Deep Dive: Thryv Holdings (THRY) Stock Analysis
A classic melting ice cube... A high margin software business with strong optionality hiding under a dying YellowPages business that the market is blind to, priced at 5.5x NTM EV / EBITDA.
Disclosure: I am long shares of THRY, and have been adding at current prices. This writeup reflects my thoughts exclusively, and is not investment advice. Please do your own due diligence.
Thryv Holdings, Inc.
Ticker: NASDAQ: THRY
Share Price: $18.48
Market Cap: $649.8M
EV: $1.08B
Reasons I’m Drawn to THRY:
CEO owns ~7.7% of the company, and has been a buyer on the open market for the last 2 years straight… estimated $50 Million ownership in THRY stock
Sticky recurring revenue, with a growing offering base (billing, contracts, payment processing, appointments, scheduling, CRM database etc.)
Self financing: Very FCF generative, trading at less than 5x P/FCF + Net Income profitable
They are they lowest cost provider, targeting customers out of the scope of CRM-based competitors: ($HUBS, $MNDY, Zoho etc.), almost acting as a competitive advantage
Management has shown creativity in turning a dying business (Yellow Pages) into a lucrative sales tactic to grow their underlying software business
Referral Program: “As of December 31, 2022, our efforts led to approximately 39% of our new SaaS clients originating from our Marketing Services segment” *FY ’23 10-K*
Very minimal stock based compensation (Less than 4% SBC)
Long-Term Minded Management:
When asked in earnings calls whether they would spin-off the SaaS business to achieve “SaaS-like multiples”, CEO, Joe Walsh shot them down, claiming they have no interest in achieving exotic multiples this week, and instead, concentrating on the 10-year target of $4B in sales (in 2032)
CEO, Joe Walsh has announced 5 year targets to FY '27 & 10 year targets achievable (organically) for the SaaS business of $1 & $4 Billion, respectively
Joe Walsh has purchased $516,000 on the open market since 12/8/22, with no sells
No focus on moving to larger enterprises 5, 10 years down the line, but improving & adding cross-selling opportunities
In acquired marketing service businesses and some yellow page units for ~2x EBITDA
Pre Mortem / Associated Risks:
Macro environment squeezing the wallets of SMB customers (although this could be alleviated based on THRY’s recession-resistant customer base.. ie. Accountants, lawyers, hospitality, contractors: electricians, plumbers etc.)
Immense, fragmented competition… many of which who benefit from greater economies of scale (few vendors targeting businesses of 2-25 employees, however)
Customer churn: ~2.1% customer churn every month… meaning they lose ~ a quarter of SaaS customers every year (much of this is attributed to their customer size and how often they go out of business)
The “Marketing Services” business declining faster than anticipated
Customer acquisition costs increase, or referrals to neighboring SMB’s slows down
Already have minor presence in Australia & Canada… but international markets present new risk in penetrating international markets
CEO, Joe Walsh retiring. He’s currently 60 years, but appears to have the spirit & passion to work well into his 70’s
294 sales people have unionized, potentially creating a threat to employment compensation
Simple Business Description:
Thryv Holdings is a business perceived as a “melting ice cube” with a legacy yellow pages business supporting 82.0% of sales in the last fiscal year. These leads are employed by a sales team of over 1,000 strong to sell advertising space in both digital and print yellow books. Thryv’s goal is to help local businesses build their clientele list and pipeline. Over the last few years, Thryv has launched and been refining a CRM platform aimed at SMB’s with 2-25 employees, the current focus of the sales team. This revenue segment makes up 18.0% of sales in the last fiscal year, and is the growth avenue of the business. Given the shrinking nature of Thryv’s Yellow pages services, this business is being priced as a dying entity. However, I disagree, and see the scale their CRM platform can enact as a hidden gem that encapsulates the market’s inefficiencies.
Company Background:
CEO, Joe Walsh is truly an entrepreneur at heart. Originally, he bootstrapped a competitor to yellow pages, built it up, and sold it. After spending a few years building up his acquired company, Walsh jumped ship joining a very small challenger called “Yellow book”, another directory-style competitor. At this company he met current Thryv CFO, Paul Rouse and Chief Strategy Officer, Gordon Henry. A few years later, and 77 acquisitions later, Walsh was left with a $2 billion yellow books company in 250+ markets. This business IPO’ed on the London Stock Exchange for $4 billion before Walsh exited.
