Q4 2023 Earnings Summary
- The company's SaaS business is expected to become the dominant revenue source, reaching approximately 40% of revenue in 2024 and achieving parity with legacy marketing services next year, with good margins to carry the EBITDA load.
- There is strong growth in seasoned ARPU, increasing in the mid-teens among customers who have been with the company for at least a year, driving improved net dollar retention.
- The successful execution of legacy client upgrade plans is anticipated to capture the entire base over time, significantly boosting SaaS growth.
- The company's Average Revenue Per User (ARPU) may be under pressure due to new customers entering at lower price points, including promotional pricing and free offerings like the Command Center. The CEO acknowledged that ARPU will be "noisy" as they work through these trends, which could impact revenue growth in the short term.
- The transition of legacy marketing services customers to SaaS offerings may take longer than anticipated, potentially delaying expected revenue growth from these customers. The CEO mentioned that this transition may not happen in 2024 or even in 2025, indicating a prolonged timeline for full adoption.
- There appears to be a slowing growth in SaaS subscriber numbers, with Q4 showing similar growth to Q3 despite a significant jump in Q3. This could suggest challenges in accelerating SaaS adoption among customers.
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M&A Strategy and SaaS Transition
Q: How will M&A affect your SaaS transition?
A: We're nearing the end of adding legacy "zoo-like" businesses and have been successful in converting them to SaaS. There's not much of that left, and we're looking forward to making SaaS acquisitions. However, current valuation and financial constraints make significant SaaS acquisitions hard to do right now. We have a "lousy credit facility" that we'll swap out to gain more flexibility. We're confident that the crossover point to becoming a full SaaS company is not far away—perhaps in 6 to 8 quarters—and we're paying close attention to that. We seek investors who are thinking a few years out and want to invest in a growing business. -
Customer Migration to SaaS
Q: How many marketing services customers will migrate to SaaS?
A: Over the next 5 to 6 years, we believe all our legacy customers will transition to cloud tools if they're still in business. We're well positioned to get them all onto our SaaS tools, but this process will unfold over time and won't happen entirely in 2024 or even 2025. -
ARPU Trends and Outlook
Q: How should we think about customer growth vs. ARPU in 2024?
A: Seasoned customers are spending more, and their ARPU is growing, but overall ARPU might be a bit noisy due to two factors. First, as we move legacy customers to new tools, sometimes at little or no additional cost, it may not reflect full rate increases immediately. Second, our product-led growth allows customers to sign up for free and upgrade over time, introducing smaller price points initially. Despite this, we expect ARPU to gradually rise towards $7,000 per year over the next 3 to 5 years as customers add more features and centers. -
SaaS Subscriber Growth
Q: Why did SaaS subscriber growth plateau from Q3 to Q4?
A: It's a natural process. Customers are seeing value in adding analytics and diagnostic tools, and we're moving them over at little or no additional cost. This sets up opportunities for rate increases over the next couple of years through upgrade paths. Our salesforce is now comfortable with the story, the product is performing well, and we believe subscriber growth will continue. -
Internal Resource Allocation
Q: Do you have resources for the SaaS transition?
A: We've been transitioning throughout the last year. We brought Marketing Center along slowly to ensure success and minimize churn. By Q3 of last year, we saw a strong acceleration in subscriber adds as we organized around this strategy. We've already seen it flow through our numbers. -
Incentives for Legacy Customers
Q: Have you changed incentives to accelerate legacy customer transition?
A: We're focused on providing value equal to what customers received on the digital marketing services side while giving them access to modern, up-to-date platforms, often at no additional cost. This increases their engagement, turning passive yet happy clients into more active and engaged happier clients.
Research analysts covering Thryv Holdings.