Earnings Call Transcript - THRY Q1 2022

Operator, Operator

Ladies and gentlemen, good afternoon. My name is Abbie and I will be your conference operator today. I would like to welcome everyone to the Thryv First Quarter 2022 Earnings Conference Call. Thank you. I would now like to turn the conference over to Cameron Lazard, Director of Investor Relations and Capital Markets. Mr. Lazard, you may begin your conference.

Cameron Lazard, Director of Investor Relations and Capital Markets

Good morning and thank you for joining us on today's conference call to discuss Thryv's first quarter 2022 financial results. With me on today’s call are Joe Walsh, Chairman and Chief Executive Officer; and Paul Rouse, Chief Financial Officer. Before we begin, I would like to remind you that shortly before today’s call we issued a press release announcing our first quarter 2022 financial results. We also published an 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 our Investor Relations website. With that introduction, I would like to turn the call over to Joe Walsh.

Joe Walsh, Chairman and Chief Executive Officer

Thank you, Cameron and thank you all for joining us on today's call. Q1 was yet another strong quarter for Thryv, with its revenue and EBITDA all beating expectations, so we are raising our guidance. Let's jump into the headlines. Total SaaS revenue grew 29% in the first quarter. SaaS subscribers are growing nicely, now at 47,000 subscribers, so we are on track for double-digit subscriber growth. We had previously said that we thought we could achieve a better balance between subscriber growth and ARPU growth, and that’s beginning to play out, as demonstrated by these numbers. Engagement is still really good and increasing. Monthly active users were up 16% year-over-year, with our daily and weekly cohorts growing even faster at 21%. People are really engaging and using the software, which has been our North Star—driving to that engaged user. Retention remains solid. Seasoned churn is steady in the mid-single digits, which is world-class when managing very small businesses as we are. Seasoned net dollar retention is now 93%. We had an Investor Day about a month ago in New York City. It was exciting for us to meet many of our investors who have supported us and meet them in person. We outlined how we see this decade playing out with the mega trend of small businesses adopting cloud tools, which powered enterprises in the last decade. We talked about the platform role we believe Thryv can play within this greater ecosystem. We outlined a goal of reaching $1 billion in SaaS revenue by 2027, and $4 billion in 2032. We are confident that these are realistic targets, and we laid out the metrics by which you can track our progress, the levers we'll use to get there, and the signposts along the way. If you missed that Investor Day, you can go to our website and check out the presentations and videos to learn more about us. We believe this year is off to a great start. So, with that, let me turn it over to Paul Rouse, who will take you through the numbers.

