Thryv - Q2 2023

Transcript

Operator (participant)

Thank you for standing by. My name is Anna, and I will be your conference operator today. At this time, I would like to welcome everyone to the Thryv Second Quarter 2023 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 would like to ask a question during this time, simply press star, followed by number one on your telephone keypad. As you would like to if you would like to withdraw your question, again, press star and number one. Thank you. Cameron Loeser, you may begin your conference.

Cameron Loeser (Director of Investor Relations)

Thank you, operator. Hello, and good day to everyone. Welcome to Thryv's second quarter 2023 earnings conference call. On the call today are Joe Walsh, Chairman and Chief Executive Officer, Paul Rouse, Chief Financial Officer, and Ryan Cantor, our Chief Product Officer. 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 today. 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 Joe Walsh. Joe?

Joe Walsh (Chairman and CEO)

Good morning, Cameron and thank you all for joining us on our call today to discuss our second quarter results. We had another solid quarter in SaaS, most notably from a bottom-line perspective, as we continue to focus on driving profitable growth, maintaining flexibility, and executing efficiently. Highlights for the quarter were 20% year-on-year SaaS revenue growth, SaaS EBITDA hit double-digit margins, client growth continues up double digits, and our engagement trends continue to be very strong. One of the things that we're really excited about is we had a goal for the year on profitability for our SaaS business, which we've reached already. We, you know, we in our fervor to get more efficient, we got a lot more efficient, and that is something that we're excited about.

It did cause us to have a very narrow miss on our revenue guidance for SaaS, but we're in a very strong position with the way all the elements are coming together, and we're confident enough that we're going to be raising SaaS revenue guidance for the year and EBITDA guidance for the year. A lot of very strong momentum in the business. We just made the decision to basically sell fewer of the more expensive sales that come through our inbound channel and made a few other efficiency moves, and it's resulted in about a 10-point swing in the EBITDA profitability from, you know, the around breakeven to double-digit EBITDA. We're really pleased with that. We think that really demonstrates the profit-making power of this business and the overall control we have over the business model.

Pretty, pretty pleased with that. Pretty excited about that. For SaaS, we've, in the past, have relied on 3 channels to drive our growth, and I've described that as a third, a third, and a third. A third coming from the zoo, you know, a third coming from happy customers referring people just like them to our base, and then a third coming from our inbound channel. That's begun to get kinda out of that perfect third thing lately. Actually, the largest source of customers is the referral bucket, 'cause there are so many customers in the happy zoo bucket that are referring people. You know, that's well into the 40s, that are coming from referrals. Up, you know, in that, well more than a third, bucket is people coming out of the zoo.

Year to date, less than 20% we now have coming from our demand generation funnels. In fact, in the most recent period, it was more like 14%. We really have been, you know, cutting back on those more expensive sales. We love those sales less because we have to do content marketing, in some cases, paid marketing and advertising. We're doing webinars, seminars, all these things to identify these folks. When they come through the funnel, we can't control who they are. They haven't been with us for 15 years. They aren't always established, mature businesses. It exposes us to a little bit more churn risk, which in the end, makes it a little bit more of an expensive sale.

Our ability to reduce our reliance on that, it has been an important element in this drive toward efficiency and profitability. We're going to talk in just a couple of minutes, adding now a fourth funnel to our business, and we're really excited about, you know, what, what that will do. We've spoken over the last year or so about our desire to implement product-led growth, to generate product-qualified leads, to use our product to help identify new prospects and new customers, to deliver some value to customers before we ask them for any money. We've been at work now for several years on an important new product that's going to allow us to do that. We're in the process right now of rolling out the beta version of our Command Center.

Command Center is an opportunity for small businesses to consume some of our product, get value, sort of raise their hand, and become a product-qualified lead, which can then be worked through and managed by our very powerful sales-led motion. We're not giving up on the sales-led motion, we're basically just adding a fourth, very highly efficient funnel to the process, and we're really excited about it. It's a culmination of multiple years' work, and it's really cutting-edge technology. Without, you know, stealing any more thunder, I want to bring our Chief Product Officer, Ryan Cantor, on to talk you through a little bit about how Command Center fits into our playbook, and also how we're harnessing generative AI in our business model. Ryan?

Ryan Cantor (Chief Product Officer)

Thank you, Joe. The launch of Command Center Beta today isn't simply a product launch. Moreover, it's a rearchitecture of the entire Thryv platform into a modular and easily expandable user experience built for the average small business owner. The need for Command Center arose out of three primary drivers. Number one, our close relationship to our users identified that even before payments, communication tools are the most primal and initial needs a small business owner has. Before scheduling on a calendar, they will email about dates and times to meet. Before accepting credit card payments, they will text the amount due. Conversational commerce is how most small businesses operate initially, and how most continue to operate today. Command Center meets these business owners where they are, not just where we want them to be.

Command Center supports native integrations to Gmail, Outlook, Microsoft 365, IMAP email, Facebook, Instagram, native phone, voicemail, and texting, along with a free web chat client. It covers all the ways today that a business communicates with their customers, unified not only in a single inbox, but in a single conversation. Number 2, we wanted to reduce the time to first value and eliminate friction for the small business owner to get started with the Thryv platform with less disruption to their day-to-day business. Thryv's Business Center CRM is magnificent, with thousands and thousands purchasing, adopting, and integrating it into their day-to-day with commitment. We see the results our products have on these business owners every day. For every business owner who has this commitment and drive, we have identified others who simply need a simpler entry path.

