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spk00: Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Thrive third quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Cameron Lessard, Director of Investor Relations and Capital Markets, you may begin your conference.
spk03: Thank you, Operator. Welcome to Thrive Holdings' third quarter 2021 earnings conference call. We issued our press release a short time ago and furnished the related form 8K to the SEC. The press release can be found on the Investor Relations section of our website at investor.thrive.com. With me on the call today is Joe Walsh, Chief Executive Officer and President, Paul Rouse, Executive Vice President and Chief Financial Officer, and Grant Freeman, Chief Customer Officer. 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 about the operations and future results of Thrive. These statements are subjective risks and uncertainties described in the company's earnings release and other filings with the SEC. Thrive has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of these measures to GAAP will be posted on the Investor Relations website at investor.thrive.com. With that introduction, I would like to turn the call over to Joe Walsh. Thank you, Cameron, and good morning, everyone, and thank you for joining us. As you've already read in our earnings release, our momentum continues as we deliver our best quarter since being a public company with accelerating growth in our SaaS business. And so we will once again raise our guidance. Our CFO, Paul Rouse, will take you through that, raise the guidance in a few minutes. It was just over a year ago this week that we began our journey as a public company with our first earnings call. We introduced the company and we laid out our strategy for helping SMBs harness the cloud, and how we thought we were in pole position to be the category leader here. And this last year has really played that out, I think, for us. And, you know, we brought a new board in, and shortly after we announced additional areas of investment in our business to really scale our SaaS organization, which we felt like we were poised for massive growth. And today, I'm pleased to say that Those decisions have borne out some very promising and exciting results. So let me walk you through the report card for the third quarter. Fast revenue plus 41%, building momentum over the last several quarters. And I want to put that in just a little bit of a context for you. Prior to going public, we came out of a distressed debt setting. And so we were in more of a harvest footing. We weren't really, we were delivering double-digit EBITDA margins out of our business. our charge was to make it make money. And so we weren't really investing and growing it quickly. But over the last year, as we've shifted our emphasis more toward investing in growth, we've gone from Q3 last year where we had 2% growth to in fourth quarter, 8% growth. And then as we turn the corner into the new year, 17% growth. And then in Q2, 32% growth. and now 41% growth. So you can see those investments and that new stance is really kicking in and that we're taking advantage of the rapid adoption happening out there in the marketplace. We're seeing our ARPU rise, $340 is what it's up to, 31% year over year. Our new acquisition channels are growing, now representing 22% of overall sales, double where they were a year ago. When you think about new clients coming into the company, two-thirds of all the new SaaS clients are new, new to the company. And about one-third of them are coming as we continue to mine the base of the marketing services business. We've seen record levels of engagement within the platform, measured by things like time in the app. Really, everything we measure is up significantly. And our retention is at an all-time high. And so I think it would be fitting to have our chief customer officer Grant Freeman speak to you for a few minutes about some of the progress we're seeing in that area. Grant? Thank you, Joe. I'm excited to be here today to share the progress being made as our clients continue to increase and deepen their engagement within our software platform. It is important to start with repeating what was shared during our Q2 earnings call, that our North Star for client success is an engaged client. We are all over engagement, looking at it from every angle. I want to share some data with you today as our underlying trends continue to improve. For example, our daily active users year over year for September is up over 30%. Beneath that, we see the percent of clients using three or more features of our platform is up over 50%. When we look at specific feature usage, we can see continued upward trends. For example, the number of clients with campaign sent is up over 30%, clients sharing documents up over 25%, and the number of clients with payments and using estimates and invoices functionality each are up over 50%. As part of these great results, we have always been measuring churn internally in several different ways. We have our standard churn metric, which we have been reporting for the past year, and we are proud to share that churn was 2.1% for quarter three. Now, while we spend lots of time reviewing churn and dissecting it, our current reported metric is a very conservative measurement. We have also measured churn to look at real adoption. We feel there is a value add to present this now since it's providing additional context for our go-to-market strategy. Small and medium-sized business behavior and stability is different and messier than enterprise behavior. As such, this measure of churn excludes newer clients as they are in the early stages of engaging with the software. For our Thrive software, we have a blueprint of our client journey, and when we look at month-over-month engagement, we quickly to our clients. But for deepened engagement, it is during the months following initial onboarding when we start to see users aggressively integrating the software. We also see those who may not have engaged for a variety of reasons, including issues like their payment being declined or them simply going out of business. The first year allows them the time to learn, to be coached, to engage, and fully integrate the software into their day-to-day business. As a result, we also measure year-over-year engagement and churn of those clients who have been with us at least 366 days, so just over a year. Our churn with these clients is only 1.7%, a metric we are extremely proud of. This is a huge success, as it means those who use the product and engage with more features over time integrate it into the fabric of how they run their business. they are using the software as we intended to allow them to compete more effectively in today's marketplace through modernizing their business. We also know that as engagement deepens, we can begin to monetize. For example, our net dollar retention has moved from 73% to 90% over the