Q3 2022 Thryv Holdings Inc Earnings Call
Coverage ratio for the third quarter in accordance with our credit facility is one six times net debt to EBITDA and well below our covenant of three times, we generated $37 6 million of free cash flow in the third quarter and paid $39 million towards our term loan.
From a year to date perspective, we generated $84 $9 million and free cash flow and paid 81 $5 million towards our term loan.
Now lets discuss updated guidance for 2022 for the full year 2022, we raised our guidance for total SaaS revenue in the range of $214 million to $215 million.
This implies total SaaS revenue in the range of $57 million to $58 million for the fourth quarter. We are updating our SaaS EBITDA loss outlook in the range of 14, five to 15 $5 million, which has improved from our previous guidance of <unk> <unk>.
16% to $19 million.
This implies SaaS EBITDA loss in the range of $3 four to $4 4 million for the fourth quarter and is designated for international investments, including our most recent launch in Canada for the full year 2022.
We are raising our guide for total marketing services revenue in the range of $965 million to $975 million and raising our adjusted EBITDA in the range of 338 to.
<unk> $341 million.
Representing an EBITDA margin of 35%.
Before I wrap up I want once again to take a minute to talk to you about revenue recognition for marketing services and give you a peek into 2023, our marketing services financial results are reported under accounting rule, ASC 606, which has a material impact.
On both the timing and method of revenue recognition specifically for our print directories print revenue is heavily impacted by the timing of shipments and our publication schedule is non linear between quarters and fiscal years.
As a result, this nonlinearity will have an impact on the timing of when we recognize revenue.
As is common in the print industry. This entire contract associated with the print publication has crystallized as revenue once shift.
For example, a 15 month direct rig will have all revenue recognized in the first months of the publication the increase or decrease in print revenue between fiscal periods is not an indicator of the health of marketing services for this reason, we provide billings as operational metrics, which she.
<unk> very consistent and steady performance of our marketing services business as we expect and have discussed with your billings and actual cash collections follows monthly invoicing and collection of cash receipts. Unlike revenue recognition. This also gives us high confidence in our ability to match.
The business generate cash and pay down debt further.
The full year, we anticipate paying $105 million to $110 million towards our term loan.
Looking back on our Investor Day in April we announced we would be lengthening directory life in our marketing services business from 15 months to 18 months <unk>.
Advantages of lengthening of directory life are that it helps us improve our unit economics and saves costs enhances our forward cash flow visibility and frees up time for our business advisors to sell SaaS to existing customers. The only disadvantage is that extending the lives of these publications creates more.
Non linearity in the timing of the revenue recognition and marketing services and will impact 2023. At this time, we expect this to be reflected in the third quarter of 2023, where the timing of publications will make the print revenue considerably less rare.
<unk> two other quarters, both here in the U S and internationally. This will have no impact to underlying fundamentals of the business. It's just an artifact of accounting. Unfortunately, we look forward to providing you more color on this when we guide for the full year on our fourth quarter call. So stay.
Tuned now I'll turn the call back over to Joe.
Thank you Paul.
The 18 months Directory innovation is really important it does a lot of good things for us it helps us with ESG.
Directors are coming out less frequently that's environmentally friendly.
Our small business customers are with us on average something like 15 years and they view their listings in our internet yellow pages directory that our print directories as an important utility in running their business and keeps them able to be found everywhere. They don't really think of it as advertising like I've got to run an AD. That's why these very long contracts work.
That's fine.
Part of what Insulates us from the ups and downs of economic climates.
That's part of why the business is steady Eddy remember this is a gigantic gigantic melting iceberg that we're running for cash are very focused on the cash generative characteristics are and it generates a lot of cash.
I'll talk for a minute about some of our product improvements we're excited about <unk>.
We recently launched thrive pay in Australia and in Canada.
Just like it is here in the U S. A a payment told thats, particularly built for service based businesses allows them to recapture convenience fees and other costs that they have in doing business, which they like a lot allows them to get paid right away for them to ask for it next day funds allows them to do it more efficiently at lower cost. So it's.
