Q3 2023 Thryv Holdings Inc Earnings Call

Thank you for holding and welcome everyone to the thrive a third quarter 20 twenty-three earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session if you'd like to ask a question.

This time simply press star followed by the number one on your telephone keypad.

I can withdraw your question again press start what.

Thank you I will now turn the call over to Cameron Lizard head of Investor Relations Mister Lessard. Please go ahead.

Thank you operator, Hello, and good day to everyone welcome to thrives third quarter 20 twenty-three earnings conference call on.

On the call today are Joe Walsh, Chairman, and Chief Executive Officer, and Paul Ross Chief Financial Officer, a copy of our earnings press release, an investor presentation can be found on our website at <unk> dot com or any investor section and investor thrived Dot com. Please.

Please acknowledge comments made out today's call our responses to your questions may contain forward looking statements about the operations of future results of the company. These statements are subject to the risks and uncertainties described in the companies that branch release and other filings with the SEC.

Drive has no obligation to update the information presented on this conference call <unk>.

Finally, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors reconciliation of those measures to gap will be posted on our website.

With that introduction I would like to turn the call over to chairman and CEO Jo Walsh.

Good morning, Camryn and thank you all for joining us on the call today to discuss our third quarter results.

I'd like to dive in here with two big ideas. The first is our SAS revenue beat guidance on both the revenue and EBITDA line, all while Kerry additional overhead that was allocated because we had lesser revenue in marketing services. So this is really a stand out order and it shows the strength it's develop.

Thing in our SAS business.

Secondly, we finally got behind US this looming thirdquarter, we've been talking about for well over a year, whereas revenue recognition was gonna be lights of the quarter in wood optically make it look like we had weak revenue. So we generated roughly 7 million in an adjusted EBITDA, but $37 million in cash flow and so it's sort of on.

Your scores the strength of this overall business and the management team is very much in control of the cost and able to look in this case more than a year ahead and tell you. How this is gonna turn out. So you know, we're using that cash to strengthen our balance sheet to pay down debt. It shows the strength of the marketing services business, even though.

Though it's declining so very very resilient and very forecastable.

I'd like to take you through our SAS quarterly highlights.

SAS revenue grew 19% year over year and sequentially accrue 8%.

<unk> adjusted EBITDA was much better than guidance, despite the impact of marketing services operating expenses.

Dash adjusted gross profit improved twenty-five percent year over year.

Delivering an adjusted gross margin of approximately 67%.

Client growth was up 29% year over year and engagement are norstar driving engagement was a 22% growth.

Really pleased so far with command Center you know, it's just been in beta this last period, but our team has been working closely with early adopters and making weekly updates and we'll wrap up this beta period very soon with little to no promotion, we received over 15000 sign ups.

We've collected thousands of channel streamlined over 3 million messages and we've seen positive signs.

Nearly 10000 phone calls and hours of video meetings.

So you know during the beta period, we found a few bugs you would wouldn't you, we really solidified and strikes in the product and we're ready a little later this month to go out with our full general release.

No we're achieving sign up to command center in two ways first we're offering unassisted online sign ups would take less than 60 seconds really easy to sign up.

And we've seen these users in many cases self upgrade and actually purchase where they are buying more channels or more seats or somehow expanding those that haven't expanded will monitor their usage in their engagement and those with the highest usage will actually turn it over to our sales force to contact them work with them and discuss future expansion.

<unk> opportunities. These are <unk> I guess, you would call room hand razors.

Second we're leveraging our global Salesforce with command center in their tool kit business advisers are well positioned to provide value as trusted partners. This will help that drive more demos in sales to our other centres in the future.

With that I'd like to turn it over to Paul Ralph's and let them take us through our third quarter financial results Oh.

Thanks, Jeff.

As a reminder to listeners we're going to focus on our two segments fast and marketing services, which includes results from domestic and international operations.

We feel this is more beneficial in modeling and understanding the business <unk>.

Additional detail between domestic and international.

Each segment can be found in the appendix section of the Investor presentation, Okay, let's jump into the results beginning with our <unk>.