past year. And when you consider the one-year-plus clients that we just spoke about, their net dollar retention is 95%. We have also measured NPS for a number of years. For us, it's truly the ultimate measure of where we are headed. Among our Thrive users, we have seen a significant year-over-year improvement again. Now, we all know that small businesses have a much different relationship with software than do enterprise organizations. Engagement early is critical, as is deepening engagement over time. You know, it's much like a gym membership that we will all be buying or renewing this coming January. You may have the desire to be healthier, and you may go for the first few weeks, but unless you go and learn how to use all the equipment, create true discipline around exercise for the long term, there will be no outcome of better health. Software is similar. Small businesses need to engage with software, engage with us, practice it, giving them time to learn and truly adopt the software, and then the results that they seek will happen. To help clients who buy become engaged with the software, here are just a few of the things that we have done. We've almost completed our evolution to a team selling motion. In this model, we have a software sales specialist partner with a local salesperson for all Thrive sales, which yields higher engagement and low churn. It ensures our platform is a fit for the needs of the small business. We're also focused on delivering a best-in-class time-to-first value. During onboarding, we ensure that we understand the main problem the client is trying to solve, and then we solve it within the first 10 days. Post-onboarding, we work to deepen engagement over time at a pace that is consumable for the small business. Our team of client success managers strategize with and coach our clients to continue to use our platform to solve more problems for the business. Catered TechTouch aimed at enticing clients to use more of the software is also critical to expanding usage and spend over the course of the first 12 months. As a result, we see higher and deeper engagement, lower churn, regardless of how we measure, and we have higher net dollar retention along with the higher net promoter score. So with that, Joe, I'll turn it back to you. Thank you, Grant. Grant is our chief customer officer, and under his leadership, we have methodically worked to reduce churn in our customer base and really drive up engagement. So thanks to Grant and his excellent team for the victory they've delivered in that area. I'd like to turn now to Australia. You know, we made the census acquisition beginning of March. And we've made tremendous progress since. We've localized the software, trained the teams, gotten the product into the marketplace. We've got many customers on the software and using it already. We're experiencing really strong engagement and usage. I must say the organization in Australia has done a great job of bringing our ideal client profile in. We've been beginning to get some referrals now for people that are already using it. So it's early days, but we're off to a terrific start. We also have rebranded Census to Thrive Australia. There's a media campaign underway as we speak in Australia announcing that, which has been really well received. It's driven a lot of traffic to our website. we've been getting a lot of software demos out of it people expressing interest in it so i think we've got uh australia ideally positioned that as we turn the corner into 22 we're beginning with a lot of momentum really nothing to do to kind of get organized but we're just going and um i continue to have really high expectations about our ability to penetrate that customer base over the course of the first couple of years i think it's going to be a terrific opportunity for us and the marketing services piece of the business is performing just like it always has in a very steady and predictable way. Really happy with that. I'd like to turn now to a recent innovation in the SaaS software product, the centralized inbox. This allows SMBs to communicate with their customers and prospects wherever they are in whichever format they prefer. So this is, you know, web chat, email, text messages, Facebook, Instagram Messenger apps, Google My Business, Virtually any way you could come at that small business, it all shows up in the centralized drive inbox, which really saves our small business a lot of time having to check multiple inboxes and maybe having a message been sitting for a couple of days if they forgot to check. It brings it all into that one place, and it stores it right into the CRM contact card. So it's all there, and it begins to build a database. begins to build a lead base so that they can do marketing, lookalike marketing, follow-up marketing, nurture email. They can do all those things, an actionable CRM record, which is like a breakthrough for most small businesses. So they can really respond in real time. They've got a centralized dashboard. They don't have to juggle back and forth between multiple apps or conversation threads. Everything is pulled together in one place. And I'll say this. Consumers' expectation when they contact the business just seem to continue to rise as more and more companies are deploying more and more technology. People's expectations rise. They kind of want instant gratification. And a lot of mom and pop small businesses only have a couple of employees or a few employees. So having a powerful tool like this is always in their pocket. It's going to make a really big difference for them. I'd like to now talk about ThrivePay. We recently passed the $50 million in total payments volume mark, which we're really pleased about. I want to say this. ThrivePay for us is a big engagement driver. It allows a lot of our small businesses to get paid in a more efficient way, which really helps them, and I think makes them that much more loyal to the software, which is a big deal to us. We're continuing to see higher attachment rates on our newer clients, and teams have just really started going back to existing clients we convert them over to ThrivePay. About a third of our clients use payments, and our target is to see that grow to more like half over the next year or two. Since the launch of ThrivePay, all the clients who activate payments, more than half chose ThrivePay, which is pretty big. And we're pleased with this number, and we think that it will grow over time as SMBs who connect payment accounts may initially kind of bring their own whether it's Stripe or Square or PayPal. But we are convinced that our competitive offering will bring them over over time. We're seeing a steady migration where more of them are switching to make LivePay their primary tool. So LivePay has been a really big deal. It's really helped us a lot. So I'd like to turn now to the financial part of the presentation and bring Paul Rouse in and let him tell us about our third quarter results.