A wildly popular it represents a huge percentage of the payment volume coming out of our platform are seeing a growing really fast.
100% year over year growth off a small base, but it's becoming meaningful we're excited about driver pay and the additional engagement that it drives when your software is paying you don't tend to cancel it. So we're pretty pleased with that another area. We're really excited about is the launch of keim chat Kim chat is the budget.
<unk> ability for people to communicate within the platform staff can chat share files.
Annotate photos referenced linked to any item within thrive for fast coordination and collaboration and real time.
A separate team chat mobile app that a small business can get to their contractors or to their to their workers in the field that don't necessarily get to see the entire thrive with all the payment details and all the CRM stuff, but they can share details about the customer they can take photos of.
A job they can they can exchange documents that allows really great communication sort of almost a slack like experience with and thrive and <unk>.
<unk> the small business owner the flexibility that they were looking for and that they need and this is one of our most requested features the.
The main goal here is no more disorganized messages drive collection collapses, all conversations across all channels into a single continuous conversation with clients. So this is a big deal and this is going to increase engagement at a much much higher level across particularly our service based business.
So it really all of them anybody that's got people out in the market out in the field that communication about the jobs about their customers is something that we've been asked a lot score by our power users. So that's also a great start we're really excited about that I wanted to quickly comment on marketing Center, we announced earlier in the year that we are launching another center called.
Marketing center, we've been testing that extensively throughout the year, we had it in pilot now with a number of sales teams and customers are buying it and it will be fully rolled out before the end of the year I would expect to see revenues from marketing center beginning in 'twenty three.
So with that why don't we turn to the operator for questions.
Operator.
Okay.
Thank you.
As a reminder.
Is star one if you would like to ask a question and we will pause for just a moment to compile the Q&A roster.
And we will take our first question from Arjun Bhatia with William Blair. Your line is open.
Okay. Thank you, Hey, Joe Hey, Paul.
Congrats on the good.
Good results.
Joe maybe could you just take a second to talk about the macro and the demand.
And environment, we obviously hear a lot from some of the other companies you cover in software, but I take it your market is a little bit unique.
Being in F&B and service based businesses are likely some differences versus what we see elsewhere. What are you seeing within your customer base.
Given how much things have changed in the last few months.
Yes for us things haven't changed that much in the last two months, we are dealing with.
These are pretty small businesses.
Typically.
510 employee very small businesses. So these arent corporation, they do read all the headlines.
Hey.
They are told they're supposed to be scared and concern.
And all of that but.
They haven't changed their behavior, we haven't.
I've seen some of the earnings calls the last few days people talking about elongated sales cycles.
Taking longer to get decisions from the C suite, we don't have any sea sweep.
We're just we're just dealing with mom and pop businesses and.
The the media campaign to get them scared about the economy is in full effect, but it really hasnt changed our results, we're continuing to write great numbers and.
Arjun, it's largely down to us.
We're now sitting and waiting for people to come to us we're going to see them.
In the ordinary course, we have 400000 customers that we communicate with on a regular basis about updating their listings in their programs across the internet across our internet yellow pages in across our print directories and as a matter of that contact more and more of them.
R.
Our buying software from us and you might say well Gee those are two different things there is a massive.
Transition happening, where small businesses are beginning to move to the cloud.
Want to get more efficient they want to get organized.
I wanted to be modern they want to meet their customers where they are.
It's a process that's underway and the tailwind of that is way way bigger than the little cross wins.
Economic concerns that are that are bouncing around above them in the.
Big corporate World.
It might eventually trickle down, but it hasn't yet we're doing just fine we're continuing with double digit subscriber growth double digit revenue growth our business is doing well and.
Our business is kind of built for this weather.
We have customers on 18 month contracts.
They're managing listings across the entire internet its a very complicated thing that they're doing with us.
It virtually have to go out of business to want to turn that lifting off.
So that's our story.
Perfect.
That's great to hear and then just I wanted to touch on the.
The new HQ that you opened in Toronto what was.