Command Center takes just a few minutes to set up, a simple sign-up using existing logins for Gmail or Facebook, you are communicating with your customers in less than a couple of minutes. Multiple threads and different channels are seamlessly combined into a single conversation with each customer, bringing an aha! moment to the user. This entices them to continue to connect more channels, more emails, and more accounts. Every contact, every conversation, is subtly building a robust Business Center CRM for them in the background, ready to be unlocked when they're ready. Number 3, Business Center had a growing inbox, it was often the first feature to be adopted, it carried the most usage of any feature, with over 7 million conversations happening in 2022 and 4 million already year to date in 2023.

Like all growing platforms, it had challenges and needed an overhaul to operate seamlessly with native email and include features and capabilities commonly found in other email clients or messaging applications. To meet our users' feature requests, Command Center was born. Command Center brings native email into a chat-like experience. It brings pinning and labels found in other platforms inside our inbox. It creates a visual experience with attachments and centralizes all of the files, both sent and received, across any channel into an iPhone media gallery-like experience. Command Center presents an inbox that looks like Gmail, operates like an iPhone, with the convenience features of Slack, and all built for the small business, and it is available for free forever in an all-new freemium model.

Paid plans are available per seat to properly scale with the financial size and maturity of the small business, and those plans start at $20 and $30, respectively, in the United States per seat for a Plus and a Professional plan, with these plans offering additional channels, more call minutes, and even more features. The Command Center beta program is available in the United States, Canada, Australia, and New Zealand. Command Center turns virtually all facets of customer communication into the rhythm and convenience of the text messages you get on your phone. Imagine you're a business and you open your phone. You open up messages, and it isn't just a text. It's any prospect or customer trying to contact you all in one easy place, presented in a uniform, chat-like experience. This is a modular approach.

Since you've been following the company, we frequently state that each small business owner is unique with individual needs. The reimagined Command Center navigation enables the Thryv platform to grow and be customized to meet each business owner's wants, needs, and aspirations. With Command Center, the Thryv platform can be customized to meet this need of individuality and improve personalization. By focusing on reducing friction of use, pricing it on a per-seat model, and creating easy avenues for expansion and customization, we believe the launch of Command Center and the platform rearchitecture presents a clear path to sustained net dollar retention improvement in the coming periods as volume materializes against the overall size of our existing business.

Furthermore, we believe the frictionless adoption of Command Center via online channels presents a potential force multiplier for our professional sales force, who can be made more efficient by reducing the time they spend sourcing new business themselves and replacing it with qualified users in their local community, ready for a local representative and to upgrade their experience.... Beyond just Command Center, we are seeing the pace of innovation and platform improvements increase nicely. In the first half of 2023, on average, 3 new major improvements were released every week. After slowly rolling Marketing Center out in the first part of 2023, more Marketing Centers were sold in June than in all of Q1 combined, and we will soon have a couple 2,000 active Marketing Centers sales.

Marketing Center is a single platform that helps small businesses navigate all the complexities of modern-day marketing: websites, Google Business Profiles, paid advertising campaigns, offline call tracking, and more. These are all just various ways consumers seek out and find small businesses, and Marketing Center helps each business owner know in real time, which of these efforts is working and which ones aren't. Sales are also accelerating due to additional product enhancements. We launched integrations with Nextdoor, YP.com, Yahoo, and Yelp to enable paid profile enrichment that is fully integrated and controlled inside the platform. We also just announced expansion of Marketing Center into both Canada and Australia, coupled with the addition of a new higher tier of Marketing Center at $299 a month. We are now offering both a Plus at $199 and a Professional version at $299 a month.

It is important to state that our focus on centers will also bring an expected higher gross margin, as each center is being designed to deliver north of 75% gross margins. Across the rest of the platform, innovation also continues. Earlier this year, we launched our integrated Signatures app. Since then, thousands of e-signatures have been sent and signed. ThryvPay got mobile device readers and Tap-to-Pay. This helped deliver 30%+ quarter-over-quarter growth in Q2 and about 60% year-over-year growth year to date. We aren't just focused on usable features. As engagement in the Thryv platform continues to grow, it is equally important that Thryv takes the proactive steps to ensure our users and their data remain safe and secure. In Q2, we successfully rolled out and have universally enforced that every user inside the platform is now protected by multi-factor authentication.

The other area Thryv has been focusing on is generative AI. Through the end of 2022 and early parts of 2023, the product team invested hours and hours in speaking with our users about practical ways generative AI tools could improve the product and to help them in their day-to-day. Our focus initially is when to use generative AI, and using AI to help create the right content blocks at the right time. Today, we are leveraging generative AI to create ad copy, headlines, keywords, and ad groups inside Marketing Center. AI is used in the creation and publishing of our professionally designed websites. In the near future, we are excited to bring AI to our social media module, aiding small businesses in the creation of better content.