Third quarter revenue was $67.4 million, an increase of 19% year over year, and 8% sequentially and above our guidance range.

<unk> adjusted gross margin expanded to 66.6%.

For 63.5% in the prior year.

Representing a 310 basis point increase year after year, and a 150 basis point increase sequential.

SAS adjusted gross margins will see continued expansion with the promotion of centers.

And we believe they will continue to expand with the upsell motion from the New Command Center product, which is now widely available to all of our customers SAS. Adjusted EBITDA was negative 504000 and significantly exceeded our guidance range of negative 3.5.

Two $4 million let.

Let me provide more color on a fast adjusted EBITDA margin as previously communicated we allocated operating expenses as a percentage of revenue between our two segments Sassing marketing services.

Due to materially lower <unk>.

<unk> revenue in marketing services SAS carried significantly more operating expense during the court.

Which negatively impacted or adjusted EBITDA.

And resulted in a slight reported loss in the third quarter compare to continue at sustained marching improvements.

Over the past several quarters.

However, I am pleased to report that we weren't able to substantially narrow Abyss EBITDA lost more than 3 million I effectively managing or go to market channels and customer acquisition initiatives.

This is a testament to the strength of our team and our ability to execute on our strategic plan is.

Joe said in his opening remarks, we are now past the print directory revenue recognition dynamic.

We remain confident in a long term growth prospects and are focused on accelerating profitable growth in our SAS business and we.

We will continue to invest in our <unk>, our priorities, while managing operating expenses carefully SaaS subscribers grew to approximately 66000 at the end of the third quarter, an increase of 29% year over year SaaS are approved decreased to 300.

$65 in the third quarter and represents a 3% decrease year over year.

With our new product right growth strategy, we anticipate continued subscriber growth, but monthly <unk> may face some headwinds due to pricing mix, while our sash subscribers are ramping.

They are signing up for lower introductory packages and our current average <unk> for example.

Popular marketing center offering is currently priced at 199 and 349 per month in the U S. As we move forward. This will allow us to upsell and cross sell additional products, which will benefit net dollar retention in the future.

Third quarter seasoned net dollar retention was 92% an increase of 300 basis points sequentially.

Gus previously with the introduction and expansion of our new centers like Gladbeck Center paid command center and other products such as <unk> signatures website builder, another marketplace apps and integrations will make it easier to upgrade customers, while providing excellent customer service and support.

Oops, Nancy R opportunity to expand our N D O R.

Moving over to marketing services.

Third quarter revenue was 116.5 million within the mid point of our guidance.

Third quarter marketing services, adjusted EBITDA was 7.8 million.

<unk> and then adjusted EBITDA margin of settled per cent.

This was expected due to your timing around revenue recognition of our print directories lengthening from 15 to 18 months.

Third quarter marketing services billings was $159.5 million, representing a decline of 19% year over year.

Third quarter consolidated adjusted gross margin was 60%.

Third quarter consolidated adjusted EBITDA.

Seven quite dream night, representing an adjusted EBITDA margin of 4%.

Finally, our net deposition was 377 billion at the end of the third quarter hour leverage ratio is 1.8 times net that to even talk which was well below our covenant of three times. The company generated an additional 37 billion in free cash flow in the third quarter and you.

$42.5 million to pay down our turmoil.

Including the additional 10 billion of payments made in October we have made 105 million and year to date term loan debt repayments in 2023.

Lastly.

Regard to want explorations on August 15th approximately 8.3 million blorenge expired on exercise and the company's all vulgar has any large outstanding Warren folders exercise approximately 1.2 million Florence, resulting in the issuance 646000 <unk> sure.

Ours of common stock, resulting in minimal dilution and generating 15.8 million cash proceeds for the company for debt Paydowns.

Now, let's turn to guidance.

We are raising our full year <unk> revenue guidance to the range of 262 261 billion.

We're also racing <unk> guidance to the range of $929.5 million.

For the full year 2023, we are a luxury.

