Ladies and gentlemen, thank you for standing by, and welcome to Thryv Holdings Inc. Third Quarter 2020 Earnings Call. [Operator Instructions] I would now like to turn the call over to KJ Christopher. Please go ahead.

Good morning, everyone, and welcome to this recorded management discussion of Thryv's third quarter results. By now, you should have received a copy of the company's third quarter 2020 earnings release and investor supplement which is also posted on our website at investor.thryv.com. With me today are Joe Walsh, our Chief Executive Officer and President; Paul Rouse, the Chief Financial Officer and Treasurer; and Ryan Cantor, Vice President of Product and Marketing. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. 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 call. Also, on today's call, our presenters 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 the Investor Relations website at investor.thryv.com. With that introduction, I would like to turn the call over to Joe Walsh.

Thank you, KJ. During today's call, Paul and I will provide details on our Q3 results as well as guidance for Q4 and the full year 2020. We'll also spend time covering our business and market opportunities as many of you may be new to the Thryv story. For those who are new, let me take a moment and tell you about what we do here and offer some comments about the direct listing we just completed. So Thryv, in the materials we set out, Slide #10 is a great visual that shows kind of the Thryv product overview. Thryv is an end-to-end client experience. It's basically an operating platform for a small business. We're on the device they already own, through the cloud, we deliver this great organizing tool. And it allows a small business to stay organized to kind of be visible everywhere across the web to get the job, to manage the job and to get credit for the job. And if you take a look at that visual, you can see some of the different pieces that are involved in Thryv and allow Thryv to operate. And it really lets you do almost everything you need to do to run your business. And the things that it doesn't do, we have an app store or an app marketplace that you can go to and you can -- let's say you want to have e-commerce capabilities, and you want to sell things on your website, you can just plug-in Shopify and use it, no problem. Zoom, if you want to use Zoom, it's right there in the app store. If for your accounting, you want to use QuickBooks in the cloud, you just plug it in and the API [indiscernible] shares your sales information, so it updates…

Thank you, Joe. Before we begin, I'd like to point out that while we will be talking about revenue during this call. Due to the global pandemic, the company has temporarily issued certain customer credits in the second and third quarter, which have masked a true year-over-year comparability in both SaaS and marketing services. During the third quarter, the company has recognized pandemic credits of $7.8 million provided to customers most impacted by COVID-19. The company has reflected these goodwill adjustments as a reduction to revenue. Now I'll start with our SaaS segment. Third quarter SaaS revenue increased 2% year-over-year. When adjusted for temporary pandemic credits, SaaS revenue would have increased by mid-single digits. As Joe mentioned, our latest SaaS offering has experienced strong demand in 2020. The demand for cloud-based tools has shifted during the pandemic, and we are experiencing tailwinds in this segment. We've refined our ideal client profile to focus on large, small businesses, and this has resulted in lower churn and higher average selling price. All this is proof that SMBs now require SaaS management tools more than ever and Thryv's end-to-end client experience platform is serving those needs. Moving over to Marketing Services. Third quarter revenue decreased 28% year-over-year. As we have said, Marketing Services is a naturally declining business. We must thoughtfully manage this business to a higher-margin while we cross-sell marketing services, print and digital clients into our SaaS platform and generate cash to support our growing SaaS business. Before we continue, I'd like to remind everyone that our print product has a contract price that usually exceeds 1 year. We target 15-month publications. And these longer publication lives provide the twin benefit of ecofriendly reduced paper consumption and margin lift due to the decreased cost. However, a byproduct of a 15-month cycle…