We plan to bring it to our review management section to help small businesses with suggestions on how best to respond to online reviews, and to our new inbox to aid in response times. Many of these items are in various stages of development and testing, but our most important guiding light is never to simply use AI for the sake of AI, but instead to ground each improvement, each dedication of resources towards a capability that will make a difference to the benefit of our small business users. We have an exciting roadmap ahead with continual improvements to all of our centers and apps, and I look forward to sharing with you in future periods. With that, I will turn it back over to Joe.

Joe Walsh (Chairman and CEO)

Thank you, Ryan. Command Center is our new front door. It's how you'll enter our company. It's how you'll enter our product. It's the idea of a platform with multiple products. The entry point is Command Center. If you have Business Center, you'll also have a Command Center. If you have Marketing Center, you also have a Command Center. What it does is it frees us up now to sell Marketing Center to anybody. We, we can use it as an opening product. Up until now, we've been very deliberately, very carefully ramping Marketing Center and only selling it really to customers that already have a Business Center. You know, it's, it's moving along nicely. We're at about a $4,000 Marketing Center annual run rate in the most, in the most recent month.

It's building nicely, but the sort of velvet ropes come down now, and rather than only being able to sell into the Business Center universe, you can now sell anybody a Marketing Center with the advent now of Command Center as our new front door. Command Center is multiple years of work coming to fruition, you know, today, you know, going out in the market right now, and we think that it really is transformative in terms of using the product to prospect for ideal customers. Then, based on their usage behavior, they identify themselves as people that we wanna spend time with and assist in their digital journey, and that will be a really good use of our sales force's time. We will call these product qualified leads as they reach a certain point of value consumption.

Really pleased with this fourth funnel, this very efficient fourth funnel that we're adding to our machine. It's part of how we see growth accelerating as we go into 2024. Because rather than selling 1 center in 1 country, we're now in multiple countries, and we're now selling multiple centers. There's many more vectors of growth that will allow us to lean into that and expand our growth. We've talked before about we see ourselves as a Rule of Forty company. This is part of how we get there, is these additional products, which have been multiple years in development, that are finally there. Last comment I'll make, Ryan touched on generative AI. We have approximately 3,000 employees, so we have all kinds of different functions and departments across our business.

Our leadership team are looking to leverage generative AI right across our business and find additional efficiencies and find additional services and, and superior products and superior service delivery that we can give to our customers. We're seeing it in little and big ways right across the business. It will help us become more efficient as we, as we look forward. I think it's time we get into the numbers. Let's let's hear from Paul Rouse. Paul?

Paul Rouse (CFO)

Thank you, Joe. Good morning to everyone on the call. As a reminder to listeners, we're going to focus on our two segments, SaaS and Marketing Services, which includes results from domestic and international operations. We feel this is more beneficial in modeling and understanding the business. Additional details between domestic and international for each segment can be found in the appendix section of the investor presentation. Okay, let's jump into the results, beginning with our SaaS segment. In the second quarter, we continued to execute on the plan we announced on our fourth quarter call to gear towards efficient growth in our SaaS business. Said differently, we want to grow profitably. Second quarter revenue grew by $2.5 million sequentially to $62.5 million, or 20% year-over-year, just below our guidance range.

Despite slightly lower revenue, adjusted EBITDA increased by $6.4 million sequentially, way outperforming our guidance range of $1 million at the midpoint. As Joe laid out in his opening remarks, the improvement in SaaS adjusted EBITDA was driven primarily by optimization of operating expenses, particularly sales and marketing expenses associated with our new acquisition channels. Our SaaS adjusted gross margin was 65.1%, versus 64.2% in the prior quarter, representing a 90 basis point improvement as a result of our focus on selling to higher margin Marketing Center to our installed base of Business Center clients. With Marketing Center now freely sold on a standalone basis with the launch of Command Center, we do expect to see incremental gross margin improvement in our SaaS business as we move into 2024.

SaaS subscribers totaled approximately 56,000 at the end of the second quarter, an increase of 12% year-over-year. SaaS ARPU increased to $377 in the second quarter and represents 5% growth year-over-year, relatively flat on a sequential basis. As we have communicated on the previous call, we are experiencing some new clients activating at lower price points. We feel strongly this allows the company to drive additional spend and NDR expansion per client as the client grows with us, and we can attach additional centers to each client. Second quarter Seasoned net dollar retention was 89%, a decline of 200 basis points versus the prior quarter. With the rollout of new products like Marketing Center and Command Center, Thryv is on a path to achieving 100% NDR.

By providing our subscribers with a better experience, additional centers will boost customer satisfaction and loyalty. This can lead to more clients renewing their subscriptions, upgrading to higher value packages, and referring the software to their network of friends and colleagues. We also believe by addressing these factors, we will keep churn low while generating new revenue streams via new centers to offset the cost of customer acquisition, which leads to higher NDR. Moving over to Marketing Services, second quarter revenue was $189 million, matching the midpoint of our guidance. Second quarter Marketing Services adjusted EBITDA was $63.2 million, resulting in an adjusted EBITDA margin of 33%. Second quarter consolidated adjusted gross margin was 67%. Second quarter consolidated adjusted EBITDA was $69.4 million, representing an adjusted EBITDA margin of 28%.

