Upland Software, Inc.

Thank you for standing by and welcome to the Upland Software second 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 second 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, sir.

Thank you, and welcome to our Q2 2021 earnings call. I'm joined today by Rod Favrone, our President, and Mike Hill, our CFO. On today's call, I'll start with some opening comments on our Q2 results. Then Rod is going to provide some color around customers and also around product developments. And following that, Mike will provide some insights on the Q2 numbers and on our guidance. After that, we'll open the call up for Q&A. But before we get started, Mike, could you go ahead and read the Safe Harbor Statement?

Thank you, Jack, and good afternoon, everyone. 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 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 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 second quarter 2021 results, which is available on the investor relations section of our website. Please note that we're unable to reconcile any 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.

All right. Thanks, Mike. So in the second quarter, we continued executing on our acquisition playbook. We completed another strategic and accretive acquisition, Panviva, which is a cloud-based knowledge management solution. And that expands our product library within the knowledge management market giving our customers a new way to drive contact center productivity, particularly in regulated industries such as utilities, healthcare, and financial services. And I'll note we did that, completed that acquisition while posting strong free cash flow of $10.6 million, and that's after acquisition expenses. And so that's over $22 million of free cash flow for the first half of 2021, again, after acquisition expenses. So this makes three acquisitions for us completed thus far in 21. And while there can't be any guarantees, I think we're well on our way to making 2021 a strong year for acquisitions. Our pipeline of acquisitions is robust and we're active in the market for additional opportunities. In terms of Q2 results, We had 7% total revenue growth as expected. Adjusted EBITDA came in at 31%, of course, reflecting our continuing go-to-market investments. Q2 free cash flow, as I just mentioned, $10.6 million, $22 million for the first half. of the year, minus 2% organic growth. But again, if you exclude the political messaging revenue from last year, our organic growth was positive 4% in line with what we expected. Now, we're clearly lapping some tough revenue growth compares right now, given last year's spike in political messaging revenue, as well as the impact of COVID, including the fact that We shut down acquisitions for most of 2020, so that impacts our total growth rate here in 2021. But that said, as we move through this and we look out over the next several years, I really like the way this business sets up. We've got a powerful cloud software library, a proven operating platform. We've got a strong base of over 1,700 enterprise customers, over 10,000 customers total, but 1,700 enterprise customers. And we've got an equity compounder financial model. beginning in 2022 and over those next several years, this is a business that can reasonably target total revenue growth of 15% per year. That's organic plus acquisitions at 15% per year. And importantly, achieve that growth on a sustainable and self-funded basis and generate positive free cash flow as we go. And that's financed out of internally generated cash flow, cash on hand in our debt facility with no further dependence on the equity capital markets. In addition to that, now that we've digested the structural go-to-market investment we've made with some of the new leadership team, the new sales and marketing service and product team members, we are set up nicely over the next several years for strong and expanding adjusted EBITDA margins as we take those margins from 32% toward our long-term goal of 40%. So with that background, let me turn the call over to Rod for some insights on customers and product developments. Rod? Thanks, Jack. Good afternoon, everyone. On the customer front in the second quarter, we expanded relationships with 311 of our existing customers. It was a strong expansion quarter. 51 of those were major expansions. We also welcomed 133 new customers to Upland during the quarter, including 32 new major customers. I'd like to talk about a couple of those major expansion and cross-sell stories just to add some color to how things played out during the quarter. Let me start with Gannett. I think we all know Gannett, a major player in the media and publishing space and an Upland top 25 customer. They expanded their existing relationship to multiple products within our customer experience library, signed a multi-year expansion, really focused on helping them achieve their revenue and growth goals. A very exciting deal for us. Another Upland top 25 customer and the largest SaaS player in the world significantly expanded their relationship with Upland to four products within our enterprise sales and marketing library. In this case, they double down with their current spend on our content marketing products specifically. I've been doing this for 25-plus years, and when I see a big customer like this, who is the undisputed leader in what they do, double down on our sales enablement products to seven-figure-plus levels, it helps validate the competitiveness of our products, the scale of the cross-sell opportunity we have in front of us, And frankly, how we at Upland are beginning to position ourselves as a trusted partner to global enterprises, really bringing last mile solutions to big problems. And finally, last quarter, we mentioned our deal with HP to resell the Upland Document Workflow Cloud. I'm excited to announce this is now rolled out to the market with first wins closed and in the books and pipeline building. We have a lot of excitement about this relationship going into 2022. Switching to the product front, we had a good quarter for new product releases. We also welcome Dan Doman as our new Chief Product Officer. Dan will own the overall product strategy for our library of products. He will focus on our R&D focus, staffing, strategy, all while working closely with our M&A teams and our go-to-market teams. With that, I'm going to turn the call back to Mike.

