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.

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.

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…

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…

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…

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…

Thank you. We are now opening the floor for questions. [Operator Instructions] Your first question comes from the line of Arjun Bhatia from William Blair. Your line is open.

Perfect. Thank you, guys. I appreciate all the color and nice job on Q4 here. Joe, if I can touch on the transitions and upgrade plans that you've laid out a little bit, how should we think about maybe handicapping, how many of the marketing services customers will migrate over or will upgrade versus some that that may or may not? And what are you kind of incorporating into the guidance for that? And maybe as a follow-on to that, when customers do move out or do you anticipate they're going to buy a business center, marketing center? Or is it going to be a little bit of all of the above.

So those are two great questions. They really get at the core in the latest and unfold over the next couple of years. I wonder if you'll permit me back the camera up a little bit and think about bigger picture. So it in February of 2024, let's just go out to the latter part of the decade. Let's go out to 29, 30 like sort of even five, six years now as we go out in time and we'll weigh, all of those businesses if they're still in business will be using cloud tools at that point. So today, a lot of them are what I often affectionately refer to as the unplanned and whether they're really still using spreadsheets and they got dry or a forward sale or the trucks to go on and they're still doing manual things and a lot of American kind of blue-collar businesses a lot of them and they don't have advanced education. They haven't been exposed to a lot of technology. And so, they require a little help. But if we go forward, say five or six years, virtually everyone that's still in business will be on the cloud. So then the question becomes, they've been with us for 15 years or more, for those businesses make the transition to the cloud? Are they going to do it with us? Are they going to do it with their trusted business advisor and with a company that they have this relationship with us that has the category leading software that's focused on making it easy to use. That has literally hundreds of people guiding, teaching, selling, helping them get there. So we think that we're very well-positioned to literally get them all, to get off on a legacy customer over on the staff…

Yes, that's super helpful. And actually just kind of dovetailing off of that because I think that this transition certainly makes sense or is kind of inevitable, anyway it's right. And but when you're thinking of how to run the business through this process, how are you thinking about kind of internal resource allocation because I mean one of the obviously potential and likely outcomes of that. This drives a host of transition to the fax business. And so to onboard these customers to get them ramped up on the product and start even the cross-sell motion at some point right internally. But do you have the resources set for that? Or is that something that maybe an incremental investment we should expect to keep growing the SaaS business.

That's another excellent question. We’ve been actually doing what you just described sort of – sort of transitioning to that – that's putting really throughout the last year. If you remember, we kind of brought marketing center along slowly in Q1 and Q2 of last year. Then it really hit stride when we let it out for full relief in the summer. And up until that time we did not allow the sales force to sell to anybody and we really had kind of a gated process because as you know very well, churn is the thing that we just do not want. So we wanted to make sure we sort of brought it along slowly for successful. So if you go back and you look at Q3 of last year, you saw a pretty strong acceleration in subscriber adds. That was us really getting onto that putting and us organizing around that. So it’s past tense, we've already done it. So you've already seen it flow through our numbers.

Perfect and appreciate it. Thank you, guys.

Thanks, Arjun.

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

Hi, good morning. Thanks for taking my questions and congrats on the solid Q4 results here. I was hoping to maybe add to a question towards grant in terms of this transition process within that legacy marketing services base. I mean can you talk about, has there been any sort of change in terms of incentives that are offered to some of these legacy customers or the approach to really accelerate that jump over to either marketing center business center?

Yes, good morning, Zack. That's a great question actually. So I think what we've been laser focused on during this process is ensuring that we still provide a value that's commensurate with what they were receiving on the digital marketing services side but then focus on giving them access to the additional tools that the more modern and up-to-date and invested in platform can afford them. So in terms of bringing them across, while still generating them whether it's leads or the exposure that they have on the old side, still giving them that. Still doing things like managing the listings, et cetera, but now giving them more modern technology, as I mentioned before, it really in many cases no additional costs. And that also increases their level of engagement in the platform. When you speak to for example, people that are moving over from more passive value digital marketing services lead-generation products and to the platform to marketing center for example, where you will now see them understanding things like attribution, the return on investment at the beginning where their customers are coming from et cetera. So again, it's really important to us and we're laser focused on giving the value that they had on the digital marketing services side and delivering upon that but then adding more in many cases at no additional cost. So it's been received very well and we're turning people that were relatively passive, yet happy clients into more active and engaged happier clients. So I don't know I hope that answers your questions, Zach

Yes extremely helpful. Thanks for that Grant. And Joe, just one question for me around just the number of SaaS subscribers. You had the big jump up in Q3 and it seems well strong growth year-over-year in Q4, essentially pretty similar from Q3 to Q4. Can you talk about any moving parts around that metric and kind of what played out in Q4 for that SaaS subscriber metric?