Paul Rouse, Chief Financial Officer

Thank you, Joe. As a reminder, we will focus on total SaaS and total marketing services results, which include both domestic and international operations. This is how we provided guidance to start the year and will continue to do so going forward, as we believe this will be more helpful in modeling the business. Let's discuss our first quarter results, starting with our SaaS business. First quarter total SaaS revenue was $48.2 million, an increase of 29% year-over-year, ahead of our guidance range. First quarter SaaS adjusted EBITDA was a negative $6.8 million, which is better than our initial outlook. The reason for the improvement was due to delaying key product and engineering investments to future periods. Total SaaS ARPU grew to $352 for the first quarter, an increase of 16% year-over-year. Total ending SaaS clients were 47,000 for the first quarter. As previously stated, we expect a balanced growth between subscriber growth and ARPU expansion, which is reflected in our 2022 SaaS revenue guidance. Seasoned net dollar retention was 93% in the first quarter. As a reminder, seasoned net dollar retention represents clients that have been with us for over one year. Monthly churn remained stable in the quarter. Moving over to marketing services, first quarter total marketing services revenue was $260.2 million and ahead of guidance. The reason for the overperformance was due to the Vivial acquisition, which contributed $23 million in the quarter on a reported basis. First quarter total marketing services adjusted EBITDA was $90.5 million, resulting in an adjusted EBITDA margin of 35%. Please note that our recent acquisition of Vivial Holdings had a negative impact of approximately 380 basis points on adjusted EBITDA margin in the first quarter. First quarter total marketing services billings, excluding Vivial, were $222.6 million, a decline of 90% year-over-year. As consistent with previous earnings calls, we are providing billings and additional operational metrics to give our investors better insight into our operational performance. Billings data will show a steady decline in our marketing services business, which has shown to be lumpier on an accounting basis due to the extended lifecycle of our directories. This data is provided in our Q1 investor presentation available on our Investor Relations website. Turning now to profitability and leverage for the consolidated business, first quarter consolidated adjusted gross margin was 67%. First quarter consolidated adjusted EBITDA was $83.7 million, representing an adjusted EBITDA margin of 27%. Finally, our net debt position was $567.5 million in the first quarter, after accounting for the $22 million we borrowed for the acquisition of Vivial Holdings. Our leverage ratio for the first quarter, in accordance with our credit facility, was 1.55x net debt to EBITDA, well below our covenant of 3x. Now, let’s discuss guidance for 2022. For the second quarter of 2022, we expect total SaaS revenue in the range of $50.5 million to $51 million, representing growth of 22% to 23% year-over-year, and an adjusted EBITDA loss in the range of $6 million to $6.5 million. For the full year 2022, we are raising our guidance for total SaaS revenue in the range of $208 million to $209 million, representing growth of 22% year-over-year. We are reiterating our SaaS EBITDA loss in the range of $21 million to $25 million. For the full year 2022, we are raising our guidance on total marketing services revenue in the range of $905 million to $920 million and raising adjusted EBITDA to range from $315 million to $320 million, representing an EBITDA margin of 35%. Consistent with previous calls, we will provide quarterly ranges for marketing services revenue for the remainder of the year, which can be found in our first quarter investor presentation on our website. We provide these figures because the sales canvas process allows for strong visibility into future revenues, and because print publication timing is not generally consistent quarter-to-quarter. Now, I will turn the call back to Joe.

Joe Walsh, Chairman and Chief Executive Officer

Thanks, Paul. A few more items before we go to Q&A. First, I'd like to start with Vivial. We made the acquisition in Q1, and we're off to a great start with Vivial. We’ve picked up excellent people who truly understand the local market and have strong customer relationships, and they will greatly contribute to the overall Thryv story. We’re excited about the Vivial employees. We've also picked up some great customers, and they're already beginning to adopt our SaaS product. Looking forward to 2023, you will see strong growth coming through from this new leg we’ve added with Vivial's substantial customer base. Another area that I think will be very strong next year is international. We recently hired Marie Caron as President of International Markets. Marie has extensive SaaS experience and has worked around the world, creating partnerships and affiliates. It will be her mission to rapidly expand internationally. She possesses the experience to make it happen. As you look at your models for '23, international will become a significant part of the story, in addition to the strong results we’re continuing to see from the U.S. With that, I’d like to turn it over to questions. Operator.

Operator, Operator

Thank you. And we will take our first question from Arjun Bhatia with William Blair. Your line is open.

Arjun Bhatia, Analyst

Perfect. Thank you. Joe, maybe we can start with you. I just wanted to get a sense for what you're seeing in the customer base and the broader SMB market in terms of sentiment and appetite to invest in software at this time. I know there have been a lot of macro headlines regarding inflation, interest rates, and recession risk. But I'm curious, it seems like it was a good quarter from a customer acquisition perspective; however, we'd love to hear about what you're seeing and hearing from customers.

Joe Walsh, Chairman and Chief Executive Officer

Arjun, yes, you're right. There's certainly a lot of noise from the war, interest rate changes, and challenges in hiring, and we do hear these concerns. Nevertheless, I would say that small business morale is not as bright as it was, maybe when we were experiencing strong incentives earlier. However, it hasn't affected sales. We're still seeing strong demand overall due to the unstoppable trend of people moving from analog to digital; the transition to the cloud is still very much in play. if anything, the challenges around hiring are causing businesses to seek modernization because it’s labor saving. Some aspects of Thryv, such as key marketing automation tools, scheduling tools, or reminders, are helping businesses streamline operations. For example, just before this call, I received two calls from my dentist trying to confirm my appointment. And by the way, my dentist has thrived. They're over 100 years old, and I'm having a hard time getting them to adopt technology. Overall, demand continues to remain strong. We are reporting on our strong performance from Q1 and are well into the second quarter, where things are continuing to go well. We're very optimistic about the market, evidenced by our decision to enhance our targets for the year.

