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

Thanks, everyone, for joining us today. My name is Scott Berg. I lead our enterprise software and SaaS research efforts here at Needham. Thanks for joining us. Today with us, we have Thryv. We have the company's CEO, Joe Walsh. Joe, thanks so much for joining us today.

Glad to be here.

In nice, warm New York City, is what it is. I guess for those less familiar, how about an overview of Thryv, kind of what you do, what -- the products you sell.

Yes. It's a small business software application, basically, where they run their business. In the morning, they open up their application and they look at their schedule for the day, scroll through and look at their 10:00 appointment, click on the client card. It opens up. It's got the details of what the customer bought last time, what their needs are this time, which one of our agents is handling it. It's all right there, very simple. They can handle the estimates, invoices, billing and all that on the back end, and it also allows you to communicate with your customers and share documents and information.

We're going to start with product, usually my favorite area to talk about. We're only going to talk about one question on the legacy business, and the rest is going to be on what's exciting going forward. But I guess the question, because it's very topical, it's a large chunk of your revenues today, is Yellow Pages business. I think most investors I talk to think -- are surprised that it's still around, that there's this misconception that everything is online. But where does that product today kind of still sell and market effectively? Where are you really kind of generating a strong revenue stream from that? And I'm sure we all know it's probably going to 0 over time, but that decay is a lot slower than what people think as well.

It is. Yes. It's been in a gradual demographic decline now for the better part of 2 decades. And it's still -- the yellow pages, believe it or not, are still used in a lot of flyover places, Manhattan, Kansas, not Manhattan, New York or Rapid City, South Dakota. There's still strong yellow pages usage out there. So it is declining, and it's a business that we are working overtime to get out of basically. Our model is to work our way out of it. When you look at our Marketing Services business, the printed Yellow Pages is actually not that big of a piece of it. So much of it is online directory. It's not just our own but a big web and a network of products like Nextdoor or Yelp or other things that are in our online networks. We do search engine marketing. We do SEO. We do websites. So these are businesses that are fundamentally good businesses. It's just not the direction that we're going in. We're building a cloud software business, and we're using that business as basically a source of cash. So we're not working to grow the Marketing Services. We're actually looking to grow our SaaS business.

Yes. So you have the 2 pieces of the platform, as you mentioned, and you're slowly migrating customers over. You had a nice bump in the last quarter that we'll talk about a little bit more here in a minute. But do you think you have the modules and the functionality in the SaaS platform today to properly replace what the customers have been getting out of the yellow pages side?

That's such a good question because the first 7 or 8 years of our journey, we're really building a CRM. And a CRM helps you run your business. It's an operator business tool. And the reason that you bought in all the marketing services products was to get more customers. It wasn't to operate your business. So we had to find people who had been out to get more customers, and we had to help them move over to run your business. So it was quite a change that we're asking for. Our newer centers, most recently Marketing Center, is really a grow your business center. And Command Center is all about really the inbox and communicating with your customers. It's very close also. So I feel like part of the reason you're seeing so much better penetration into our base is the products that we're selling now are more grow your business products. And so the traction within the base is much better.

I guess a big question on that is how do you get those marketing services customers or the [ chasm ], if you want to call it that, to purchase these solutions. Some of them are mom-and-pop stores, local businesses. They might have been using the yellow pages for 30 or 40 years or whatnot. But how do you kind of push them over that edge?

Well, the point you make is a good one, and that said, we've been around a long time, and we have deep relationships with these small businesses. Most of them have been with us for more than 15 years, so there's a long trusted relationship. So we're just helping them with the next problem, the next opportunity with their business. We get a conversation every year because we have that trusted relationship where we're in there talking to them all the time. We're asking them about how it is they're modernizing their business, how they're meeting their customers' needs and demands. And most recently, what we found is these kind of grow your business tools are right down Broadway from them. It's a real easy thing for them to transition. That's part of why you're seeing such an uptick now.

You've -- if you look at the last 2 years, the last 18 months specifically, you've released 2 new centers. You mentioned Marketing Center and Business Center there is -- you've taken the approach of weaving the data in there, which I think is -- and to build off of each other, which is super important. But you sell to a micro customer, companies that have 2 to 25. Maybe 50 employees are a really large one, plus or minus. How do you think about the balance of adding more modules and functionality for a customer segment that doesn't always buy really deep software? What does that balance look like over time?

I think you have to back up and think about where we are in the world. We saw -- during the last decade, we saw enterprises, big companies move their computing into the cloud. And we saw small businesses do nothing. They basically stayed analog. They stayed with spreadsheets. They stayed with e-mail. They started a texting, woo-hoo, to their customers, but they really weren't harnessing cloud tools. Now we are seeing it. We're probably in the third inning now of this thing really beginning to unfold, and we feel like the marketplace of January '24 is light years different than the marketplace they have 2020. It's just moving so much faster. They are actually -- they know about the cloud. They're interested in it. So in some cases, they have experimented with some point solutions, and the uptake in the demand is really coming on now. And we think that the balance of this decade will be really big for adoption of cloud tools. And so we're just getting a lot more traction now. We're seeing it unfold that way.

