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 our 19th Annual Technology Media and Consumer Conference. With us today, we have Grant Freeman, President of Thryv. Welcome.

Thank you. Thanks for having me.

Sounds like your day is busy. Hopefully, it's a good thing for you.

I thought you at least got a break here. But it's good that we didn't.

No rest for the weary, I guess, or something like that. So I guess to start off, how about giving an overview of Thryv for those that may be less familiar with the company.

Sure. So I would start out by saying that, first and foremost, we're a business that's absolutely dedicated to the success of small businesses around the globe. We have an intimate knowledge of these businesses that's all many of us have ever worked with. So we get them, we understand them, and we build products that serve the needs that they have. As a business, specifically, we're sort of at the tail end of a transformation to becoming a SaaS company, a profitable one at that, and we're accelerating toward that point. Majority SaaS revenue is really important to us, as we spoke about before, and sort of crossing that chasm from being less Marketing Services revenue to more SaaS revenue. We have some really distinct and unique competitive advantages that some of you in the audience that I look around already know about. Because of our traditional business, the Marketing Services business, we have 315,000 customers that we affectionately refer to as our zoo. And we hunt in our zoo to find a SaaS client, so people that are buying digital marketing services or printed media that we have trusted relationships with, garnered over the course of many decades, who are now looking to evolve their business and move into cloud-based tools and technology and away from sort of Post-it notes and Excel spreadsheets, understanding the need to have things like a CRM, like appointment scheduling, like marketing attribution tools, communication tools, et cetera. And we're the ones that they really turn to for that as we've been their trusted advisers for a very, very long time. As the needs of their business given the economic environment sort of transition through the year from printed media to digital spend and now to software, we're always there for them. And we're really proud of that. So...

Great. Well, let me spend, I think, basically, all my questions but 2 on the software SaaS side of the business because that's the growth engine and that's where the company is obviously going. But on the legacy Marketing Services business, I think most investors are surprised that the Yellow Pages are still around out there, to some extent, right? And I don't see them very often. But when we look at that business, and Marketing Services more than that, there are some other digital services out there.

There are, yes.

But when we look at that business, the rate of decay on that over the last couple of years has been kind of in that 20% annual range. Last couple of quarters, it's been 24%. Since Q1 call, the question I probably had most frequently is, what's the right way to think about that rate of decay going forward? Is it just -- is it accelerating a little bit from 20% a year? Is this like a onetime event the last quarter or 2? Or what does that look like if we're thinking maybe 3 to 5 years out?

Well, I don't know if we see anything far more dire than that. As you know, it's been kind of like a metronome. It's been steady, it's been consistent, it's been easily measurable. Has it accelerated a little bit? Yes, it has. Nobody ever thought the Yellow Pages were going to make a comeback, by the way. So we have been prepared for this day. Look, it is still highly profitable, as you know. But I think what's most important to realize is we have an excellent track record of rationalizing the costs. So there's levers that we can pull for things like print distribution. We do a great job right now of understanding who should get the book and who doesn't, albeit none of you get the book because we target people 65 and older. We mail them the book. We have no waste. We reduce print and distribution costs by only sending it to people that use it. So really intelligently understanding who's using the book, sending it to them so you don't have a degradation of the call counts or the value to our customers calling from the book, but you save money from a cost standpoint through printing and distributing less. So I would say we're anticipating the decline. I think the 23%, 24% that you've seen more recently feels about right for now. We don't have things from the front lines coming in and saying, "Oh my gosh, everybody's canceling, everybody wants out." But I think it was just a natural acceleration as far as the phone book in general. There are still pockets in this country that don't have broadband prevalent. And we always joke that Manhattan, Kansas gets usage, but Manhattan, New York, you would never see a book. We don't distribute them at all here. So I think a lot of the cash flow questions that do come up are really derived out of concern for what we just rid ourselves of, which was sort of that short-term debt maturity that was coming. And with the refinance now, as you know, that's been pushed to 2029, which is fantastic. It also offers us more liquidity, as you know, Scott. We now have a 50% sweep instead of 100% sweep, which is very advantageous for many reasons. And I think that, that, coupled with the ability to rationalize the cost of print moving forward, we're really confident that we're not going to be in a bind.

Okay. So my natural follow-up to that, we're just kind of briefly discussing the south side, right, is it's more around the concern around your ability to meet the debt payments, the requirements, is, you're right, sweeps at 50% now. It's, I think, 54 million annually in the next 2 years, and then there's a step down after that. But if the rated decay is too quick, how do we think about the, was it $250 million worth of debt out there? But it sounds like you're not worried about kind of paying that down in the next couple of years. You can pay more if you want, but you certainly don't have to.

