Q3 2021 Thryv Holdings Inc Earnings Call
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Good morning, My name is Rob and I will be your conference operator today at this time I would like to welcome everyone to the thrive third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
We'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again prestige Star one. Thank you Cameron Lazard director of Investor Relations and capital markets. You May begin your conference.
Thank you operator, welcome to thrive Holdings third quarter 2021 earnings Conference call, We issued our press release, a short time ago and furnished the related form 8-K to the SEC. The press release can be found on the Investor Relations section of our website at Investor Dot thrive Dot com.
With me on the call today is Joe Walsh, Chief Executive Officer and President.
Paul Rouse Executive Vice President and Chief Financial Officer, and Grant Freeman Chief customer Officer.
Before we begin I would.
To remind you 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 Brian <unk>.
These statements are subject to risks and uncertainties described in the company's earnings release and other filings with the SEC thrive 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 these measures to GAAP will be posted on the Investor Relations website at Investor Dot drive dotcom.
With that introduction I would like to turn the call over to Joe Walsh.
Thank you Cameron and good morning, everyone and thank you for joining us.
As you've already read in our earnings release, our momentum continues as we deliver our best quarter since being a public company with accelerating growth in our SaaS business and so we will once again raise our guidance for <unk>.
CFO Paul routes will take you through that raised the guidance in a few minutes.
It was just over a year ago. This week that we began our journey as a public company with our first earnings call.
We introduce the company and we laid out our strategy for helping Smbs harnessed the cloud and how we thought we were in pole position to be the category leader here.
And this last year has really laid that out I think for us.
We brought a new boarding and shortly after we announced additional areas of investment in our business to really scale, our SaaS organization, which we felt like we are poised for a massive growth and sitting here today I am pleased to say that those decisions that borne out some very promising and exciting results. So let me walk.
You threw the report card for the third quarter SaaS.
SaaS revenue.
41% building momentum over the last several quarters.
To put that in just a little bit of a context for you prior to going public we came out of a distressed debt setting and so we were in more of a harvest footing and we werent really we were delivering double digit EBITDA margins out of our business. Our charge was to make it make money and so we weren't really investing and growing it quickly but over the last year.
As we shifted our emphasis more towards investing in growth.
Gone from Q3 last year, where we had 2% growth.
Two in fourth quarter, 8% growth and then as we turn the corner into the new year, 17% growth and then in Q2, 32% growth and now 41% growth. So you can see those investments and that new stance is really kicking in and we're taking advantage of the rapid adoption happening out.
They're in the marketplace.
We're seeing our <unk> $340 is what it is up to 31% year over year, our new acquisition channels are growing now representing 22% of overall sales double where they were a year ago. When you think about new clients coming into the company two thirds of all the new SaaS clients are new new.
New to the company and about one third of them are coming as we continue to mine.
The base of the marketing services business, we've seen record levels of engagement within the platform measured by things like time in the App really everything we measure is up significantly and our retention is at an all time high and so I think it would be fitting to have our chief customer Officer Grant Freeman speak to you for a few minutes.
Some of the progress we're seeing in that area.
Thank you Joe I'm excited to be here today to share the progress being made as our clients continued to increase and deepen their engagement within our software platform.
It is important to start with repeating what we shared during our Q2 earnings call that our North star for client success is an engaged clients.
We are all over engagement looking at it from every angle I wanted to share some data with you today as our underlying trends continued to improve for example, our daily active users year over year for September is up over 30% beneath that we see the percent of clients using three or more features of our platform is up over 50.
Percent.
When we look at specific feature usage, we can see continued upward trends for example, the number of clients with campaign is up over 30% clients sharing documents up over 25% and the number of clients with payments and using estimates and invoices functionality each are up over 50%.
As part of these great results, we have always been measuring churn internally in several different ways. We have our standard churn metric, which we had been reporting for the past year and we are proud to share that churn was two 1% for quarter three.
Now, while we spend lots of time reviewing churn and dissecting. It our current reported metric is a very conservative measurement.
We are also measured churn to look at real adoption. We feel there is a value add to present. This now since it's providing additional context for our go to market strategy.
Small and medium sized business behavior, and stability is different and messier than enterprise behavior.
As such this measure of churn and excludes newer clients as they are in the early stages of engaging with the software.
For our thrive software, we have a blueprint of our client journey and when we look at month over month engagement. We know we can deliver value quickly to our clients, but for deepened engagement. It is during the months. Following initial onboarding when we start to see users aggressively integrating the software.
We also see those who may not have engaged for a variety of reasons, including issues like their payment being declined more than simply going out of business.
The first year allows them the time to learn to be coached to engage and fully integrate the software into their day to day business. As a result, we also measure year over year engagement and churn of those clients who have been with us at least 366 days so just over a year.
Our churn with these clients is only one 7% a metric we are extremely proud of this as a huge success as it means those who use the product and engage with more features over time integrated into the fabric of how they run their business.