Do you think the pandemic helped with that? It drove more people just to naturally be online and have more activities online. Do you think that impacted the mindset of some of your customers in saying, "Hey, everyone's doing this. I need to find a way to probably capture this opportunity."?

Yes, I think that there was -- we saw right in e-commerce sales. E-commerce lapped up, obviously, when the pandemic started. We've seen it with Zoom adoption and other things like that. And then we saw a hangover when people were able to get back out. We saw those things pull back. But I think after settling, that's now chugging ahead again. And I think it was somewhat similar for small business adoption. I think it was shoved forward and then there was probably a breadth, and now I think it's picked up because consumers are demanding it. Consumers want to pay digitally. They want to be able to adjust their appointment with you at 10:00 at night when they remember or something. They want to be able to communicate, not necessarily call and leave a message on an answering machine. So I think we're really in the power curve of the adoption. I think Thryv is really well positioned as a way to play this megatrend. I don't know if you realize this, but there's only 500 businesses in the S&P 500. Did you know that?

That's an interesting statement. I never considered that.

The point I'm trying to make is there's a fairly limited number of really big enterprise-level businesses, but small businesses, there's millions and millions and millions. And it's just so much of a bigger, more imperfect market. It's a lot of work, but we're really well positioned to do it with our giant sales organization, our 100-year history in these local markets. We are in the catbird seat as this megatrend unfolds to capture it. And if you look back at our history, we only had a single center, and really, for the most part, we were selling in a single country. Now we've got a platform with 3 centers out, a fourth one about to come out, and we're operating in many countries, adding more countries all the time. So there's scale for us to really begin to grow as we ride the wave of adoption. It's going to happen with or without us.

I suppose next you're going to tell us there's 1,000 companies in the Fortune 1000.

I could. That could happen.

But it's an interesting statement because I did this exercise probably about 5 or 6 years ago, and it's a -- I think investors get too titrated sometimes on billion dollar type companies because of the amount of spend that's there, and there's a lot of spend. I live in Minneapolis for those that aren't familiar, a suburb of Minneapolis. Drive a mile in a suburb of Minneapolis and count the local businesses that are not national chains. Go downtown and do the same thing. And then come to a large city like New York City and walk a mile and count the number of local businesses. You're flabbergasted at the number of them. So it's a huge market at the end of the day. I agree with you.

Yes. And so that's our world. That world you're talking about, that's our world. And the hardest problem if you're -- frankly, anybody can write some software code. The hardest problem is getting a quality conversation with a small business, always genuinely listening and looking for solutions. We get those just by our birthright because of where we came from. We have just shy of 400,000 small business customers that are our customers that we meet with and talk to regularly. I feel sorry for other software companies that maybe have nice code, have a good idea, but they can't get anybody to talk to them.

Yes. A point of housekeeping, we will take some audience Q&A when we're done if there are questions. Continuing on the product theme, Command Center was your most recent center that was released here over the last several months. I view this center as really communications hub, and you kind of touched on that a little bit already, but to centralize all of your customers' client channels. Is that the right way to describe it? And then when you think about client channels, how many different client channels can you actually integrate effectively with that center?

A bunch. It's amazing actually. When you think about -- even as consumers, each of you, even if you use social media a little bit, you've got a bunch of things you have to check. You're checking your business e-mail and your personal e-mail. You may have a junk e-mail box, right? Then you may have Facebook that you keep up with your family and friends on and then maybe on Instagram. Maybe you have a guilty pleasure. You look at TikTok or whatever. So you end up with 4, 5, 6 kind of places to check. So you're waiting in the muffler shop for a few minutes for your car and you're checking all those places. Well, think about it if you're a small business, and those are your actual leads coming in, and customers have an expectation you're going to respond and get back to them. That's kind of frustrating. People are Facebook messaging you. People are sending you stuff on Instagram. People are e-mailing you. People are texting you. People are calling you, all these different channels coming in. What Command Center does is it unifies all that into one place, gives you one thing to check, one place to get your notifications. And it syncs up with all those other things all the time. And so it also creates for you a chronological CRM effectively of the conversation. Consumers have a way of contacting you by phone and then e-mailing you and then sending you a text and then sending you something on Facebook Messenger, all within the space of a day or 2. And you're somehow supposed to keep all that straight. And Command Center does that for you, keeps it all straight. What's most exciting about Command Center is it's absolutely free forever. So it allows people to virally spread it around. I can say I found this cool way to unify my complicated world and make things simple, and it's free. Here's the link. Download it. Let me show it to you. And without any promotion, really just beta and just briefly coming out of beta, we have more than 25,000 downloads of this thing. And that -- those are all little Thryv customers waiting to be born that are going to kind of grow up. And they're already beginning to self-upgrade, add minutes to the phone capabilities that we give them, add video capability -- or add minutes to the video capability that we give them. They're paying up to add additional channels beyond just what's available free. They're adding additional elements to it as well. So we think this is going to be a nice customer acquisition path. Basically, it kind of creates a new zoo.