Finally, our net debt position was $430 million in the second quarter. Our leverage ratio for the second quarter, in accordance with our credit facility, was 1.6 times net debt to EBITDA and well below our covenant of 3 times. The company generated an additional $16.5 million in free cash flow in the second quarter and paid $17.5 million towards our term loan. Now, let's turn to guidance. We are raising our full-year SaaS revenue guidance in the range of $258 million-$260 million. We are also raising our full-year SaaS EBITDA guidance in the range of $7 million-$8 million.

For the full year 2023, we are maintaining our outlook for Marketing Services, which is revenue in the range of $653 million-$663 million, and adjusted EBITDA in the range of $187 million-$190 million. For the third quarter 2023, we are guiding SaaS revenue in the range of $66.5 million-$67 million, and SaaS adjusted EBITDA loss in the range of $3.5 million-$4 million. Please note that the SaaS business will be carrying more overhead in the third quarter due to operating expense allocations as a result of lower Marketing Services revenue, due to the timing around print revenue recognition. As you can see from our full year guidance, SaaS EBITDA returns to positive levels as the operating expense allocations return to normalized levels for the fourth quarter.

For the 3rd quarter of 2023, we expect Marketing Services revenue to be in the range of $114 million-$118 million, and Marketing Services to deliver $8 million-$9 million in adjusted EBITDA. I will now turn the call back over to Joe.

Joe Walsh (Chairman and CEO)

Thank you, Paul. Q3 will have optically lower revenue and EBITDA because of the revenue recognition. Cash is not affected. We said at the beginning of the year we would pay down about $100 million of debt for the year. That was before we bought New Zealand. As of this moment, we've paid down $70 million year to date. We absorbed the New Zealand acquisition, paid down $70 million of the $100 million. In Q3, cash will continue very, very strong. We're, we're having a really good year on cash. Cash is, is, is right on plan, and the revenue recognition anomaly isn't something you should be concerned about. When you think about the, the balance of the year, in Q4, revenue and EBITDA start roaring back. Then in 2024, they really roar back.

One item, just to make a note of, is that in Q3, SaaS will carry more of the general overhead, you know, a portion of Paul's salary and mine, a little bit more general overhead. Then in, in obviously Q4 and as we go into next year, Marketing Services comes back and carries more of its share of the overhead. I wanna be clear about this. We have meticulously communicated this over the last year. I don't think there's anybody that follows this company that doesn't expect this little air pocket, that was made up of our transition to 18-month books. That innovation has been genius for us in terms of delivering, you know, revenue and EBITDA. It's been incredibly good for the environment. It's good in all ways, except for this little air pocket, and everyone knows about it.

If it's any kind of a surprise to you, you haven't been paying attention. Let me turn and talk about New Zealand. We acquired New Zealand at the beginning of April. They are right on track. They are performing to plan that, that we had in the acquisition. Integration is, is, is moving along at a nice pace, integrating them into the greater Thryv. Next month, we launch SaaS in, in New Zealand. We're really excited about that, and the local folks in New Zealand are really excited about getting going there. 2 years ago, we bought Australia, and we said at that time that there would be 3 years of investment: investment of EBITDA, investment of cash flow, to get that SaaS business up and fully scaled.

Those of you that pay close attention will notice that Australia is actually making money on, on the SaaS business this quarter. I mean, it, it's already coming along. You know, for, for the full year, it'll be, you know, closer to a push, and, you know, as we finish up this year going into 2024, it'll be making money. About a year ahead of schedule, actually delivering at the bottom line. That business is going amazing. Customers are using the product. It's scaled up significantly now, brand awareness is high, customer satisfaction is high. Our employees are really engaged. There are periods where Australia is our number 1 region now. It's, it's incredible how well it's going there. Really pleased with that and feel like we can build on it in New Zealand.

I'd like to wrap the call by giving 1 final little, you know, fun news item. We were recently named Best Companies to Sell For. There's a top, you know, list, top 50 list. We're in the top 10, so we keep climbing higher and higher in this list. We're really proud of the fact that we create an amazing environment for sales professionals, we call them business advisors, to practice their craft within our company. That's something that we're super proud of. With that, let's turn it over to the operator. Operator?

Operator (participant)

Thank you. 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. We will pause just for a moment to compile the Q&A roster. Your first question comes from the line of Arjun Bhatia from William Blair. Your line is open.

Arjun Bhatia (Analyst)

ou. Hey, guys, thanks for taking the question. Joe, maybe I'll start with you. So the first one, just when we think about where the business is today, where you're seeing maybe some inbound marketing challenges, it seems like that was the big driver behind the SaaS revenue coming in a little bit lighter than you had forecasted, but you raised full year guidance for the year. Can you give us a sense for what you're seeing in Q3, Q4, developing, that we should see that net new revenue on the SaaS side picking up? What's giving you the confidence there?

Joe Walsh (Chairman and CEO)

Thanks for the question, Arjun. Well, we're going from selling, you know, really one center in one country to kicking it wide open, selling three centers in all of our countries. And, you know, we're seeing a really strong acceleration. Let me walk you through it. We brought out Marketing Center at the very end of last year, right before Christmas, and we began selling it in a fairly limited way initially. We had, honestly, we had planned to ramp sales a little more quickly, but we weren't satisfied with the feedback we were getting from those very early customers who were finding a couple edge cases and things we needed to work on. Our sales force was still kind of getting it dialed in.

