Thryv Holdings, Inc. (NASDAQ:THRY) Q4 2023 Earnings Call Transcript
Thryv Holdings, Inc. (NASDAQ:THRY) Q4 2023 Earnings Call Transcript February 22, 2024
Thryv Holdings, Inc. misses on earnings expectations. Reported EPS is $-7.39 EPS, expectations were $0.41. THRY isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to the Thryv Holdings Inc. Fourth Quarter and Full Year 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you. Thank you. I'd now like to welcome Cameron Lessard, Head of IR to begin the conference. Cameron, over to you.
Cameron Lessard: Thank you, operator. Hello, and good day to everyone and welcome to Thryvs Fourth Quarter 2023 Earnings Conference Call. On the call today are Joe Walsh, Chairman and Chief Executive Officer; Paul Rouse, Chief Financial Officer; and Grant Freeman, President. A copy of our earnings press release and investor presentation can be found on our website at thryv.com or in the Investor Section at investor.thryv.com. Please acknowledge comments made on today's call and responses to your questions may contain forward-looking statements about the operations and future results of the Company. These statements are subject to the risks and uncertainties described in the company's earnings release, and other filings with the SEC.
Thryv has no obligation to update the information presented on the conference call. Finally, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on our website. With that introduction, I would like to turn the call over to Chairman and CEO, Joe Walsh.
Joe Walsh: Good morning, Cameron, and thank you all for joining us on the call today to discuss our fourth quarter and full year results, 2023 was a stellar year for Thryv, and we capped it off with an incredible fourth quarter that once again exceeded our expectations. For the full year 2023, we delivered SaaS revenue of $264 million, up 22% year-over-year with SaaS adjusted EBITDA of $12 million, which represents an adjusted EBITDA margin of 5%, because when we started the year we were projecting somewhere around breakeven for our SaaS business. We've more than delivered on that objective. And for the quarter, we're really happy to announce two notable improvements in our SaaS metrics. SaaS adjusted gross margins improved to 70% in the fourth quarter.
Our gross margins have been trending towards the 75% that we guided in our long term guidance. And it's really a function of us having built out our platform. We've got more to go, but we're able to sell multiple centers out of existing customers. And so you end up with a lot better gross margins. So that's a trend that we think we'll see continuing. Next data I wanted to mention was net dollar retention we came in at 96% for the fourth quarter. And again, that has to do with us selling additional centers to existing customers, who previously only had one center that just wasn't a lot else to sell them. We have some small add-ons, but now that we're building out more center with another one coming later this year, we expect net dollar retention to continue trending toward that 100% that we've given our long-term guidance.
We generated $148 million of cash from operations and free cash flow of $115 million, which was very similar to the prior year even after accounting for the print revenue recognition dynamic in the third quarter and our acquisition of yellow New Zealand which occurred in the second quarter. This allowed us to retire a significant amount of debt in 2023. Later in this call, Paul will delve into our impressive fourth quarter and full year results. However, I wish to direct everyone's attention to the press release we issued alongside our earnings results this morning, for those familiar with our company on this call you are well aware of our ongoing multiyear transformation. We're shifting from a massive marketing services entity, selling both digital and print products to small medium-sized businesses, to a rapidly expanding and innovative SaaS powerhouse catering to the same client base.
Our unparalleled advantage lies in the strategic selling of our SaaS products, directly into the client base within our marketing services business. We refer to it as the zoo, with our recent product launches notably Marketing Center and Command Center. I'm excited to share today that we're seeing an acceleration of clients coming from Brazil into the SaaS platform. As we journey along the digital transformation, we're excited to share an update on our ongoing initiative to transition marketing services clients to the powerhouse Thryv platform. This isn't a sudden shift or anything new but the next natural step and a decade-long commitment to equipping small businesses with the best tools for success. This will be a significant growth lever for the company in 2024.
And I'm delighted to welcome our President Grant Freeman to provide a more in depth commentary on the transformative process.