His next project would be to take on a consultant role with colleague, Gordon Henry at Dex Media. Dex Media would end up being the predecessor to Thryv Holdings. The origin of Dex, and what likely drew Walsh to the company, was a merger that compiled the Yellow-page “book of business” for Verizon, Super Media, Dex One, and another media company . What many deemed to be worthless assets, Walsh saw as a way to scale and enhance relationships in local end-markets. A year later, in 2014, he would go on to take over Dex Media, and launch their SaaS offering for SMB’s. Walsh stayed true to his conviction in these assets, and eventually acquiredAT&T’s yellow page book of business in 2017.
Business Breakdown:
Marketing Services:
This segment consists of both “Print" yellow pages (PYP’s) and “Digital” or Internet yellow pages (IYP’s). The print segment is published on a 15-18 month cycle, as revenue is generated for ad placements geared at SMB’s. Although print directories are a declining business, management recognizes this. They aren’t focused, nor concerned with scaling this revenue segment. Instead, they view it as a highly cash generative business that helps fuel the growth of their SaaS solution, and the future of Thryv. Print is aimed at consumers 55 years and older, with higher disposable income often in single family homes. Given the contract structure of ad placement, sales are very predictable and build pipeline, enhancing SMB end-market relationships, and creating an opportunity to upsell their SaaS offering.
In the US, Thryv’s digital segment is characterized by yellowpages.com, superpages.com, and dexknows.com, which drive an average of 23 million visits per month. Revenue is generated by charging SMB’s advertising space and priority. These webpages not only generate cash, but help filter consumers who are further in the purchasing process, again enhancing the relationship with local businesses. Thryv also owns advertising platforms and 3rd party directory services across Yelp and Nextdoor that generate 78 million visits a month. Given CEO, Joe Walsh’s unusual commitment to acquiring yellow page accounts from large organizations, this digital network offers a supposed high conversion traffic at a low cost.
Thryv also makes money from Search Engine Marketing (SEM), selling paid listings on Google, Yelp, Bing, Yahoo and directories like CityGrid, White-pages, and more. Finally, a small revenue segment is sourced from social advertising, video, and SEO tools. This segment tracks cost-per-click and cost-per-call across SMB clients to offer context to the effectiveness of local SMB’s campaigns.
Thryv SaaS Solution:
Thryv’s SaaS solution is a CRM platform built for SMB’s with 2-25 employees. The interface is aimed at simplification. Although Thryv has implemented many new capabilities, and will continue to. Thryv does not offer a “Freemium” plan, but does offer a free trial for 30 days. The CRM is accessible across all major browsers, and has a fluid mobile app available today. My general read is that management really emphasizes the importance of creating a robust mobile app, as their target audience is less likely to sit down in an office, and instead, be working in the field.
Thryv offers features like billing, quoting, invoicing, appointment booking dependent on purchasing tier. There are many add-ons to enhance quality of life. “ThryvPay”, a payment processor comes with a mobile tap-to-pay, and a mobile card reader. Thryv “Marketing Center” enables automated marketing campaigns, and “ThryvLeads” will automatically populate customers with interest so pipeline can be managed and contacted via email or phone. On top of this, Thryv records all customer documents, with the ability to organize files by customer, make documents private based on user access, and ThryvSecurity, for customers with HIPAA compliance requirement. From reviews, it’s clear that customers appreciate how many services this CRM can centralize on one interface. On the flip side, there are some criticisms surrounding the depth of insight customers have access to, however, that’s expected given their target demographic. More surface level context goes a long way, especially when trying to track and organize requests across a vast client list.
The CRM platform is sold on a monthly subscription model, with 3 levels: “Plus”, “Premium”, and “Unlimited”. However, I’ve been unable to find any information on this tiered pricing.