Over the last number of months, we've cured all that, and Marketing Center has really, you know, caught a lot of momentum. We mentioned it in the prepared remarks, you know, as recently as, as this last month, you know, running at more of like a $4,000 annual run rate and ramping quickly. We're confident that the, that the ramping that's going on in Marketing Center alone will carry us over the revised guidance for the year, where we actually raised guidance for the year. Keep in mind that we were only selling Marketing Center to Business Center customers and only in the U.S., and on a very kind of, you know, curated basis, very, very carefully.

Now that we have the momentum that we do, we have the product where we want it to be, you could sell Marketing Center to anybody, it doesn't have to be a Business Center customer. It can be... It can be the lead product. You can also sell it in Australia, Canada, and in 30 days, in New Zealand. We've kicked that wide open. Now, add onto that Command Center, which, you know, hundreds of signups have come in already, just in the very brief period that we've rolled the beta out. There's already been sales. You know, one of my dreams is to have sales while I'm sleeping, and that's already happening. We're already seeing these things come in. You know, and the trends for the underlying Business Center continue to be very strong.

You know, sort of, I guess, hidden a little bit in the noise of the numbers was, you know, Business Center is actually a little bit ahead of our plan. We're very confident that we're gonna be able to deliver this raised guidance for the year, and we're really proud of the profitability that we've generated. We think that that, you know, is a, you know, a really important thing to deliver at this point, is the bottom line.

Arjun Bhatia (Analyst)

Got it. Thank you, Joe.

Operator (participant)

Your next question-

Arjun Bhatia (Analyst)

Sorry, can I squeeze one more in? Joe, the announcement around the Command Center is, is really interesting, and the go-to-market, product-led growth dynamic there, something newer for, for you that we're seeing. If, if that's successful, would you consider doing a freemium go-to-market motion across Business Center, Marketing Center, and drive this, you know, get more sales in your sleep?

Joe Walsh (Chairman and CEO)

Great question. That is my dream, while I'm sleeping at night. We designed this very innovative product, I think you're gonna get to see it tomorrow, right? We're gonna do a little demo. We designed this, this product, as, as a freemium, as the kinda tip of the spear, it's been more than 3 years in development, of, of investment, of, you know, 100+ engineers and product people working at this, building it. It's been a major lift, I think, you know, when, when you see just all the, you know, threads it pulls together in one place for a customer, you're, you're gonna be, you know, impressed, if not blown away. Business Center is a much bigger... It's a CRM.

It's, it's a much more difficult thing to, to offer for free. A lot of the effort involved by both the small business that comes on and by Thryv to get them set up and onboarded, you know, is, is populating the CRM, is, is, you know, getting everything set up. It's a, it's more of a business process change. It moves the needle more if you go ahead and bite the bullet and do it, but it's, it's not something that you could say, "Here, take it for free and give it a spin." You know, you're not gonna spend the time to populate the CRM and do all the stuff you need to.

This new Command Center, actually, if you accept the free Command Center and get, get using it, it actually begins to sort of build you a CRM, if you think about it. Because you, you've got all that inbox stuff coming in, sort of building a record of who your customers are and all that. It's a beautiful on-ramp. We're, we're not planning at this time to, to add a freemium or a PLG motion to the other centers. The on-ramp into the product will be Command Center. But it will take what was kind of a 2-lane highway coming into our company and make it a 10-lane, you know, massive interstate. The number of people that we'll be able to have, go have a conversation with will, will broaden tremendously with the advent of Command Center.

Arjun Bhatia (Analyst)

Very helpful. Thank you.

Joe Walsh (Chairman and CEO)

Thanks, Arjun.

Operator (participant)

Your next question comes from the line of Scott Berg from Needham & Company. Your line is open.

Scott Berg (Analyst)

Hi, everyone. thanks for taking the questions here. I have two here. First of all, on... You know, Joe, you sound really excited about selling the new modules and then the new pro- in back to your base and, and obviously, new customers. How do we think about how you're gonna prioritize the marketing spend to do that? I know you pulled back on the marketing for some of the new inbound channels in the quarter, but knowing that some of these products probably require a little bit of spend into those outbound channels, how do we think about kinda your priorities around marketing those new modules versus just selling the core platform today? Thank you.

Joe Walsh (Chairman and CEO)

Yes. Well, let's start with Command Center, which rolled out, like what? Yeah, 2 days ago, I guess, in beta. You know, we've had hundreds of signups, and we've had some people upgrade already. It's off to a really good start with in the dark, without really any promotion. This is just our own employees telling people about it and sharing it, I think. You know, our plan is to run it in beta briefly, then do a bigger kind of market launch after Labor Day with, you know, some earned media and promotion, and advertising, and all that stuff at that point to kick it off and get, get the word out there.

We do believe it's, it's a sort of a self-discovery product that has the potential to really go viral, to be honest with you, because it delivers so much value for no money. I mean, the key element here is it's the best available product in the marketplace, and it doesn't cost anything. You know, you can, you can get in there and accomplish a lot for your business without spending any money at all. We think that that is really the key. It's not a very real marketing-heavy thing. As far as Marketing Center goes, you know, we're experiencing stronger and stronger demand, the better the sales force understands this.