Well, thank you, Rod. I'll cover the financial highlights for the second quarter and our outlook for the third quarter and full year 2021. On the income statement, total revenue for the second quarter was $76.3 million, representing growth of 7%. Recurring revenue from subscription and support grew 7% year-over-year to $72.4 million. Professional services revenue was $3.4 million for the quarter, a 10% year-over-year increase. Overall gross margin was 67% during the second quarter, and our product gross margin remained strong at 68%, or 72% when adding back depreciation amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation amortization, and stock comp were $31.6 million for the second quarter, or 41% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $5.5 million in the second quarter, which were about as expected after some puts and takes. Without additional acquisitions this year, we currently estimate acquisition-related expenses to be around $4 million for Q3 and around $3 million for Q4. For each acquisition, total acquisition-related expenses are generally 50% to 60% of the acquired annual revenue run rate. and it varies from acquisition to acquisition depending upon uncontrollable factors such as size and location. Generally, for each acquisition, 45% to 50% of these transaction and transformation expenses are incurred within the first three months and then tapered down rapidly until the transformation is complete by each acquisition's first anniversary. Our second quarter 2021 adjusted EBITDA was $23.7 million or 31% of total revenue, consistent with $23.7 million or 33% of total revenue for the second quarter of 2020. As expected, adjusted EBITDA margin was lower due to our increased go-to-market investments compared to last year. We still expect adjusted EBITDA margin for 2021 as a whole to be around 32%, as implied by the midpoints of our guidance. and we expect to exit 2021 with Q4 at around 33% to 34%. On cash flow for the second quarter of 2021 here, GAAP operating cash flow was $10.8 million, and free cash flow was $10.6 million, even with $5.5 million of acquisition-related expenses in the quarter. We also had some positive changes in some of the working capital accounts, like collections on accounts receivable. With over $22 million of free cash flow year-to-date through Q2, we continue to anticipate full-year 2021 free cash flow of over $30 million and possibly over $40 million, depending upon the size and timing of future acquisitions and the corresponding acquisition-related expenses associated with those. So, we are generating substantial gap operating cash flow and free cash flow even after acquisition-related expenses. This ongoing free cash flow generation, in addition to our existing liquidity of $236.5 million, comprised of approximately $176.5 million of cash in our balance sheet as of June 30th, 2021, and our $60 million undrawn revolver. This ongoing cash flow generation, existing available liquidity, and expanding our credit facility while maintaining our net debt leverage of up to a maximum of around four times should allow for self-sustained growth without dependency on the equity capital markets. I should note that our net debt leverage is currently around 3.6 times based on the midpoint of our 2021 adjusted EBITDA guide. As of June 30th, 2021, we had outstanding net debt of approximately 354 million. after factoring in the 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, and 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. With regard to income taxes, Upland currently has approximately $356 million of total tax net operating loss carry-forwards, and of these, we estimate approximately $216 million will be available for utilization prior to expiration. I will note that we still expect around $5 million per year of cash taxes. For guidance, For the quarter ending September 30th, 2021, Upland expects reported total revenue to be between 75.4 and 79.4 million, including subscription and support revenue between 72.2 and 75.8 million for growth and recurring revenue of 4% at the midpoint over the quarter ended September 30th, 2020. Third quarter 2021 adjusted EBITDA is expected to be between 23.9 and 25.9 million, for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is in line with the quarter ended September 30th, 2020. For the full year ending December 31st, 2021, Upland expects reported total revenue to be between 300.8 and 312.8 million, including subscription and support revenue between 287.1 and 297.1 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 94.8 and 100.8 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a reduction of 2% over the year ended December 31st, 2020, reflecting our incremental investments in our go-to-market activities. And with that, I'll pass the call back to Jack.

