Q2 2024 Earnings Summary
- Strong growth in SaaS subscribers and products: The company saw SaaS subscribers increase by 52% year-over-year to 85,000 clients. Marketing centers have become the fastest-growing product, surpassing the business center. The shift to SaaS is accelerating, with expectations that SaaS revenue will account for over 40% of consolidated revenues in 2024, and more than 50% in 2025, making it the majority of the business. They are also focusing on upselling customers to multiple centers, increasing ARPU over time.
- Improving profitability and margins in the SaaS segment: SaaS adjusted EBITDA grew over 60% year-over-year to $10 million, achieving an adjusted EBITDA margin of 13.1%, the highest as a public company. SaaS adjusted gross margin increased 460 basis points year-over-year to 69.7%, with expectations of exceeding 70% by year-end. As customers add more centers, the company is experiencing operating leverage, leading to margin expansion. The CEO believes they are on track to become a "Rule of 40" type company.
- Strategic use of AI and new products to enhance customer engagement and drive growth: The company is enhancing its Thryv AI capabilities to empower small businesses, including AI-enabled customer support and tools to generate engaging social media content, improving customer satisfaction and engagement. New center rollouts are planned, with another center coming before the end of the year, and plans to utilize freemium models to attract new customers. This focus on product innovation and incorporating AI could drive customer adoption and retention, supporting growth.
- Decreasing SaaS ARPU and Customer Caution: Thryv's SaaS Average Revenue Per User (ARPU) has decreased for four consecutive quarters, with an accelerated decline this quarter. This decline is attributed to customers opting for lower-priced options amidst a challenging macroeconomic environment, as they are moving cautiously and choosing lower-tier offerings instead of higher-priced packages. This trend may put pressure on revenue growth and profitability in the SaaS segment.
- Underperformance of Command Center Product: The company's Command Center product, intended as a growth driver, is not performing as expected. CEO Joe Walsh stated that it is "not currently as good as I want it to be" and that they are working through some "sharp edges" encountered by customers. This suggests potential delays in product rollout and challenges in driving new customer acquisition through this channel.
- Limited Financial Flexibility Due to Debt Obligations: Thryv's free cash flow is primarily being used to meet amortization obligations under the new debt facility, which limits the company's financial flexibility to invest in growth initiatives or return capital to shareholders. CFO Paul Rouse indicated that while they are confident in meeting mandatory amortization, they are still determining if there are better places to allocate cash flow in the future.
-
SaaS EBITDA Leverage
Q: How will SaaS EBITDA leverage evolve into 2025?
A: Joe Walsh explained that they are seeing overall margin lift in their SaaS business due to the addition of new centers and platform strategy. The growth of EBITDA from SaaS will replace the decline from marketing services, reaching an inflection point where adjusted EBITDA could increase from 2024 levels. As they cross over to SaaS becoming the majority revenue source, they anticipate strong Rule of 40 metrics and improved net dollar retention, aiming to stand on par with other SaaS companies. -
Free Cash Flow and Debt
Q: How will free cash flow look with the new debt facility?
A: Paul Rouse assured that they will meet their amortization obligations and have flexibility due to reduced mandatory amortization in the new debt facility. Joe Walsh added that historically all cash flow went to debt repayment, but now with increased flexibility, they can invest in product and engineering, consider share buybacks, or explore acquisitions, enhancing their position. -
ARPU Improvement Expectations
Q: Why will ARPU improve in the second half?
A: Paul Rouse is confident that ARPU will rise as new customers added late in the quarter will contribute full billing in the coming months. Adjustments in commission plans have driven center sales, and as customers are fully onboarded, ARPU is expected to increase. -
Promotional Pricing Impact
Q: How is promotional pricing affecting ARPU trends?
A: Joe Walsh explained that the lower ARPU was partly due to pro-rated billing as customers migrated late in the quarter. They did not offer significant discounts but made it easier for customers to transition, which will correct right away, leading to ARPU improvement. -
AI Implementation Benefits
Q: How is AI being used, and does it aid sales or retention?
A: Joe Walsh detailed that AI helps customers develop content for landing pages, promotional offers, product descriptions, and social posts, reducing the challenge of starting from a blank page. This feature excites customers at the time of sale (a sales aid) and increases satisfaction and engagement among existing customers, aiding retention. -
New Center Rollouts and Freemium
Q: What's the timing for the next center rollout and freemium options?
A: Joe Walsh confirmed that a new center will be released before the end of the year. They plan to allow customers to benefit from the new offering on a "try before you buy" basis, incorporating freemium elements to deliver value before requiring payment. -
Command Center Progress
Q: Can you update on Command Center and future rollouts?
A: Joe Walsh described Command Center as cutting-edge but acknowledged they are working on refining it from V1 to V2 and V3 based on customer feedback. While initial uptake is good, they aim for it to serve as a product-led growth tool over the long term, bringing in new customers through free experiences that lead to paid conversions. -
SaaS Customer Growth Focus
Q: Are new customers joining other centers or mainly Marketing Center?
A: Joe Walsh stated that Marketing Center has eclipsed Business Center as their fastest-growing product. It's appealing because it's a smaller leap for customers transitioning from legacy services, and it directly helps grow their business, leading to enthusiastic adoption. -
Margin Outlook in SaaS
Q: Is higher SaaS profitability due to customer conversion efforts?
A: Joe Walsh confirmed that margin lift is largely due to adding additional centers to existing accounts, which brings great leverage. Selling to existing customers reduces acquisition costs and increases operating leverage, improving profitability. -
Expansion Priorities for Customers
Q: What's the expansion focus as SaaS customers grow?
A: Joe Walsh indicated that the priority is for customers to add additional centers, which brings more margin and engagement. Incremental adoption of features like signatures and team chat also drives growth, but adding centers is the main goal.