Upland Software, Inc.

Thank you for standing by, and welcome to the Upland Software 4th Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the fourth quarter 2020 earnings release, which was distributed today at 4 p.m. Eastern Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Thank you, and welcome to our Q4 2020 release. I'm joined today by Tim Maddox, our President and Chief Operating Officer, Rod Favrone, our President and Chief Commercial Officer, and Mike Hill, our CFO. Up front, I'll summarize our results as well as recent sales, product, and operations highlights. Following that, Mike will provide some insights on the Q4 numbers and on our guidance. And then we'll open the call up for Q&A. Before we get started, Mike is going to read the safe harbor statement. Mike? Thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meanings of the securities laws. These statements are subject to risks, assumptions, and uncertainties that could cause our actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in our annual report on Form 10-K. as periodically updated in our quarterly reports on Form 10-Q filed with the SEC. The forward-looking statements made today are based on our reviews and assumptions and on information currently available to Upland Management as of today. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. On this call, Upland will refer to non-GAAP financial measures that, when used in combination with GAAP results, provide Upland management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our fourth quarter and full year 2020 results, which is available on the investor relations section of our website. Please note that we are unable to reconcile any forward-looking statements, non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without a reasonable effort. And with that, I'll turn the call back over to Jack. Thanks, Mike. So Q4 was a strong close to a year that demonstrated the strength and the resilience of Upland's business. We posted record organic growth in q4 and also a record free cash flow and after the end of the quarter we announced the acquisition of second street thus restarting our m a engine our acquisition pipeline is robust our acquisition program of course now is self-sustaining as our free cash flow and our financial resources mean that we're no longer dependent on the equity market so with that let me review the q4 and 2020 results For the fourth quarter, 18% total revenue growth, 7% adjusted EBITDA growth. Now, our EBITDA growth rate was lower than our revenue growth rate due to our ongoing sales and marketing investments, and also a temporary uptick in CXM messaging costs based on high election year volumes. For 2020, we're looking at 31% total revenue growth overall with 21% adjusted EBITDA growth. Our Q4 cash flow was a record at $21.2 million, $21.2 million in free cash flow in Q4. We had only $2.6 million of acquisition expense in the fourth quarter, and we had about a $6.6 million net positive change in working capital. For 2021, Overall, free cash flow was $34.5 million, and that was even with $27.1 million of acquisition-related expenses on the year. Of course, from this point forward, we're focused on generating material gap operating cash flow and free cash flow even after acquisition expenses. Net dollar retention rate came in at 94%. So despite the global pandemic, Our retention rates remain strong in the mid-90s percentage point range. Q4 organic growth in reported recurring revenues came in at a record at 21%. Again, driven by election year CXM usage. and also some acquisition driven deferred revenue discounts. We don't view this as any kind of a new normal for organic growth, and we're going to maintain a conservative organic growth outlook for 2021. On the sales and marketing front, In the fourth quarter, we expanded relationships with 242 existing customers, 55 of which were major expansions. We also welcomed 111 new customers to Upland in Q4, including 38 major customers. We continued investment in our go-to-market initiatives. including establishing a global account sales team focused on our top 175 customers, aligned by key verticals, including financial services, healthcare, CPG, high tech, and others. And we also built out a new centralized lead generation sales development team. And after the close of the quarter, we launched a refreshed brand and streamlined website. So we're going to continue building out this phase one combined team now. As of end of year, 24 global account salespeople and sales development reps in total, and we continue to add to that in the first quarter on the lead gen sales development rep side. On product, we had five major releases and 11 feature packs across Upland's product portfolio. So in the Project and IT management product suite, we expanded our Microsoft Teams integration to accelerate cross-team collaboration and communication for users. In document workflow, we announced new capabilities and integrations focused on in-demand security features, such as single sign-on. And moving over to M&A, as I mentioned earlier, After the end of Q4, we closed the acquisition of Second Street, which is a leading cloud-based audience engagement software platform that will be added to our customer experience management product suite. And again, we are now on a self-sustaining growth basis without dependency for equity capital markets for acquisition growth capital. Our M&A pipeline, as we look out into 2021, is strong, and we are actively in the market looking at opportunities. So with that, I'm going to turn the call back over to Mike. Thank you, Jack. I'll cover the financial highlights for the fourth quarter and our outlook for the first quarter and full year 2021. So in the