question here towards Paul is how should we be thinking about free cash flow generation with the new debt facility and just given the accelerated conversion activity that we're observing within marketing services?

Yes. My main message is if there are any concerns about our ability to meet amortization expectations, you shouldn’t worry. We’re committed to fulfilling that requirement. Our mandatory amortization has been significantly reduced from previous levels, so we feel secure about our cash flow management related to that. We’re still assessing potential opportunities for utilizing our cash flow effectively in the future.

Understood, that’s helpful. Well, thanks again for taking my questions and best of luck with the rest of the quarter.

I will now turn the call over for closing remarks. Please go ahead.

Thank you very much. Yes, to wrap up, we discussed cash and the company has traditionally generated substantial cash flow. In the past, this cash flow primarily went toward debt repayment. However, with our new credit facility, we will gradually build flexibility over time. We no longer have a 100% cash sweep in place, and this added capacity excites us. Our foremost priority continues to be product and engineering, ensuring we deliver the best software, optimize its development, and maintain interoperability for our customers' ease of adoption. We've established continual communication with our engaged customers regarding what they seek from us next and where they experience any challenges with our product. That priority always comes first. Additionally, due to our low share price, share buybacks could present an option. We're observing the market interest in potential acquisitions for some of these SaaS companies, and the pricing seems to be stabilizing, opening up opportunities for us. I believe we've made notable progress even while faced with constraints in cash flexibility. Moving forward, we are well-positioned in line with the significant trend of small businesses migrating to the cloud. The 25% SaaS growth and 50% subscriber growth are figures that we take pride in, and we anticipate further positive developments in the future. With our crossover point approaching, it's an opportune time for people to consider Thryv. Thank you, everyone.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.