They are using the software as we intended to allow them to compete more effectively in today's marketplace through modernizing their business.
We also know that as engagement deepens, we can begin to monetize for example, our net dollar retention has moved from 73% to 90% over the past year and when you consider the one year plus clients that we just spoke about their net dollar retention is 95%.
We are also measured NPS for a number of years for us it's truly the ultimate measure of where we are headed among our thrive users we have seen a significant year over year improvement again.
Now, we all know that small businesses have a much different relationship with software then do enterprise organizations engagement early is critical as is deepening engagement over time.
It's much like a gym membership that we will all be buying or renewing. This coming January you may have the desire to be healthier and you may go for the first few weeks, but unless you go and learn how to use all of the equipment create true discipline around exercise for the long term there will be no outcome a better health.
Software is similar.
Small businesses need to engage with software engage with us practices, giving them time to learn and truly adopt the software and then the results that they seek will happen.
To help clients, who buy become engaged with the software here are just a few of the things that we've done.
We have almost completed our evolution to a team selling motion.
In this model, we have a software sales specialist partner with a local sales person for authorized sales, which yields higher engagement and low churn. It ensures our platform is fit for the needs of the small business.
We're also focused on delivering our best in class time to first value during onboarding, we ensure that we understand the main problem. The client is trying to solve and then we solve it within the first 10 days.
Post Onboarding, we worked to deepen engagement over time at a pace that is consumable for the small business. Our team of client success managers strategize with and coach our clients to continue to use our platform to solve more problems for the business catered tech touch aimed at enticing clients to use more of the software is also critical.
<unk>, two expanding usage and spend over the course of the first 12 months.
As a result, we see higher and deeper engagement lower churn regardless of how we measure and we have higher net dollar retention along with the higher net promoter score so with that Joe I'll turn it back to you.
Thank you grant Brown as our chief customer officer and under his leadership, we have methodically worked to reduce churn in our customer base and really drive up engagement. So thanks to grant and his excellent team.
Or the victory they've delivered in that area.
Turn now to Australia.
We made the sensus acquisition at the beginning of March and we've made tremendous progress since we've localized software training the team's gotten the product into the marketplace. We've got many customers on the software and using it already were experiencing really strong engagement and usage I must say the organization in Australia has done a great.
Job of bringing our ideal client profile and we're even beginning to get some referrals in health for people that are already using it. So it's early days, but we're off to a terrific start. We also have rebranded <unk> to thrive Australia. There is a media campaign underway as we speak and Australia announcing that which has been really.
Well received it's driven a lot of traffic to our website, we've been getting a lot of software demos out of it people expressing interest in it. So I think we've got Australia ideally positioned that as we turn the corner into 'twenty. Two we're beginning with a lot of momentum really nothing to do to kind of get organized but we're just going and I.
To have really high expectations about our ability to penetrate that customer base over the course of the first couple of years I think it is going to be a terrific opportunity for us.
Marketing services piece of the business is performing just like it always has been a very steady and predictable we're really happy with that I'd like to turn now to our recent innovation in the SaaS software product with centralized inbox. This allows smbs to communicate with their customers and prospects.
They are in whichever format they prefer.
This web chat E mail text messages Facebook Instagram messenger apps, Google My business virtually any way you could come at that small business. It all shows up in the centralized drive inbox, which really saved our small business a lot of time, having to check multiple inboxes, maybe having a message been seen for a couple of days.
Because I forgot to check it brings it all into that one place and in stores it right into the CRM contact car. So it's all there and it begins to build a database begins to build a lead base. So that they can do marketing lookalike marketing follow up marketing nurture E. Mails. They can do all of those things and actionable CRM record, which is.
Like a breakthrough for most small businesses.
So they can really respond in real time, <unk> got a centralized dashboard. They don't have to juggle back and forth between multiple apps our conversation threads everything has pulled together in one place.
I'll say this consumers expectation when they contact the business just seem to continue to rise as more and more companies are deploying more and more technology people's expectations rise they kind of want instant gratification and a lot of mom and pop small businesses only have a couple of employees or a few employees. So.
Having a powerful tool like this it's always in their pocket.
Make a really big difference to them I'd.
I'd like to now talk about thrive.
We recently passed the $50 million in total payments volume, Mark, which we're really pleased about I want to say that thrive paid for US is a big engagement driver and it allows a lot of our small businesses to get paid on a more efficient way, which really helps them and I think makes them that much more loyal to the software which is.
A big deal to us, we're continuing to see higher attachment rates on our newer clients and it teams are just really started going back to existing clients to convert them over to thrive about a third of our clients use payments and our target is to see that grow more like half over the next year or two.
Since the launch of drive pay all.
All of the clients, who activate payments more than half chose drive Bay.