What did you see in that in that market, where you said, hey, we need a physical headquarters and physical presence.
In that market and how should we think about just the revenue progression in <unk>.
Canada playing out.
Well I mean, we have some revenue beginning to develop there now we have thrived available in an online only fashion now.
Here to these announcements.
We're adding now its feet on the street, we're adding the feet on the street through.
Partnerships and we're doing it by beginning to build.
Direct sales force in that.
The activity is just getting underway I don't want to make it type we've been doing it for a long time, we're just getting going now. So this is really a 'twenty three kind of thing don't don't look for a bunch of revenue.
This quarter.
But we're going to go we're going to go build that build that out and we expect strong growth.
Obviously, a very tiny base, but its just another plank in our growth plan.
Canada is obviously more like the size of almost one big state in the U S. So it's talking to.
Massively alter our results we havent acquired anything that there yet. This is just this is just us going in getting going in the model that youre seeing us execute there I think youll see us doing in additional countries as time unfolds here.
Perfect.
<unk> you, taking the questions and congrats again guys.
Thanks Ari.
And we will take our next question from Robert Oliver with Baird. Your line is open.
Great. Thanks, guys for taking my question, Joe I have one for you and then Paul a follow up for you as well so maybe I'll follow up a little bit on <unk> question Joe.
You guys, clearly not not seeing any macro impacts yet smaller customers.
Sort of a golden age here for SMB digital transformation.
You've been through a lot of cycles in your career.
Can you talk a little bit about the kind of potential recession resistant to the business in ways that you might be able to you know.
Be creative and harvesting even more of the customers from that zoo in other words, if we were to get into a more sustained recession here and F&B were to be impacted.
What are some of the ways that you guys.
It would have.
Defensiveness, there or an embedded advantage versus potentially some of your competitors.
Okay.
Keep in mind in marketing services.
These guys are not running at this isn't like putting up a billboard or running a flight on radio or television. This is your listings and making sure that you found in all the places that consumers look so it's printed directories, it's our online directories.
Network of about 100 other.
Online directories that we don't own and then that's lifting all over the web that we're managing for these people. So it would be like turning taking the sign off of your building.
Turn this stuff off.
We only ask them to update it every 18 months and a lot of it just auto renews and we apparently even talk to us.
We sent out an E mail, saying any changes there, okay and I just keep rolling. So this is not some big advertising decision and it's not being made by an AD agency.
Being made by a corporation that cuts its AD budget is being made by a mom and pop business.
That doesn't want to switch off the way everybody is finding them.
So, yes, we have been Paul and I and some of the other members of the team have been through a number of.
Recessions over the years and have seen the way.
This thing rolls.
One of the things that's really important as are our customers have been with us for a very long time, we don't sell a ton of new business as you can imagine.
Its 33 year old that's opening up a new business doesn't say it let's go sell let's go buy it out in the yellow pages.
Ill.
We tend to have very mature customers that have been with us for a long time and were the main thing that they do.
And.
So they don't they don't tend to go in and out of business.
Lot.
The thing that you highlight in your question.
As I turned to think about the SaaS business is the efficiency. The sales efficiency that we have a lot of our peer companies and I talked to a lot of other SaaS Ceos, they complain about how much they're spending with Google and other online sources to try to generate inquiries and leads.
And I feel so blessed that everyday.
We're talking to thousands and thousands of small businesses just in the ordinary course.
And a lot of them that werent ready last year are ready now to begin modernizing their business and so about a third of our customers come from just the normal.
Route that we do every year talking to customers about another third of referrals from those guys.
We're really happy with the changes that they've been able to implement and they're bringing their buddy who is disordered highest that need some help and to talk to us. So that two thirds and then the final third comes from all the various.
New channels motions that we are creating from from inbound and content generation to our multi location franchise sales to resellers and so on.
And.
That's kind of the way our business comes in so it's really efficient and.
One of the things that at least I'm hearing a lot about reading a lot about as I look at some companies that were just.
Pending whatever it took to drive growth numbers.
We were never really comfortable with that to be honest with you.