Arjun Bhatia, Analyst

Perfect. Thank you. And maybe a follow-up for Paul. I think you mentioned something regarding SaaS EBITDA and that there were some product and engineering investments that were delayed. Can you provide some background on this, and should we be concerned about impacts on the product roadmap as a result of those delayed investments?

Joe Walsh, Chairman and Chief Executive Officer

Paul and I will share this answer, as I tend to overlap with him. One major factor was the acquisition of Vivial. We had planned to hire product people and engineers, and some additional sales representatives. However, with the Vivial acquisition in early January, we acquired a lot of those resources, which has jumpstarted our plans for the year. This contributes to our optimism about our performance this year, as these resources came with the acquisition instead of incurring individual expenses. But that doesn't mean we will hold back on our planned investments; we're excited about our progress and will stick to our targeted investments for the year.

Paul Rouse, Chief Financial Officer

Perfect.

Arjun Bhatia, Analyst

Perfect. Thank you both. Very helpful. Take care.

Joe Walsh, Chairman and Chief Executive Officer

Thanks, Arjun.

Operator, Operator

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

John Godin, Analyst

Hey, everybody, this is John Godin for Scott Berg. I appreciate you taking my questions. First, I wanted to delve deeper into engagement. What are some aspects you see resonating most with customers, especially in relation to add-on modules, newer features you’ve launched, or investments in customer success? Any insights on this would be helpful. Thank you.

Joe Walsh, Chairman and Chief Executive Officer

Yes, the progress on engagement is impressive. We recently had a Board meeting and examined the growth in engagement, noting that it is outpacing customer growth by 5 to 1. It's encouraging. We view it as a leading indicator for retention and low churn moving forward, which will help us grow ARPU by delivering more products over time. The biggest driver of this strong engagement is the refinement of our onboarding process. We have a very effective onboarding tool that facilitates quick setup for users. We have significantly improved our onboarding process, enabling many more users to adopt the tool faster. Additionally, we are focusing our sales calls and onboarding around solving specific problems that small businesses face rather than providing generic product tours. We know from prep calls why a user purchased the service, whether it was for scheduling, payment, or other solutions. We confirm at the call's end that we've addressed those needs and assure them that we'll build from there in future communications. We're using a targeted approach rather than a broad one, which has yielded great success. Furthermore, our product innovation has accelerated this year, with more releases than last year combined, due to increased investments in product and engineering.

John Godin, Analyst

Got it. That's helpful. Additionally, could you update us on the mix of new customer growth from conversions versus the new channels you’ve been ramping up?

Joe Walsh, Chairman and Chief Executive Officer

Thank you. You can think of our customers as coming from three sources. Approximately one-third come from our existing marketing services customer base, sometimes referred to as our legacy customers. Another third comes from referrals from satisfied customers. As our local sales network sells to new clients through referrals from previous customers, the pace of these referrals is increasing with our higher net promoter scores and reduced churn rates. Occasionally, investors inquire about when we'll exhaust our existing customer base, but the customer base continues to generate referrals, while we continually bring in new businesses as well. The last third comes from various new channel initiatives, in which we’re still refining and improving. Each quarter, we’re getting better at inbound sales, content marketing online, and advertising to drive interest toward our website. We've had success with partners, affiliates, and a multilocation franchise channel, which has started strong this year. So, we’re making good progress overall, but each area is developing at different speeds.

John Godin, Analyst

Awesome. Thank you, guys.

Operator, Operator

And your next question comes from the line of Zach Cummings with B. Riley Securities. Your line is open.

Zach Cummings, Analyst

Yep. Hi, good afternoon, Joe and Paul. Congratulations again on the strong results, and thanks for taking my questions. Joe, in terms of ARPU growth in the SaaS business, I know you've stated we should expect more balanced growth between new customer acquisition and ARPU this year. Can you discuss opportunities to continue growing that ARPU number, particularly in relation to rolling out the new centers you mentioned at Investor Day?