Which is pretty big and we're pleased with this number and we think that it will grow over time as Smbs, who connect payment accounts may initially kind of bring their own whether it's stripe square or Paypal.
But we are convinced that our competitive offering will bring them over over time, we're seeing a steady migration where more of them are switching to make.
<unk> pay their primary tool. So I'd say, it's been a really big deal. It's really helpful helped us a lot.
So I'd like to turn now to the financial part of the presentation and bring Paul routes.
Let him tell us about our third quarter results Paul.
Thank you Joe.
I will now cover our U S business segments, starting with SaaS.
Third quarter of 2021, SaaS revenue was $44 8 million, an increase of 41% year over year.
Growth was driven by a steady increase in clients a bigger uptick in.
And average revenue per unit for Arco and favorable sales allowances when compared to the prior year.
Up to 41% increase in revenue.
600 basis points relates to improvements in sales allowances when compared to the prior year.
SaaS Arco was $340 up 31% year over year, when compared to the prior year, we attribute the growth in part to several factors.
Actions, we took in.
In 2019 going upmarket with continuous change in subscription mix with ads coming in at higher value.
Upsell to higher priced tiers within our installed base.
Cross sell from our marketing services client base, and finally sales of additional seat licenses automated ladies and add ons.
Third quarter season, SaaS churn was one 7% a 90 basis point improvement year over year, and a 10 basis point improvement sequentially.
As Joe and Greg alluded to earlier, we will now be reporting this additional metrics going forward as it best reflects our efforts in driving adoption and engagement for our SaaS solution.
Seasoned.
Net dollar retention reached 95% for the quarter, a 900 basis point improvement year over year.
Moving over to U S marketing services third quarter revenue was $213 2 million, an increase of two 3% year over year and ahead of guidance.
<unk> performance for the quarter was driven by a print publication schedule that included a significant number of books published when compared to the prior year and was expected based on our publication schedule. Additionally.
Additionally, our digital offerings, specifically <unk> came in above our expectations.
Given these positive developments.
We will update our revenue guidance accordingly for this over performance.
Third quarter marketing services billings with $204 $9 million.
A decrease of 21% year over year and consistent with previous quarters.
As is consistent with previous calls, we will provide billings and additional operational metrics to give our investors better insight into our operational performance.
One billings data will show, a very consistent and steady decline in our marketing services segment, which is shown to be lumpier on an accounting basis, given our 15 months lifecycle of our print directories.
This is provided in the third quarter Investor supplement available on our Investor Relations website.
Moving on to thrive International's.
Third quarter thrive International revenue was $53 3 million, Australia and ahead of guidance on a reported basis private international revenue was $39 3 million.
The reason for the over performance was related to the timing of print publications in the quarter.
Turning now to profitability for the consolidated business third quarter adjusted gross margin was 70% for the consolidated business when excluding thrive international adjusted gross margin was 71%, a 710 basis points improvement year over year.
Third quarter total adjusted EBITDA was $102 $4 million.
Hosting and a total adjusted EBITDA margin of 34, 4%.
Third quarter U S marketing services and EBITDA margin came in at 45%.
Aided by strong print revenues, while <unk> international adjusted EBITDA margin came in at 30% due to timing around print publications.
As expected.
SaaS EBITA margin was lower due to our increase in go to market investments compared to last year, we expect SaaS, David <unk> margin for 2021 to be negative for the full year and we expect to exit 2021 with Q4 at around negative six to 8 million.
<unk>.
Finally, we repaid $35 million of our term loan for the third quarter, which brings our cumulative new term loan repayment to $123 million since the refinance associated with the acquisition in March.
We continue to be very focused on debt paydown.
Okay.
Now, let's update guidance, starting with our U S segments.
For our U S. SaaS business, we are raising our 2021 revenue guidance range to $169 million to $171 million.
For our U S marketing services, we are updating our 2021 revenue guidance range to $785 million to $790 million.
As mentioned on previous earnings calls U S marketing services EBITDA margins will be consistent with prior years on an annual basis.
Thrive international.
We're updating our fourth quarter revenue guidance range to $53 million to $57 million Australia.
Please see our third quarter Investor supplement posted on our IR website for additional information.
I'll now turn the call back over to Joe.
Thank you Paul.
We were excited to receive an appeal award recently.
Purely awards are a SaaS customer success award, where they use the net promoter scores user interface.
<unk> recent product improvements customer feedback and third party research analysis looking at.
You received four five stars or higher on <unk>, our cat Tara other other several other platforms and they bring all of that together to see what's the easiest to use what's the most appealing.
Software and now.
<unk> and <unk>.
Award, there, which we're really excited about and I think it continues to punctuate just how good our software.
I know, we're here to talk about our financial results, but our software is really good and it's getting better all the time.
I'd like to talk a little about our acquisition strategy.
We're often asked when we meet with investors.