Great. Thanks, Mike. Operator, we are now ready to open the call up for Q&A.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like 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 Bhavan Suri with William Blair. Please go ahead.

Hey, gents. Thanks for taking my question. Actually, the political messaging was pretty solid, organic growth, so congrats on that. I mean, Jack, for you initially, just watch us a little more about how Rod's sales restructuring has been progressing, you know, given we're halfway through the year. What sort of milestones should we look for by the end of 2021? Sort of think about, you know, how that's playing out. Well, you know, look, I... Talked about this before, and there are a series of milestones we look at, right? The first was getting the team in place, which was done on a really lightning fast basis when you consider that Rod joined early last year and was able to have the full team in place by the end of last year. And then we started to see, you know, a different level of hygiene around the process and really building a true go-to-market culture within Upland and adding capacities like, you know, centralized lead generation, adding the global account managers. And we're seeing the impacts of that already in terms of opportunities within accounts. So I'll let Rod kind of comment some more on this. But just one point before that, when I look at this business over the next several years, uh i think about upland as an equity compounder and this is a business that can grow 15 total growth a year right and that's going to be a mix of acquisition growth and m a and again can do it on a sustainable basis on a self-funded basis while generating positive free cash flow, material positive free cash flow, and while putting up expanding adjusted EBITDA margins here as we move from the low 30s where we are today up toward our long-term goal of 40%. So Rod is bringing that strength around go-to-market. It's beyond just the sales and marketing piece, right, because he's making changes in customer success, making changes on the whole product side of the business. and building a stronger platform that will continue to bolt acquisitions on top of. And I think the combination of that and that total 15% growth, to me, is the number to look at as we move out over the next several years. Yeah, just to add to that, I think what, you know, to Jack's point, the progress we measure internally is a combination of capability and outcomes, right? So we We've spent the last five quarters swapping out a bunch of leadership, putting in new systems, putting in new process, changing how we sell. The early indications of that are in the area of conversion. In other words, the pipeline we had a year ago, how well are we converting that and how clean was that? And we've learned that, you know, we've learned how to convert it better. We have better, stronger salespeople, better methodology. So you start with converting what you have and then you start shifting to making sure you're bringing in the kind of pipeline you can win. And so that's what the SDR team and the marketing teams have been doing. And, you know, all the early indicators, the SDR team, which is our lead qualification team, has steadily created really good pipeline in the first six months of the year, you know, for not a very big team. And so I'm encouraged by that. We're seeing that pipeline convert already in some cases, you know, which is encouraging. You know, the challenge is to, you know, try and describe to you guys at an operating level, we are – so much better, I think, than we were five quarters ago, just in talent and process, discipline, the quality of our data, how we're presenting our products, our pricing business, those type of things. But as we said earlier in the call, we're coming off of that compare, which will be very difficult to see the outcome of this work. you know, from a growth perspective until we kind of, until we lap this. And so, so really I, you know, my, my, my answer is just rest assured that what we are doing right now, I think it's just making this company so much better. And frankly, setting us up for the next five to 10 years of compounding growth and, you know, turning back on the M&A game too, is that we really didn't do any of that last year. We did a deal early, early, early 2020 and turning that back on and executing that and having a team that that is going to market and integrating acquisitions at the same time, much more capable, much cleaner. Our deals are getting tucked in quicker, you know, less angst on the acquisition. So, I mean, I'll just leave you with, you know, inside, a lot of really good operating improvements, which you will see over time. They'll just be very hard to visualize given the compare. I think that's the trick. And I appreciate the color. I think, you know, if you start off with those operating improvements and you say, okay, they'll play out, I think you said two, three, four quarters, you know, even given the compare, we'll see how they go. And so I appreciate the color and candor. I guess to add to that, You know, one of the things I've always asked Jack and the team over the years has been the ability to cross sell. And you've come in and sort of said, okay, we're going to start focusing on some of the cross sell. You've made some really interesting acquisitions that actually fit really well with cross sell. And so we'd love to get an update on how that motion is going. And, you know, to put a fine point on maybe a little bit, so obviously that ultimately plays into net dollar retention rates and your existing base starts buying more. Maybe help us think through sort of, A, how the cross-sell is going, and maybe you or Mike or Jack talk about how that plays into, you know, the net dollar retention rate over time. Thank you. Jack, would you like me to start?