<unk> got.
Cash guys we're interested in.
<unk> and making money and have an unit economics that work in.
So we're much more comfortable in this type of environment.
That's great.
Thanks, Joe I appreciate that Paul just on that on that point.
With the improved ROI on some of your marketing spend it sounds like you have found some levers you can continue to pull there to drive better profitability and more efficiency, which you guys are showing which is great.
Are those levels has been exhausted other additional levers that you might be able to pull to drive further efficiency.
In operations and in particular, maybe in your marketing expense. Thanks, Paul.
We never added levers.
And as the business grows on the SaaS side, we have more revenue.
There's going to be.
More profitability as you saw for two straight quarters in the U S. We're already profitable. So we never had to lever. So we're always constantly looking at the business and finding ways to squeeze costs out.
Great. Thanks again guys.
Thanks, Rob.
And we will take our next question from Scott Berg with Needham Your line is open.
Hi, everyone. Congrats on a good quarter and thanks for taking my questions I guess I've got a couple here.
First of all Joe you talked about the marketing center to be released in full.
It looks like by end of the year.
We're in beta right now at least it looks like that was able to find some things on your webpage.
But.
With the early successes that you've had there how do you think about selling that product going forward you have to change anything in your sales motion, maybe it's going back and trying to cross sell to your existing base or something net new to drive the initial adoption in that solution.
It's a great question.
One of the things you should know.
You have to have thrive.
To have marketing center, so the universe of people that we could potentially sell it too is drive customers.
You Couldnt sell if somebody without thrive and so we've got 51000 drive customers. So thats the universe of people that we could potentially.
Sell this thing too.
And Furthermore, you have to have had have had drive for more than 30 days. So it's got to be.
In place set up running before you can then add marketing center to it so.
<unk>.
So we can sell it too in terms of.
How we're selling it to them.
All of the current drive Teva business adviser of record.
We also have an <unk>.
Additionally over the top of our CX kind of monetization team is talking to small businesses and then we have some tech touch where we can put out which we haven't done yet, but we can put out the marketing I'll, let people know that this is available but.
We're finding there is a tremendous.
Tremendous desire to track everything that people do they want to be able to track their lawn signs they put in front of jobs that they're working on they want to be able to track their trucks that are driving around they want to be able to attract flyers that they leave around in the physical world if they run and add it up at a penny saver and a local.
No.
School paper or something like they want to be able to track that work and marketing et cetera, let them do that lesson track absolutely everything that they do and put everything into one dashboard and pull it all together and Thats worth its weight in gold is well organized well run small business, which most of these existing thrive customers really are starting to get.
Got it.
And their act together so.
That's who we sell to and how we sell it.
Got it helpful. There and then for my follow up perspective, with Paul I recognize youre not adding for next year, obviously, but you gave a little bit of color on what's happening with the accounting around the marketing services business next year anytime I think about.
Some revenue changes there I always like to think about the impact on.
Expenses and our profitability in the period I assume from a linearity of the year, we should expect some profitability metrics to decline in the third quarter of next year and I clearly recognize its just because of the accounting treatment of those revenues, but just trying to think about how to potentially titrated models going into next year.
Right that's right.
And our plan now, particularly in the third quarter of next year, there's going to be very little print. So with very little print is a very little profitability.
That's completely detached from the cash flow of the business. So that's why we each quarter, we keep on bringing this up to remind everyone. The health of the business is really the billings, it's not really the recognition of the revenue.
Okay.
Very good helpful. Thank you congrats on a good quarter again.
Yes.
And as a reminder, this star one if you would like to ask a question and we will take our next question from Zach Cummins with B Riley Your line is open.
Yes, hi, good morning.
Thanks for taking my questions.
Joe just starting off nice to see double digit double digit subscriber growth again in the SaaS segment can you give us any update on kind of the mix of.
Channels that youre acquiring customers from I know, it's typically been a third a third a third in the past I'm just curious if theres been any shifts around here.
In recent months.
Yes, I mean look it's probably we're.