spk01: Paul? Paul Rouse Thank you, Joe. I will now cover our U.S. business segments, starting with SaaS. Third quarter 2021 SaaS revenue was $44.8 million, an increase of 41% year-over-year. Growth was driven by a steady increase in clients, a bigger uptick in average revenue per unit, or RP, and favorable sales allowances when compared to the prior year. Of the 41% increase in revenue, 600 basis points relates to improvements in sales allowances when compared to the prior year. SaaS ARPU was $340, up 31% year-over-year when compared to the prior year. We attribute the growth in ARPU to several factors. Action we took in 2019 going upmarket with continuous change in the subscription index with ads coming in at higher values. upsell to higher price tiers within our install base, cross-sell from our marketing services client base, and finally, sales of additional seat licenses, automated leads, and add-ons. The third quarter season SaaS churn was 1.7%, a 90 basis point improvement year over year, and a 10 basis point improvement sequentially. As Joe and Brian alluded to earlier, We will now be reporting this additional metric going forward as it best reflects our efforts in driving adoption and engagement for our SaaS solution. Seasoned net dollar retention reached 95% for the quarter, a 900 basis point improvement year over year. Moving over to U.S. marketing services, third quarter revenue was $213.2 million. an increase of 2.3% year-over-year and ahead of guidance. Overperformance for the quarter was driven by a print publication schedule that included a significant number of books published when compared to the prior year and was expected based on our publication schedule. Additionally, our digital offerings, specifically IYP, came in above our expectations. Given these positive developments, We will update our revenue guidance accordingly for this overperformance. Third quarter marketing services billings were $204.9 million, a decrease of 21% year over year and consistent with previous quarters. As is consistent with previous calls, we will provide billings and additional operational metrics to give our investors better insight into our operational performance. The billings data will show a very consistent and steady decline in our marketing services segment, which is shown to be lumpier on an accounting basis given our 15-month lifecycle of our print directories. This is provided in the third quarter investor supplement available on our investor relations website. Moving on to Thrive International. Third quarter Thrive International revenue was 53.3 million Australian and ahead of guidance. On a reported basis, Thrive International revenue was $39.3 million. The reason for the overperformance was related to the timing of pre-publications in the quarter. Turning now to profitability for the consolidated business. Third quarter adjusted gross margin was 70% for the consolidated business. When excluding Thrive International, adjusted gross margin was 71%. a 710 basis point improvement year over year. Third quarter total adjusted EBITDA was $102.4 million, resulting in a total adjusted EBITDA margin of 34.4%. Third quarter U.S. marketing services EBITDA margin came in at 45%, aided by strong print revenues, while five international adjusted EBITDA margin came in at 30%. due to timing around print publications. As expected, SAS EBITDA margin was lower due to our increase in go-to-market investments compared to last year. We expect SAS EBITDA margin for 2021 to be negative for the full year. And we expect to exit 2021 with Q4 at around negative $6 to $8 million. Finally, we repaid $35 million of our term loan for the third quarter, which brings our cumulative new term loan repayment to $123 million since the refinance associated with the acquisition in March. We continue to be very focused on debt pay down. Okay, now let's update guidance, starting with our U.S. segments. For our US SaaS business, we are raising our 2021 revenue guidance range to $169 to $171 million. For our US marketing services, we are updating our 2021 revenue guidance range to $785 to $790 million. As mentioned on previous earnings calls, U.S. marketing services' EBITDA margins will be consistent with prior years on an annual basis. At Thrive International, we are updating our four-quarter revenue guidance range to $53 million to $57 million Australian. Please see our third-quarter investor supplement posted on our IR website for additional information. I'll now turn the call back over to Joe. Thank you, Paul.