Yeah, no, please do.

Yeah, so that's a great question. The color on cross-sell is that we really started, we created our cross-sell as a unique pipeline in the third quarter of last year. We got all the integrations tucked in, got the systems tidied up, and we really started tracking cross-sell as a unique pipeline. And from Q3 to Q2 of this year, four quarters in a row, our cross-sell bookings grew every quarter. They're still not a high percentage of our overall sales, but every quarter they get better. The pipeline grows. The deals grow. A couple of the deals I mentioned earlier in the update were both cross-sell deals. One was an expansion and some cross-sell, and the other one was a cross-sell. And so the most healthy cross-sell quarter we've had in Q2. Now, that's not to say we're where we need to be, but if I drew the line, I like the slope. So I think I'll leave that there. So from a cross-sell perspective, a lot of progress. And your point is perfect, right? I will say we've got the organization focused on what I'll call net ARR. You know, net dollar retention, obviously, with the year-over-year growth measurement is kind of harder for the individual sales guy or customer success manager to see. But what they can see is, are we, you know, we're selling this much and we're churning this much in a given quarter. And so we've, we've reoriented the entire business around, frankly, the net ARR output of a given quarter. which is exactly what drives organic growth the following year. And so that's another sort of behavior change, operating change that we've put in. And so you've got it. We are spending, I'm probably spending more time on the churn part of that net ARR conversation, frankly, than I am on the new dollar part, just because the new dollar part's up and running the teams there. And now we're focusing on, hey, what do we need to be doing different with our products? to improve our retention rates, whether we need to be doing differently in pricing and organizational structure, optimizing who's got commercial skills, who doesn't. So we're really looking at the org to tighten up how we're doing retention, which is a huge capability that we – if you go – I mean, we go back 24 months. This company – wasn't anywhere near this big. We didn't have anywhere near this many products to renew. And getting the org oriented and ready to deal with the next 20 acquisitions and being capable of managing those customer bases you know, is a big part of another thing we're working on right now. We've accomplished a lot, and we have a lot to do. So we live and die every day inside the business on a net ARR metric for a given quarter, and that's essentially, you know, what everybody's competition is aligned on.

That was really helpful. I really appreciate it. Thank you. Thank you for taking my question. Appreciate it.

The next question comes from Brent Hill with Jefferies. Please go ahead.

Hello, everyone. This is Love Soda on for Brent Hill. I wanted to follow up on the question that Govan asked about, you know, along the lines of the sales investment that you've been making for the better part of the year. I guess, how should we think of organic growth as a component of that 15% revenue growth target that you laid out, Jack. Should we expect it to be a step function higher than the mid single digit growth that you've been delivering thus far?

I think, Love, in the near going here, you know, I wouldn't change the outlook that we've had historically. We've always talked about targeting mid-single digits and guiding more conservatively than that to low single digits. And so I'm not ready to change that. So the total 15% growth, we can get that done on a self-funded basis. on a sustainable basis at those organic growth levels. Now, there's some optionality in there that organic growth could go higher as we move, and that will be upside, but that's where I come out on that.