Yes I mean, it's actually a pretty natural process. Our customers are seeing value in – I mean Grant said it so beautifully there, in adding these analytics and diagnostic tools and we are basically allowing them to do it for little or no additional money. We're kind of moving them over and that is going to set up the opportunity for us and you'll probably get a little bit of rate at the next couple of years go by. There's a little bit of an upgrade path. I think that will be able to happen there. And you'll see that flowing through in net dollar retention and some of our growth numbers in the future. But some it's allowing us to also reduce or even eliminate some of the investments that we would have been making in some of those older platforms, as people moving over. So in terms of the -- I guess, the way what to expect as you keep going forward we think there's a lot more our sales force really has that on the story down. They're comfortable telling the story. Now, the product is performing well and none. We think there's going to be more I think what you've been seeing you will see for a while.

Understood. Well, thanks for taking my questions and best of luck here in 2024.

Thank you very much.

Your next question comes from the line of Rob Oliver from Baird. Your line is open.

Great. Thanks guys. Good morning. Appreciate it. Joe you -- I appreciated the color that you gave around some of the RPU trends and the fact that kind of newer customers are coming in at promotional pricing. Can you talk a little bit about how we should think about customer growth versus ARPU in 2024, because while there is some pressure on those new customers this season ARPU numbers actually really nice. I just wanted to understand, how you guys are thinking about that? And then I just had a quick follow-up.

Yeah, you got everything rolling exactly, right. Reasonably, broke out the seasoned ARPU to make sure you guys were comfortable that the customers that we have in the base at the moment the while our spending more are growing even if the ARPU number gets noisy because of some of the cross wins that are coming through this. There's two big cross win. They're going to kind of shake up the ARPU number and make it bounce up a little bit. And one is what we've been talking about and that customers coming over and us moving them in some cases for what they're currently spending on old tool over the new one or maybe only a small step up but not all the way to full rate. So that gives you a little bit of noise there and that should be a good guide for growth going forward. And the second thing is going to be introducing some noise as we go through 2024 and 2025 is our product-led growth motion where command center customers can literally discover the product on their own sign up and use it for free forever. And then if they want to add channels or they want to add users that they want to upgrade it. They can upgrade on their own or after a certain amount of usage. They'll kind of turn green on our dashboard and we're going to go talk to them and they're going to upgrade. But in a lot of cases they'll be coming in at smaller price points. And that's more of a land and expand motion. It's to help us build a New Zealand new Blue Ocean out there of customers to go work with and call on. So I expect those numbers to be fairly small…

Great. That's really helpful detail. Thanks. Joe. And then on -- just one follow-up, I would love to hear your perspective. I mean, you mentioned your 10-year anniversary here. Obviously, you know looking back it's been a tremendous amount of progress and the move to kind of really transforming into a SaaS company here and on. Just in that context, I wanted to just get your thoughts on M&A, because on the one hand you guys have really proven that are buying of these zoo like businesses globally is a core competency of yours, and your ability to convert them as you know, but better than anyone out there into SaaS customers and you're just really hitting the knee of the curve on that right now. On the other hand by more of those companies would push out that transition point to becoming a SaaS company further. So I'd just love to hear how you're thinking about that particularly in light of the SaaS momentum you guys are currently experiencing? Thank you.

Well, it's a really good question. It's kind of a complex question. And I don't want to take too terribly much time. So I'll tell you that we've been really successful with these adding customers to the zoo and converting them. That's gone well. But pretty much at the end of that or nearing the end of that, there's not, not a lot of that left. We anxiously look forward to making SaaS acquisitions and moving in that direction. It's really, for us a financial question. We're currently valued in a place where it makes significant SaaS acquisitions hard to do. And we think that will change in the near future. But for the moment, that's sort of where we are. So we've had to be kind of cautious there. We also have a particularly lousy credit facility, which at some point, we'll swap out. And that will give us a lot more flexibility and help us a lot. But you know that and as far as postponing, when the crossover point on SaaS revenue is and all that stuff. We're paying attention to that. That's something that we think about. But we've had some really incredible economics with the acquisitions that we have made. And so we're not sorry that we made them. And I think the improved fraction we're getting into zoo with marketing center and some of the other new developments that we've made give us a lot of confidence that that crossover point is -- nobody should worry about that. Whether it's six quarters away or seven or eight quarters away, it's not that far away. And if you're an investor and you're not thinking at least a few years out, we'd just as soon not have you in our equity, to be honest with you. We're looking for people that want to invest in a growing business. So that's kind of how we think about it.

Okay. Thank you very much.

Thanks.

And your final question today is from the line of Richard Francis from [indiscernible]. Your line is open. Your line is open. That brings our Q&A session to a close. Thank you to our speakers for today's presentation and thank you all for joining us. This concludes today's conference call. Enjoy the rest of your day. You may now disconnect.