spk03: We were excited to receive an Appealy Award recently. Appealy Awards are a SaaS customer success award where they use the net promoter scores, user interface, experience, recent product improvements, customer feedback, and third-party research analysis, looking at where you receive 4.5 stars or higher on G2 or Catera, several other platforms. And they bring all that together to see what's the easiest to use, what's the most appealing SaaS software. And we received an award there, which we're really excited about. And I think it continues to punctuate just how good our software is. You know, I know we're here to talk about our financial results, but our software is really good. It's getting better all the time. I'd like to talk a little about our acquisition strategy. We're often asked when we meet with investors whether or not we are going to just acquire marketing services businesses or just acquire SaaS businesses. I want to just clarify the way we think about this. We are a very experienced acquiring team. We do like to make acquisitions. We think it's a speedy way to grow. In a rapidly expanding marketplace like small business migration to SaaS, we think it's appropriate that we should be aggressive here to scale the company up quickly. And so the first lever that we're looking at is SaaS acquisition. We will look to acquire SaaS companies to bring in additional talent, to bring in additional capabilities and additional customers. And we've been active, very active in the recent months in a number of conversations and a number of processes looking at different SaaS companies. And I don't have anything to announce today, but that's our primary focus, looking at SaaS type acquisitions to accelerate the growth of the company. Now, as it relates to marketing services business, we do have a unique set of skills here. And opportunistically, we, you know, we're keeping an eye on that space. And if, you know, we find something that where the payback is, you know, crystal clear, our return on investment can be speedy. And we really feel like it flatters and enhances the growth rate of our SaaS business. We will consider that. It certainly makes sense to do. There are not very many buyers for some of those businesses. But sometimes we can be the buyer of the last resort, which is really puts you in a position where you can acquire at a favorable price so that's how we're thinking about acquisitions we've got investor day that we're planning for march you can look for registrations that will be coming out on that but we're going to we're going to do an in-person investor day in new york city really excited about that an opportunity to kind of unveil a lot of our strategy and go into a lot of detail so at this time we're going to get ready to do q a and i'd like our chief product officer Ryan Cantor is going to be joining us to help answer the questions. Operator, can you open up the line for questions?
spk00: Certainly. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Arjun Bhatia from William Blair. Your line is open.
spk03: Perfect. Thank you very much. And congrats on a strong SaaS growth. Great to see that continue to accelerate. Joe, maybe the first one for you. I think when we were going through the direct listing a little bit over a year ago, one of the goals was to accelerate that SaaS business to 20%, 25% growth by 2023.
spk01: And now we're sitting here at the end of 2021, two years ahead of time at a 40 plus percent growth rate and you seem well positioned going into next year.
spk03: So maybe you can just give us some color on how you're thinking about your medium and long term targets in light of the current growth you're putting up, you know, well ahead of schedule. Thanks for the question. That's a great one. One of the things to understand about our company is we meaningfully changed our stance as a business. were for a number of years being owned by a distressed debt group, basically asking us to return cash. And so, our SaaS business, you know, in the prior year had double-digit EBITDA margins. We were running it for profitability. And some of the discussions around the board table were why the margins were a little lower on SaaS than they were on the legacy marketing services business at that time. So we assembled a new board just a little over a year ago. That board did a real deep dive into the business and basically confirmed the progress that we'd made in the quality of the software. And a decision was made to change the stance of the company to more of a growth stance, to permit us to invest in more engineering talent, more product development people, and really enhance the software. And so that change is what you're starting to see flow through the business now. We had a lot of good momentum coming into the direct listing, don't get me wrong, but that the acceleration in part is due to the sort of the new board blessing of a more growth-oriented stance. And so when we came public, we said just very generically that we thought we could double the revenue and customer base in the company in the medium term. And, you know, the kind of growth that you talked about is sort of all we felt comfortable really admitting to. Part of the other, I'd overlay one other thing, Arjun, onto our improved results, and that's that the small business market is increasingly embracing this transition to the cloud. You know, we were arguably early, you know, six or seven years ago when we started talking about this, We would go in and talk to a small business owner and talk about the cloud, and they would ask if it was going to rain. You know, like they didn't really understand the cloud and what all that meant. Today, there's just, you know, part of it's the pandemic, a whole different orientation. People sort of feel an urgency to figure this stuff out. And so we're, I think, really well positioned. We're the clear category leader for small businesses across the nation. And I think what's happening now is as they – are deciding they want to do this. Increasingly, they're turning to us and a lot of our customers who initially had bought our offering and sort of were happy with a really good website and some listings management and a couple little things are starting to engage now and really use the tool. So that's sort of how we think about it. And that's been really propelling our growth along. Got it. That's a very helpful color. And then, you know, this seasoned customer metric is really interesting. Obviously, it shows that customers engage more the longer they stay. So when you think about your future growth strategy in the SaaS business, how much of it is focused on leaning in more with these existing seasoned customers and expanding versus, you know, next new customer acquisition. I'll say, and then on the first side of the equation, is there pricing power in your offering as you launch new features like decentralized inbox? Maybe just help us