Got it. And I guess as we head into the back half of the year, obviously, you know, you have the tougher compares given the election-related spend. You know, maybe for Mike, could you share a little bit as how you think about, you know, guidance, but more specifically, like, you know, how we should be positioning, you know, our models and any insight that you could share on additional things?

Yeah, love Mike here so that last year the political revenue of course ramped up during the course of the calendar year quarter to quarter as we got closer and closer to the election in Q4. We talked about 2 million of election revenue in Q1 last year that was not in this year's Q1. Now we've got about three and a half million in Q2. that was in Q2 last year that's not in this Q2, and then, of course, ramps to higher levels in Q3 and Q4 last year. So, again, that's what we're talking about, that we're going to have to lap those. We will continue, just like we did in today's 10Q filing and the next Qs and then the 10K, we will format those out to show the breakout of the political revenue And so I think that's it. I think it's just the trend. You can see it coming. We know the trend from last year. And, of course, you know, we'll continue to back that out to try to give disclosure and visibility into the impact for this year. But we've got our guidance numbers out there for this year, as you can see. And that should, as Jack said, just sort of, you know, carry us through.

Got it. One last one, if I may, for Rod. Just, you know, great to see the momentum on the existing, you know, accounts and the expanse within the existing accounts. Could you maybe give us some more light as to which, I guess, which parts of the portfolio saw most traction with and, you know, where is the most opportunity in terms of the process of motion? Thank you.

Yeah, that's a great question. You know, I'll mention – I didn't mention this customer. I can't say their name, but it's another major tech company. This is illustrative of a strong product group for us, obviously, in our sales enablement group. This organization – purchased our Altify sales enablement suite, and they're rolling it out to 1,200 salespeople, their entire sales organization. So when a company like that bets its sales methodology on you, it's a pretty strategic deal. That part, I mean, we have strength in every business unit and, frankly, in each of our each of sort of the library areas of the business where we saw, you know, good cross-sell and good expansion. Obviously, expansion for us is a lifeblood. I mean, I mentioned earlier we track our cross-sell pipeline. We also track expansion separately, and we track, obviously, new logo. We track all three because they convert at different rates, and we run different campaigns and programs. And, you know, all three, I would say extension is reasonably healthy, and we're making a lot more progress there of kind of same-store sales, of getting, you know, existing customers with existing products to expand. And that's obviously the lifeblood of any software business. And I mentioned earlier the growth in the industry. in the cross-sell success. And that leaves us with the logo, which frankly is the longest sales cycle pipe, right? You don't have an existing relationship or an existing contract. It's a net new conversation that you're winning from scratch and you're putting in contracts, and those things take longer. And so we run that as sort of another parallel pipeline. And all three, we've optimized investment for all three. We weren't doing this, I would say, two years ago. And we've sort of optimized the marketing investment across those three pipelines to drive the most sales. And I think it's working pretty well. Again, the global account team has been in place an average of about nine months. They now know their cohort group. So those folks manage our top 170, 175 customers vertically oriented, those global account managers. And their statistics from Q2 are uh was very encouraging they were if i looked at the whole company relative to net arr do we how much more did we sell than we lost so to speak if we looked at that cohort group substantially better than the overall companies as a whole so we know that applying these type resources um into our biggest customers is going to have a great outcome and we've just got early evidence a couple quarters into those folks being in their seat that they're already impacting it so we just you know we've just got to keep we've just got to keep doing what we're doing and Sometimes we're going to have a year like 2020 where we had an overall growth rate based on our 2019 acquisitions and some tailwind with the elections. And sometimes we're going to have a year like 2021, which we're talking about today, where, you know, we didn't acquire a lot last year and we're dealing with some, you know, lap numbers from the election. So, you know, as Jack said at the very beginning, I think the most important data point here is This is a 15% grower forever, and that's honestly why I'm here. I'm obviously here to generate organic growth, but we're here to sort of compound this business over the next five to ten years and create that value.