Joe Walsh, Chairman and Chief Executive Officer

Certainly, new centers will play a significant role. If you consider our long-range targets set during our Investor Day, we aim to raise average revenue per customer from about $4,000 a year to approximately $6,000 in the next five years. In comparison, a company like HubSpot is achieving nearly $12 right now, so we believe that target is attainable. As our customers become more engaged, they will utilize more of our products and onboard more employees. Our local marketplace customers have a considerable advantage over those who aren't using cloud solutions. They have a better chance to be discovered online and can streamline their operations, giving them an edge in their industries. We've been observing customers’ spending with us expanding by five times as they grow alongside our offerings. Thus, helping our customers succeed will also drive our growth. Adding new centers is critical, and we plan to introduce at least one substantial center annually while developing our roadmap for the upcoming years.

Zach Cummings, Analyst

Understood. And my final question is about Vivial. Can you share more about the revenue contribution we saw in Q1? It looks higher than what I estimated in my model; can you also speak to the synergies within your existing domestic marketing services business and the potential to convert some of their customers over to the SaaS platform?

Joe Walsh, Chairman and Chief Executive Officer

The last part of your question sums up our rationale for acquiring Vivial. We want to convert Vivial’s clients to SaaS subscribers. At first glance, it may seem counterintuitive since their clients initially purchased marketing services. However, we've refined our process to have that discussion, and we've already had hundreds of Vivial clients adopt our SaaS offerings within weeks of training our salesforce. The sales team is excited about our new mission of guiding small businesses into the cloud and helping them compete effectively in the market. Therefore, we anticipate that we will gain thousands of additional SaaS subscribers from the Vivial base over the next three years, which was indeed our purpose for the acquisition. The marketing services side is also very beneficial. We realized numerous synergies due to many duplicated costs and our ability to integrate Vivial's operations into our own. It has been a successful endeavor for us so far, and we feel very positive about Vivial's contribution.

Zach Cummings, Analyst

Understood. Great to hear. Well, thanks for taking my questions, and best of luck in Q2.

Joe Walsh, Chairman and Chief Executive Officer

Thanks, Zach.

Operator, Operator

And your next question comes from Shrenik Kothari with Baird. Your line is open.

Shrenik Kothari, Analyst

Hey, Shrenik on for Rob. Firstly, congratulations on the Entrepreneur Awards. That's well-deserved. Thryv SaaS ARPU was flat sequentially. I understand you reiterated your growth strategy, highlighting the year-over-year increase in customer growth as well. Could you discuss the drivers of these strategies, particularly from a vertical perspective? You mentioned specific offerings for different verticals, like dental, for example. Can you elaborate on the traction you're seeing there with customer acquisitions and overall contribution?

Joe Walsh, Chairman and Chief Executive Officer

Certainly. Thryv aims to be the platform small businesses rely on. Businesses that start with a few point solutions often feel overwhelmed trying to manage multiple services from different vendors. This often leads them to seek a complete solution. We're poised for a significant uptick in businesses transitioning to a single platform. While the market has gradually become more amenable to platforms, we believe we are in an advantageous position as this trend unfolds. We go to the market with a competitive edge. Some competitors focus narrowly on niches, offering specialized solutions tailored to specific industries, e.g., pest control. By leveraging our strengths in home services, verticalizing our offerings seemed like a natural progression, both in how we present ourselves and how we fulfill services. As we interact with potential customers in various verticals, we customize our approach to address their specific needs effectively. We are still early in this journey, and there is much work ahead, but we are experiencing traction, which is reflected in our customer growth numbers. We've committed to balancing our growth this year to address prior criticisms surrounding previous ARPU-driven growth. I gave assurances that our subscriber growth activities were picking up momentum, and that has been borne out in our current performance as we see strong subscriber growth moving forward.

Shrenik Kothari, Analyst

Got it, got it. Just one quick follow-up on ThryvPay. It seems that traction continues to grow. I observed that the TPP number has reached $100 million annualized, which is an increase from the $60 million highlighted last quarter. Could you provide insight into the attach rate and market share progress thus far? I remember you mentioning it was greater than 50% last quarter; any updates?