Our outlook for marketing services revenue in the range of 650 655 million and it just it EBITDA in the range of 177 to $179.

The reasons for the revision is that we are facing some FX pressure and have proactively made the decision to retain more of our marketing services sales force and enter into a new commission structure in an effort to drive higher productivity and growth and our size business.

We ultimately view this as an investment that will benefit our SAS business in future periods I'll now turn the call back over to Joe.

Thank you Paul.

Or international business is continuing to develop nicely.

We now have all centers available in all markets. That's that's really just as recently as just the last couple of months.

And that's part of our optimism as we look ahead to next year, we believe with more centers to sell our international business will continue to develop at a at a nice pace.

I wanted to comment on marketing Center <unk>.

Marketing Center is a platform that's a lot closer to the old advertising and marketing services that are marketing services visit the cells and therefore, we're finding more application more traction if you will what those marketing services customers. So I think you you will see us do a really good job of of more <unk>.

Deeply penetrating the zoo a few well now that marketing <unk> excuse me marketing center is really kick.

Kick in along and we've got a bunch of happy customers and the referral network is spreading the word of mouth was spreading of confidence is there and the sales force and things are.

Beginning to build so I think you'll see you know more penetration there.

You know and Pauls remarks, he raised guidance for our SaaS business and we're delighted that the sash business is continuing to really.

Develop the metrics or improving were driving toward rule of 40, you're seeing you know net dollar retention expand gross margins expand you know what you're seeing it overall acceleration as we look ahead to next year, we expect revenue growth will accelerate and we expect margins will expand in the SAS busy.

And you know, we're we're continuing to push toward being a best of breed rule of 40 business and we want you know it'll be 40 next year, but word that's the direction that we're driving tour and you have growth in both the revenue growth and large expansion will help us to get there.

So that's our thinking on the quarter operator, why don't we open it up for questions.

Certainly at this time, if you'd like to ask a question. Please press start one on your telephone keypad.

Again that is star one on your telephone keypad to queue up for our questions are.

Our first question comes from the line of <unk>.

<unk> back to you with William Blair. Your line is open.

I guess <unk>.

Thanks for taking the questions Joe one of the things that jumps out this quarter I mean, I think it's it sticks out in a in a good way is the net new customer additions I must ask business I think you added.

10000.

Customers quarter over quarter, what uhm it seems like I am I'm Sure Command Center has something to do with that but can you just unpack that up a little bit and then talk about how you capitalize on these new customer adds in and drive expansion down the line because it seems like a huge opportunity for Ya.

Yeah. Thanks for the question Command Center doesn't have a whole lot to do with it because the the command center, which is still in beta we're going to remove the beta later this month.

Most of those sign up so just free premium and they don't they don't go in the customer account. There are a number of those that after they signed up matriculated through itself upgraded and are now paying those are paying customers, but we've had no sales effort against it no.

Salesforce hasn't been involved in selling anything so what you're seeing mostly is uptake of marketing center and so.

As I mentioned in the prepared remarks, the marketing center is much much closer to the the purpose for which people were buying our marketing services and so are we're hunting in the zoo with more effect and we're getting more traction and that's working out really well and in terms of your the second part of your question.

A lot of them came in at the lower level over the the entry level price and.

There were there were even some distinct groups that we did some promotional stuff to move them over to allow us to decommission some older systems and so that's why you see a little bit of a tugged down on <unk>, it's not a permanent problem, there's actually quite a bit of scope to increase them over the next period of time, so it sort of.

Coiling the spring if you will for that dollar retention in the future.

Perfect. Yeah. That's that's that's great to hear on on marketing Center and [noise], sorry call you mentioned lowering the marketing services guidance part of that was driven by F. X can you maybe just expand a little bit on that what was the is this mostly the.

Acquired businesses that are having an impact with some system.

And others and maybe if you can just touch on some of the sales restructuring that's.

That's that's going on there and how we can expect that to play out over the next year or so.

Sure sure the FX pressure, we were experiencing than our plan was related to Australia and New Zealand.

On the the.