Perfect. Appreciate the thought. Thank you.

The next question comes from Scott Burke with Needham. Please go ahead.

This is Michael Rackers. I'm on for Scott Berg. Thanks for taking my question. Just have one quick one for you. But now that you've had Enviva for a little over a month now, is the trajectory of that acquisition comparable to other acquisitions that you've done, or have you found anything unique that would require a different time frame? And can you just kind of give us some color around that? Sure.

So Panviva was a great add to our software library, and we've seen a lot of opportunity in the knowledge management space. And, of course, we've got a strong – we had a strong offering pre-Panviva with Right Answers, which is more about enterprise search, right, where you've got a search bar and you're tapping a federated group of databases and a contact center agent is doing that and getting the right answer at the right time. Here with Panviva, you've got a structure where it's one database and really the lens, the core lens of the product is around workflow. And so you're walking contact agents through a specified workflow in order to provide consistency in service and support delivery in And today, especially, right, promotes faster onboarding of contact center agents, which is a critical item for our customers given the labor environment that we're in. It also, you know, has a particular area of strength in regulated industries, healthcare utilities specifically. financial services. So we really like the way Panviva fits into our existing software library. The early indications on the integration process, which obviously is a pretty well-baked process for Upland, 28-plus acquisitions in, has been going very well. And I would also say, and again, these are early kind of signs, but some of the early signs on the sales side there uh are also positive and you know just to kind of uh reinforce uh or or comment on something rod said a moment ago and which i think is so on target and so important a lot of the the positive changes that rod and and the team are bringing to the table make us a better buyer of businesses. So our ability, and I think it was pretty well developed even before, but it's better now. Our ability to tear these businesses apart and to understand how we're going to integrate them and sort of hit the ground running on the go-to-market side is a level up from where it was before. And, again, these changes to me are what support that total growth rate of 15%, you know, over the next several years and over the long term as we scale the business.

Great. Thank you so much. That's all from me.

Thank you.

Our next question comes from Terry Tillman with Truist. Please go ahead.

Hey, guys. This is Joe Mears on for Terry. I think I missed these numbers. I think you mentioned them a few minutes ago, but I think the last time we spoke, you said you had nine dams across eight verticals. Is that still the same number, I guess, is the question, and then... Are you thinking about increasing investments in GAMs? I know it's a more recent move for you guys. I'm just wondering if you're planning on loading up since it sounds like you've been very productive so far.

Great. Rod, do you want to talk a little bit about that? Sure. Yeah, those numbers are the same. You know, I would probably not use the term GAM only because, you know, the people, the spec we use to hire that team, very senior, these are the kind of people who could work, you know, at Salesforce and run their biggest accounts, kind of that's the spec. The next set of hires, you know, will be focused on sort of those next level down customers. So the customers are generally a little bit smaller. So I think what's more important to think, I would think of it this way, rather than thinking about us adding GAMs, think about us adding more salespeople who own an entire account. So we're kind of a tricky business in that we have 30 products and a salesperson, it's very hard to sell 30 products, to know how to sell 30 products. So we've been working on our product expertise and product specialists. We call them solutions consultants in that capacity so that more of our sellers can represent all of Upland to a given customer. And that is another big key to unlocking cross-sell long-term because you have a more strategic account plan for that customer. I'll give you an example. We're a Salesforce customer and we have a sales guy at Salesforce who represents all of the products that Salesforce has to Upland. He doesn't know them all in detail. But, you know, he learns what we're up to, and he'll bring to bear the product experts. So if we want to learn about Datarama, if we want to learn about Tableau or MuleSoft, right, you know, he has access to the specialists. So this is a long answer to a short question, but where we'll head there is more salespeople that own entire accounts and more product specialists, right? who sort of sit behind them and are available when the conversation goes to the third or fourth level. And that's sort of an important evolution. That's going to take us time because every 90 days we buy another company that has another team that only knows one product. So that is going to be a way of life as we move forward.

