Thryv Holdings, Inc. (THRY) Earnings Call Transcript & Summary

Hi, everyone. Thank you for joining us this morning at Needham's 24th Annual Growth Conference. My name is Scott Berg. I lead the research efforts on our enterprise software and SaaS research team here. Today with us, we have Joe Walsh from Thryv, CEO and newly Executive Chairman, I believe. Congratulations on that appointment. But I guess, Joe, to start off for those less familiar, how about giving a brief overview of who Thryv is?

Sure. No, thank you very much. I really appreciate being a part of your conference. My background quickly is I'm an entrepreneur. I started a directory company competing against the telephone company Yellow Pages business way back when as a young guy. Built it up for a few years, about 5 years sold it to a bigger company, spent a couple of years there, eventually sold out. And I joined a mom-and-pop yellow pages competitor called Yellowbook in Long Island. And we've built that over 20-something years into a -- $2 billion in the U.S. and about $2 billion globally, $4 billion overall. Took it public on the London Stock Exchange and -- world on -- at that time, digital marketing type opportunities. So that's my background. I see I'm getting unstable.

I wasn't sure it was me or you, but hopefully, we'll get through without a problem.

Yes, hopefully. So I -- after that, set up a Board advisory practice, which led me into SaaS software. I started working in the education space with Cambium Learning Group, which was the ticker symbol was ABCD. It was a public company. We sold software in 43 countries around the world for educational K-12 for kids. So that was an interesting experience. And then we were contacted by the people that owned the old telephone company Yellow Pages, looking for some help with a strategy. So my team and I went in and recommended helping small businesses with the cloud, and that's how Thryv began.

Well, let's start with the product because it's one of my favorite areas to talk about. I guess if you look back, why start the SaaS platform at Thryv? What was the opportunity at that point, did you think?

Well, the hardest thing for any SaaS company is to get a conversation with the business. That's -- it's just very difficult. It's -- people talk about CAC to lifetime value, cost of acquisition to lifetime value. That's always the big deal. And in this case, because the company already had a more than 350,000 customer base in small businesses that knew and trusted the company with this century-old relationship, we had the ability to have an automatic conversation. It happened every year. It happened automatically. It was an easy thing to do. So we were able to tell our story and it gave us a real kind of edge, a real unfair advantage when we started.

By the way, a point of housekeeping, I failed to mention this a moment ago is we will take audience Q&A after our questions that we have here. [Operator Instructions] Otherwise, feel free to e-mail me directly at [email protected], and we'll take those with the last 10 minutes. All right, back to products. I guess when you look at your product today, what type or size of customer do you typically market to today? And how do you view Thryv's functionality versus what's a really crowded market for marketing software?

Yes. So it isn't just a marketing software. I mean we have a very powerful CRM. We do estimates, invoices, payments, billing, reputation management. It does a lot, it's a big tool. So think about like what a salesforce.com might do for an enterprise company, Thryv does that for a small business. So we sit in the market well beneath -- obviously, well beneath Salesforce and even beneath like a HubSpot. But way above the little point solutions that are out there, there are hundreds of them, and we have much more functionality and capability than some of these various verticals that have cropped up. So we're in an interesting spot. Our customer size is really kind of 2 to 49 employees, but a particular concentration at 8, 10, 12, 15 employees, the small businesses. And we're really proud of the very strong engagement that we've been able to achieve and really unbelievably low churn, when you consider how small the businesses we work with are.

I actually put Thryv in kind of a newer space within enterprise applications. I've kind of called it customer engagement. It kind of sounds like where you would put it yourself, at least from how you describe it.

Yes. We sometimes say customer experience. But yes, it's allowing your modern consumer to interact with you as a small business in a more modern way. Rather than having to call you, they can make an appointment on your online appointment tool. They can exchange documents with you about the services you provide or jobs they want on or whatever. They can pay you electronically. They can deal with you in modern ways that they're accustomed to with other companies.

Sure. Sticking on the product theme. Outside of the SaaS solutions, you have a marketing services business, which you kind of obviously highlighted earlier and I don't ask this question to maybe be crass, but why isn't the Yellow Pages caps up dead today at this point? I mean most people -- I mean, it's crazy to me because I still get a phone book delivered to my house. It's just yellow pages today. It's not the white pages. But I think if you ask the typical consumer out there, they might think that it's not around, but it is. Any idea why it's still around today? All right. We're back.