Sales restructuring <unk> you know we look forward all the time. So we were trying to think what's best for 2024. So we thought you know given that we now have a marketing center.

With success, we were having during the third quarter, Yeah, we should really make maintain the salesforce. We have right now and put the right Commission structure in place to drive revenue now and come out into the into 2024 very strong. So we made an investment in ourselves there and we think that's the best.

Longterm move for the company and and that's it thank you behind that.

Okay got it. Thank you guys I appreciate you taking the questions.

Charging.

Our next question comes from the line of Scott Berg with Needham and company. Your line is open.

Hi, everyone. Congrats on the nice quarter in and thanks for taking my questions here I I guess I got a couple of Joe I wanted to start with or maybe it was a policy statement, but the other statement I was expecting fast revenue growth to accelerate in 24, I guess you know what gives you the confidence in that in that state.

<unk> customer additions on the South side, we're obviously strong but you know the macro still kind of waiting out there just help us maybe understand put some tapes of where that confidence comes into play.

Yeah, I mean, it it really comes back to if you if you look at.

<unk>, where we've been coming from we've been coming from selling really one center in one stroke kind of two countries and as we look forward to 24, you know we are all singing all dancing selling the full platform now with three centers are forthcoming next year in.

And doing it in all markets and so that's that's kind of where the confidence comes from we're getting a lot of traction now with marketing center. It's it's really moving you know we talked to earlier last year about how we kind of kept it slow in the beginning to make sure. We got it figured out and it's moving quite briskly now so.

You know you're you're right that the the macro is not all better it's not wonderful. So so I'm not saying that you will have massive acceleration, but but we do believe there'll be acceleration next year.

Just based on selling the full platform and all markets.

Okay great.

From a follow up question perspective.

Another question was just asked about customer additions, but what was different <unk> customer additions this quarter versus the last quarter. You know if I go back to my notes in the second quarter. You know Joe you kind of pulled back from from top of the final marketing to some of those customers because they weren't converting is as strong as what you've seen historically, but but but why kind of the influx maybe.

In this quarter.

We basically went hard into the zoo [laughter], we really went after a lot of the standing marketing services customers.

With marketing center and.

We've talked about this a little bit in the past Scott.

If you think about what the visit et cetera does our original biggest center does it's a C. R M and it requires some amount of business process change to adopt it and incorporate it into your company.

Marketing Center is a lot closer to the marketing services products they've been buying in the past, it's more kind of apples to apples, maybe red apples go into green as opposed to.

You know the business center, which isn't like an orange, it's a very different thing.

So we're finding a pretty easy conversation there and so it's increasing our optimism about how will do let's say in 24 driving deeper into the zoo for penetration and as you've already you already know we've already discussed that's our best customer acquisition channel is.

Is when we were able to go call him standing accounts, we already know them. They already know what they're paying us with your credit is good like it's it's it's nice as opposed to going out into the outside world trying to meet.

<unk> meet new people, so what you're seeing is an acceleration of our drive into the base and.

If if I may you know, there's a little bit of cannibalization, there, too, where where where where where where not only just adding a center button. Some case, you're moving some of those customers over into marketing Center. You know, we do have a melting iceberg N R.

Marketing services business, we aren't doing anything to really grow that business, we're not working hard at growing it we're sort of harvesting cash out of it and if I'm honest, we look forward to the day when our.

Predominant revenue stream is death.

And and that that has a higher and higher percentage of revenue every year, there's a crossover point in the not distant future for us and so to the extent that we were able to you know kind of migrate some of the marketing services customers that land nicely onto our marketing center platform, we consider that a double.

<unk> because we we really have now moved them onto a modern platform, where they get much higher level of engagement and the service they get they get better value.

And it speeds up the day that we do that crossover.

Excellent thanks for taking my questions. Thanks.

Thanks Scott.

Our next question comes from the line of Rob Oliver with Bird Your line is open.

Great. Thanks, Good morning, guys, Joe I had one for you and then fall at a follow up for you. So Joe just on command center it sounds like really encouraging trends here through the beta.