income statement, total revenue for the fourth quarter was $78.2 million, representing growth of 18%. Recurring revenue from subscription and support grew 27% year-over-year to $74.9 million. Professional services revenue was $2.7 million for the quarter, a 21% year-over-year decline, which was expected due to the COVID-19 travel impacts. Overall growth margin was 66% during the fourth quarter, and our product growth margin was remained strong at 67% or 70% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation, amortization, and stock-based compensation, were $28.1 million for the fourth quarter, or 36% of total revenue, all generally as expected. also acquisition related expenses were approximately 2.6 million in the fourth quarter and of course will continue in q1 as a result of our renewed acquisition activity acquisition related expenses are generally 50 of acquired annual revenue run rate and are typically slightly more for foreign acquisitions for each acquisition 40 to 50 percent of these transaction and transformation expenses are incurred within the first three months and then tapered down rapidly until complete by the acquisition's first anniversary. Our fourth quarter 2020 adjusted EBITDA was $26.6 million or 34% of total revenue, up 7% compared to $25 million or 38% of total revenue for the fourth quarter of 2019. Adjusted EBITDA margin was lower due to our continuing go-to-market investments and due to increased CXM messaging telecom costs due to the high election year volume that we experienced in Q4. So now to cash flow. For the fourth quarter of 2020, GAAP operating cash flow was $21.5 million, and free cash flow was $21.2 million. Even with $2.6 million of acquisition-related expenses in Q4, this was a record cash flow quarter for us, right after the record $18.7 million of gap operating cash flow that we produced in Q3. I will note that Q4 cash flows were benefited by a little over $6.6 million of net positive temporary timing differences in our working capital accounts. So adjusting for the timing differences, that's still over 50% cash flow conversion from adjusted EBITDA. Looking at the full year, 2020 GAAP operating cash flow, was 35.6 million dollars and 2020 free cash flow was 34.5 million dollars even with 27.1 million dollars of acquisition related expenses on the year from this point forward we are focused on generating substantial gap operating cash flow and free cash flow even after acquisition related expenses we are estimating that even with ongoing additional acquisitions forward 12-month free cash flow should be over $30 million and possibly over $40 million, depending upon the size and timing of future acquisitions. Now on the balance sheet. This ongoing free cash flow generation, in addition to our existing liquidity of $310 million, comprised of the approximately $250 million of cash in our balance sheet as of December 31, 2020, and our $60 million of undrawn revolver, This ongoing cash flow generation, existing available capital, and expanding our credit facility while maintaining net debt leverage up to a maximum of around 4.0 times should allow for self-sustained growth without dependency on the equity markets. And I should note that our net debt leverage is currently at around three times. With regard to income taxes, I will note that Upland currently has approximately $345 million of total tax NOL carry forwards. And of these, we estimate that approximately $211 million will be available for utilization prior to expiration. As of December 31st, 2020, we had outstanding net debt of approximately $283.3 million after factoring in $250 million of cash on our balance sheet. I will note that the principal payments on our term debt are 1% per year, or about $5.4 million per year, with the remaining balance maturing in August of 2026. The interest rate on our outstanding term debt is locked at 5.4%, making our annual cash interest payments approximately $30 million at our current debt level. Additionally, I will point out that our term debt has no financial covenants on current borrowings. Now to guidance. For the quarter ended March 31st, 2021, Upland expects reported total revenue to be between $70.6 and $74.6 million, including subscription and support revenue between $67.6 and $70.6 million for growth and recurring revenue of 8% at the midpoint over the quarter ended March 31st, 2020. First quarter 2021 adjusted EBITDA is expected to be between $21.6 and $23.6 million for an adjusted EBITDA margin of 31% at the midpoint, representing a reduction of 8% at the midpoint over the quarter ended March 31, 2020, reflecting our incremental investment and sales headcount and related lead generation activities. For the full year ending December 31, 2021, Upland expects reported total revenue to be between $288.6 and $300.6 million, including subscription and support revenue between $276.3 and $286.3 million for growth and recurring revenue of 1% at the midpoint over the year ended December 31, 2020. Full year 2021 adjusted EBITDA is expected to be between $90.8 and 96.8 million for an adjusted EBITDA margin of 32% at the midpoint, representing a reduction of 6% at the midpoint over the year ended December 31st, 2020, reflecting our incremental investment in sales headcount and related lead generation activities. And I will add that with additional acquisitions during 2021, our target is to be back to the mid 30% adjusted EBITDA margin by Q4 2021 Read that around 34%. And with that, I'll pass the call back to Jack. Thanks, Mike. And now we're ready to open the call up for Q&A. Please feel free to direct questions to Mike, Tim, Rod, or me.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Robin Shaw with Credit Suisse. Please go ahead.