balance those two growth levers together. Yeah, look, we do think that there's pricing power. There's sort of a gradual unbundling that we've been doing, which is some mild price in that. Some of those we've talked before about when we experimented going down market with lower price points, sort of simpler offerings. We're putting through some price down there to try to – we're pretty clear we don't want to be in that business, so we're sort of forcing some of that up or out. So there's a little bit of price mixed in here, and there'll be a little bit more price mixed in here as we keep going forward. But a lot of it is just the customers buying more. It's more seat licenses. It's really using ThrivePay, which generates a little bit of revenue. It's buying some of our add-on offerings that we have, and there's increasing more of them all the time as we keep adding more products and services. Some of them are actually upgrading to higher levels of Thrive. Some of them came in on our entry level and are moving up to the higher levels now as their usage is improving. So we definitely believe that our internal models show ARPU continuing to grow. We think there's definitely more there there. And then looking at our existing customer base for marketing services, that zoo, as we sometimes call it, the little hunting in the zoo, About a third of our new customer acquisitions are still coming out of that phase, and they're feeling a lot more urgency to modernize now. Even though they might have said no to us over the last couple of years, they're saying yes now. And so we think that's going to continue to be a strong source of good customers coming in. And then the new business acquisition activity, we've spoken to you, we sometimes call them our new channels, all the different new things that we're doing. you know, are up in the 20s now percent of our revenue on a monthly or quarterly basis and climbing nicely. That team is really figuring it out. And we're getting better and better at all that stuff. Awesome. And last one for me before I see the floor here. The SaaS M&A strategy is, When we think about this, should we think of these as smaller tuck-ins that may help you bring a new feature to market at a faster pace than you could organically? Or might that range on the larger end of the scale just help us think through how you're planning the SaaS acquisition strategy from a scale and size perspective? Well, look, let me just be honest with you. We don't currently carry a SaaS valuation. You know, we're still valued as a dying phone book business. So our ability to go make big SaaS acquisitions is tough. I mentioned earlier that we participated in many, many processes and had many really great conversations this year about making SaaS acquisitions. And we got relatively close. doing some, but we were not able to get there because we've got a really short stool. We're working at just such a tremendous discount to other SaaS companies. It makes it very difficult. So our ability to make large SaaS acquisitions is just not very realistic today. We believe, as 22 unfolds, That will change. We think we'll be more reasonably valued as a true SaaS company as we continue to generate quarter after quarter after quarter of really reliable, durable growth. And maybe some analysts take a good look at the actual software and just how good it is. We think that that will change. And I think our ability to make larger SaaS acquisitions will come into frame maybe as early as the early part of next year, actually. For now, Arjun, you know, we're probably sentenced to look at smaller stuff because the other participants that might be on the other side trying to buy similar assets just have better buying power because they've got actual SaaS valuations or they're venture companies that have got a, you know, a time horizon that lets them, you know, pay a full price with some of these things. The market's very hot. It's not exactly a buyer's market for it. for these things, as you know. So that's a long-winded answer of saying, I think it probably starts a little bit on the smaller side. And then I think, you know, we'll grow. As a team, we've made approximately 100 acquisitions together in our time together. We've made some very large, multibillion-dollar acquisitions. We're very good at those. We know how to do those. That's our, you know, particular set of skills is making big acquisitions. But we also know how to do tuck-ins and roll along and do those. So for the moment, I think we're probably stuck doing tuck-ins until our shares start to re-rate and give us a little bit better opportunity. Understood. That's very helpful, Keller. Thank you again for taking the questions, and congrats on the strong results here. Thanks, Arjun.
spk00: Your next question comes from the line of Scott Berg from Needham. Your line is open.
spk03: Everyone, this is John Goveen for Scott. I appreciate you taking my question. First, it's a product question. How is the uptake of some of the new verticalized functionality in the CRM platform, and are you seeing particular demands, outsized demand from any verticals in particular? Thank you. It's a good question because this year that was a big area of investment that we made to both put the tech in place to make the verticalization work, hire the vertical leaders, build out all the taxonomy and the landing pages and all the bits to really make that work. You haven't yet really seen anything coming through in terms of return on that investment. That's really 22 and forward. You know, we're very pleased with the progress that we've made, but any kind of financial improvements will really begin in 22, I think, meaningfully. As far as, you know, traction in verticals, some of it has to do just with our legacy business. You know, our legacy marketing services business has a tremendous number of service-type businesses in it. all kinds of home services, personal services, car services. And so those tend to be areas where we've got lots of relationships and have seen a lot of traction. We've seen a lot of traction in legal. We've seen a lot of traction in allied health areas. So I think that's really going to be, in terms of us showing off great results to you, I think it's going to be a 22-story more. This was the year that we're building it. All right. Sounds good. And then second, just as far as the three new go-to-market motions that you've put in place or channels that you've put in place over the past couple of quarters to inbound, to multi-location, to partner, just wondering if you could provide a little more granularity on how those three are trending, specifically if you're seeing any increased demands for multi-location or franchise businesses. Thank you. Yeah, I happen to have with me here today our chief customer officer who runs those channels. So I'm going to ask Grant Freeman to give you some color on the progress that we're making in those channels.