Grant Freeman: Thanks Joe, and good morning, everyone. As Joe mentioned earlier, we issued a press release this morning detailing our legacy client upgrade plans for 2024. Since you may not have had a chance to review it yet, I'll provide a brief overview and address any questions during the Q&A portion to follow. With our Thryv platform including business center and the recent introduction of Marketing Center and Command Center, we are aligned with our vision for growth in the SaaS business. By strategically expanding our platform into areas that complement our existing services, we're capitalizing on product adjacency opportunities. Specifically, our new offerings seamlessly integrate with our legacy products into the SaaS platform, creating a natural progression for our clients.
As a result we anticipate a slight acceleration in the decline of billings from marketing services as clients naturally transition to the SaaS platform, attracted by the enhanced features and capabilities that it provides You know for eight years we've been actively engaging with our marketing services clients to encourage them to modernize and adopt our award-winning Thryv platform as an upgrade to their existing services. Thryv will continue to upgrade our clients to our platform as we execute our planned migration away from legacy digital products and services. We've been converting many of our legacy customers to Business Center, a software product designed to help SMBs manage and organize the business, generate invoices, run social campaigns, manage listings and send estimates and many, many more important elements of running their business.
Many of our business center clients opt to keep the marketing services products, because they consistently rely on them to generate low cost, high converting business leads, which they find extremely valuable. This underscores the positive interconnection between SaaS and marketing services usage among our clients. Our dedication to client success isn't limited to introducing new offerings like Marketing Center, Command Center, ThryvPay, et cetera. It's a move that unlocks NDR expansion. These offerings are not cosmetic enhancements they serve as catalysts for growth. By simplifying client upgrades and providing enhanced value propositions, we've established a virtuous cycle. Clients gain access to expanded solutions fueling their success while also generating predictable recurring revenue streams for us.
This mutual benefit isn't a one-time thing. It's a symbiotic relationship that lays the groundwork for sustained growth and partnerships. As small businesses, Thryv and grow, they naturally use more of our platform capabilities. Now to support our growth, we will streamline operations, reduce complexity and create efficiencies around our legacy digital systems. We've been upgrading our long-standing clients our award-winning platform at no additional cost to them in some instances. We have also observed clients who have increased their spend in the platform. We’re eager for them to explore and utilize and grow into various modules of the platform to empower their businesses. While many of our legacy digital products deliver value, they simply aren't receiving investment or further development.
We are investing in our platform, our existing centers and have plans for new rollouts in 2024 and beyond. By upgrading clients to our Thryv platform, we provide the same value they currently receive plus numerous additional features to help them solve more problems today while also offering the opportunity to address future challenges through the addition of new centers. Our Marketing Services revenue is declining every year in the range of 20%. We are being proactive in retaining clients for the long-term by offering them a viable product, a software platform that prepares them for the future. Upgrading them to our platform can address their current and future needs. Every client being upgraded also receives our unique Command Center, which helps them tackle the universal problem faced by SMBs, which is effective and efficient communication with customers with prospects and with their internal team members.
In sum, our client upgrade plans for 2024 underscore our commitment to growth in the SaaS business. With the introduction of the Marketing Center and Command Center, we're not just evolving. We're revolutionizing our approach seamlessly integrating new offerings to enhance client experiences and Thryv sustained success. In addition, we're excited about the role of Thryv Command Center as a freemium offering and what new opportunity it provides. By offering Command Center to the businesses and developing the usage of their free center, we're building a blue ocean of freemium users who are benefiting from our platform. This allows the Company to target those freemium users who begin to activate and become hand raisers, allowing the company to offer these users paid centers to solve additional problems on our Thryv platform.
So with that, I'll now turn it over to our CFO, Paul Rouse to discuss our fourth quarter and full year financial results. Paul?
Paul Rouse: Thanks, Grant. As a reminder to listeners, we are going to focus on two segments SaaS and marketing services, which includes results for both domestic and international operations. Additional detail between domestic and international for each segment can be found in the appendix section of our investor presentation. Let's dive into our results beginning with our SaaS segment. Saas revenue was $74 million in the fourth quarter ahead of our guidance, representing an increase of 25% year-on-year and 10% sequentially. Full year SaaS revenue grew 22% to$ 263.7 million. Moving on to profitability improvements for the quarter, SaaS adjusted gross margin increased 690 basis points year-over-year and 310 basis points quarter-over-quarter was 69.7%.