I was going to say, I think we have a track record that proves that we will pay more than is asked of us. We've traditionally done that, and I don't really see that slowing down. As far as cash flow, we're looking for that to increase in the near term through rationalizing the cost on the Marketing Services side, sunsetting a whole bunch of systems as we upgrade customers from digital marketing services to the SaaS platform, which means we save on systems, on people and on all kinds of other waste that come along with it. So there's still plenty of rationalization that can happen on that side of the business.

Okay. Now we're going to move to the fun forward-looking side, at least that's...

SaaS part?

I call it the fun forward-looking side, the SaaS part, definitely.

Yes, yes. It's definitely more fun than Yellow Pages.

So I remember the Analyst Day 2 years ago. The company unveiled its new center strategy. Since then, we've seen 2 new centers come out, Marketing Center and Command Center, in addition to the Business Center that's out there. But to this point, what sort of learnings have you garnered from the center strategy early that can really help propel maybe even better execution here going forward, both for the product and then from the sales perspective?

Yes, absolutely. So I think, first and foremost, we'll talk about Marketing Center, which really was released to the broader market in August of 2023. It is absolutely flying off the shelves. It's a darling of our salespeople. And it really has shown us that the conversation about marketing and growing a business and lead generation with the small business is one that's far easier to get than where we started, which was with Business Center, which was overhauling how you run your business, keeping a digital client list instead of an Excel spreadsheet. And in retrospect, you think, God, I wish we had started there. However, a lot of the tools that are in Marketing Center now because we're asked about a lot, Scott, weren't available 6, 7 or 8 years ago. It wouldn't have made it as valuable to our clients as it is now. But I think that as an entry point, I mean the Marketing Center sales are flying pass Business Center sales, and Business Center has been with us for 9 years now. So it's really good to see the take rate and the excitement about Marketing Center because what that opens up to us -- in addition to a whole new gateway or door into our platform ecosystem, it also leaves us with the 50,000, 55,000 Business Centers that we have the ability to have a viable marketing product to attach to those. And one of the things that we spoke about in the earnings call after Q1 was a metric that we're following closely now, which we believe is a massive leading indicator of future growth and trajectory of the software business, and that's the percentage of our clients that buy 2 or more centers, which has gone really from 1% to now 8% and is growing as we have the ability to not only sell people in the existing non-SaaS zoo Marketing Center as a lower barrier to entry than trying to get them to overhaul their business operations, but also looking at our SaaS zoo of almost 70,000 customers going around to them and adding a second center, which, obviously, both of those motions are pretty affordable from an acquisition standpoint.

So what I heard in there, in particular, was you didn't use the word entry point, but I'll use the word entry point, is customers can actually land on the Thryv platform and something besides Business Center. They're coming in with Marketing. Are they also coming in with Command? Because I've kind of seen this playbook a couple of times. It's not just always this one. If you can expand that opportunity, the cross-sell and the consistency of the business certainly improves.

That's absolutely true. So let's talk about entry points. Command Center is our freemium offering. It's our first foray into a PLG motion. We've had a very successful sales-led growth motion, which has catapulted us to exiting this year with somewhere around $328 million of profitable SaaS revenue. But we want to grow exponentially. So we've seen, to your point, others have done this like HubSpot, who offer a freemium, a free-for-life tool that is of tremendous value to small business owners. Ours is Command Center. It helps them streamline their communications. So if you think about all of our worlds and how your friends reach out to you, sometimes it's Facebook Messenger, sometimes it's Instagram Messenger, you might have a couple of different e-mail addresses, et cetera. This software takes those and aggregates all those into one centralized communication stream regardless of the channel that your customer prospect reaches out to you on. So it's really easy then for small businesses to not miss a message because they didn't check one of those social vehicles, which happens a lot. This solves that problem in addition to offering them sort of a Slack Lite, if you will, for their business where they can communicate for free with up to 5 of their staff members, send photos back and forth, fun Bitmojis, et cetera, but most importantly, help them increase their effectiveness and efficiency in their workplace. So we do have people coming in with that. Two main ways: the first is through digital acquisition. When we turn to stick it on, so to speak, we were really happy to see that all the research was right. And there is a strong demand for a tool like this that simplifies a small business' ability to communicate with each other and with their customers and prospects. And then we were also extremely happy to see the sign-up flow took under 8 seconds to be signed up and dumped right in, which customers really appreciated. So we now have that in the tens of thousands as a freemium motion. In addition to using it, the second way is our actual local sales reps, of which we have 850 across the globe that are interwoven sort of into the fabric of the communities that they serve and trusted by the business owners there. They now don't have to waste a conversation. If somebody's not ready for a demo or to buy one of the higher-ticket items, they at least leave them with this freemium. Take 10 minutes and engage them in it, hook up some of their channels. They get 3 for free, and then it's gated after that for easy upsell. And what they're doing is effectively building their own micro zoo, if you will. And we have many local reps that now have 100-plus of these that they can go back to every month and then expand their spend further into Marketing Center or Business Center. So that's been a fantastic entry point in addition to Marketing Center, which you just mentioned.