Got it. That was a really, really helpful answer. I appreciate it. And then just as a follow-up around acquisitions, we've been doing a lot of work on the CDP space, and I know BlueVen is like a smaller acquisition, but are you seeing anything out of that asset so far?

Yeah, I mean, it's been – the integration's gone well, and we – I'm very excited about Blue Ben because of what it represents in terms of bringing together the existing CXM assets that we had in SMS messaging and in-app and push notification and in email and in customer sentiment. And, you know, so thus far the integration there has been, you know, proceeding just as planned. And, you know, again, on Rod's point, as he builds out that account-focused selling ability, you know, that means in every acquisition we do, up when the choir is a business, we can now take that product and put it into the sales bags, if you will, of our account-based salespeople. you start to really see leverage on that with acquisitions. It helps us create even more efficient businesses post-acquisition. It's one more chapter in that integration playbook. that enables us to reduce unnecessary cost and get more operating leverage. So, again, to me, it supports that 15% total growth target, and it supports that expanding EBITDA and free cash flow margin as we go.

Awesome. Thank you. I've got another one, but I'll jump back in the queue.

Our next question comes from Jeff Bannery with Craig Halem. Please go ahead.

Hey, guys. This is Aaron on for Jeff. Just one quick one for me. Rod, you mentioned churn and the efforts you guys are taking there as far as retention goes. Just curious to get a little more color around what you're seeing right now as far as churn is concerned, you know, what's working as far as retention is going, and kind of how does that compare over the last couple quarters to a year?

Yeah, I think, I mean, obviously we reported at the end of last year that, you know, we did have a little more churn than we had historically had. And it was, you know, primarily COVID-related. Customers decided to pause projects or pause activities. I will say as we got into the new year, we've seen improvement across the board, more improvement in our big global accounts, but improvement across the board in better churn, less churn, to be clear.

Perfect. Thanks. That's it for me.

The next question comes from David Hines with CannaCard. Please go ahead.

Hey, guys. This is Luke on for DJ. So I think you hinted at this earlier, but maybe you can put just a finer point on it for me. I'm curious with, you know, the heightened focus on cross-sell. Are you looking at M&A through a lens that incorporates more thought around product and go-to-market synergy? Thanks, Luke. So, yeah, look, I think it's Upland's reached that point of scale where I like it because in a way it becomes a simpler business. We're building this cloud software library. We've got this platform in place that is supporting 1,700 enterprise customers globally, 10,000 total customers. It's delivering high customer satisfaction and also a high and expanding customer margins, and we've married that to an equity compounder model. And so the piece to me that we needed to build on was distribution. And as we put that account-based selling in place, exactly the points that Rod's been making on this call it's just going to help us to bring more of those products in. And it's cross-sell, and obviously we've done some nice clustering, I think, of our acquisitions. If you look at what we've done over the past four years, I mean, I think the story kind of tells itself around that focus on cross-sell, whether it's the suites we've built in CXM, in document and workflow automation, you know, in enterprise sales enablement, as well as in project and IT management. But, you know, you see it particularly those first three that we really built some cohesive offerings there. And, you know, we were mentioning earlier in the call, some of these major sas leaders with uh you know with expertise in in the sales domain uh you know moving toward uh you know multiple product implementations and uh you know you know seven figure kind of uh annual recurring revenue numbers are growing i think that says something about the uh the work we've done in bringing these products together. So we'll keep that focus and we'll continue to build out that account-based sales capacity, you know, with an eye towards increasing velocity around both expansion, enterprise license agreements, and cross-sell as we go. Got it. That's really helpful. Maybe just as a follow-up, you know, How are you guys thinking about deal sizes as your business continues to scale? Which is to say, should investors expect larger deals or for the volume of deals to increase over time? You know, what we're really focused on right now, to be plain about it, right, it's 15% total growth. That means, and doing it on a self-funded, sustainable basis while continuing to generate positive, materially positive operating cash flow and free cash flow. And that means we'll be doing $40, $45, $50 million a year of acquired revenue. And that could grow a little bit as we scale. And so, you know, that's going to set up as, you know, call it three or four acquisitions a year within, you know, our size category, which is this $5 to $25 million. To me, that's the part of the market that we can really be dominant in, where we can have pole position on acquisitions. We haven't really talked in this call yet about our pipeline, but very strong. You know, again, if you look at where we were a few years ago, we were having to fight our way into sales processes that we're now invited into. And again, in our size category, we really have pole position because we've got a unique value proposition for these buyers, for these sellers, I should say, as being a buyer that's got fair, transparent pricing that brings speed and certainty to the process. And that also is the best home for the product and the customers and a subset of their high-performing people. So I think we just keep executing. That's the good part here. In order to create the kind of growth we're talking about and the kind of shareholder value we're talking about over the next several years. We don't have to do anything new. Rod's got to continue with what he's doing on the product and go to market side. And on the M&A side, we've just got to continue one foot in front of the other, bringing in these great cloud digital transformation tools that big corporate customers love. And we have a big pipeline of deals to execute against. Very helpful. Thank you.