spk01: Grant?
spk03: Absolutely, Joe. Thank you. So we're making fantastic strides in all of those channels. As you've seen in the packet, if you got a chance to look at it this morning, We have our sales from new acquisition channels is up over two X year over year from last year. Our franchise channel, which is sort of our version of enterprise, as we sit here today, has already signed more logos to this point than it did in all of last year and units as well. And we've just updated our tech stack for our partner channel, and we are seeing some acceleration there also, in addition to a newly retooled and relaunched affiliate program, which we're really excited about, which is getting some great traction as well. So the trajectory is going extremely well for all three of those channels. Great. Thank you, guys. Congrats. Thank you.
spk00: Your next question comes from the line of Rob Oliver from Baird. Your line is open.
spk02: Great. Good morning, guys. Thank you for taking my question. Joe, since nobody's asked yet about the SMB macro, I think I'll ask about that. Obviously, some really good numbers from you guys on SaaS growth and all-through strength, which I really think speak to the strategy and the strength of the products, which You know, we've spent a fair amount of time with understanding. On the other hand, you know, we did see sequential downticks in dollar retention and customer ads. So just I know last time you and I spoke, you were, you know, it was kind of post-summer reopening. Is that seasonality? Is there something more going on? I know there's been a lot of cross-currents on SMB Macro. So just curious what you're seeing and how you feel that sets up here at the year end and into 2022. And then I had a quick follow-up.
spk03: Sure. Yeah. Yeah, I had previously mentioned that the YOLO summer, you know, you only live once a summer when the CDC said, well, we can all go out and play. Lots of people did. And the early part of the summer was a period of vacation, just lots of people on vacation. It did firm up in the back half of the summer. And, you know, by Labor Day and after Labor Day, you know, our sales were very strong and business activity was very strong. And And I think there was quite a bounce back. But maybe Delta shuttered people back in. I don't know. But anyway, that was what we saw. And that continued right through. Our sales have been very strong. And, you know, we're finding people answering the phone or answering the meeting on the other end. And that's been going okay. You know, look, I have to comment that small businesses, their confidence, I would say, is mixed. you know, because, you know, the inflation thing scares them. I think some of them don't agree with some of the things that are happening in Washington as far as, you know, just the massive spending and all that. I think there's some malaise kind of around that, honestly. But it hasn't really harmed or affected our results. We continue to do very well. And I think, as I mentioned in my, you know, comments earlier, the desire for, you know, this type of software is really coming into its own. I think the wave is forming. I think the big part of the wave is still in front of us. I think of the last decade, 2010 to 2020, as a decade that enterprises adopted the cloud. And I think the decade we're in now is the decade where SMBs adopt the cloud. And there's a lot more SMBs than there are enterprises. So I think it's going to be a really big wave. And our surfboard is perched right up on top of it. I'm very bullish on how this looks going forward. As far as one little comment that you made in there about net dollar retention not continuing to rocket up, you know, we are dealing with SMB. There's a lot of, you know, activity, a lot of noise. When we look back at the year-over-year look back, that was the pandemic. We were offering some pandemic credit. There's a lot of noise in these numbers. I wouldn't take that seriously. As any kind of trend, I think if you look back at the huge progress that we've made in the prior few quarters, I think that's the story is that NDR is going up. I think you're just looking at a little statistical noise in this number. I want to remind everybody listening that we're not an enterprise software company. You're not going to see us have 130% or 140% net dollar retention. You know, 100% is awesome. And, you know, we are going to get to 100%. It's going to take us a little time. But we're not going to get to 120 or some bigger numbers than that. We're dealing in SMD. We're not in enterprise. And so we just don't think that that's really available to us. But I don't want anybody to read into, just please look at the last three or four quarters of trends. That's your story on what's happening with net dollar retention. And all the things that drive net dollar retention up, are still going really, really well. All that's still coming together. You're just looking at a little statistical aberration in that there's no news of it.
spk02: Got it. Okay. Thanks, Joe. Helpful caller. I appreciate it. Paul, one for you on the marketing services business. And I know you did comment in your prepared remarks about, you know, billings and some of the variability around billings, which was down year over year. But revenues were up, you know. So just can you just remind us of that dynamic, how to understand that dynamic in light of the reported numbers? Thanks.
spk01: Sure, sure, absolutely. As we've been saying on each earnings call, we keep reminding everybody of the lumpiness of the schedule, of course, of the 15 months. So what you wind up is with strong quarters and weak quarters. And this one was a strong quarter due to the publication schedule. I think there might have been 179 additional directories that published in the quarter over the last year. And that's why we gave the billings information, just so you could see the trend over time. I think that's the metric you probably should rely on for trending. What's going to happen, that trend is going to reverse in the fourth quarter, and we gave you those numbers specifically so you could do the math yourself and see. It's going to be – we're going to have a great – we had a great quarter in marketing services because of print. It's not going to be as stellar. given that the print schedule in the fourth quarter is not very strong. So that's really it. If you're looking at trending overall for marketing services, the billing metric is probably more accurate, you know, full year view of where we're going to be. So does that answer your question? Nope, it's helpful.