Thanks, Paul. So as you can see, we're on plan with the development of our SaaS business. I want to just make a comment about how we got here. We went from a standing start to 40,000 subscribers in our SaaS business because we had a large sales force and a large customer base, and we went out and offered to that customer base. In the meantime, more recently, we've now begun to build new channels where every customer that came in, in the beginning, was really cross-sold out of our marketing services space. As of this writing, as of today, more than half of all the customers coming over the transom for SaaS are new, new SaaS. They're coming in through inbound marketing. They're coming in through our partner channels, our resellers. They're coming in from our multi-location franchise group. And in some cases, they're still coming in from the traditional sales force, but they're using software to open the account, and they may be are cross-selling back to Marketing Services. But more than half of all the new clients coming in today are new, new. It doesn't mean there's no penetration left in the sort of Marketing Services base. That will continue, but we grabbed the low-hanging first 10% or 15% very, very quickly. Each time we make an acquisition, like when we bought YP, we saw more than 10% of their customer base boom come in right away. And if you see us making future marketing services type acquisitions, you can expect pretty rapid penetration as we go out and offer Thryv. But importantly, Thryv has its own sales channels now that are beginning to develop, and it works beautifully back and forth between marketing services. But it's beginning to stand on its own two feet a little bit with its own sales channels that are growing and developing. So when we express confidence about building momentum with our SaaS business in '21, we have really good forward visibility on the scaling that's going on with our inbound channel, our reseller channel, our multi-location channel, and the productivity is rising out of the traditional channel, just because the software is so much better, and we've got so much positive word of mouth, high client engagement of the customers who are already using it. They're referring their friends. And it's just coming along, it's so much easier today than it was before. So the businesses function beautifully together. So I just want to wind up here and just say that the building momentum that we see carry through '21, and we believe we can scale it and continue to accelerate it. So with that, let me just open it up for questions, and we'll be glad to answer that we can. Operator?

[Operator Instructions] Your first question comes from Arjun Bhatia from William Blair.

First one, Joe, you talked about this a little bit in your prepared remarks, but I would love to maybe dig into the macro environment a little bit and the tailwind that it's generating. I know there's this obviously, a macro, there's some challenges because of the economy, but there's also businesses digitizing for the first time. So if you can share maybe a directional sense for how some of the gross customer add metrics are trending, that would be great. And then the second part is, maybe just talk a little bit about the capacity you have internally to onboard new customers. And how you're ensuring that those customers are successful on Thryv? And how you're handling those resource allocation decisions?

Sure. Be glad to. Thank you very much, Arjun, for the question. So you actually -- in the way you asked the question, you touched on the answer. And that's that small businesses feel an urgency now to modernize, to move online to have a great site, to have a great mobile site. They feel a real urgency to be able to communicate changes in their current service offerings and their hours based on changes as COVID is rolling along, as lockdowns and partial lockdowns are moving through and so on. There's a need to update that and Thryv beautifully does that for them. They can get paid electronically. They can follow up with customers, all contactless. They can arrange delivery. If they previously had people come into their stores to buy, they can now do e-commerce by going into our app store and plugging in Shopify and just doing some e-commerce that way. So overall, we're in a situation where there's a much stronger sense of demand for small businesses. In the past, when the economy was roaring pre-COVID, we would sometimes get feedback from customers that would say, look, I know I need to do this. I got to get around to it. I just -- business is going really well. And I just -- I'm so busy, I don't have time. And all of a sudden, they have a little bit more time on their hands and a real urgent need to do it. So that's the environment. Now that's crossed with the fact that businesses are scared, they're uncertain about the future. The compromises they've had to make, in many cases, have caused them to have reduced revenues. And so it's not as robust an environment, and their whole categories, in some cases, are really struggling.…

Yes. That was great color. I appreciate that. And then I know it's still early on ThryvPay, but it seems like a very exciting part of the business. So I would love to hear how you're thinking about that business might scale up. And what the contribution might look like in next year and a few years, right, more medium to long term? And thus far, maybe if there is a particular type of customer that's adopting it, just where are you seeing the traction so far? I know we're just maybe a few weeks after since it's been launched, but we'll love to hear some of that early commentary?

It is just a few weeks, I think, 16 days, if I remember correctly. We've had hundreds of sign-ups already, and we're seeing transactions processed right away by customers. We're seeing really significant volume. So it's definitely kicking in and being used. You asked a great question. Who did we build it for? We built it for all of our customers, but we have a particular niche as a business with service-based businesses. These are the roofer, plumber, locksmith, landscaper, tree guy, all these service businesses. And they tend to take pretty large payments from their customers. Think of like if you're doing a roof, and you maybe pay $3,000 upfront and then another $3,000 when the job is completed or something like that. These are big payments. And these businesses want to take the payment electronically. But they don't want to take it on a credit card because the credit card fees are so high. And so what ThryvPay allows them to do is provide that great service, that great electronic payment, know they've got the money, know they've got it right away, have confirmation, but for a much smaller fee. So that's really kind of we designed it for those guys. And so far, so good. As far as how we see it going, we think it's going to be kind of a premium offering where customers that have not yet bought Thryv could come in and get ThryvPay. One of the things we did just a while back, we were doing some -- when we added payments to the platform, we put Square and Stripe and some of these other tools on there, we were doing some of our online marketing. We ran some keyword advertising in and around the search term payments for small business. And…