Joe Walsh, Chairman and Chief Executive Officer

Yes, the trend within our customer base is that ThryvPay has become the preferred payment option. While customers have the choice to use their existing payment services, many quickly pivot to ThryvPay since it is highly integrated, has lower fees, and is incredibly user-friendly. Consequently, we are seeing an ongoing shift towards ThryvPay from our users. Additionally, ThryvPay's freemium app—available to customers who haven't yet adopted Thryv—is starting to gain traction. It took us some time to refine the approval and onboarding processes, but we are witnessing significant momentum. In the next year or two, it will become a notable contributor to our performance, and we hope it may also drive new SaaS subscribers our way. It's still early, but the potential for ThryvPay to retain customers is clearly evident; once they start using it, they are less likely to discontinue their software subscriptions.

Shrenik Kothari, Analyst

Got it. Thanks a lot, Joe. I appreciate it.

Joe Walsh, Chairman and Chief Executive Officer

Thank you. Thanks for your questions.

Operator, Operator

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

Daniel Moore, Analyst

Thank you, Joe and Paul, for the insights. You’ve covered most of my questions, but one more: at the Analyst Day, you mentioned franchise customer penetration as a key driver of growth mid to long term. Could you discuss your go-to-market approach here and the potential opportunity you observe?

Joe Walsh, Chairman and Chief Executive Officer

Yes, that initiative has gained traction this year. One unique situation we faced while pursuing the franchise market was the pandemic restricting attendance at franchise exhibitions; consequently, we experienced challenges acquiring new clients. However, those events have returned, and we are actively participating. We've established a solid social media presence related to this effort and are signing new franchise contracts. Marie Caron, our new International Leader, is transitioning to head this initiative internally. Considering her experience in this domain, we are optimistic about her positive impact. This approach will enhance our domestic as well as international outreach, particularly with franchises that have expansion plans outside the U.S. We are seeing promising results already, and we believe this growth will significantly enhance our performance in this area moving forward.

Daniel Moore, Analyst

Perfect. One last thing—if it’s in the prepared docs, I apologize if I missed it. What can we anticipate for Vivial's revenue and EBITDA contribution as part of the overall guided numbers for the full year?

Paul Rouse, Chief Financial Officer

We haven’t specifically broken that out, as we're blending both organizations and are merging operational expenses. Therefore, it's best to view it as one cohesive entity moving forward rather than as separate. We won't specifically talk about Vivial going forward; consider it integrated into Thryv as a whole. Yes, the impact of Vivial will enhance our overall numbers for the year, but tracking specific metrics will be challenging as we incorporate their customers into our systems.

Daniel Moore, Analyst

All right. That's helpful. Thanks again, and best of luck in Q2.

Joe Walsh, Chairman and Chief Executive Officer

Thank you.

Paul Rouse, Chief Financial Officer

Thanks.

Operator, Operator

And there are no further questions at this time. I will now turn the call back over to Mr. Joe Walsh for closing remarks.

Joe Walsh, Chairman and Chief Executive Officer

Thank you very much. To wrap up, we are positioned well, which is rewarding as we exceed our expectations during this call and raise our guidance. It's always gratifying to deliver better numbers than anticipated, which has happened repeatedly over the past quarters. We maintain a conservative stance for future guidance, so we hope to continue this trend. A significant mega trend is underway. The trend we experienced in the 2010s was enterprises migrating to the cloud. This upcoming movement of small, independent businesses transitioning to the cloud will be many times larger than that, as the market is vast and filled with potential. Those independent businesses will need these tools to stay competitive against larger entities and the role of private equity in the market. We are committed to guiding small businesses into the cloud and helping them take advantage of the devices they already have—whether it’s a phone, tablet, or other technologies—to run their businesses more flexibly. This includes keeping track of their operations and maintaining customer service efficiently. We provide businesses with simple solutions to enhance their customer interactions, ensuring they do not lose potential clients. Each day, we receive heartfelt feedback from our customers, grateful for the positive impact we’ve had, which fuels our team's passion. We appreciate the support from our investors, and we remain optimistic about the remainder of the year. Thank you very much.

Operator, Operator

And this concludes today's conference call. You may now disconnect.