Full year SaaS adjusted gross margin expanded to 66.6%, an increase of 300 basis points from the prior year. A year-over-year improvement in SaaS adjusted gross margin was driven primarily by two factors, a favorable mix shift in revenue towards our higher margin subscription base centers and cost efficiencies delivered in the quarter related to fulfillment. We expect to see continued expansion in this metric moving forward, we reported notable improvement in SaaS adjusted EBITDA in 2023, which significantly exceeded our guidance to close out the year. Fourth quarter SaaS adjusted EBITDA was $6.5 million, significantly exceeding our guidance range of $3.5 million to $4 million and resulting in SaaS adjusted EBITDA margin of 8.8%. Full year, SaaS adjusted EBITDA was $12 million, resulting in a SaaS adjusted EBITDA margin of 4.6%.
EBITDA margin improvement was directly attributable to the aforementioned improvement in our adjusted gross margin, as well as continued reliance on low cash conversion out of our marketing services installed base of customers. As previously discussed, we've undertaken a detailed analysis of our inbound acquisition channel, focusing on investment allocation and ideal client selection. This rigorous approach has yielded significant outcomes, not only enhancing efficiency but also unlocking operating leverage through optimized sales costs, prioritizing high value clients with strong potential, minimizes upfront sales investment. This laser focus drives sustainable growth by maximizing ROI and fostering enduring relationships with our ideal customers.
This solid foundation unlocks future growth through tailored upselling and cross-selling, ensuring mutual success by aligning with evolving needs and maximizing overall value. We are confident that our new command center empowering clients with self-service and insights will serve as a future acquisition driver, attracting new customers and strengthening existing ones. SaaS subscribers were approximately 66,000 at the end of the fourth quarter, an increase of 27% year over year. SaaS RPU edged higher sequentially to $370, a decrease of 4% year over year. As previously mentioned in the prior quarter, our adoption of a new multicenter PLG strategy has led to new system SaaS subscribers signing up for lower introductory packages compared to our current average RPU, thus contributing to the year-over-year decline.
Fourth quarter season net dollar retention was 96%, an increase of 500 basis points year-over-year and 400 basis points sequentially. Our enhancement in season net dollar retention directly correlates with our upselling and cross-selling initiatives. Historically, our company primarily focuses on selling one business center. However, with the introduction of additional centers and products such as marketing center, command center and product add, we are now witnessing the positive outcomes of diversifying our offerings expected in the expansion of our NDR. Our intensified efforts in up-selling and cross-selling are yielding these significant results. Moving over to marketing services. Fourth quarter revenue was $162.2 million above the midpoint of our guidance.
Full year marketing services revenue was $653.2 million also above the midpoint of our guidance. Fourth quarter marketing services adjusted EBITDA was $45.8 million resulting in an adjusted EBITDA margin of 28%. Full year Marketing Services adjusted EBITDA was $175.5 million resulting in an adjusted EBITDA margin of 27%. Fourth quarter marketing services billings was $149.2 million, representing a decline of 23% year-over-year. Our billings exceeded internal models in recent quarters, this decline rate were aligned with our long-term vision. The introduction of Marketing Center aligns perfectly with our vision for sustained growth in the SaaS business as there is a clear product adjacency fit. And so we would expect marketing services billings decline to increase given the natural upgrade to the SaaS platform.
While it represents a higher value proposition for legacy clients leading to increased adoption and retention, it also delivers improved gross margins compared to traditional marketing services products. This win-win approach ensures long-term success for both clients and our SaaS business. Fourth quarter consolidated adjusted EBITDA margin was 70%. Full year consolidated adjusted gross margin was 67%. Fourth quarter consolidated adjusted EBITDA was $52.3 million representing an adjusted EBITDA margin of 22%. For the full year our consolidated adjusted EBITDA was $187.5 million, which represented an adjusted EBITDA margin of 20%. And we recorded a non-cash impairment charge to goodwill in the amount of $268.8 million or $7.71 per diluted share once again attributable to the structural decline in our marketing services business.
Net loss was $257.5 million or a loss of $7.39 per diluted share for the fourth quarter of 2023 and compares to a net loss of $50.4 million or a loss of $1.47 per diluted share for the fourth quarter of 2022. Finally, our net debt position was $340 million at the end of the fourth quarter. Our leverage ratio was 1.8 times net debt to EBITDA which is well below our covenant of three times. The company generated an additional $34 million in free cash flow for the fourth quarter and used $25 million to pay down our term loan. We made $120 million in term loan debt retirement in 2023 which was ahead of plan. Now let's discuss guidance for the first quarter and full year 2024. For the first quarter, we expect SaaS revenue in the range of $73 million to $74 million.