Yes. Just a glitch there, but I got the question. Look, the Yellow Pages 12 years ago, 15 years ago, supported 7, 8 different competitors directories that were coming to your house. All of that's quieted down. There's really just us now. There's not a lot of other directories out there. And the market for Yellow Pages is gradually contracting. It's doing it in a demographic way. People that are kind of 60 and over are pretty habit knit, big time users of directories and they're still using them. And so the number of usage occasions is shrinking over time. And the revenue associated with the business is shrinking. But we've variabilized the cost structure in the business. It makes very high profit margins. We certainly aren't forecasting it to grow, but it will certainly be around.

All right. Welcome back here. Let's talk about a product addition from a year ago. I know you were enthusiastic about it. I think it was about 15 or 16 months ago. It was -- you added payment functionality on the platform. I guess, first of all, how does payments enhance the Thryv platform? And where are you all today in terms of maybe penetration or usage by your customer set, do you think?

We're doing really well in terms of adoption. A lot of our customers came to us with Square or Stripe or PayPal or something else. And they've switched to ThryvPay because it has some added functionality and we have a lower cost to use it. What we're finding is generating strong loyalty in our customer base. It seems like if your software pays you, that's a good thing. If you're getting paid by your software, you don't want to cancel it. So that's worked out really well.

Good. What are the economics like on ThryvPay for the company? Do you get basis points? Or is it on a per transaction basis? Maybe help understand that a little bit.

No, we get basis points, and it's growing nicely. I don't want to hold out anybody if we're a payment company or a payment play. Again, the purpose is really to drive engagement and usage in the software itself. But it's not insignificant. I mean it's definitely developing nicely, and we have further enhancements planned to make it a bigger part of the strategy. So I think if you have a tool like we have with 45,000 customers, pretty significant volume is being transacted out there. If we can aid customers in doing that, I think it's something we should be doing.

Sure. I guess if you look back since your IPO, what other kind of feature functionality enhancements are you kind of most excited about? And how should we view that innovation kind of strategy over the short term? Is this more extensions in areas that you're already in? Or could it be, maybe, bigger chunks of functionality to help really give you a platform extension?

Both. Our priority has been investing in engineering and products. That's really been our focus. And so we've quickened our road map, really extensive integrations with other software tools. I guess, most notably, Google, both with the whole Gmail, G Suite, the Google My Business, all of that, there's a seamless integration, which is really important to and very helpful for small businesses. Great interoperability with everything from QuickBooks and MYOB and Xero for accounting type stuff, to Shopify for people that wanted e-commerce enable. Many of the Constant Contact Mailchimp, things like that, that are out there that some people use as a point solution, we can simply plug it in and integrate with that in the data share. So we've made it easier and easier for our customers, for small businesses to live and work in an environment with interoperability. So that's been really important. We plan a pretty significant kind of blockbuster new product every year. Last year it was ThryvPay. We've got another new product in the market right now in a beta, which we'll be announcing a little later this year. We're having a big Investor Day in April, where we're going to kind of unveil all kinds of exciting stuff. But if you think about, for example, HubSpot's got hubs, they've got their Marketing Hub, right? And then they've got a Service Hub, a Sales Hub. Similarly, we're pursuing a strategy where to keep the main application from becoming too cluttered, you sort of come up with a couple of other ones, so the people can learn the tools that are clean and easy to use. The construct that Salesforce has used, HubSpot has used, we're using it to drive also. So you can look for additional significant centers coming as we go through the next couple of years.

Lastly, on the SaaS platform, at least at the moment, I know the company likes to give engagement metrics, at least on a quarterly basis. Can you talk about just general customer engagement trends with the platform made over the last year or 2? And as your brand recognition on the SaaS side has improved, has your retention also trended up more positively?

Yes, definitely. I mean we've cut our churn in half over the last 18 months, 2 years. It's been a phenomenal journey. And it's really been all about engagement. And part of it, if I'm really honest, is the software that we are offering today is way better than what we're offering 2 years ago. There's been a lot of ease-of-use innovation that we've brought into it. I mentioned earlier, a lot of additional interoperability. And so things that you could do in the software 2 years ago, you can now do easily. It's just super easy to do. And so we're kind of lowering the technical skills bar a ton as we keep getting it better and better and better. So we're really proud of that. And we're seeing it in time in app. We're seeing it in messages within the inbox. We track that kind of stuff. Payments accepted, invoices, issues, estimates put out, marketing automation campaigns launched, just all the different things that we can measure in terms of engagement and usage, we're seeing it.

Apologies, I guess I have 1 more on the SaaS platform. It's really more around your M&A strategy. I think if I look at your M&A strategy in the last couple of years, it's -- I know you've talked about moving a little bit from acquiring these marketing services, complementary businesses at low multiples. And now you're starting to look at, I think you call them zoos, but now you're looking to maybe change that targeting more SaaS-like applications. A, I guess is that accurate? And b, how should we think about your thirst or interest in acquiring other SaaS technologies?