They are not we are going to just acquire a marketing services businesses are just acquired SaaS businesses I wanted to just clarify the way. We think about this we are a very experienced acquiring team we do like to make acquisitions. We think it's a speedy way to grow and a rapidly expanding marketplace like small business.
Migration to SaaS, we think it's appropriate that we should be aggressive here the scale of the company up quickly.
So the first lever that we're looking at is SaaS acquisitions, we will look to acquire a SaaS companies to bring in additional talent to bring in additional capabilities and additional customers and we've been active very active in the recent months and a number of conversations in a number of processes looking at different SAA.
<unk> companies and don't have anything to announce today, but thats our primary focus looking at gas type acquisitions to accelerate the growth of the company now as it relates to marketing services businesses, we do have a unique.
Skills here and Opportunistically, we keeping an eye on that space and if we find something that where the payback is crystal clear our return on investment can be BD, and we really feel like it's flatter and enhances the growth rate of our SaaS business, we will consider that it certainly may.
Sense to do they are not very many buyers for some of those businesses to sometimes we can be the buyer of last resort, which is really puts you in a position where you can acquire at a favorable price. So that's how we're thinking about acquisitions.
Got.
Investor Day that we're planning for March you can look for registrations that will be coming out on that but we're going to we're going to do in in person Investor day in New York City really excited about that and opportunity.
Unveil a lot of our strategy and go into lot of detail.
This time, we're going to get ready to do Q&A and I'd like our chief product Officer, Brian Kantor, who is going to be joining us to help answer the questions. Operator can you open up the line for questions.
Certainly at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
For just a moment to compile the Q&A roster.
And your first question comes from the line of Arjun Bhatia from William Blair. Your line is open.
Perfect. Thank you very much and congrats guys on a strong SaaS growth great to see that.
Great to see that continue to accelerate.
Maybe the first one for you I think when we were going through.
The direct listing a little bit over a year ago, one of the goals was to accelerate SaaS business there.
25% growth by 2023 and now we're sitting here at the end of 2021 two years ahead of time.
<unk> plus percent growth rate and you seem well positioned going into next year. So maybe you can just give us some color on how you are.
And about your medium and long term targets in light of.
The current growth Youre, putting up well ahead of schedule.
Thanks for the question that's a great one.
One of the things to understand about our company is.
We meaningfully changed our stance that the business we were.
We're.
For a number of years.
<unk> owned by <unk>.
Distressed debt group basically asking us to return cash and so our SaaS business.
In the prior year had double digit EBITDA margins, we were running it for profitability.
Some of the discussions around the board table were why the margins were a little lower on SaaS than they were on the legacy marketing services business at that time.
So we assembled a new board just a little over a year ago.
<unk> did a real deep dive into the business and basically confirmed the progress that we've made and the quality of the software and a decision was made to.
Change the stance of the company to more of a growth stance.
Permit us to invest in more engineering talent more product development people.
And it really enhance the software and so that change is what you're starting to see flow through the business that we had a lot of good momentum coming into the direct listing don't get me wrong, but the acceleration in part is due to the sort of the new board.
Blessing of a more.
Growth oriented stance and so when we came public we said just vary.
Generically that we thought we could double the.
Revenue and customer base of the company in the medium term.
And.
The kind of growth that you talked about sort of always felt comfortable really.
At bidding too.
Part of the other the other overlay one other thing origin onto our improved results and Thats. The small business market is increasingly embracing this transition to the cloud.
We were arguably early.
Six or seven years ago, when we started talking about this.
We would go in and talk to a small business owner and talk about the cloud and they would ask is that a rate they didn't really understand the cloud and what all that bad.
Today, there is just is it.
Part of it's the pandemic a whole different orientation people sort of feel an urgency.
Figure this stuff out and so I think really well positioned for that.
Clear category leader for small businesses across the across the nation I think what's happening now.
Our deciding they want to do this.
Creasing Lee they are turning to us and a lot of our customers who initially.
Had bought R.
Our offering and sort of we're happy with a really good website and some listings management and a couple that we think are starting to engage now and really use the tool. So.
That's sort of how we think about it and that's been really propelling our growth alone.
Got it.
Very helpful color and then.
The season customer metric is really interesting.
Obviously, you chose the customers engaged more of the longer they stay.
So when you think about your future growth strategy in the SaaS business, how much of it is.
He is focused on leaning in more with these existing seasoned customers and expanding versus net new customer acquisition.
I will say on the first on the first side of the equation.
Pricing power in your offering as you launch new features like the centralized.
So maybe just help us balance those those two.
Growth levers.
Yes look we do think that there is.
Pricing power or are there sort of a.
Gradual unbundling that we've been doing which is some.
Some mild pricing that some of those we've talked before about when we experimented going down market.
With lower price point.
Simpler offerings, we're putting through some price down there to try to work.
We're pretty clear, we don't want to be in that business and so we're sort of.
Forcing some of that up or out. So there is there is a little bit of price.