I'm curious to hear just on the usage of command Center you guys had some to your pricing uhm out there for a command center and just curious what you're seeing within usage patterns and how that could play out in terms of where your customers may land in those tiered pricing plans.

Well.

He said I know it is still in beta and you know it's early but yeah, we're seeing people hook up a unified inbox and and pull together all the different communications that are coming from different areas.

Oh, and we're hearing things like you know I'm not missing messages anymore, I mean, who who goes it always checks every one of your social outlets. You know every day, it's kind of a <unk>.

Laborious thing to do and it's pulling it all together into one place and there are there are.

Customers not big numbers, yet very small numbers, but we've had some customers discover command center online.

Goin' downloaded and sort of 60 seconds start using it.

This is all really cool move through and buy another center like by a business Center you know like like move all the way through the process and self upgrade and buy more stuff. So.

It's really early and there was some there was some early.

Little little glitches in things during the beta period that we work out so we're super optimistic about what that will mean in terms of helping us meet new qualified customers ideal clients in the future. So you know the numbers are very small of people that are self upgraded our buying and we haven't told anybody command center yet.

But what we're super optimistic about what it will look like as it comes off data become generally available and we began to actually promote it and tell people about it and spread the word.

Got it very helpful color. Thank you and then Paul just curious if you know any revenue factions. It starts to go a lot of this quarter was contemplating it in your guidance relative to command center for the quarter. Thanks Gotcha <unk>.

<unk> very little but that.

Rarely something you're gonna see more in the <unk> ear periods.

It's <unk>, it's really driven by the success of marketing sound of the optimism marketing center. We have is the optimism in the fourth quarter.

Okay, great. Thanks, again, yeah, I I, just gonna add a little tiny bit to that answer just for the for the whole audience.

The <unk>.

Because it's a premium motion and command center.

While we're excited about it we don't see any revenue really this year and and even in the first half of next year it'll be relatively slow ramp of revenue not a user's we think users are gonna go through the moon and it's gonna be a really.

Powerful tool for us to.

Enter new markets meet new customers, you know kind of spread of blue Ocean of excitement about what we're doing.

But revenue will follow later, because we want to deliver value to those customers before we ask them for any money. So it's.

It's not like some of the other centers, where they were sales driven motions, where as soon as you roll. It out you started selling it.

Next question.

Our next question comes from the line of Zach Commons with C. Riley Securities. Your line is open.

Hi, Good morning, Thanks for taking my questions. Joe I, just wanted to ask a little bit more about marketing center.

Just give us a sense of how much opportunity is left within the existing zoo. It seems like it's it's really been a focus on the near term, but just try to get a sense of how much more runaway there is to go in terms of adoption on that side.

A lot.

The whole lot Yeah, we've got nearly 400000 customers right now we've got you know 60 odd thousand that are that are buying some kind of center from us. There's a lot I mean, I I can't really think of a reason why over the balance of this decade.

Virtually all small businesses won't adopt some of these tools and since they're our customer and they have a relationship with us. The average has been with us for 15 years on average.

Why wouldn't they give us a chance why wouldn't they talk to US you know and so I'm quite bullish that we're gonna be able to penetrate our way through that base and I will tell you.

Yeah, well approaching them with marketing related products and services is easier than approaching them with a full business process change and they need to sign up for a CRM and and really change the way they do visit it's easier this way.

Maybe we should have done them in a different order I'm not sure but it is what it is but we're definitely getting more traction now and uhm I'm quite bullish that that that will carry through next year and you'll see.

Zoo hunting is a bigger a bigger piece of the puzzle of customer acquisition and relying less on outbound and inbound marketing and spending money to acquire customers. You know just just continues to drive <unk>.

You know better margins in this as business as well.

[noise] understood and <unk>.

Regarding the decision the restructuring within marketing services that maintain more of those salespeople.

Should we think of that as more of just a one time margin impact here in queue for or is what what's the right way to think about that in terms of continuing to manage margins across the marketing services business.

