Description

Thryv Holdings Inc. (THRY)

Thryv Holdings is a marketing and advertising company that operates legacy small business advertising assets (Marketing Services segment which operates Print Yellow Pages or “PYP” and Internet Yellow Pages or “IYP”) and a SAAS product “Thryv” that serves as a one-stop-shop cloud-based small business management software. The thesis here is one of a melting ice cube reallocating cash flows into a new, growth opportunity. The growth opportunity is selling the company’s proprietary SaaS product into a market segment that has lagged larger enterprises in transitioning to cloud and digital tools. After some tinkering with go-to-market strategies both within their existing rolodex and through new channels, SaaS growth has accelerated, with Q4 2021 anticipated to show a 7th quarter of growth and +30% YoY for the past 3 quarters. CEO Joe Walsh owns 2.3 million shares, 6.7% of outstanding. He most recently purchased shares directly from Mudrick at $35.50/share.

Thryv shares are worth north of $40 versus sub $30 price tag today.

The opportunity exists for a few reasons:

• Stagnate period (2019 through mid/late 2020) where SaaS revenues trended flat due to poor focus and the need to build more comprehensive features. Essentially, users were onboarding themselves and hardly using the product, resulting in churn and retention issues. Growth has since accelerated with retention and churn significantly improving. 

• Shareholder overhang. Former creditors from the prepacked 2016 bankruptcy of the legacy Yellow Pages business, now shareholders, have been selling shares since Thryv’s direct listing. Mudrick owns 9 million of 34 million shares, Paulson owns 2.1 million and GoldenTree owns 0.8 million. At the time of the direct listing, this group owned ~24 million.

• Shows up poorly on any fundamental screen. As a result of the size of the legacy business relative to the SaaS business, consolidated revenues have declined from $1.8 billion in 2018 to $1.1 billion as of the 9/30/21 TTM period. 

• No dividend and no recent share repurchases in 2021 or YTD as cash is redeployed into SaaS and growth.

• Lack of pure play story and a shareholder base that is still turning over/being established.

History

Thryv traces its roots back to Dex Media, which resulted from the 2013 merger of Dex One (the former R.H. Donnelley Corp following restructuring) and Supermedia (formerly Idearc prior to 2009 bankruptcy). Dex delisted in 2016 as part of a prepackaged bankruptcy. Notable creditors were Paulson, GoldenTree, and Mudrick. In 2017 the company acquired YP Holdings 2017 acquisition from Cerberus for $600 million in cash plus ~3% of shares. In October 2020, Thyv began trading on the NASDAQ via a direct listing. In March 2021 Thryv acquired Australia-based Sensis for $215 million, now rebranded as Thryv Australia. CEO Joe Walsh has said this acquisition fits “hand and glove” and represents an excellent opportunity to sell the Thryv Platform into Australia.

Target Market

Thryv serves Small-to-Midsized Businesses but primarily focuses on the smaller side of this group, with 20 employees or fewer. Customers are typically service-oriented businesses and on Thryv’s website, it cites home services (roofers, HVAC, Plumbers, Landscapers, Home Improvement), Health & Wellness (Medical practices, dental practices, chiropractic, fitness studios, physical therapy) and Legal (Small law practices), but seeks to target other small businesses outside of these areas as well.

Small and medium sized businesses in the United States are defined collectively as those with fewer than 100 employees to as many as 999 employees. Approximately 60 million people in the USA (roughly half of employed private labor) work in businesses with 499 or fewer employees. Two-thirds of those (40 million) are at employers with 99 or fewer employees. According to the SBA, small businesses employ roughly half of employed Americans and firms with fewer than 20 employees represent 1/5th of totally employment. (source: https://cdn.advocacy.sba.gov/wp-content/uploads/2019/04/23142719/2019-Small-Business-Profiles-US.pdf)  

Needham estimates an addressable market of 3.7 million SMBs within Thryv’s core focus of 2 to 20. Thryv management cites the SBA’s figure of 10 million businesses with 50 or fewer (Thryv management has said they fit well with 2-20 but service customers with up to 50 employees) as its target relative to the 30 million SMBs (999 or fewer employees) in the Unites States. Digital adoption within these businesses has lagged larger enterprises. The customers prefer an all-in-one user-ready, user-friendly platform with relatively low price points versus Salesforce, ServiceTitan, and Hubspot which boast features outside the scope of this customer base and higher price points.

Competition

Thryv competes with several public and private players but most focus on larger customers or offer more fragmented vertical solutions that imply a much higher “all-in”price tag. For example, Thryv tiers price in the range of $199-$499 per month versus Hubspot or ServiceTitan which can cost several thousand per month. Hubspot has some free and entry-level tools and low per monthly rates, but its Professional and Enterprise packages a) range from a few hundred to several thousand per month and b) are siloed by vertical – Marketing, Customer Service, Sales, CMS, leaving less sophisticated users and smaller businesses costly options to cover all their needs.  Private players exist as well such as Keap and Mindbody.   Thryv’s target SMB customer needs a lower cost solution with an all-in-one offering as users typically wear several hats at their employer.