Mixed in here and there'll be a little bit more price mixed in here as we get going forward.
But.
Lot of it is just the customers buying more it's more it's more seat licenses, it's really using drive pay which generates a little bit of revenue.
It's buying some of our add on offerings that we have in there is increasing more of them all the time as we keep adding more products and services.
Some of them are actually upgrading to higher levels of thrive. So often came in on our entry level and are moving up to the higher levels now as their usage is improving.
We definitely believe that our internal models show <unk> continuing to grow.
We think there is definitely more they're there.
And then looking at our existing customer base or marketing services that zoo suddenly sometimes call. It we're hunting in the zoo.
About a third of our new customer acquisitions are still coming out of that base.
They are feeling a lot more urgency to modernize now because even though they might have said no to us over the last couple of years. They are saying, yes now.
And so we think that's going to continue to be a strong source of good customers coming in.
And then the new business acquisition activity.
We've spoken to you, we sometimes call them, our new channels all of the different new things that we're doing.
Our app in the 20th now percent of our revenue on a monthly or quarterly basis and climbing nicely.
That team is really figuring it out and we're getting better and better at all that stuff.
Okay.
Awesome.
Last one for me before I cede the floor here.
The SaaS M&A strategy.
When we think about this should we think of these as.
Smaller tuck ins that May help you bring a unique feature to market.
Faster pace than Youtube organically.
Organically.
That range or Mike that range on the larger and handle the scale just help us think through some of that.
How you're how you're planning.
The SaaS acquisition strategy from a scale and size perspective.
Well look.
Be honest with you.
Don't currently carry at that valuation.
We are still valued as of <unk>.
<unk> Phonebook business.
So our ability to go make big SaaS acquisitions is tough I mentioned earlier that we participated in many many processes and had many really great conversations this year about making SaaS acquisitions, and we got relatively close.
Some but we werent at not able to get there because.
We've got a really short story.
Okay.
We're working.
Working at just such a tremendous discount.
Other SaaS company.
Is it very difficult so our ability to make large SaaS acquisition.
It's just not very realistic today that we believe in 'twenty to unfold that would change we think will be more more more reasonably valued as a truth that company as we continue to generate quarter after quarter after quarter.
Really reliable durable growth.
And maybe some analysts take a good look at the actual software just how good it is.
We think that that will change and I think our ability to make larger SaaS acquisitions will come into frame.
Maybe it's early.
The early part of next year actually.
For now margin.
Sure.
Probably <unk> to <unk>.
Look at smaller stuff.
Because the other participants that might be on the other side trying to buy similar assets just have better buying power because they've got actual SaaS valuations or their venture venture companies that have got.
A time horizon that let them pay a full price with some of these things the market is very hot not exactly a buyer's market for.
So these things as you know so.
That's a long winded answer of saying I think it probably starts a little bit on the smaller side.
And then I think we will grow as a team we've made.
<unk> 100 acquisitions together in our in our time together we've.
We've made some very large multibillion dollar acquisition.
We're very good at those we know how to do those.
Particular set of skills is making big acquisition.
But we also know how to do tuck in and.
And roll along and do those so.
For the moment I think we're probably stuck doing tuck ins.
Until our.
Sure start to re rate.
And give us a little bit a little bit better.
Attunity.
Understood. That's very helpful color. Thank you again for taking the questions and congrats on the strong results here.
Thanks Archie.
Your next question comes from the line of Scott Berg from Needham Your line is open.
Okay.
Everyone. This is John <unk> on for Scott I. Appreciate you taking my question.
First a product question how is the uptake of some of the new very collide.
Functionality the CRM platform and are you seeing particular demands outsized demand from any verticals in particular, thank you.
So it's a good question because this.
This year that was a big area of investment that we made.
Put the tech in place to make the vertical they should work higher the vertical leaders build out all the taxonomy and the landing pages and all of the bits.
To really make that work you havent, yet really seen anything coming through in terms of.
Return on that investment, that's really 'twenty two and forward.
We're very pleased with the progress that we've made but.
Any kind of financial improvements will really begin in 'twenty, two I think meaningfully as.
As far as <unk>.
<unk> and verticals some of it has to do just with our legacy business.
Our legacy marketing services business as a tremendous number of service type business isn't it.
All kinds of home services personal services car services.
And so those tend to be areas, where we've got lots of relationships and.
I've seen a lot of traction we've seen a lot of traction legal.
<unk> seen a lot of traction.
Allied health areas.
So.
I think thats really going to be.
Terms of.
Yes.
Showing off great results to you I think that's maybe 'twenty two story more this was the year that we're building it.
Alright sounds good and then second just as far as the three new go to market motions that you've put in place over our channels that you've put in place over the past couple of quarters to inbound to Multilocation. The partner just wondering if you could provide a little more granularity on how those three year are trending specifically.
You are seeing any increased demands.