Yeah. So if we if we kind of backed the camera up a little bit and think about the big picture of what we're doing here, we are taking a marketing services business and we're we're running it on a harvest for cash.

We're we're not really making any any efforts to grow that business and so if you think about over the last number of years, even following the company.

We've been Variabilizing, all the costs against marketing services in advance.

Revenue decline so we sit down you know in.

In the summer before 20 twenty-three and we we map out what revenue is likely to be and it's incredibly projectile and predictable what those revenues are gonna be and we lay out what our costs should be to continue to deliver high margins and so what are the number one levers that we've used to variabilize the cost of the business is.

Justin the number of feet on the street, how big that sales forces. So we're reaching a point kind of inflection point, now where marketing services and Oh excuse me sad is getting to be a much much bigger percentage of our overall revenue in carrying more overhead.

And so we we actually have the luxury now of not necessarily shrinking that salesforce into that number and so there's a little bit of cost at U C show up in it but we think that will <unk>.

Quickly convert into stronger SAS revenue as we go into the future. So.

It's not so much adding anything it's just slowing down the action that we've been taking and.

You know.

Directionally. This is not meant to be specific guidance, but directionally SaaS will be approaching 40 per cent of revenue next year and within the next bunch of quarters actually cross over and become are predominant revenue stream and so you know, we're we're looking more and more at at how to grow SaaS business as opposed to just you know.

How to manage margin on the marketing services business. It's it's it's really just kind of a transitory thing that's taking place inside the visits graduates not all at once.

<unk> does that make sense to you.

Yeah that makes sense, thanks for answering my questions.

Again, if you'd like to ask a question. Please press start one on your telephone keypad, Dan more with C. J S. Your line is open.

Good morning, maybe just one or two others. Maybe this time last year you kind of gave the outlook for marketing services EBITDA you know given the change in the billing cycle. When we looked at 24, how do we think about marketing services EBITDA relative to you're twenty-three guidance Sunday.

The current printing cycle.

Well, there's a there's a let's start with the printing cycle clearly more books come back next year. So so there'll be a little bit of a comeback in marketing services. That's that's on the good side and and marketing services is continuing to perform in a reliable steady Eddie y.

Hey, you know I'll point, you to our billing as you can look back.

Many many many quarters and look at how how.

Consistently it performs having.

Having said that.

Given the traction that we're getting with the new products that were coming out with <unk>.

We're feeling like we can go more aggressively into that zoo, not just doing add on sales, but even a little bit of self cannibalization.

And so you know we are doing the work right now on what the 24 plan will be in in our February earnings call will guide you on what next year, it's gonna look like.

But yeah, I think directionally, we've probably will be you know as I mentioned before growing the SAS business, a little faster and possibly modeling a little a little bit more of a decline in marketing services as we really.

Cannibalize that ourselves and penetrate that ourselves and we think overall, that's a healthy thing because rather than sitting and letting the might've iceberg just melts on its own you know where we're going in there with a real actionable product and we're moving people to a much higher engagement much much more modern platform.

It's also helping us reduce costs on the other side of the business because as we move people over.

We can wind down and and and turn off some legacy systems that they are on so there's a lot of moving parts in this but when I think about next year I think about more more books showing up in the pub schedule next year. So that's a good guy to marketing services, but maybe up leaning on it from cannibalization a little harder than we have.

In the past.

That's helpful and and I haven't seen if you've put out a supplemental deck I haven't seen it yet so forgive me, but not seeing any change in the that sort of 20 per cent annual decline in billings at all.

We don't anticipate that no Cameron do you have anything to add to that.

With the cannibalization might flavor it a little bit over time, but not not out into the future and if you have yeah.

<unk>, what we're doing the work now on how much we think we can do next year and.

It will be <unk> very communicative with you as to what that is but I would expect will lean on marketing services, a little harder in order to grow fast a little faster.

That's helpful. Thank you again.

Alright, thank you.

Our next question comes from Emily need them with 400 your line is open.

You can just end the call.

This concludes the Q&A session as well as the call. We thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

[music].

Mmm.

And.