One of -- and by the way, from a housekeeping perspective, you can tell it's my first one I've done today and it's 3 in the afternoon, I know, we will take Q&A at the end. If there are any questions from the audience, feel free to hold them to the end, and we will take them at that time. From the Marketing Center perspective, one of the things I think that is interesting is that application has given your Marketing Center customers, or at least some of them, an avenue to a more fully featured, obviously, different offering on the SaaS side. And we've seen customer acquisition for your SaaS platform as a whole tick up the last couple of quarters, for lack of better term, kind of got the product right after being in the market for a couple of quarters to meet that need. Can you talk about what that advantage looks like? And easy is maybe not the right word because nothing is easy, but how easy is it to sell into those marketing service customers?

No, it's a great question. We have droves and droves of customers on the marketing services side that have one or more of our digital product offerings. And when you think about it, this motion is no different than most SaaS companies, where you sunset something older and give something newer and better and faster and slicker to your customers. That is what we're doing as we upgrade thousands of people from our marketing services platforms over to the SaaS platform. And our value statement, our commitment to them is they will get a value that's commensurate with what they had on the digital marketing services side plus access to all of these tools. So we have a really solid simple motion where now, Scott, we can do it without a human. We use 30 to 60 days of tech touch leading up to the upgrade of a customer, celebrating the fact that they're going to get everything they had plus more, yay, in a platform that is going to receive further investment and growth and we're able to move. Whereas it used to be one at a time, now you can move thousands, and at the same time, not degrade the client experience at all or the engagement metrics that go with the usage of Marketing Center. So that's been really cool, to answer you, very simple to move them and no pushback from customers because they're getting something better and they're getting it initially at the rate that they were spending on the older thing, on the other side. And then we will intelligently increase the rate over time to get them to rack rate.

So I remember when I got a demo of the Command Center application last year. I think it was in August when you're showing it to The Street here at least is -- one of the things I picked up on initially that was kind of cool is I get the title wrong, but it was like an app center where in Command Center, you could go in and actually buy...

The Marketplace.

Yes, maybe that's what it was, Marketplace. You could buy other Thryv apps directly from that. And I haven't seen that in the other modules before. You could also buy connectors and other things that were in there. Have you seen customers on that solution actually use that? Because I thought it was a great way to drive some ARPU growth because it really made, or simplified, I should say, that purchasing process.

Yes, we have but not in the millions yet by any stretch of the imagination. I think that PLG is a new motion to us, speaking honestly, and it's something that it takes time to get perfect. What we have seen are people inside Command Center clicking and asking for a demo on Business Center or Marketing Center. They just want further information. You got to remember that this subset of clients that we're dealing with, they're not all digitally savvy. So they do like another human to explain things to them a lot. We have seen some uptake on people, for example, activating ThryvPay and doing a DIY website through there, which has been fantastic. But until we get the motion right, we're not spending heavily on driving people there. We're working on in-app messaging, on making the actual upgrade process as seamless as possible. So yes, we're making ground there, but by no means are we where we want to be on it.

Okay. The metric you gave, you mentioned earlier 8% of your SaaS customers have more than one...

Paid center.

Yes, paid center today. It's only 3 centers today. But is there a combination you've seen most? I'm sure I can probably guess what it is but...

Business Center and Marketing.

That's what I figured. Okay.

Yes, yes. And I think we're getting -- what we're doing right now, we were already very good at the motion of going to our Business Center customers and convincing them to grow their business by adding Marketing Center. And by the way, when you add it, it's fantastic from a net revenue retention standpoint because the lowest-price Business Center if they had it was $199. The lowest-price Marketing Center is $199. So that's pretty good. And that's been sort of driving the net dollar retention closer to 100%, which is where want to get. What we're working on now and had a key external hire is really just the entire go-to-market picture, the implementation of tools and technology like sales loss, like propensity modeling, to understanding when to approach, for example, our new Marketing Center clients that entered our ecosystem via Marketing Center, understand how they engage, when they engage, longevity, when do we approach them with our Business Center, what do we say and why based on vertical, size of business, firmographic information, et cetera. So we're working on those motions. But yes, it's definitely going well ahead of expectations.

I think you're cheating. You're looking at my next question here.

I didn't -- I can't read that.

I know you can't.

I'm getting old.