For multi location franchise businesses. Thank you.
Yeah happy to have with me here today.
Our chief customer officer, who runs those channels, so I am going to ask grant Freeman.
To give you some color on the progress that we're making in those channels.
Absolutely. Thank you.
Okay.
Apologies can you hear me.
Yeah.
Were making fantastic strides in all of those channels.
As you've seen in the package you got a chance to look at it. This morning, we have our sales from new acquisition channels is up over <unk>.
Year over year from last year.
Our franchise channel, which is sort of our version of enterprise.
As we sit here today has already signed more logos to this point than it did in all of last year and units as well and we've just updated our tech stack for our partner channel and we're seeing some acceleration. There also in addition to newly retooled and relaunched affiliate program, which we're really excited about.
Which is getting some great traction as well so the trajectory is going extremely well for all three of those channels.
Great. Thank you guys congrats.
Thank you.
Your next question comes from the line of Rob Oliver from Baird. Your line is open.
Great. Good morning, guys. Thank you for taking my question Joseph Nobody's asked yet about the SMB macro I think I'll ask about that.
Obviously, some really good numbers from you guys on SaaS SaaS growth and <unk> strength, which I really really think speak to the strategy and the strength of the products, which.
We've spent a fair amount of time with understanding on.
The other hand.
We did see sequential downtick.
In dollar retention of customer adds so just I know last time, you and I spoke.
You were.
We kind of post summer reopening is that seasonality is there something more going on I know theres been a lot of cross currents on SMB macro. So just curious what youre seeing and how you feel that sets up year to year end and into 'twenty, two and then I had a quick follow up.
Sure Yes.
I had I had previously mentioned that the Yolo summer you only live once the summer when the CDC said, while we can all go out and play a lots of people did.
The early part of the summer.
Was it a period of vacation just lots of people on vacation it did firm up in the back half of the summer.
By Labor day, and after Labor day.
Our sales were very strong business activity was very strong in and I think that was.
Quite a bounce back, but maybe delta shuttered people back in I don't know, but anyway that was.
What we saw and that continued right through our sales have been very.
Strong and we're finding people are answering answering the phone or answer on the meeting on the other end of that.
It's been going okay.
Look I have to comment that.
Small businesses.
Their confidence I would say it's mix.
Because.
Inflation. Thanks Gareth.
I think some of them don't agree with some of the things are happening in Washington as far as just a massive spending.
And all of that I think there is some there.
The malaise kind of around that honestly.
But it hasn't really harmed or affected our results. We continue to do very well and I think as I mentioned in my.
Comments earlier.
The desire for.
This type of software is really coming into its own I think the wave is forming.
Big part of the wave is still in front of us.
I think of the.
Last decade, 2010 to 2020 as a decade.
Enterprises adopted the cloud and I think the decade, where now as the decade, where smbs adopt the cloud and there is a lot more SMB than there are enterprises. So I think it's going to be a really big wave and so forth, it's pretty straight up on top of it so.
I'm very bullish on how this how this looks going forward as far as one little comment that you made in there.
Net dollar retention.
Not continuing to rocket up.
We are dealing with SMB.
There's a lot of.
Activity a lot of noise when we look back at the year over year look back that was the pandemic. We were offering for pandemic credits. There is a lot of noise in these numbers.
I wouldn't take that.
Is there any kind of trend.
I think if you look back at the huge progress that we've made in the prior few quarters I think thats. The stories that endear is going up I think you just look at it a little statistical noise in this number and I want to remind everybody listening that we're not an enterprise software company you are not going to see us have 130 or 140%.
Dollar retention.
100% is awesome, and we're going to get to a 100% it's going to take us a little time, but we're not going to get to 121, some bigger numbers than that we're dealing in SMB, we're not an enterprise.
So.
We just don't think that Thats really.
No.
Available to us, but I don't I don't want anybody to read into this please look at the last three or four quarters a trend. That's your that's your story on what's happening with net dollar retention and all the things that drive that dollar retention up are still going really really well all of that still come together you were just looking a little.
Tickle aberration.
And that is it.
Nothing no news in it.
Got it okay. Thanks, Joe helpful color I appreciate it Paul one for you on the marketing services.
Business and I know you did comment in your prepared remarks about.
Buildings, and some of the variability around billings, which was down year over year, but revenues were up. So just can you just remind us of that dynamic how to understand.
That dynamic in light of the reported numbers.
Sure sure absolutely, yes, yes, we've been saying on each earnings call and we keep reminding everybody of the Lumpiness of the schedule for the 15 months. So what you wind up with some strong quarters from weak quarters.
And this one was a strong quarter due to the publication schedule I think there might have been up 179 additional directories are published in the quarter over last year.
And that's why we gave the billings information just so you can see the trend over time I think that's the more the metric you probably should rely on for trending.