For the full year, we expect SaaS revenue in the range of $325 million to $328 million, which implies SaaS revenue growth of 23% to 24%. For the first quarter, we expect SaaS adjusted EBITDA in the range of $6 million to $7 million. For the full year, we expect SaaS adjusted EBITDA in the range of $26 million to $29 million, which implies SaaS adjusted EBITDA margin of 8% to 9%. For the first quarter, we expect Marketing Services revenue in the range of $152 million to $155 million. For the full year, we expect Marketing Services revenue in the range of $495 million to $505 million. For the full year, we expect Marketing Services adjusted EBITDA in the range of $132 million to $135 million. I'll now turn the call back over to Joe.
Joe Walsh: Thanks Paul. I'd like to comment on the net dollar retention improvements. So, probably be a little bit of noise in that number as we move along because we've introduced the product-led growth motion and that is, in some cases, introducing customers a little bit lower price points, we believe will come up and certainly they'll aid our net dollar retention number over time and also some of the conversions or some of the customers coming from the marketing services space have come over on promotional pricing where that represents an opportunity for rate in the future, which will be great. But that's just introducing a little bit of noise into our ARPU number. Before anybody gets too worried about you know our ARPU number, I wanted to just highlight that we've studied season ARPU looking at people have been with us at least a year and we're increasing seasoned ARPU in the mid-teens.
So, once somebody is with us and settled down and get going, we see a strong ARPU growth, which of course, is what's driving the net dollar retention improvement. So, all I'm saying is just watch out for a little -- they will maybe a little bit of bouncing around in ARPU as we bring in mass numbers of new customers some of which have different price points. I'd like to comment on our legacy client upgrade. If you came to invest in the phone book business, it's not a bad news for us. We are rapidly building the SaaS business and now we've got more business lead generating tools for getting a lot better traction into that legacy base and really excited to see how this thing is happening and marketing center has been a real key in what's driving that.
So, I wanted to just sort of wrap up today's call by just talking about EBITDA. This is a business that has had big EBITDA, but it's been declining EBITDA for a very long time. And we are finally showing up at the place where we're reaching the nadir of the low point in that EBITDA and that's because the SaaS business is now profitable and SaaS EBITDA is growing quite quickly and it's chunky now. And so as we look at the total EBITDA that the company generates, we are reaching the point where are there or thereabouts, we stopped falling and we'll be around the same place as the transition of source of EBITDA goes from the legacy marketing services to now the SaaS business. So, we expect that the SaaS business will be approximately 40% of the company's revenue this year and looking ahead to the next year, we're looking at now reaching parity and coming out of that with the SaaS business actually being the larger chunk of our business.
So, it has good margins and has the potential to really carry the EBITDA load. I wanted to comment quickly on international. International is going really well for us. So, the deal in that area is going great. Our greenfield activity in Canada is making good progress. We are -- our international leaders looking at taking us into some more markets. The last several years EBITDA has been a bit of a drag out of international and as Australia is now reaching profitability, as we look forward, international will not will stop being a drag and begin to contribute. And certainly as we look into 2025 and beyond. So, when you think about EBITDA sources and minuses, that goes from having been a minus being a neutral this year to being positive in the future.
So, we're pretty excited about it our international business and how that's going. So, I'm going to wind up just by saying this has been quite a journey. I'm coming up on my 10th anniversary here at what used to be Dex and has now Thryv. And you know we set out a pretty ambitious thing. Take this big legacy media business and transform it into a fast-growing SaaS business. And we're now just a few quarters away from that being the predominant source of revenue and being very profitable and driving forward. So, we're pretty excited about that. And I think almost anybody could see that now. It was hard for people to see a couple of years ago, but it's pretty easy to see it now. So thank you for your support. We really appreciate our investors that had the vision to hang with us and sort of see the thing unfolding, I think you're going to be rewarded now.
So, with that I'm going to wrap up and turn it back to the operator. Operator?
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