Well, look, the company is super powered up until now has been the ability to have a quality conversation with small businesses. Hunting in a zoo, working with our -- within our existing customers. So where we've had opportunities to add to that zoo, add big groups of new customers with a deep relationship, we've done that. And most recently, in Australia, we added about 100,000 customers in Australia and became kind of a market-leading company overnight there through that acquisition. So we've been doing that. Our return on capital is very quick there because those companies don't demand super high prices. And where -- our company is valued at a premium to some of these others that we're acquiring. So it's very accretive, very natural thing for us to do and very synergy rich. So we will look to keep doing that where we can. What opens up for us as we began to achieve more of a SaaS valuation with our SaaS business is the ability to make SaaS acquisitions. And we've been in looking at a number of different -- both point solutions and things that we can potentially enhance our product, potentially add some customers, add some talent. We haven't done one yet. And in part because we haven't been able to achieve a reasonable price. There's been some high expectations out there in terms of pricing. If I'm really honest, I mean, we're not yet valued as a SaaS company. I mean there are some people who give us some of the parts valuation. But even there, we're getting a pretty significant discount to our peers. And I think what that misses is that we're a SaaS company with a big advantage, a big superpower. And that's this capability to go out and enter all these customer conversations. And keep in mind, we have more than 2,500 employees, have more than $1 billion in revenue, and our company makes hundreds of millions of cash flow. I mean it's super -- when you look at investing in something that has a high multiple that you're going to maybe experience profits in 3, 5 years from now, our company is very profitable today. So maybe the change in market sentiment has kind of come on a way a little bit.

Well, all of that said -- last time I checked so I just put out a big note on it last week, Thryv stock actually was the best performing stock in my coverage universe last year. So congratulations on that. So you've narrowed that chasm, but there's still a chasm. I certainly understand it. But I guess if you look back at the last year, what went so right for you to drive that outperformance? Because software was certainly kind of a bipolar year, if you want to call it that, right? But you guys had a fantastic year.

Yes. Look, you have to understand the back story here. We brought a new Board in September 1 of last year, so what's that about, 15, 16 months ago. That new Board switched the orientation of the company from make money today, make it right now, make your SaaS business profitable today -- remember, we had a double-digit EBITDA profit coming out of our SaaS business in the prior year in 2019. And we had a Board of people who were bothered that it didn't have as high a margins yet as a marketing services part of the business. And we were saying, what you're missing is the opportunity to really grow. And this new Board came in and did a deep dive, deep evaluation into the software, brought in Gartner, explored how the marketplace is and looked at the code, and the decision was taken to lean into growth and allow the SaaS business to kind of retain its earnings and even put a couple of pennies into it. Remember, it's a rounding error when you talk about $300 million on the other side of the house. So I think what's changed and what's been a big catalyst for us is we had been fighting this fight with one arm tied behind our back, without any investment really. We were almost harvesting the SaaS business. So instead, we changed the stand, started hiring more engineers, putting a lot more resources in the product. And our product road map really started to quicken. And then we put a few bucks into demand gen as well, which brought a lot more people to us. So you're seeing a steady ramp in growth for a product that was always great, but it's now gotten a lot better. so that was the catalyst. And the Board is very pleased with the returns. We far outstripped what we promised them in terms of what we said we could do. So they are now asking us questions like, well, how fast can you grow? If you did that much with a little bit we gave you, what could you do? And I think the thing that we've been trying to explain both to our Board and to the market is that this hasn't even started yet. The big show is between now and 2030. The small business market is only just now waking up to the cloud. They're buying little point solutions, maybe buying a little vertical, figuring out that they need to wholesale, put their operations in a cloud tool that automates things is just beginning to happen. Most of the sales cost that we make are to the unclouded. People who are using paper and pencil or using Excel spreadsheets or e-mail, or maybe one-to-one texting with their customers, not really using a platform. And they're frustrated because it's hard to keep up with the expectations of consumers when you aren't using a true platform. So the demand for Thryv will really take off over the next couple of years. And we want to basically ride that wave. We want to participate in that growth and lead it. And we will be left behind if we don't grow faster.

Sure. The natural follow-up to that is, so how fast can you grow? I'm just kidding. You're not guiding '22 or '23 here, we'll take that off the table. But I guess the natural follow-up from that is probably really, how do you change those -- that investment strategy in the short term at all? Or is it really just more of what you've done recently to drive the product and the customer funnel that's had success over the last year?