Yes. That led actually really well into my next question, is, I think, a key capability or component of Command Center has been the ability to purchase these add-ons. I noticed that when we got the demo of it back in August is I gravitated right towards that because when I looked at Marketing Center and Business Center, there wasn't a natural way, in my mind, to go add on ThryvPay or add on an integration to someone else. There's a lot in there, is -- what have you seen with the results so far? It sounds like you've certainly seen some customers upgrade to some of those. But has it been kind of in line with your expectations or maybe ahead or behind on how you thought customers would start using it?

It's early. So I don't want to project off of a really small data set, but we definitely are seeing self-upgrades. We definitely are seeing movement. And I want to bring this back to a metric. One of the metrics for our business that people look at a lot is what the net dollar retention revenue is. And when we first started, we basically were sending an expensive salesman out there to make the entire sale of one center. And there was very minimal add-ons that we had at that early stage. Now that we have 3 different centers and soon a fourth and then there's add-on elements built in there, we're seeing that net dollar retention really start to get to move. You'll remember in our Analyst Day, we said we expect to be 100%. And in the next couple of quarters, we actually drifted down a little bit. People were like, "Wait a minute, I thought you were going to go up." But we're really meaningfully seeing that coming through now. And it does a lot of things. It flatters gross margins, which we're seeing really, really gather now going forward. And it will introduce some noise into our ARPU because you'll have a bunch of people coming in at fairly low price points as they self-upgrade. So that metric will get a little noisy. But what we did was we carved out customers who have been with us a year or longer, and we studied their spend. And their spend is up in the mid-teens year-over-year. So we're seeing really good follow-through, where customers who have been with us for a year or more buying more centers, buying more products and that they're driving up. So even if there's a little bit of noise in the overall ARPU just because of the denominator problem of adding so many -- some of which are smaller, we believe that our story of driving overall ARPU from 4,000 to 7,000 over the intermediate period is very much intact.

Well, I've seen this story and this playbook a couple of different times with other public competitors in the marketing space where they start with a single product, add different centers or modules, whatever you want to call it. One might call it a hub. And they're able to drive some consistent cross-sell opportunity there. And I think the playbook down market has really evolved over the last 5 or 6 years of you just got to get them in the door using the product a little bit. If you have a good product and they like it, it's amazing how they just start adding on because those smaller customers want a one-stop shop. They don't have the resources to keep integrating.

What you just said is exactly the deal. They are sick of sticky notes. Like if you ever get logged out of something, you're like, what's the code, and John, what's the -- oh, he's not here. Well, I can't get in. Well -- but he'll be back in half an hour, and now I'm logged out. The question we get asked the most is, is there one place that we could go where we could have one platform. Everybody could be logged into the same thing under one log-in number. And we can get at all of our tools. And that's what we've done with Thryv. We've created a dashboard. And behind that, you can integrate your QuickBooks or your FreshBooks or MYOB or Xero or if you enjoy Mailchimp, you can connect it and the data will flow back and forth, and you can get at it through your Thryv. And that's made such a big difference for people.

So you released the 2 centers over the last 18 months, the 2 new ones. Is one a year the right way to think about the cadence here going forward? Or is there opportunities to maybe do -- release more than one a year? Or should we think about it maybe being less than -- more than a year for each one?

No. We've guided that we think we'll roll out one new center a year, and we're still comfortable that that's good guidance. And if you are modeling this and you start layering in any kind of reasonable uptake of that next center and you don't necessarily have the original customer acquisition cost but it's -- you can see how it really flatters margins and drives ARPU.

All right. Moving to go to markets. I kind of mentioned before you sell to what I consider to be micro customers, smaller customers. We've seen software demand in this segment being consistent for the last 4 to 6 quarters given the macro, not a surprise, I'm sure, to anyone listening to this. But you had a very good third quarter in terms of customer acquisitions on the SaaS side of the business as you leaned into the zoo, as you'd like to call it a little bit. That 10,000 level may not be sustainable for a period of time. Obviously, we'll see 4 coming up relatively soon. But how should we think about that framework? Is this a motion that you're going to be able to lean into throughout 2024 here where your customer additions have an opportunity to be above historical trends because now you have the right product to sell into the zoo?