spk02: Thanks, Paul. Thanks, Joe. I appreciate your time, guys. Thank you.
spk00: Your next question comes from the line of Daniel Moore from CJS Securities. Your line is open.
spk03: Good morning. Thanks for taking the questions and the additional color this morning. Maybe first, just beyond ThrivePay, what are some of the other primary functions or functionalities that you find are really driving engagement, product expansion, and therefore retention? That's a great question. Thanks for asking it. Our Chief Products Officer, Ryan Cantor, is with us today. going to ask vines just to comment a little bit on where he's seeing some of that engagement progress thanks joe um obviously centralized inbox uh feature improvement was a a big effort and that is a doubling down on what we were already seeing in the platform and that is that our overall inbox still remains one of the primary drivers of engagement when small businesses get an incoming communication from either a prospect or a customer With one simple click, they log right into the platform and can respond. So adding additional channels and centralizing all of that communication became a natural next step for us. To facilitate that, we also turned our inbox into a real-time messaging platform. So items like web chat, Facebook Messenger, Instagram Messenger, and others operate as they should with a real-time messaging platform between customer and the SMB. Not just ThrivePay, but overall payments in general and everything around payments has been another area of focus inside the platform. We really think that communicating with your customers and getting paid from your customers are kind of pretty fundamental to any SMB success. And in the payments category over the last year, we've added everything from improving our invoices and our estimates to how we take payments, to packages, to products, to deposits. Anything and everything you can kind of imagine around ensuring that the platform allows SMBs to take payments and manage the money the way they want to. And we're really seeing that reap our dividends here as we move along. Perfect. Thanks. And maybe just on Australia or international, talk about the initial uptake for SaaS solutions and consensus and whether that initial 10% penetration that we had seen historically is still achievable or even conservative in a reasonable timeframe. Thanks. I'll start with yes. We're still really comfortable that the thesis of penetrating that existing base um is intact and you know all the uh early signs here a half a year in are fabulous um that we're going to be good there you know this this acquisition closed in march there obviously a little bit of time just putting the two companies together localizing software getting everything in place um and we actually are out you know accepting customers now we've been very disciplined very careful about all those early customers making sure that They were our ideal client profile, that they were onboarded correctly, that there were no misunderstandings, that they were using the software. So we have a very small, incredibly engaged group of really, really happy customers. And they're already beginning to refer others. It's getting to go. So as we shift into 22, we will shift it up into high gear in terms of really an outgoing, outbound, you know, sales effort, and you'll see sales begin to ramp very quickly in Australia. We just wanted to take the time to really bet it down and get it off to a good start. And we didn't want to make the rush to get, you know, a few early customers sort of the wrong way, you know, influence the long term. So I think you can be very comfortable with that, you know, that idea of penetrating that base. Perfect. Maybe one or two more quick. The color on the shift in M&A strategy is really helpful and appreciated. And it's a natural extension, obviously, of where you've been going. But I'm wondering, you know, is the pipeline for marketing services opportunities any different? Or is it simply a function of, you know, confidence and wanting to accelerate the shift? and skew towards SaaS solutions, revenue, profitability, et cetera. I appreciate the call. Yeah, look, make no mistake. We're building a SaaS company. That's what we think about morning, noon, and night is building a SaaS company. So if we were to acquire a marketing services business, it would be in service of the goal of building a SaaS company. Full stop. We think that there's a really efficient potential customer acquisition model of adding more animals to the zoo so there's more people that we can kind of go have a friendly, easy conversation with with a low-cost cat. And if we can do that, we will do it. I mean, we're not going to turn those away. But that's not – we're not spending a lot of time out trying to source those. You know, opportunistically, if there's something that can be done at a – And I can't refuse price. We certainly will do it. But we're not going to stretch or become distracted by that. So, you know, there is a pipeline. There are other things out there to do. It's just not our highest priority. So, you know, we'll keep you posted if we come across any that look like they'll fit. I mean, we made the Australia acquisition at two times EBITDA. with a pretty quick cash repayment, so it made complete sense to do it. And if we have others that sort of fit that model, we'll certainly look at that. Michael Heaney That makes sense. Congrats on the progress. Last for me, for Paul, just any thoughts around free cash flow generation for the remainder of the year? Thanks.
spk01: Paul Krugman Yeah, thinking about free cash flow, you know, I'd probably look at this quarter's cash flow as a predictor of next quarter's cash flow.