Well, look, let's be clear. We're watching the marketplace and how it's developing very carefully, and we do not intend to get left behind. We intend to scale up internationally, to be in markets as -- those markets that are maybe a couple of years behind the U.S., developed. And there's a large unserved group of small businesses here in the U.S. that are on cloud that are coming over. And maybe more importantly, there are a lot of small businesses that have begun to experiment and tinker a little bit with these point solutions. They've gone out and they've tried a little something, and they've had some success. And they'll be ready over the next 3 to 5 years to graduate to a bigger platform type tool like Thryv. We sit in an aspirational location in the market. Now if you're a SaaS investor in enterprise, you might think, oh, you've seen us, those guys are getting like $4,000 a year from customers. That's only tiny businesses. But there are scores of tools beneath us in the market that are $50 a month and $90 a month or something like that. Those customers that are using those point solutions as they add a second and third, get frustrated with all the log-ins and the sticky notes everywhere and I got logged out, now what do I do? Having the data entered back and forth. Small businesses hate data entry. They just hate it. So the fact that we've got a complete tool that's interoperable in the market where you don't have to re-data enter and you're logged in, you stay in, simple. It's an aspiration for a lot of these small businesses. And so they have to step up and spend maybe $400 or $500 a month to be in our program, but more and more of them are doing it. That's part of why you're seeing our season churn at 1.7%. We're really proud of that. I mean if you're really dealing with solopreneurs and tiny start-ups, you can't even get anywhere near that level of churn.

All right. Just as a reminder for everyone, we will be taking audience Q&A in just a moment here. I will ask 1 more and a couple have come in, so we'll start to take those. I guess the last question for me, Joe, is on capital structure, because it's probably 1 of the top 2 or 3 questions I get, especially right after product, is the company saw a significant amount of debt. But as you mentioned, you throw off a ton of free cash flow. Have you publicly discussed what your cap structure could look like in a couple of 3 years? Just trying to understand how much goes towards paying off the debt versus maybe looking at investment opportunities.

Yes. Our company generates an extraordinarily large amount of cash. Our debt-to-EBITDA is about 1.5x. So it's not exactly [ right that you get this ]. I would describe it as efficient capital structure management here. And we pay our debt down pretty fast. And so we store up additional capacity within our balance sheet pretty quickly. If you look back at the history over the last 5 years, we went to AT&T and Cerberus, and we bought their yellow pages operations called YP for $600 million, and then completely retire the debt. No time flat to the point where we were able to then go buy Sensis from Platinum and Telstra for a couple of hundred million bucks, with debt, no problem. We paid it down that quickly. And now that acquisition has worked out super well and we're rapidly retiring that debt. So it is self-generative, regenerative, because it generates so much cash. And our model for the marketing services side of our business are very conservative, and we've been beating them consistently and delivering a lot of cash. So as a very large shareholder in the company, and I've been steadily buying more as recently as a few weeks ago, I'm not interested in diluting myself by going out and diluting or raising a whole bunch of new equity unless there's some just amazing purpose for it. So I think you're going to see us able to easily pay down the debt that we have and make acquisitions out of that.

Got it. Again, if you want to ask a question, there is a Q&A window in the presentation screen. Feel free to enter there and it will pop up on my moderator screen here or you can e-mail me at [email protected]. The first question is, does the company need to keep the yellow pages, i.e., marketing services business, in order to have a low customer acquisition cost model for the SaaS business?

Well, that's a good question. I mean, look, every month, it seems like, some private equity guy calls me up and says, I got a great idea. Let's bust these things in half and we'll crystallize the arm here, because your SaaS business is being held back by your marketing services business. My time horizon and our Board and investors' time horizon is not 1 quarter. We're thinking about how can we participate in this massive wave of SMBs moving on to the cloud, and having a few thousand employee company with an international footprint and all the resources that we have by being combined, better enables us to compete that way. Now it is true that we gained an unfair advantage with a super low CAC to LTV when we get them out of the zoo, because we don't have to -- we just go see them anyway. We're having a normal conversation with them about this year's program, and it turned into taking a sale for Thryv. So that's really easy to do. And when we go outside the zoo, we're a lot more like another SaaS company. We've got to spend some money on demand generation. We've got to create content. We got to bring people to our website. We got to convert them down through a funnel. But I would argue, even there with our brand and with our scale, we have many advantages over some guy that's just only doing that. Keep in mind, we also get a lot of referrals out of that space. Right now, about 1/3 of all the customers coming over the chasm are coming out of the zoo, 2/3 are coming outside the zoo. But of that 2/3, about another 1/3 are referrals from the zoo. So part of it is in a lot of the businesses that we work with, the traditional yellow pages customers, marketing services customers, are not the fastest early adopters, if I'm honest. They're taking some time to get there. We have 45,000 customers out of 350,000. So it's got a long way to go. So it is -- the opinion of management that the company is stronger with them together and that we -- the blending of our very low CAC out of the zoo with a little bit higher CAC when we go outside is an advantage that few other software companies have. I mean one other software company could you talk to that's, like us, it's our size, that's got the big business behind it, it's big cash flow behind it and all these resources, we think it's a distinct advantage, not a disadvantage. And the fact that there's a valuation -- so I guess, challenge to me is it's temporary. I think the market will see how durable our growth is. And I think honestly, what other software company is growing as fast as we are valued where we are? You're the analyst, you would know.