Assumptions:
Management has assumptions on a 5 year basis of a $1 Billion run rate in 2027 with 20% adjusted EBITDA margins for the SaaS segment. Personally, I’m not confident that they reach that level of scale. Based on an average growth rate of 35% from 2023-2027, they would guide to ~$911 Million in sales, just shy of their goal. However, I do believe they can reach a 20% Adjusted EBITDA margin. Using 15% EBITDA margins to avoid adjusted metrics, this equates to about ~$137 Million in EBITDA. Assuming the marketing services segment contracts sales by -16% per annum, which is fair, you’re left with about $400 Million in sales. Given this segment consistently returns a ~35% Adjusted EBITDA margin. Applying a 30% EBITDA margin, the marketing services would put off about $120 Million in EBITDA.
This brings total sales to: $1.31 Billion in 2027, and ~$257 Million in EBITDA. CRM competitor platforms like monday.com (MNDY) trade at 200x EV/EBITDA, while growing 42% YoY. Smartsheet.com (SMAR) trades at 49x Fwd EBITDA, growing 30% YoY. And hubspot.com (HUBS) trades at 60x Fwd EBITDA, while growing mid-to-high 20% sales. Assuming Thryv’s CRM is growing sales at mid 30% per annum, trading at 20x EBITDA would be conservative, assuming the market starts to appreciate the underlying growth and SaaS multiple. It wouldn’t be unreasonable to assume that THRY has a $5.1 Billion market cap (on $250M EBITDA x 20x multiple). Assuming a 2.0% dilution rate for the next 5 years, we’re left with 40.3 million shares. This would give us a $116 share price in 2027. In other words, an upside of over 530%, which could drive a 130% IRR over the next 4 years!
Although these numbers are obscene at initial glance, believe it or not, I actually think they’re conservative. First off, I’m not assuming they reach their target of $1 Billion SaaS revenue. Additionally, I’m assuming that they dilute for the next 5 years, despite the fact that they have a highly cash-generative business that can finance itself. Next, I’m assuming that the marketing services business contracts at an aggressive -16% per annum… a segment which has shrunk on average of 11% over the last 5 years. Finally, a 20x EBITDA multiple on a sticky, CRM business growing 35% is very conservative. A 30-40x EBITDA multiple would be much more realistic, but I want to keep my assumptions somewhat grounded. Given my confidence in Joe Walsh, the level of consistency he has proved in the last few years, I feel like management’s execution acts as another margin of safety in buying shares around the ~$18 level.
Catalysts for Value Expansion:
The market re-rating this as a SaaS business, not a shrinking marketing business
An EBITDA multiple closer to competitors: $MNDY (200x EV/EBITDA), $SMAR, (49x Fwd EBITDA), $ASAN (Still EBITDA negative), $HUBS (60x Fwd EBITDA)
Further debt repayment (their most immediate goal!) + potential debt refinancing down the road
Continued scale to $1B run-rate for the SaaS with improving EBITDA margins
Expanding across new geographic territory, taking share of international SMB CRM tools
Continued growth in payment processing (expected to transfer $3B in funds by 2027)
Greater attention from analysts and Finance media outlets
Management & Executive Officers:
Compensation:
Joe Walsh - Chairman, CEO // 60 years old - $1.0M base, $6.5M Total
Paul Rouse - CFO, EVP, Treasurer // 64 years old - $521K Base, $3.9M Total
Gordon Henry - Chief Strategy Officer, EVP // 62 years old - $425K Base, $2.875M Total
James McCusker - CRO, EVP // 60 years old - $425K Base, $2.875M Total
John Wholey - COO, CIO, EVP // 58 years old - $425K Base, $2.8M Total
Notable Large Ownership:
Affiliates of Paulson (John Paulson is a Billionaire, Founder of the hedge fund) - 2 Million shares + is a creditor helping them from Chapter 11, 5.7% shares O/S
Yosemite Sellers Representative (Steve Feinberg is a Billionaire, CIO of the hedge fund) - 1.8 Million shares, 5.2% shares O/S
Executive Officer Incentive Structure:
Short Term Incentives ~
EBITDA (25%)
Free Cash Flow (25%)
SaaS Net Revenue (25%)
Individual Performance (25%)
Over performance Incentives ~
EBITDA (25%)
Free Cash Flow (25%)
Net SaaS Revenue (50%)
Long-Term Incentives ~
35% RSU’s vested each January of ’23, ’24, 25
65% PSU’s vested at the end of 3 year period
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God bless.