Because we happen to be on go-to-market here, so that's a good segue. How are you incentivizing your salespeople to effectively sell the SaaS platform as a whole but then also cross-sell? You kind of talked about the strategies you're working through a little bit. But I would imagine for the hundreds of reps that you have, especially with the marketing services in a state of decay, you probably have to refocus and move their efforts even more. How do you incentivize them properly to start doing all that?

Yes. So you take a look at the different levels of the compensation plan, you try to understand what's critical for the business. One of those things, for example, are getting our SaaS margins consistently above 70% and the gross SaaS margins into the mid-70s. That's going to mean we need to sell more of our high-margin products, which are our centers of Command Center, Business Center and Marketing Center. So the compensation plan changed to drive them towards selling more of those where they get more incented and more celebrated the more centers they sell. And then there is a revenue per customer component, obviously, which would drive them to want to sell multiple centers to those customers. So we were really excited with the compensation changes. A, we didn't have some mass uproar or defection or disturbance. We've been doing very well with those changes. B, it drives a higher margin sales. C, our local sales force is really, really excited about it. You don't have to convince them that it's more fun to sell software than Yellow Pages. It's actually a pretty compelling argument. Nobody wants to go to like the holiday dinner with the family and say that they're selling space in phone books.

I'm just trying to imagine how that conversation would go.

Not well.

It would be a little comical, I think, today. So I was, for some reason, thinking back to the comment you made earlier about phone books not showing up in Manhattan, New York, but they'll show up in Manhattan, Kansas. I think it was Kansas at least, is how do you think about selling the SaaS platform today on a -- just on a geographical region? If you look at the U.S. or North America broadly, are there areas where the platform has maybe resonated better than others?

We love sort of Tier 2 and Tier 3 cities. Obviously, there's a high level of saturation in the Los Angeles or San Francisco or a Manhattan. But when you go to like, let's say, a Nashville, a Louisville, suburbs of Chicago, the state of Florida, some of those Jacksonville areas, Tampa area, et cetera, those are really fertile hunting grounds for us. We have a high level of success in those areas, the places that are sort of awakening to the fact that they need to increase their digital aptitude, they need to adopt tools because others around them are just starting to. It's more of a first-mover advantage in those type markets than it is in the bigger metro areas.

Okay. On the macro perspective, I've talked about how software has kind of been in a recession in general, especially relative to the rest of the kind of the markets, at least for the last 2 years, plus or minus. We've seen overall demand in software certainly be less than what it was maybe in '20 and '21. But -- and the SMB has probably been hurt disproportionately a little bit. Small business is just a little bit more concerned about their -- not knowing where their business is going in this macro. But as I look at your metrics relative to some of the other vendors I cover that are SMB-focused, your sales metrics have, in general, held up better. Is there something particular about the Thryv platform, the new SaaS platform that you have, that's maybe holding up better? Because you sell to micro customers, not even just small customers, micro.

Absolutely. It's a great question. And it's part of our secret sauce. Our clientele are simply far more resilient to economic impact than the typical just broader small business. What do I mean by that? We deal with dirty businesses, not a lot of -- not a whole lot of white collar. We have 50% of our clients are people like roofers, plumbers, service-based contractors, service industry, right? They are people that if you have a leaky roof, you're calling a roofer. If you have a clogged toilet, you're calling a plumber. You just find a way to afford it because you have to. Even things like dentists, veterinarians and attorneys, which are the other subsets that we sell a lot of, these are services that you simply need. So they're a little bit more resilient to economic impact. And I will say, Scott, I talk to customers on a monthly basis. You know that my boss does. Our new CPO has spoken to a customer every day for over 3 weeks now. And what you're going to find is we actually don't hear that a lot. We don't hear, "I don't think I can afford that. I'm worried about the future." The customers that we serve are not saying that to us. And this has been a question that's come up all day. And I think the metrics and the results and the performance and the growth that you see both from sub count and revenue are just because the clients that we serve are not right now as worried as sort of the broader SMB market appears to be by the data that's shared by people. We just simply don't hear it.

Okay. So I've got a long 2-part question, but you see where I'm going with it in a second.

Can I take notes?

Well, here you go. Just kidding. So didn't really -- I didn't ask a question about product strategy. You released 3 centers today -- or 2 new ones in addition to Business Center is do we think about -- should we think about the company releasing a new center per year? Because I know that was communicated before...

Absolutely. Still on course for that, yes.

Okay. So we've got one per year come in and whatever that kind of final number or platform looks like. When you get to 4, 5 or 6 modules, we'll just throw that number out there because about -- it's a couple more down the line, how much of that sales strategy can be product-led growth? And how much can it be more inside salespeople that you got to start splitting up around, maybe even net new versus cross-sell expansion opportunity? Because I just think about the complexities is that small business, if they're buying 3 or 4 centers, it's a very different motion, even if you're buying it online. For one, once you get to 2 or 3, sometimes you need some help with that.