Great. Yes. So that sounds -- yes, it sounds like a great opportunity. One of the things you touched on, and that was positively surprising to hear was that half of your customers are coming in from some of the newer channels. If you could just talk about where -- which of those -- between inbound and partners and multi-location, which is the most -- which you think is the most important? And where do you see the greatest opportunity to kind of lean in and invest more to kind of broaden that top of funnel and get more -- drive more customers to the Thryv platform?

Well, I first want to admit that we're late to the dance. Most, I think, SaaS companies don't have 1,000-plus person sales army and a giant customer base. So they have to do this from the very beginning. In our case, we didn't do it at all. We just focused on serving our existing customers and serving our existing sales force. So we came late to the party to try to set up an inbound machine. And I must say, it was something that, as we said about it, we were really trying to create a machine, like a scalable machine where if you put this many leads in the top of the funnel, this is what came out the bottom. And it took us a little while to get that dialed in. But throughout this year, we really have dialed that in. It's been very -- the inputs are some paid demand gen at the top. And then we -- our content marketing game we're again fairly new at. We weren't doing a lot of that over the whole 5 years, but we're doing a whole lot of it now, and we're really getting on our game and getting good at it. And we're getting more and more kind of free traffic and free mentions coming our way, coming out of the content marketing that we're now doing. So I would say the centerpiece of this is the inbound machine, and we have a plan that just looks out in time where we're just scaling that inbound machine each month. There's a certain number of additional leads that we're investing and making sure come into the top of the funnel. And there's additional FDRs talking to them, servicing them, working with them. We're doing -- we've got sort of…

Perfect. That's very helpful. And last one for me, and I'll cede the floor. Maybe for Paul. Can you just talk a little bit about the guidance? And what -- and particularly on the SaaS side, what kind of visibility you have into the fourth quarter numbers that you put out in terms of how much is already contracted? How much is in backlog, et cetera?

Well, like Joe explained, we're starting to ramp up, and we're starting to build out our channels. So we're feeling pretty good about the future. And it's not quite like a backlog like there's backup stuff is going to come out to the future. It's really every day, we're building and building. So you're going to see a slow, steady build with Thryv as we build-out. And as you see from the charts, our ABO is increasing, and our churn is going down. So that's very helpful. And also, our sales force continues to sell the product very effectively. And as Joe mentioned on the different channels, we're starting to see a slow build in each of those channels. And as you mentioned, we relate to the game, and we're building up our muscles, doing the work out to get there. So I don't have any specific backlog information to give you, but we're very optimistic about where things are heading, and we expect it to continue to get steady growth.

[Operator Instructions] Next question will come from John Slater from GPI Capital.

Joe, this John Paulson asking the question. Joe, it's very exciting to see the focus on Thryv. You really created something very meaningful here and necessary for the small business and you are up to version 5.0 now, and I'm sure more to come. When I look at the valuation, as exciting it is, we all know software companies trade at much higher multiples than we do. But by combining the 2 companies together, the whole company only trades at 2.2x EBITDA. Now it's hard to find pure plays. But when I look at HubSpot, which is a public SaaS company and not necessarily the same as Thryv, but they have a $15 billion market cap. They trade at almost 17x 20 sales and 200x EBITDA. Thryv trades at only 0.6x sales. It would seem that Thryv really by combining it with a business that's declining low 20% a year, I don't think you'll ever get the valuation that Thryv deserves. So my question is why not spin-off the Thryv, the SaaS business, so that can have a valuation that's multiples greater than the total valuation for Thryv today? And the Marketing Services will probably continue to trade at the same valuation, more or less 2 to 2.5x cash flow.