Marketing Services business

The Marketing Services segment consists of several print and digital legacy assets. PYP owns and operates The Real Yellow Pages brand and IYP operates through yellowspages.com, superpages.com and dexknows.com web domains. Also included is Search Engine Marketing and Search Engine Optimization tools within this segment. This business is in terminal decline and revenues are set to decline from $1.3 billion in 2019 to ~$785 million per guidance. This also implies Q4 revenues will be around $140 million or less than half of 2019 Q4 revenues. These revenues are shifting to the usual suspects: Google, Facebook, Yelp, and the like. EBITDA margins averaged ~40% over the past 2 years in this segment and management has guided toward similar margins for the near future despite revenue declines.  As of Q3 2021, the company reported 268,000 paying customers within this segment but important, the “the hunting zoo” as CEO Joe Walsh calls it, consists of a broader reach of relationships given the larger customer base over the past few years (>350,000). While these relationships feed SaaS, CEO Walsh has noted on recent calls that new customer growth within SaaS is 1/3rd from these relationships and 2/3rds from new points of contact.

International

In March 2021 Thryv acquired Sensis, an Australian marketing and directory business, akin to Thryv’s legacy domestic business. Sensis reported 100,000 customers, many of which will fit with the existing Thryv SAAS offering. The $215 million acquisition was funded by a new term loan. The company began successfully selling Thryv into the Australian marketplace May 2021. As of Q3 ’21, International revenues are annualizing at $170 million. Thryv is following their domestic playbook and using the former Sensis (Now rebranded as Thryv Australia) to target and land new SaaS customers while harvesting cash flows within the legacy business.

SaaS business

The company’s SAAS offering, called “Thryv”, was developed partly in-house and partly by 3rd party development vendors. Notably, it’s not a 3rd party white label product that the company rebrands and sells but a bottom-up tech stack that they built. This product includes several features that SMBs would otherwise pay much more for through a comprehensive offering or through several vendors. Solutions include online scheduling for SMBs with their customers, CRM, marketing & advertising functionality, invoicing and (recently released) payment options (ThryvPay). Notably, many SMBs have employees wearing several hats who don’t need and don’t have the knowledge to use the full functionality of enterprise systems and don’t have the budget to afford those products. Thryv has price tags ranging from $199 to $499. Recently, the company has eliminated lower priced tiers, added to onboarding education, which has generated results with higher ARPU and reduced churn. 

The company ended Q3 2021 with 45,000 customers at an monthly ARPU of $340 up from 44,100 and $260 a year ago. Recent channel initiatives are being launched to generate new user growth. Guidance implies $47 million in Q4 SaaS revenues which is up significantly from $35 million in Q4 2020. 

Add-on features

• ThryvPay was launched in late 2020 and offers attractive processing rates with no subscription fees. ThryvPay offers SMBs the ability to accept payments by card or by ACH. ACH fees run at $1 minimum, 1% of total payment up to a cap of $9. Card processing rates are 2.9% plus $0.30/transaction. Importantly, these payments can be invoiced, tracked and reconciled through the Thryv platform. ThryvPay Total Payment Volume has grown from about $2.5 million/month in Q1 2021 to $7.5 million/month in Q3 2021. The company reports more than 50% of its customers choose the ThryvPay feature, a feature that didn’t exist 1.5 years ago. While much of those economics are passed along, it adds to the comprehensive nature of their portal for SMB customers.

Source: THYV investor slides

• ThryvHub was also launched in 2020 is a tool built for the franchise market that allows franchisors the ability manage their brand and track franchisee performance and locations.

• Thryv Leads is a customer acquisition tool that offers SMBs the ability to find new customers, track leads and generate advertising analytics.

Source: company filings

Shareholders

There are a few large shareholders that were initially creditors during the 2016 bankruptcy. Paulson & Co owns 2.1 million shares of Thryv versus 34 million shares outstanding. Mudrick owns 2.9 million shares having sold down from a much larger 18 million share position that was established during 2020. From the restructuring, credit shop GoldenTree owns a large block but has been exiting too and is now down to ~800,000 shares. During the Q3 2020 call Paulson suggested splitting the business, citing a valuation on the legacy business that would remain (likely) unchanged post-spin while the SAAS business could/would command a much higher multiple closer toward P/S metrics at that time. Management has indicated that at this time, they want to continue to harvest and reinvest cash while using the legacy assets’ relationships to pitch new SAAS customers. The losses at SAAS essentially shield some of the cash flows at the legacy business. Share sales by these investors possibly acted as a headwind to price appreciation but by this point the overhang from share sales by these shareholders is relatively minimal. 