What's going to happen that trend is going to reverse in the fourth quarter and we gave you those numbers specifically so you can do the math yourself and say, it's going to be we're going to have a great. We had a great quarter and marketing service, but the cost of print.
It's not going to be as stellar.
Given that the Prince schedule in the fourth quarter is not very strong.
Thats really again, if you've been looking at trending overall for <unk>.
Marketing services billing metric is probably more accurate.
Full year view, where we're going to be.
So does that answer your question or.
Okay No that's.
That's helpful. Thanks, Paul Thanks, Joe I appreciate your time guys. Thank you.
Your next question comes from the line of Daniel Moore from CJS Securities. Your line is open.
Good morning, Thanks for taking the questions and any additional color. This morning.
Maybe first just beyond thrive pay what are some of the other primary functions of functionalities that you find are really driving engagement.
Product expansion and therefore retention.
That's a great question, thanks for asking it.
Chief product officer, Ryan cancers, with us today, I'm going to ask Bryan to comment a little bit on.
Where are you seeing some of that engagement progress.
Thanks, Joe obviously centralized inbox feature improvement was a.
A big effort and that is a doubling down on what we were already seeing in the platform and that is that our overall inbox still remains one of the primary drivers of engagement when small businesses get incoming communication from either a prospect or a customer with one simple click dialogue right into the platform and can respond so adding additional channels and.
Centralizing all of that communication became a natural next step for us.
Silicate that we also turned our inbox into a real time messaging platform. So items like web chat Facebook messenger, Instagram messenger and others operate as they should with a real time messaging platform between customer and the SMB not.
Not just drive pay but overall payments in general and everything around payments has been another area of focus inside the platform, we really think that communicating with your customers and getting paid from your customers are kind of pretty.
Fundamental to any F&B success and in the payments category over the last year, we've added everything from improving our invoices in our estimates to how we take payments.
To packages to products to deposits.
And everything you can kind of imagine around ensuring that the platform allows smbs to take payments and manage their money the way they want to and we're really seeing that rebar dividends.
As we move along.
Perfect, Thanks, and maybe just on Australia.
International talk about the initial uptake for SaaS solutions.
Whether that initial 10% penetration that we had seen historically is still achievable or conservative.
Reasonable timeframe. Thanks.
I'll start with yet.
Where.
Feel really comfortable that the thesis of penetrating that existing base.
Is intact and all the.
Early signs here half of the year and are Fabulous.
But we're going to be good there.
This acquisition closed in March.
There, obviously is a little bit of time, just putting the two companies together localizing software getting everything in place.
And we actually are out.
Accepting customers now we've been very.
Disciplined and very careful about all of those early customers, making sure that.
They were.
I'd deal client profile that they were on boarded correctly that there were no misunderstanding that they were using the software. So we have a very small incredibly engaged group of really really happy customers.
They are already beginning to refer others, it's getting to go so as we shift into 'twenty. Two we will shifted up into high gear in terms of really an outgoing outbound.
Sales effort in and Youll see sales begin to ramp very quickly in Australia. We just wanted to take the time to really bedded down and get it off to a good start and we didn't want to.
It makes the rush to get.
A few early customers sort of the wrong way influence the long term. So I think you can be very comfortable with that.
That idea of penetrating that base.
Perfect, maybe one or two more quick.
The color on the shift in M&A strategy is really helpful and I appreciate it.
And it's a natural extension, obviously, where you can go in but I'm wondering is the pipeline for <unk>.
Marketing services opportunities any different.
Or is it simply a function of confidence and wanting to accelerate the shift towards.
And skew towards SaaS solutions revenue profitability et cetera.
I appreciate the color.
Yes look make no mistake, we are building a SaaS company.
That's what we think about morning noon and night is building a SaaS company.
<unk>.
If we were to acquire a marketing services business. It would be in service of the goal of building a SaaS company.
Full stop.
We think that there's a really efficient potential customer acquisition model.
Adding more animals to the zoo. So that's what people that we can kind of go have a friendly easy conversation with the low cost cap.
And if we can do that we will do it I mean, we're not going to turn those away.
Right.
That's not we're not spending a lot of time out trying to source those.
Opportunistically, if there's something that can be done at.
And Ah.
Can't refuse price, we certainly will do it but we're not going to stretch or.
Sure.
Or become distracted by that.
So.
There is a pipeline there are other things out there to do.
It's just not our highest priority so.
We'll keep you posted if we come across any that.
It looked like they'll fit I mean, we made the Australia acquisition.
Two times EBITDA.
With a pretty quick cash repayment.
So it made complete sense to do it.
And if we have others that sort of fit that model that we'll certainly look at that.
Makes sense congrats on the progress last for.
Maybe for Paul just any thoughts around free cash flow generation for the remainder of the year.
Yeah, just thinking about free cash flow.
I would probably look at this quarter as cash flow is a predictor of next quarter's cash flow.
That is helpful. I appreciate it will catch up.