We've had Australia, you know, you know, ringing the bell, screaming, "Give it to us, give it to us!" So we, we have done that now, this week, given it to Australia, and they've got a, a backlog of people that, that are interested in it. We think we'll see a, a nice surge in sales from there as well. Overall, if you think about it the way you think about it from a modeling standpoint, we're, we're not gonna, you know, spend any more than we have budgeted or planned for the year. We are gonna redirect some of those resources into some of these messaging around these, these new elements, but that was our plan all along, to be honest with you.

Scott Berg (Analyst)

Yeah, that's very helpful. Then, Paul, from a follow-up question, your seasoned churn did tick down two points, as you noted. One quarter is certainly not a trend, but your turnover the prior four or five quarters was amazingly consistent, especially as the macro changed a little bit. How should we read that two-point change? Is that just something, you know, specific in the quarter? Should we expect it to bounce back? Maybe it's macro. Obviously, we're all seeing the macro, so don't need-

Paul Rouse (CFO)

The seasoned churn is flat, and, so does that... I, I think that's the issue you're trying to address here, right?

Joe Walsh (Chairman and CEO)

Paul, I think he's going for net retention, yes.

Paul Rouse (CFO)

You know, I think that's this is a temporary thing, you know, because we had down a little bit, and we're expecting. Marketing Center gives us a perfect opportunity to add additional products, and that, and particularly with Command Center, the new front door. The, we're gonna see net dollar retention head towards 100% fairly quickly with this new innovation. We're exactly expected to reverse and go the other way.

Joe Walsh (Chairman and CEO)

Yeah. Yeah, I would just echo and add, Paul, that this is really the beginning now. You can sort of mark it down and circle it on your calendar. This, this quarter is sort of the beginning now of our net dollar retention journey. If you think about it, other than some very small add-ons, we didn't really have anything else to sell to a small business. You know, when we went in, we were using an expensive sales channel with a big demo, and we were making the entire sale at the time of the sale. There wasn't really a lot to add on. In soft economic periods, you know, people weren't buying as big. There were even a handful of downgrades of people that were, you know, would buy maybe the good, better, best.

They'd buy the best and then downgrade a little bit out of economic fear, reading all the headlines. We had a little bit of headwinds there. You start now, and you look at our business, that we now have the ability to go in and make an initial sale and then go back and add additional meaningful, very high-margin software centers, not just little signature packages or, you know, other small add-ons. This is a very significant change. From here forward, you're gonna see our, our net dollar retention rise to that 100 that we've guided you all along on. We now have the products to sell.

Scott Berg (Analyst)

Excellent, Joe. I marked it on my calendar. I look forward to the follow-up conversation on that. Congrats, and talk to you guys soon.

Joe Walsh (Chairman and CEO)

I know you did. I know you wrote it down.

Operator (participant)

Your next question comes from the line of Patrick Schulz from Baird. Your line is open.

Patrick Schultz (Analyst)

Hey, you guys talked a lot about the SaaS business. Appreciate the call you provided in the prepared remarks around both growth and ARPU. Just wanted to dig into this a little bit more. ARPU growth decelerated again this quarter. Curious to hear more about the customer buying patterns and maybe what has changed since last quarter, excuse me. Are you guys seeing a greater impact?

Joe Walsh (Chairman and CEO)

Well, in the, in the kind of the first half, a little bit of more cautious behavior on the part of our small businesses. They, they tended to be a little bit more cautious about making a purchase. They tended to think in terms of savings and value and spending less. On our good, better, best, we definitely saw a little bit of movement toward people buying, you know, the good as opposed to the better or the best. We, we saw that in our data, we saw that in the average new sale that came in. We saw that in caution to add our add-ons. People are saying, "Well, let me, let me see if I can get along for a little while without it.

I'll think about it later." People were a little bit more cautious, for sure. Now, here's the lightning bolt. You know, I was with the whole sales leadership team last week talking about this topic, they agree that we're seeing that lift. We're seeing that begin to change. Just in the conversations, the sort of seat of the pants and expectations about what the coming months and year look like are better now than they've been over the last nine. Nearing the end of the interest rate tightening cycle, they're seeing inflation backing off. Their supply chains have improved, in some cases, completely healed. The situation around labor for a small business is somewhat better than it was. It's not perfect, but it's definitely better than it was.

The small business morale ticked up more toward the green, in recent weeks, literally. I can't point to a lot of data that says that yet, but that's definitely the case. You know, I spent some time yesterday just talking to customers. I talk to customers every week. I met with Half Price Hot Tubs yesterday, who has a Business Center, our main piece of software, our CRM, and they added a few months ago a Marketing Center, and they're actively running campaigns on it. There's a very, very savvy business owner.

Actually, I was meeting with the GM, his name is Jim, got a tech background at Toshiba, you know, really understands. He's in his 50s, but really understands the dashboard and said it's very intuitive, easy to use, and, you know, got direct feedback. Like, he's not letting go of his Marketing Center. He thinks it's like a game changer for him. You know, in talking to him, he said business has been picking up and better. I think that the drumbeat of this recession that was gonna kill everybody, it never really came. It sort of, I'm not gonna say it's past, but it's definitely better. Definitely things are better for us, and we're getting better feedback. There's a little feedback from the street.