Valuation

On a per share basis, Thryv is worth more than $45 per share. A slower decline rate in the legacy marketing services businesses would push that figure upward by about $3/share for each 5% improvement in decline rate (declining at 20%/yr instead of 25% over a 5 year period lifts value by $100 million or $3/share, 15% instead of 20% would lift another ~$100 million or $3). 30% topline declines instead of 25% results in a reduction of ~$3/share in value. 

I value the legacy domestic and international marketing businesses $600 million using a 10% discount rate on cash flows and 25% topline decline rates. This implies a 2.1x multiple on 2022 EBITDA for those business lines. 

For the SaaS business, Hubspot is relevant particularly as a competitor, is growing topline at the same rate as Thryv’s SaaS, but is larger on a cap basis. Other “peers” with similar growth, EBITDA breakeven or burn, and slightly smaller capitalization values suggest a high single digit revenue multiple is appropriate.

Risks to thesis

• SaaS growth may stall once Thryv exhausts its legacy SMB relationships. The counter to this is that management has noted new users have recently sourced from 1/3rd legacy relationships (“the zoo”) and 2/3rds new channel sources. This was mentioned by Walsh in November 2021 and again in January 2022.

• ARPU rather than new users have been the largest contributor to growth. Management anticipates 2022 and 2023 will show change in this area due to new partner and channel initiatives. Before these initiatives management shored up the product offering by putting more resources to white-glove onboarding and adding features. Comments from Walsh noted in the above bullet point on channel-sourced new customers reduces this risk.

• Sentiment around SaaS businesses and their valuations will affect Thryv.

• Legacy business declines faster than anticipated. This business has some visibility as print books are printed on a 15 month basis with a variable cost structure that keeps margins intact. Digital legacy products may see, at some point, evidence of a longer tail. However, even digital is still losing shares to Google, Facebook, and Yelp, per management.

Catalysts

• Breakup of the two businesses. See transcript excerpt below where Joe notes that both business are being run and accounted for entirely separately and that ~4 years what his (CEO Joe Walsh’s) time frame at late 2020 but he would entertain an earlier time frame.

• SaaS business shows continued rapid growth and new customers rather than solely ARPU gains.

• More robust guidance. Walsh has suggested he might starting adding subscriber figures into guidance given improved visibility for that metric. Doing so might add more conviction in sell-side sum of parts valuations.

Addendum – Q3 2020 earnings call excerpt, John Paulson & CEO Joe Walsh 

John Paulson: 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.

Joe Walsh Thryv CEO: 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 investment analysts and so on, they start talking about sum of the parts where perhaps somebody will begin to view the hidden gem that's sitting inside of this big company and say, gosh. In fact, a direct quote, one of them said, the -- your $100-plus million SaaS business is like a mini unicorn." It's worth more than the entire company is. And I don't really -- I'm not an expert on valuations. I'm an expert on trying to help small businesses. So that's what I'm focused on.

I do think that there will be a rerating as Thryv continues to grow and accelerate. I mean, if I'm really honest, we grew so fast, we had to kind of digest for a minute there. We had several quarters where Thryv didn't grow as we were kind of changing strategies, moving upmarket. We sold a lot of customers, we probably shouldn't have sold initially that we didn't know any better. And we had to kind of work those through and work those off. But now we've got a very tight ideal client profile. We know exactly who we should sell. We're disciplined about selling those people. We're finding they onboard and use the software. And we think we can really build on this space. And we see it in our engagement. We see it in the number of people using the software logging in every day. We see it in payment volumes. We see it in automated marketing automation campaigns that are going out every day. We can see -- we've got a tool that allows us to watch that.

So in summary, you're right, there probably is an opportunity down the line to separate these businesses. But my prediction is that we will benefit a lot over the next few years by them being together. And that there will be an expansion of -- people will begin to kind of see through that, and there'll be a little bit of a sum of the parts type valuation that will likely occur. And if not, then that might push us to do it sooner, but I think that will happen. And only time will tell.

John Paulson:  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.

Joe Walsh Thryv CEO: 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.

Catalyst

• Breakup of the two businesses. See transcript excerpt below where Joe notes that both business are being run and accounted for entirely separately and that ~4 years what his (CEO Joe Walsh’s) time frame at late 2020 but he would entertain an earlier time frame.

• SaaS business shows continued rapid growth and new customers rather than solely ARPU gains.

• More robust guidance. Walsh has suggested he might starting adding subscriber figures into guidance given improved visibility for that metric. Doing so might add more conviction in sell-side sum of parts valuations.