2023-10-22 07:30:00 ET
Summary
- Thryv Inc. is using its legacy Yellow Pages and other marketing businesses to develop software for small and medium businesses to modernize their operations.
- THRY has seen a 10 percentage point increase in margins on the SaaS side and has experienced growth through customer referrals.
- The company's goal of generating $200M in EBITDA from their SaaS business could lead to a potential 400% increase in shares over the next few years.
The following segment was excerpted from this fund letter.
Another example is our investment in Thryv Inc. ( THRY ) which is using its legacy Yellow Pages and other marketing businesses as a base from which to build software that allows small and medium businesses to move their operations from a system of sticky notes and excel spreadsheets into the modern era. Thryv recently raised guidance, announced that margins on the SaaS side jumped 10 percentage points, and announced the release of new “centers” that should accelerate growth further. i
Shares traded down ~25% in the weeks following this news.
In my mind, it is hard to think of a better development than the margin improvement. This improvement was tied to a decision to cut back on paid customer recruitment, because more than 40% of new customers are coming through referral, which is essentially free. Combined with customers that come out of the Yellow Pages “zoo,” more than 80% of customers are coming with minimal acquisition costs. Why pay Google to help you find customers when you are getting so many for nearly free?
Importantly, the referral business seems to validate my thesis around what I call “the 3 plumber problem.” Essentially, if you live in a town with 3 plumbers, and one of those plumbers starts using Thryv so that they can schedule appointments, update you on timing, send you a bill, receive payment and more all by text message, the other two plumbers who are still saying, “I’ll be there some time next week,” have a problem. They basically have to update their own operations, or customers will simply use the plumber that has brought his business into the modern world.
In my mind, proof that this dynamic is playing out – combined with the addition of new centers that broaden Thryv’s capabilities and a management team that has a long history of under-promising and overdelivering – goes a long way toward suggesting that Thryv will hit their intermediate-term goal of generating $200M in EBITDA from their SaaS business. If that happens, and Thryv is valued similarly to other SMB software providers, shares could gain ~400% over the next few years. ii
The problem?
First is the obvious: anything “small and medium business” sounds scary in the face of a potential recession. However, Thryv’s average customer has been in business for 15+ years and operates a relatively recession resistant business, like plumbing. My theory is that the bigger problem is that customers of Thryv’s marketing businesses are being transitioned from a 15 month renewal cycle to an 18 month renewal cycle. This changes nothing in terms of the near-term cash flow, but when Thryv reports Q3 earnings next month, GAAP revenue recognition rules will create an air pocket in Thryv’s revenue and EBITDA for their marketing business. Management has been telegraphing this for a year as it does not affect cash flow, but if you are a quant relying solely on GAAP inputs, this air pocket may trigger a sell decision, and if you are a short-term trader, this can be exploited.
In any case, I can tell you with near certainty that small and medium businesses will modernize their operations and move to the cloud at some point. I can also tell you that with the ability to self-finance and the lowest customer acquisition costs out there, Thryv has real competitive advantages. Thryv also arguably has the best product at the lowest price, which is very difficult to compete with. Lastly, I can say that Thryv’s intermediate term goal implies winning less than 2% of their TAM. This does not strike me as overly ambitious.
What I can’t tell you with any degree of certainty is when these things will happen.
So why not stay on the sidelines? Again, there are likely to be step function advances in the stock at some point. They are at the point where the operating leverage typical of software businesses could kick in aggressively, and revenue from Thryv’s SaaS business is just beginning to eclipse the revenue from Thryv’s legacy print business, which could attract a new class of buyers. Similar to CDMO, in my view it is worth stomaching the volatility in order to participate in the upside that could/should be several hundred percent over the next few years. Similar to CDMO, management at THRY seems to agree with my assessment, as there has been recent insider buying.
Footnotesi Thryv Q2’23 conference call ii Thryv Investor Relations, LWC estimates DisclaimerThis document, which is being provided on a confidential basis, shall not constitute an offer to sell or the solicitation of any offer to buy which may only be made at the time a qualified offeree receives a confidential private offering memorandum (“CPOM”) / confidential explanatory memorandum (“CEM”), which contains important information (including investment objective, policies, risk factors, fees, tax implications and relevant qualifications), and only in those jurisdictions where permitted by law. In the case of any inconsistency between the descriptions or terms in this document and the CPOM/CEM, the CPOM/CEM shall control. These securities shall not be offered or sold in any jurisdiction in which such offer, solicitation or sale would be unlawful until the requirements of the laws of such jurisdiction have been satisfied. This document is not intended for public use or distribution. While all the information prepared in this document is believed to be accurate, Laughing Water Capital, LP , Laughing Water Capital II LP and LW Capital Management, LLC make no express warranty as to the completeness or accuracy, nor can they accept responsibility for errors appearing in the document. An investment in the fund/partnership is speculative and involves a high degree of risk. Opportunities for withdrawal/redemption and transferability of interests are restricted, so investors may not have access to capital when it is needed. There is no secondary market for the interests and none is expected to develop. The portfolio is under the sole trading authority of the general partner/investment manager. A portion of the trades executed may take place on non-U.S. exchanges. Leverage may be employed in the portfolio, which can make investment performance volatile. The portfolio is concentrated, which leads to increased volatility. An investor should not make an investment, unless it is prepared to lose all or a substantial portion of its investment. The fees and expenses charged in connection with this investment may be higher than the fees and expenses of other investment alternatives and may offset profits. There is no guarantee that the investment objective will be achieved. Moreover, the past performance of the investment team should not be construed as an indicator of future performance. Any projections, market outlooks or estimates in this document are forward-looking statements and are based upon certain assumptions. Other events which were not taken into account may occur and may significantly affect the returns or performance of the fund/partnership. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. The enclosed material is confidential and not to be reproduced or redistributed in whole or in part without the prior written consent of LW Capital Management, LLC. The information in this material is only current as of the date indicated, and may be superseded by subsequent market events or for other reasons. Statements concerning financial market trends are based on current market conditions, which will fluctuate. Any statements of opinion constitute only current opinions of Laughing Water Capital LP and Laughing Water Capital II LP, which are subject to change and which Laughing Water Capital LP and Laughing Water Capital II LP do not undertake to update. Due to, among other things, the volatile nature of the markets, an investment in the fund/partnership may only be suitable for certain investors. Parties should independently investigate any investment strategy or manager, and should consult with qualified investment, legal and tax professionals before making any investment. The fund/partnership is not registered under the investment company act of 1940, as amended, in reliance on an exemption there under. Interests in the fund/partnership have not been registered under the securities act of 1933, as amended, or the securities laws of any state and are being offered and sold in reliance on exemptions from the registration requirements of said act and laws. The S&P 500 and Russell 2000 are indices of US equities. They are included for informational purposes only and may not be representative of the type of investments made by the fund. |
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
Laughing Water Capital - Thryv: Shares Could Gain ~400% Over The Next Few Years