Patrick Schultz (Analyst)

I appreciate that. That's very good detail. I really appreciate that. Also, follow-up question, just congrats on the new Command Center offering. It sounds like this could be a really nice catalyst for the Marketing Center. Just as we think about your investment opportunities, how do you internally view the trade-off between investing in additional centers and marketing existing centers relative to driving international expansion and potential M&A efforts? Just any color on that would be pretty helpful.

Joe Walsh (Chairman and CEO)

Yeah, that's such a great question because that's really the, the, the choices that are in front of us. It guided you guys, and we're still on that page of delivering one center a year. We're still very much on track for an important center next year. We're, we're very far along in work on that center and are planning for sure, you know, another center next year. I, I think that cadence is baked into, you know, our spending, our investing priority. I, I will tell you that we internally now, for the last probably about three years, have prioritized investment in, in engineering and product above all else. Like, that's those needs need to be met. That's the most important thing, because we're playing with a three or four touchdown lead.

We're way in front of anybody else serving small businesses. We're the, the gold standard brand, we're the aspirational brand. We have the lowest churn, the highest client satisfaction, the broadest set of service offerings. We are the platform for small businesses, and we don't want to blow that by, you know, being chintzy about our investment in innovation. If you look at the, the number of innovations that we've delivered for Business Center, forget about the new centers, but just improvements in Business Center, I mean, we radically overhauled the whole invoicing, you know, technology that we provide, and now it's up 70% year-to-date. I mean, you know, we keep making improvements around payments. We added a swiper and a few other really important things that our customers were asking for, and payments are up more than 50% year-over-year.

I mean, we're, we're engineering and product first, guys. That's really where we're focused. After that, what's the next priority? I think expanding is important to us. I think we want, we hired an International President, we've been lifting weights and training in the gym, working on GDPR, doing all the stuff we need to for a big push internationally. As you look at 2024, I think that's sort of the Post-It note on our forehead, is let's go. We're gonna start pushing out into more geographies and going faster in that area. As far as big spend on marketing, you know, we have a really skilled CMO, Tammy Cannizzaro, and she is really good at, you know, all of the sort of guerrilla warfare, the surround sound of marketing without spending huge amounts of money.

She's done wonders so far for us in terms of, you know, making all of that more efficient. She's only been with us a year, so we expect big things from her, and she's got experience and is prepared to really soften the beachhead internationally as we push out into more markets. I think the success of Canada that we're having, falls a lot on the skill of that marketing team and what they've been able to generate.

Patrick Schultz (Analyst)

Great, I appreciate all the color, and thanks for taking my questions.

Joe Walsh (Chairman and CEO)

No, thank you for the questions. Yeah.

Operator (participant)

Your next question comes from the line of Zach Cummings from B. Riley Securities. Your line is open.

Zach Cummings (Analyst)

Hi, good morning, and thanks for taking my questions. Joe, can you just talk about the, the SaaS-adjusted EBITDA improvement here in the quarter? I mean, what, what was really driving the decision to, to pull back on some of that marketing spend and, and see that efficiency really flow through? Now that you have additional products to offer, how does that change your approach to, to some of your inbound marketing efforts as, as you go forward from here?

Joe Walsh (Chairman and CEO)

Look, we've, we've been a three-funnel business. We've talked about it ad nauseam, you know, the zoo, referrals, and, and the inbound, outbound motion. We've just added the fourth funnel, the most efficient funnel, and that's allowing small businesses to, to discover our tool without any help from us, download it, and get real value from it, like, meaningful value from it, without ever talking to us. No demo, no, no explanation, no meeting, no marketing, no nothing. And then after they've experienced a lot of value from us, they can then self-upgrade, and, and just right within the tool, they can go ahead and upgrade themselves. We've had a couple do it already, just in the beta. We're already seeing those sales flow in. Not sure if I was asleep or not, I'll have to check, but, definitely coming in.

You know, we think this fourth funnel is, you know, the most important thing that we've done in the last four or five years, is adding this fourth funnel. We think it opens up the marketplace to us in a, in a really important way. As far as delivering EBITDA out of our SaaS business, you know, for better or worse, you guys know this, you know all of our works, you know, we're a SaaS company that actually carries a little bit of debt. And debt's become a little bit more expensive lately, and, you know, I have Paul Rouse working with me, who's very, very conservative. He loves his cash.

You know, there, there's a real drive toward efficiency in our organization, and making sure that, you know, that everything we do is profitable, and shifting our emphasis toward higher and higher margin activities. That, I think, showed great promise. I mean, how many companies do you follow that, you know, have a 10-point swing at the EBITDA line, you know? We're, we're pretty proud of that, and we, we hope that you're impressed by it, and you can see the, the, the profit-making power of this business.

Zach Cummings (Analyst)

Understood. And my one follow-up question is really just around the dynamic for customer growth versus ARPU expansion. I know customer growth has, has really been kind of the stronger portion here in the first half of the year, but how do you anticipate that that dynamic will really sort of normalize as, as we go over kind of the next 12 to 18 months?