I like 40% growth. That's what your SaaS business is growing right now. There aren't many companies growing above that 40% range. So I would certainly concur with that thought.

And how many of them can you buy for 5x EBITDA?

Somewhere between 0 and 0, I think. All right. Next question here is on customer account. The company has made a transition from a freemium model to just all paid. Net new customers, while that's had a benefit to ARPU, customer count growth has been minimal. When should we see that inflect a little bit more going forward and actually see customer count numbers actually expand?

That's the best question yet. Look, that's the big issue over -- like if I had a thought bubble hanging over my head here on the screen. Almost all of our growth, like 90% of our growth last year, came from ARPU expansion, only like 10% from subscriber growth, as you get into '22 and particularly beyond, but as you get into '22, you're going to see that become more balanced, where maybe not be exactly 50-50, but much more balanced where subscriber growth will carry a big load and then ARPU growth will carry on and continue. And there's a couple of reasons for that. The first and the simplest one is we did an experimentation a few years ago where we went down market and offered a buy or sell stripped down version of Thryv at a lower price. And it was very successful that we signed up a lot of customers, but those customers tended to be smaller, more fragile businesses. It didn't have as much of an ongoing usage case for Thryv, and so we saw more churn. So part of what you saw happen over these last 5 or 6 or 7 quarters is 3 of the little $99 a month guys would go out, 1 $349 customer would come in, and it would look like we went backwards 2 steps, even though we were actually moving ahead. And then within our base, you've got people that are moving up from a good offering to our better offering to our best offering, and then adding on add-ons that engagement is increasing. So that moving sidewalk, that treadmill we were on is slowing down now because that mouse has kind of moved its way through. Mostly there's still a little bit of that left, but we're out running it now, like in the current quarter and the current period looking at this year. And we're actually talking internally about possibly guiding on subscriber growth to help people get their heads around that. We have not prepared to do it today. But I will tell you that you will see a more balance between the 2, it won't be just all ARPU. It will be more of a balance this year.

Got it. So takeaways this year is how do you grow faster and what's your customer comp going to be, going back to several questions ago. All right. We look forward to that come up, probably at the Analyst Day or your Q4 results, definitely. Last question that we have time for here is on international opportunities. Your acquisition of Sensis looks like it's been very successful. Should we consider additional acquisition, M&A activities going forward to be more domestic? Or are there other opportunities to continue the international expansion?

Let me start by thanking the person for the question. The Sensis acquisition is maybe one of the best ones we've ever done. It's been just a hand-in-glove fit. The people in Australia are now branded Thryv Australia, not Sensis anymore. The plumbing is all done. We've got hundreds of SaaS customers whose engagement is higher than in the U.S. We took everything we learned and applied it there. All the new channels are being set up. And that story, I've said all along, '22 and '23, you'll see really exciting growth coming out of Sensis. That's all in place. That's going to happen. And the recovery of our cash that we spent to buy it will happen so fast. I mean we're coming up on the anniversary and we're a long way down the road to paying it all back. It's very cash generative. So very happy with that. And we are certainly open to doing more of those and there are other countries where we can do those, there's even potentially some stuff in the U.S. that we can do. So to the extent that our acquisition machine can acquire more new animals at really attractive prices, we'll do that. And I think it would be reasonable for you to think we'll do that. And then we talked earlier about SaaS acquisitions as a separate conversation. But I think it would be reasonable to expect that something that's working that well, we will keep doing.

Well, with that, we're effectively out of time. I wanted to thank everyone for joining us today. I apologize for the technology-related issues. And Joe, thank you so much for your time. I hope everyone has a fantastic conference. So if there's anything we can help with, certainly let us hear at Needham.

Thanks a lot, Scott.