spk03: That is helpful. Appreciate it. We'll catch up soon.
spk00: Your next question comes from the line of Zach Cummins from B. Reilly Securities. Your line is open.
spk03: Yeah. Hi. Good morning. Thanks for taking my questions and congrats again on the strong results here. I think a lot of the key ones I wanted to ask have already been asked by the other analysts on the call. But Joe, when you're making these investments in Q4 in the SaaS business, I mean, essentially implied by the adjusted EBITDA guidance that we were given. And what are the key focus areas? I mean, what's been working extremely well thus far that maybe you're going to add more fuel to the fire, or are there different areas that you're thinking about investing in as well? The biggest single area is engineering and product. You know, we've got a pretty ambitious roadmap, always have had, but it's become an even sharper focus for us as we're moving along here. And, you know, We've got lots of needs these customers have that we want to fill. And so it's really engineering and product-focused. We're in the process of – let's be honest. When we started, this was sales-driven growth. We kind of, you know, had a simple product, and we sold the crap out of it, you know, and – We've learned a lot since, and we've refined it a lot since, and we've now got a very, very nuanced, very good product. But with that has come, you know, a pretty big roadmap of things that we want to do. And, you know, we've been building out our engineering and product team. They are superb. I mean, they're a mighty team, and they accomplish a lot. But we want to add resources to that. And so the payback on those kinds of things aren't, You don't get it the following quarter or, you know, it's more like the following year, you know, a year or even two years out. But this last year, with the blessing of our board and the investment that they granted us, we really have substantially enhanced our investments in that area. And I don't think you've seen much of it come through in this year. I think you'll really see it fight in 22. So, we've got a lot of fuel, I guess, that we've put in there. part, we began the year thinking that we would probably run the SaaS business at around a break even. And as the year went on and things were really working very well and we saw the opportunity in concert with our board, we made the decision to actually stretch that out to more of a upper level single digit EBITDA loss on the SaaS side just to feed the growth machine And you're starting to see that come through, and I think you'll see more of it as we go through 22. And we're in consultation right now as a team and with our board about where we want to set that marker going into 22, whether or not we want to do the same or lean in a little bit more. The growth opportunity is there. The market is there now. We're not early anymore. It's the right time to be doing this. Understood. That's extremely helpful. And just one final quick one for Paul. In terms of gross margin, I mean, extremely strong in this quarter. I mean, can you talk about some of the factors that drove that really strong performance here in Q3 for gross margin?
spk01: Sure, absolutely. You know, as you know, the print business, while in decline, is an extraordinarily profitable product. And any quarter where you have strong performance, print you're going to have a strong gross margin and vice versa you know so so that's the primary driver of that improved gross margin is our print margins understood well thanks for taking my questions and congrats again on strong results thank you and your final question comes from the line of ryan mcwilliams from barclays your line is open
spk03: So what a difference a year can make. Nice job on execution, guys. Just one for me today. Now you have the right go-to-market in place, normal customer support, and product capabilities for your platform. I would agree with you that now kind of makes sense, the ramp acquisition. So what are some of the key characteristics you're looking for in a SaaS acquisition? Is it product improvements? Are you going after a certain geography? I'd love to hear how you're going to think more there. Thanks. You're going to get me a million calls from bankers. You know that? It's a question like that. Thank you. So look, it's really almost unidirectional. There's a lot of ways that we can go. Adding geography, we're trying to become really a global player. And so we're pushing outside the U.S. And to be crystal clear, we're definitely looking for you know, acquisitions and toeholds and opportunities outside the U.S. now. That's a thing. So, geography, you touched on that. That's definitely a thing. So, let's go to functionality. I mean, there are some software players out there that have maybe spent more time burrowing into a vertical or spent more time really developing a feature or, you know, a drip campaign capability or a something. that we find that's interesting, that is either better than what we have, or maybe just added this to what we have that we could add. There's that, you know, function. There's talent, you know. There is definitely a talent war going on in America, for sure. And there's some really smart people in some of these startups that could be added to our team and really bring, really accelerate us and bring us along. So there's sort of the acqui-hire, there's that kind of idea. Then there's, you know, There's some people who had maybe some venture backing, and they poured a bunch of money in, and it just never really got commercial traction and going. And they amassed 3,800 customers that we wouldn't mind porting over and bringing onto our platform and sort of getting customer ad out of it. So there's a bunch of different ways that you can kind of look at it, and I would say all of them are green lights for us. We're still early days. Remember, this thing's only been around six years. I mean, you forget that and how big it is so fast. But we really believe that there are a number of kind of vectors that we could be enhanced through acquisition. And so we're reviewing opportunities on all those fronts. Appreciate the color. I'm excited to see the changes over the next year. Thanks, Jeff. Thanks, Jeff.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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