Thank you our next question.
Your next question comes from the line of Zach Cummins from B Riley Security Your line is open.
Yes, hi, good morning, Thanks for taking my questions and congrats again on the strong results here I think a lot of the key ones that I wanted to ask have already been asked by the other analysts on the call but.
Joe when you are making these investments in Q4 in the SaaS business I mean, essentially implied by by the adjusted EBITDA guidance that were given.
What are the key focus areas I mean, what's been working extremely well, thus far that maybe you're going to add more fuel to the fire or are there different areas that youre thinking about investing in as well.
The biggest single areas engineering and products.
We've got a pretty ambitious roadmap always have had.
It's becoming even.
Even sharper focus for us as we're moving along here.
And.
We've got lots of needs that these customers have that we want to fill.
<unk>.
So, it's really engineering and product focused.
In the process.
Let's be honest when we started this with sales driven growth we kind of had.
I had a simple product that we sold the crap out of it.
And.
No.
We've learned a lot and we've refined it a lot. So we've got now got a very very nuanced very good product.
With that has come.
A pretty big roadmap of things that we want to do.
And.
We've been we've been building out our engineering and product team they are superb.
Uh huh.
There are mighty team and they accomplish a lot, but we want to add resources to that and so the payback on those kinds of things arent you don't get it the following quarter or.
It's more like the following year.
Or even two years out, but we this last year with the blessing of our board and the investment that they granted us.
We really are.
<unk> enhanced our investments in that area and I don't think <unk> seen much of it come through in this year I think you'll really see it bite in 'twenty two.
We've got a lot of.
A lot of fuel I guess that we've put in there so.
So.
Part, we began the year thinking that we would probably run the SaaS business.
At around breakeven.
And as the year went on and things were really working very well and we saw the opportunity.
In concert with with our board, we made the decision to actually stretch that out to more of a.
For level single digit EBITDA loss on the SaaS side, just to feed the growth machine and that Youre, starting to see that come through and I think youll see more of it as we go through 'twenty two.
And we are in consultation right now as a team and with our board.
Where we want to set that.
Mark or going into going into 'twenty to.
Whether or not we want to.
Do the same or leaning a little bit more of the growth opportunities. They are the market is as they are now were not early anymore.
<unk> time to be doing that.
Understood that's extremely helpful and just one final quick one for Paul.
The gross margin I mean extremely strong in this quarter I mean can you talk about some of the factors that that drove that really strong performance here in Q3 for gross margin.
Sure absolutely.
Yes.
As you know the print business volume decline is an extraordinarily profitable product.
And in any quarter, where you have.
Strong.
Print, you're going to have a strong gross margin and vice versa. So.
<unk>.
So that's the primary driver of that.
Improved gross margin as our print margins.
Sure.
Understood well, thanks for taking my questions and congrats again on the strong results.
Thank you.
And your final question comes from the line of Ryan Macwilliams from Barclays. Your line is open.
Well, what a difference a year can make most javelin execution guys just one for me today.
Now you have the right go to market in place on what customer support.
Product capabilities to the platform I would agree with you that now kind of makes sense. The ramp acquisitions. So what are some of the key characteristics you're looking for SaaS acquisition is it product improvements are going after a certain geography, so love to hear how youre kind of thinking more of there. Thanks.
Youre going to get me a million calls from bankers that with a question like that but.
Thank you so look.
It really it's really almost unit directional.
A lot of ways that we can go.
Adding adding geography, we're trying to become really a global player.
And so we're pushing outside the U S and to be Crystal clear, we are definitely looking for.
Acquisitions until holds in opportunities outside the U S. Now.
That's the thing so geography, you touched on that that's definitely a thing.
So let's go to functionality I mean, there there are some.
Software players out there that had maybe spent more time.
Burrowing into a vertical or spent more time.
Developing a feature or.
No.
Drip campaign capability or something that we find it's interesting that that is either better than what we have or maybe just additive to what we have.
We could add there is that.
Puncture their talent.
There is a definitely a talent war going on in America for sure and there's some really smart people and some of these.
Startups that could that could be added to our team and really bring really accelerate us and bring us along so that's sort of the aqua hire was that got it.
Yes.
Then there is there.
There are some people who had maybe some venture backing.
In a port a bunch of money and it just never really got commercial traction and going.
And they are masked.
3800 customers that we wouldn't mind porting over and bringing onto our platform and sort of.
Getting customer add out of it.
A bunch of different ways that you can kind of look at it and I would say all of them are green light for us.
We're still early days.
This thing has only been around six years, I mean, you forget that because how big it is so fast.
<unk>.
We really we really believe that.
There are a number of kind of vectors that we can be enhanced through acquisition and so we're reviewing opportunities on all those fronts.
I appreciate the color.
What changes over the next year. Thanks, Jeff Thanks, guys.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Please wait the conference will begin shortly.
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