Upland Software, Inc.

First Quarter 2021 Earnings Call. At this time, all participants are in 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 first quarter 2021 earnings release, which was distributed today at 4 p.m. Eastern Time. If you have 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.

Thank you, and welcome to our Q1 2021 earnings call. I'm joined today by Rod Favrone, our President and Chief Commercial Officer, and Mike Hill, our CFO. I'll summarize our results in recent sales, product, and operations. Following that, Mike will provide some insights on the Q1 numbers and our guidance. Then we'll open the call up for Q&A. But before we get started, Mike will read the Safe Harbor Statement. Thank you, Jack. During today's call, we will include statements that are considered forward-looking within meanings of 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 views 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 statement. On this call, Upland will refer to non-GAAP financial measures that, when used in combination with GAAP results, provide Upland Management with additional analytics to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our first quarter 2021 results, which is available on the investor relations section of our website. Please note that we're unable to reconcile forward-looking 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 unreasonable effort. And with that, I'll turn the call back over to Jack. Thanks, Mike. In the first quarter, we restarted our M&A engine. We completed two strategic and accretive acquisitions. Second Street blew then. And we did that while posting strong free cash flow of 12.5%. And that's even after... acquisition expenses. And while there can be no guarantees, our goal is to make 2021 a strong year for acquisitions. Our acquisition pipeline is robust and we are active in the market for additional opportunities. And as we've noted before, our acquisition program is now self-sustaining as our free cash flow and financial resources mean that we're no longer dependent on the equity capital markets. In the first quarter, we had 9% total revenue growth. As expected, adjusted EBITDA came in at 31%, reflecting our go-to-market investments. Our Q1 free cash flow was $12.2 million. We had 3% recurring growth in the organic side. Now, when you exclude political-related revenue from the first quarter of 2020, the comparison period, our recurring revenue organic growth was 6%. On the sales front in the first quarter, we expanded relationships with 283 customers, 45 of which were major expansions. We also welcomed 118 new customers to Upland in the first quarter, including 32 new major customers. Product side, we expanded security and collaboration capabilities across the Upland product portfolio with three major releases and five feature packs. In our project and IT management product suite, we delivered product integrations with key partners, Salesforce and Sage Intacct. And following the Upland and HP Hewlett Packard joint announcement in the fall, we released new capabilities in our document workflow product suite in support of HP WorkPath. And these apps will provide HP customers the ability to capture and digitize documents from multiple sources, for example, faxes, emails, scans, electronic content, to extract and index key content and then route documents for further action directly from their HP-specific devices. Again, on the acquisition front, as I mentioned, Q1 was an active quarter for M&A. We closed the acquisition of BlueVen, which is a leading customer data platform, anchoring Upland's customer experience management suite with a single view of the customer that will drive deeper engagement across email, SMS, mobile applications, and online. We also closed the acquisition of Second Street, another nice addition to our CXM suite. Second Street's interactive content and contest capabilities give our customers more ways to engage their consumers to drive revenue. As I mentioned, the M&A pipeline is strong, and again, while there could be no guarantees, It's our goal to make 2021 a very strong year for acquisitions. We are active in the market for additional 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 first quarter and our outlook for the second quarter and full year 2021. On the income statement, total revenue for the first quarter was $74 million, representing growth of 9%. Recurring revenue from subscription and support grew 11% year-over-year to $70.7 million. Professional services revenue was $3 million for the quarter, a 22% year-over-year decline, which was expected due to the COVID-19 travel impacts. Overall gross margin was 67% during the first quarter, and our product gross margin remained strong at 68%, or 72% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation, amortization, and stock compensation, were $30.4 million for the first quarter, or 41% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $9.6 million in the first quarter, and, of course, these acquisition-related expenses will continue as a result of our renewed acquisition activity. I will note that $1.2 million of this Q1 expense is related to an office lease exit from last year's acquisition. Acquisition-related expenses are generally 50% to 60% of acquired annual revenue run rate. and varies from acquisition to acquisition depending on uncontrollable factors such as geographic location. Generally, for each acquisition, 45% to 50% of these transaction and transformation expenses are incurred within the first three months and then taper down rapidly until complete by the acquisition's first anniversary. Our first quarter 2021 adjusted EBITDA was $22.8 million, or 31% of total revenue, down 7% compared to $24.6 million or 36% of total revenue for the first quarter of 2020. As expected, adjusted EBITDA was lower due to our increased go-to-market investments compared to last year. Now on the cash flow. For the first quarter of 2021, GAAP operating cash flow was $12.5 million and free cash flow was $12.2 million, even with $9.6 million of acquisition-related expenses in Q1. We also had some positive changes in some of the working capital accounts, like collections on accounts receivable. 2021 free cash flow should be over $30 million and possibly over $40 million, depending upon the size and timing of future acquisition. So we are focused on generating substantial gap operating cash flow and free cash flow even after acquisition-related expenses. So for the balance sheet, This ongoing free cash flow generation is in addition to our existing liquidity of $246.7 million, comprised of approximately $106.7 million of cash on our balance sheet as of March 31, 2021, and our $60 million undrawn revolver. This ongoing cash flow generation, available capital, and expanding our credit facility while maintaining net debt leverage of up to a maximum of around 4.0 times should allow for self-sustained growth without dependency on the equity markets. I should note that our net debt leverage is currently at around 3.5 times based on the midpoint of our 2021 adjusted EBITDA guide. With regard to income taxes, I will note that Upland currently has approximately $356 million of total tax NOL carry-forwards, and of these, we estimate that approximately $215 million will be available for utilization prior to expiration. As of March 31, 2021, we had outstanding net debt of approximately $345.2 million. After factoring in the $186.7 million of cash in our balance sheet, I will note that principal payments on our term debt are 1% per year or about $5.4 million per year, with the remaining balance 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 levels. Additionally, I will point out that our term debt has no financial covenants on current borrowings. Now for guidance. For the quarter ended June 30th, 2021, Upland expects reported total revenue to be between $73 and $77 million, including subscription and support revenue between 70.2% $3.2 million for growth and recurring revenue of 6% at the midpoint over the quarter into June 30, 2020. Second quarter 2021 adjusted EBITDA is expected to be between $22 and $24 million for an adjusted EBITDA margin of 31% at the midpoint, representing a reduction of 3% at the midpoint over the quarter into June 30, 2020, reflecting our incremental investment in our go-to-market activities. For the full year ending December 31st, 2021, Upland expects reported total revenue to be between $299 and $311 million, including subscription and support revenue between $285.3 and $295.3 million for growth and recurring revenue of 5% at the midpoint over the year ended December 31st, 2020. Full year 2021 adjusted EBITDA is expected to be between $94.4 and $100.4 million for an adjusted EBITDA margin of 32% at the midpoint, representing a reduction of 3% at the midpoint over the year into December 31, 2020, again reflecting our incremental investments in go-to-market activities. So with that, I'll pass the call back over 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, Rod, or me.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And our first question comes from Bavon Suri of William Blair. Please go ahead.