We're talking about a very subtle shift where the third that's coming from all the new channels.
Probably a little less than a third at the moment.
As we.
Decided to.
Move more toward profitability.
We guided for <unk>.
The loss at the beginning of the year I forget the exact number but in the mid 20th or something like that and we've we're listening we see that we see the way the market's reacting so we've decided to deliver a little less than that one of the ways. We could easily do that is.
Leaning more on the sales that we get from the zoo.
Our cost of acquisition is Super Super low they're super efficient there.
And when we're out in those new channels.
Our costs look a little bit more like all the other guys out there. So it was pretty easy for us to do that so it's not a huge difference the concept of a third a third a third I wouldn't.
Range, yet, but maybe that third is 29% it's.
Slightly off.
And we have the ability to sort of throttle that that way.
And having said that our new chief marketing officer that joined us about five months ago.
<unk> is a with and it's going to work on making all of those channels better and more efficient.
So.
I'm excited about what that will mean, a year from now with the work that she is doing.
Understood. That's helpful and final question for me is really just on the retention metrics they seem to be holding pretty steady right now in the midst of a pretty challenging macro environment.
Any sort of update that you can give.
What grant and the rest of the customer success team are doing at this point to hold those number of study or potentially improve them over time.
Yes.
Our product is getting way better.
So we're not selling the same thrive that we were a year ago.
Massively invested in product and engineering and it had just release after release after release.
<unk>.
What might seem to you like subtle product improvements, but they are big pain points for small businesses and then there's the bigger stuff.
Talk.
About some of this earlier, but the team chat thing, it's like a really slack feature right within thrive that allows people to live and communicate within drive and really is going to increase.
Agent.
Tremendously the Google message, it's where we are.
Got real time, two way think going with Google one of the questions. Sometimes that you guys asked me in private meetings.
What are your customers come from Joe like what were they using before and I say that most of them are the unclouded, we're moving them into the cloud for the first time, what they were doing as they were using.
Google Messenger or they were using.
Text or they were using regular old vanilla E mail and so our ability to have two way calendar sync.
To be able to ingest all these messages from these other formats and deliver them in one unified threat in your.
And your thrive client card is just massive first of all business. It kind of doesn't nowhere to turn to try to keep track of all the different ways that somebody might contact with somebody.
Somebody might send him a message on Facebook Messenger and then the next day, they might tectum and they might send them an E mail that they might do something on Google you just never know and so pulling it all together in one place is a big big deal.
<unk>.
This law.
Last period of time.
One of the things, we're getting a lot of feedback from small businesses. They had all of these apps around invoices they wanted to be able to.
Do more itemized things in their statements and they wanted to be able to.
May make all kinds of different changes and refinement and so we kind of team lift on that and just met with our power users just radically upgraded and improved invoice estimates that piece of it. So these things are all driving higher client satisfaction higher client engagement.
And so no we're not seeing any falloff at all.
Yeah.
Renewal rates in our churn are climbing.
And we've got a lot of a lot of reasons to believe.
Because the product is getting so much better than that.
That.
And they actually improve over time as opposed to go down we're still thinking we can maybe do slightly better it's hard I mean, it's like golf, we're already shooting pretty close to par.
For small businesses.
We're trying we're trying to grind out another 10th of a point here and there.
Understood. That's helpful. I appreciate you answering my questions and congrats again on the strong quarter.
Thanks Zack.
And we will take our next question from Dan Moore with CJS Securities. Your line is open.
Good morning, Thanks for taking the questions.
Maybe just quickly.
The most of the questions have been answered at this point, but on the marketing services.
Accounting Paul just to clarify this is a situation where reported revenue and EBITDA is maybe artificially low in Q3 and full year 2003, but the expectation would be that it would bounce back in 24 is that the right way to think about it.
Yes. It is.
The normal decline the decline rate is a shrinking business.
Normalized <unk> 24.
Perfect helpful.
And then the.
The initiative in Canada.
There.
Any sizing of incremental expense you might incur in 'twenty three as you stand up that office.
