putilich
The following segment was excerpted from this fund letter.
Thryv Holdings Inc (NASDAQ:THRY)
Thryv is our fast-growing software company that is modernizing the way in which small and medium businesses operate by bringing their operations into the cloud. The Company also owns the Yellow Pages as well as other digital marketing tools which are clearly in decline. However, these businesses 1) generate gobs of cash which allows Thryv to self-fund their software efforts and 2) represent a clear competitive advantage on distribution as Thryv has a pre-existing relationship through the Yellow Pages and related with about a third of their new software customers. Another third of new customers come through referral.
A distribution advantage is rare in SAAS, and allows THRY to have lower Customer Acquisition Costs than the competition, which is especially important in SMB world due to how diffuse the potential customer base is. A lower CAC combined with internal funding in a world where access to capital has dried up puts Thryv on a different playing field than other upstarts. To be fair, SMB can be rocky in a recession, but Thryv specifically services businesses that focus on “the nasty things in life” such as plumbers, who typically do not suffer during recessions.
Earnings power will grow at Thryv through topline growth tied to huge secular tail winds and operating leverage as the Company gains scale. The vast majority of small and medium businesses have not yet moved their operations to the cloud, and are instead relying on a “system” of post-it notes, excel spread sheets, and paper filing cabinets to operate. As their competitors embrace products like Thryv – where the entire customer experience from scheduling, to estimating, to invoicing and payments, to follow-up calls, etcetera can be done through an app and text messages – more and more SMBs will be forced to adopt similar solutions, or risk losing their customers to competitors who provide a better customer experience through software. This sort of secular technological change has a strong track record of success through difficult economic periods, with the rise of online travel agencies during the recession of the early 2000s being a prime example.
At an April Investor Day, the Company laid out ambitious plans to reach $1B in revenue and $200M in EBITDA in 5 years, and $4B in revenue and $800M+ in EBITDA in 10 years. Of course, all long-term projections should be taken with a grain of salt, but zooming out suggests that the 5 year targets are reasonable, if not conservative. To reach $1B in revenues, the Company thinks they will need 150,000 customers, or more than 90,000 more than I estimate they have today. To frame that, consider that the Company believes there are 4 million American businesses and an additional 4 million international businesses that make up their Total Addressable Market. In other words, the Company is forecasting less than 2% penetration of their TAM, which is a breath of fresh air versus other SAAS companies that require “winner take all” economics to be successful.
Framed differently, 150,000 customers is ~38% of the ~400,000 existing Yellow Pages customers, or only a bit higher than the 33% of new customers that are presently coming to Thryv via the Yellow Pages. Thus, there may be a path to success here even if Thryv does not move much beyond the Yellow Pages. Of course, with more than a third of new business coming from referrals, we know that Thryv is already well beyond the Yellow Pages ecosystem.
A third way to think of reaching 150,000 customers can be seen through the eyes of the Baby Boomers. We have all heard that 10,000 Baby Boomers retire every day. What is less well known is that these Baby Boomers own an estimated 4 million small businesses, and it is estimated that 3.3 million of those businesses will change hands over the next 5-10 yearsi. While some of these businesses have surely already modernized their systems, what are the odds that the next generation of small business owners who were raised as digital natives will continue on with a system of sticky notes rather than modernizing the businesses’ operating procedures by embracing software?
Lastly, two of management’s key assumptions are that they will lose market share in the years to come, and that their growth will be entirely organic. Given that at present they have the best product at the lowest price point with well-defined distribution advantages, assuming a loss of market share appears conservative. Further, given that the management team here has executed more than 100 transactions in the past and competitors may struggle in a constrained funding environment, it would not surprise me to see M&A materialize as another leg of the Thryv stool in the years to come.
Perception will change in several ways in the years to come. In the immediate term, I believe it is likely that the next round of 13F filings will show that Mudrick Capital no longer owns THRY. Mudrick, a distressed debt fund that owned THRY equity as a result of the 2016 bankruptcy of Dex Media, started 2022 as the owner of approximately 50% of THRY equity, and has been a steady seller as the original bankruptcy investment has matured. Having a 50% owner liquidate their position has been a clear overhang on the stock, which I believe will be lifted shortly. Second, at present THRY screens as a marketing services company as revenues from the Yellow Pages and related businesses are significantly larger than the SAAS business. However, at some point in the next ~3 years, revenue from the SAAS business should eclipse revenue from the Yellow Pages business, allowing the combined entity to be reclassified as a software company, which should draw in an entirely new arena of potential investors. Lastly – and most importantly – at present Thryv is a sum of the parts story where analysts struggle to value a long duration tech asset combined with a declining cash cow. As the Company matures the story will be cleaned up, and the market will be able to cleanly value fast growing free cash flow generated by a best-in-class software business with tremendous tailwinds.
In my view, if Management is able to achieve their 5 year targets and the market were to value THRY similarly to Paychex (PAYX), a more mature provider of software to small and medium businesses, shares would trade ~400% higher than they do at present. If the future does not unfold as expected, we should still do well. I would note that CEO Joe Walsh appears to share this view as he has recently purchased stock in the open market despite already owning ~7% of the equity.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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