John? Your feed dropped off there. If you come back, feel free to interrupt me. I'm going to go ahead and respond to your question and your comment. And then like I said, if you could reconnect, just interrupt me if you have more question to add to that. I just want to say that the whole company today is valued based on the cash it's generating. It's just kind of a DCF model. And the gloomy was that and a very pessimistic one. And that's okay. I mean we're pretty patient about this. We're not playing this game for November of 2020 or even this quarter or even this season. We're thinking much longer term. We think there's a really very big opportunity here. This will be the platform that small businesses around the world use to run their companies. We've got a big marketplace, app store, where lots of tools are busy jumping on our API and writing in order to connect with Thryv and Thryv real -- John, you back? And Thryv really is a platform business. It's not just a little tool or a little niche thing. It's very big. And so we're thinking much bigger about where this goes. And think of a rocket taking off. It stays attached to the gantry for a while as it's coming up. And there probably is a time out in the future, 4 years from now, where it may make sense to separate these businesses. But the 2 businesses benefit tremendously at the moment from the attachment. And we're not overly concerned that we haven't crystallized that future value today. We're just focused on building an excellent platform for small businesses. And the valuation will come. And some of the conversations we've had with a few of the…

Yes. Joe, can you hear me now?

Yes, you're right there, strong and clear.

Hello? Okay, good. Yes. No, I agree with you that Thryv is very exciting. But I don't think you'll ever get the valuation, maybe some pick up as long as Thryv is a part of a business that's going -- declining at 20%. And the thing is, as you -- what are your advisers said the value of Thryv could be as much as the whole -- the value of the SaaS business of Thryv could be equal to the total value of Thryv. The total value of Thryv is around $1 billion with only $300 million or so in equity. I mean you can potentially get a 2, 3x, 4x increase in the equity value by spinning off Thryv without -- by spinning off the SaaS business without affecting the total value of the Thryv today. And the benefit is you say you're in a very competitive market, and there's a lot of people with enormous resources. And they can tap the equity markets to raise money very easily to fund the growth and by not having that tool and being at a disadvantage in terms of the cost of capital, it's like competing against HubSpot and others with your hands tied behind your back. So I think separating the 2 -- and I'm not saying separate today, but it should be something on the -- not 4 years, something in the perhaps the next year or a year time frame. I think it will give you a lot greater flexibility and a much greater cost of capital to pursue the growth that you're targeting.

Well, I mean, you make a really good point. And I respect your experience and perspective. You also have been a great backer of listing, too. So to be fair, we'll take that and think about that. John, we are running the company today as though we're going to split it tomorrow. We're running the Marketing Services business and the SaaS business as 2. We're tracking them that way. We're running them that way. We're thinking about them accounting for them that way, and we're really working toward an eventual separation because we do see that problem. And it may -- you may be correct that it will make sense for us to do that at some point. And I'm going to take very strongly your advice and suggestion and perhaps we should do it sooner than we were thinking.

I have no further questions. Thank you. At this time, I'd like to turn the call back over to Mr. Joe Walsh for closing remarks.

Thank you very much, operator. I just would like to say a couple of closing comments. One, there was a question there a couple of minutes ago about forward visibility. The business does have pretty good forward visibility, just the way we've been building the machine on the SaaS side. We know what we're investing in the top of the funnel. We know how many leads we're targeting for the month. We typically hit that number almost exactly every month. And it's just kind of math as you bring it down. And the close time from when we initially talked to those customers when they close, it's not super long, but it's not instant. So we have a good sense of it. And we have very good forward visibility here, certainly for the fourth quarter and even into the beginning of next year. And the momentum is building, and we are really confident in that building momentum and excited about seeing the growth return to our software business. I'm also aware that there are a number of people on the line who are not allowed to ask questions, just for assorted reasons. And I would just encourage you to reach out to our IR team. They're ready to answer those questions. They'd would love to help you if you're modeling or working on it. This is our first call as a public company. We realize we're -- people are just now becoming familiar with us and familiar with our story. It does require a little work because you got to get your head around 2 businesses not one. But we promise it will be worth it. We think that there's a terrific future here. We've got a very seasoned management team who's been doing this for a while, and we're excited about this. We really believe in what we're doing. We think that this SaaS business will -- not just in valuation, but in revenue will dwarf the rest of the company in just a few years according to the plans that we've laid out. So thank you, everybody, for listening, and we look forward to updating you on our progress next quarter.

Thank you, everyone, for joining today's conference. You may now disconnect.