Pennant chart look to drive growth or if you expect it to be relatively neutral in the short term.
We're working on that currently that there will be a loss in Canada as we stand it up but it will be small.
Comparatively.
Got it.
I'm just curious you didn't call. It out was there much of an FX impact on either revenue or EBITDA did in the quarter just thinking about the recent movements in the Australian dollar any noticeable impact there.
Yes, there was there was a loss on revenue about $2 2 million, maybe 300000 dollar impact on EBITA for Australia.
Yes.
Perfect Thats helpful.
And then lastly, the question on retention just following up there.
In terms of net dollar retention do you see that leveling off here.
Or given macro uncertainty may be taking slightly lower before we start to move higher towards your longer term goal of a 100%.
Yes, Paul I'll take that one.
I don't want to promise you that it will it will move in a perfectly straight line from here to a 100.
But the direction will be up from here to 100, I think we just went from 91 to 92.
And hopefully, we'll just keep chugging up but.
Yes.
The data, sometimes we'll have anomalies in it where it can move back the wrong direction by a 10th or something like that but all of the things that we're doing in our product roadmap all the things that we're seeing with customer retention and our client experience team is doing leads us to believe that our overall retention rate.
Is steady if not rising and then we've got with the new centers, we've got new things to sell to these customers think about just do the math in your head as people will start buying marketing center.
It's pretty significant.
Or to your net revenue retention line as that starts coming through so.
Yes.
Up until now we've had some small things to sell like Adil.
Additional seats or some additional we could.
Given HIPAA compliance or whatever but now we've got full additional centers to setup.
So we're really I mean really coming into the period.
When actually Upselling is going to be a bigger thing than just selling.
Super Helpful. Last for me is with interest rates increasing.
Any delta or modest change in terms of capital allocation philosophy.
Any increased emphasis on debt reduction versus M&A.
Paul.
Yes, yes, as you can see by our debt repayment this quarter were focused.
Well, we've always been focused you know my two commandments about paying down debt. So we're focused like a laser beam paying down debt all the time, unless where you got it.
Some outstanding opportunity acquisition that comes our way.
And given the interest rate environment, it's in our best interest and our shareholders.
Pay all the debt down we can so thats been our focus.
Super helpful. I appreciate the color congrats on the execution and we'll talk soon.
Thanks, Dan.
And there are no further questions at this time I will now turn the call back to Mr. John Walsh for closing remarks.
Thank you very much appreciate it Dan just as I think about your last question, we manage to make a massive paydown on our debt last year.
And acquire Vivian along the way I mean, this business is so cash generative and.
I think that's the characteristic that really sets us apart.
Two one is that it.
So cash generative, we have our own kind of built in DC thats generating so much cash I think the second is just the sales efficiency that comes from our model and.
I think in an environment, where people are concerned with sales efficiency Havent look here to take a look at what we're doing.
Because we're just out calling on our regular customers and as they wake up and realize they need a modernized.
We are there and we're leading them over the line into SaaS land. So.
We're pretty excited about the progress that we're making super excited about getting marketing center out to the market and what that will do to start flattering our numbers as we go through next year.
Our early progress in Canada as great.
Australia is rocket that that market is now.
I believe in the month of October .
We have the U S broken up into regions, where in Australia, just one region I think that one region in Australia beat all of the regions in the U S. Just for the month of October . So I mean, they are really starting to hit their stride really starting to get get this thing figured out.
So we're excited about the international expansion of <unk>.
Energizer Bunny running around building these things looking at opportunities and there's more to come as we go into next year as we add additional countries and keep the expansion going so we're really excited about where we are as a business and yes, we read all the headlines in.
All of that but we think it's on us.
We are in a business, where we go out and see these customers, we don't wait for them to come see us and so we have a lot of control over our destiny and.
We are not facing any big problem at the moment, but if one comes we're prepared to.
A little harder and execute so thank you everybody for your time, we really really appreciate it we look forward to updating you again soon.
And ladies and gentlemen. This concludes today's conference call. We thank you for your participation you may now disconnect. Thank you.
[music].