Joe Walsh (Chairman and CEO)

It's funny, these things never, you know, run perfectly in sync. What I would anticipate is you're gonna see ARPU, you know, take the baton and, and, and jump back in front a little bit going forward. I, I think, you know, as we begin to have multiple centers to sell people. We, we have more to sell now. I mean, you know, it, it was hard for our, you know, six-figure earning professional sales force to really make a very big sale of our software before, because we really just had one, you know, one software element and a handful of small add-ons. You know, we now have the ability with, with what Ryan and his incredible product team have created, to go in and sell a pretty big suite of software to these customers, and there's even more add-ons to sell them.

you know, you, you can actually make a bigger sale today. It may not be instant, it may not hit, you know, in one quarter, but when, when I think about, like, looking out over, over 2024, I would expect that, you know, ARPU will catch a bid and, and, and start to really move now, because we have something to sell.

Zach Cummings (Analyst)

Got it. Well, thanks for taking my questions, best of luck with the rest of the quarter.

Joe Walsh (Chairman and CEO)

Thank you very much.

Operator (participant)

Your next question comes from the line of Daniel Moore from CJS Securities. Your line is open.

Daniel Moore (Analyst)

Thank you, and good morning, Joe and Paul. covered a lot of ground, but maybe, and I'm sure we'll get more details tomorrow, but maybe just talk about kind of the key differentiating features behind the, the freemium version of the Command Center and the Professional plans that, you know, could add $20-$30 in revenue per seat, at least initially.

Joe Walsh (Chairman and CEO)

Oh, well, thanks for that question. I was hoping somebody would ask some detailed questions. Ryan Cantor, our head of product's with us. I'm gonna ask Ryan to sort of tease out what's different between the free version and what you get when you start to upgrade. Ryan?

Ryan Cantor (Chief Product Officer)

Sure. Thanks, Daniel. Our freemium version is fully functional in a free forever plan. The main limitations between freemium and paid plan starts with the number of channels you can connect. Our current free offering available online allows you to connect up to 3 channels. Someone could activate phone and SMS as 1 channel, add their Gmail as a second channel, and even add video for video calls and video meetings as a third channel. If they wanna add that fourth channel, could be email, Facebook, Instagram, that would prompt them to upgrade to 1 of the paid plans. Channel count is 1 primary limitation. On our team chat capabilities inside Command Center, we focus on message retention.

So 30 days retention is included, so for real-time collaboration with your team members, what's going on right now in this period, no problem, team chat's a great collaboration tool. If you wanna unlock historical messages, you would need to upgrade to 1 of the paid plans. Lastly, we include an allotment of minutes. Currently, we provide 60 minutes of voice and video calling per month. It's important to note that someone does have the capability of buying additional minutes without having to upgrade their plan. Our pricing study suggested that minutes alone weren't going to be a catalyst enough for people to upgrade to a paid plan, but that becomes another revenue opportunity for us as well.

Again, we think from a freemium perspective, that single largest leap that we're focusing on with freemium is getting someone from free to paid, using a variety of low-friction methods to do that. Hopefully that answers your question, Daniel, but there's a couple of different avenues inside of Command Center that will drive them to upgrade.

Daniel Moore (Analyst)

No, that's helpful. As we said, hopefully, gonna see that in action tomorrow. And then the, the, the other for me, obviously, the longer-term guide that you laid out, the analyst investor day, you know, looking back, implies a meaningful inflection, you know, in, in higher and in growth. Is fiscal 2024 with the, the rollout of Command Center and Marketing Center, you know, is that where you expect to see that, that inflection point, from teens, twenties, to something much more meaningful?

Joe Walsh (Chairman and CEO)

Yes. Like, just yes. Like, you got it exactly right. I mean, you know, we've spent a lot of time with you. I know you understand the story. This is the moment where Thryv upshifts into a higher gear, where we're not selling in 1 country, 1 product. We're selling in many countries, many products. It gives us both real scope to grow ARPU, it gives us real scope to grow net dollar retention now that we have something else to sell. And it gives us a very sharp point on the spear with this very broad application of the freemium Command Center, which lets us meet tens of thousands of new businesses who are interested in modernizing, but not necessarily ready to dive in for full business transformation. They're not out looking for a CRM.

They're just trying to kind of inch their way along. you know, it, it, we, we were, we were reaching for a pretty high piece of fruit on the tree, you know, when, when we were going after, you know, selling the CRM as the first sale. We now have got, you know, a lower, lower hanging fruit we can go get, which I- we think will really broaden the funnel of people coming in. resoundingly, yes. you know, we see ourselves as a Rule of Forty company. We see our growth, which, you know, for this year is, you know, circa 20%. We see that really meaningfully reaccelerating into higher levels as we go forward, and, and we see us continuing to run the business as a positive EBITDA business.

You start doing the math on that, and you can easily see how you can, you know, get to Ruleof Forty or in, into that zone. We don't think that that's years away. We think that's 2024, you know, as, as this stuff beds down and gets going.

Daniel Moore (Analyst)

All right. Look forward to seeing it in details tomorrow. Thanks again.

Joe Walsh (Chairman and CEO)

Okay, thank you.

Operator (participant)

This concludes today's conference.