The next question comes from Alex Sklar with Raymond James. Please go ahead.

Thank you. Jack or Rod, I know most of the business is U.S.-based today, but a number of your acquisitions like Pandiva do have the international exposure. I'm just curious if you could talk about the international enterprise opportunity kind of broadly. How does the coverage of international accounts look today, and how do the products we kind of positioned outside of the U.S.? ?

Yeah. So, Mike, rough split on U.S. rest of world revenue today?

70% U.S., 30% rest of world.

Right. And that rest of world, right, the bulk of that EMEA? It is.

U.K., Europe is about 17%, 18%, 5% in Canada, and then the rest is rest of world.

All right, so just with that background, you know, we see attractive opportunities for, obviously, growth in the U.S. And some of these acquisitions that we've made, like Pandiva, are based outside the U.S., but... almost half their sales in the U.S. and the fastest-growing part of their business in the U.S. And those are acquisitions where we can help to accelerate that process by, again, tapping into this account-based sales organization that Rod and the team are building. I know there's also some interesting stuff underway on – the marketing side and on the lead gen side internationally. And so I'm going to turn it to Rod to give his views and thoughts around that. Yeah. And I think you mentioned most of Panviva's revenue, and I think a little bit more than half are right at half of us in the U.S. So we, from a, you know, what's interesting is we have serviced the rest of the world out of, frankly, the U.K. and the U.S. and Canada. for the life of the company. And I think if, you know, five years ago, people probably would have thought that was weird. But today, I think that's a strength because being able to, you know, do a deal, you know, I was on a call earlier with a big Swiss company. We're doing that deal from, you know, the sellers in the eastern U.S. for us. And the customer is cool. You know, so what we're going to focus on frankly, staffing in the US and the UK from a go-to-market perspective. And Jack alluded to the fact that our next step with our Legion FDR team is to put a team on the ground in the UK. for for time zone coverage and and language cover coverage on the continent so um yeah so we'll we'll i think more and more it's completely acceptable and and it would it would not be smart at all frankly to start building sales offices everywhere around the world so we're not going to do that um we're going to take advantage of just how work has become remote and that's how that's how we'll go to market okay great color

Mike, one for you on the free cash flow conversion, another really, really impressive quarter. I think you're tracking well above that kind of 55% normalized EBITDA, the free cash flow, if you look back over the 12 months. And despite doing those three deals year-to-date, I'm just curious if there's any color in what's driving that success on the working capital side, and if it's sustainable at all, or if there's just some timing benefits there that are occurring.

Yeah, for the most – it is sustainable. Like we've talked about – so year-to-date, almost $23 million so far of free cash flow, operating cash flow this year out of two quarters. So very comfortable, confident that we're going to get to at least $30 million on the year here, 2021, and potentially get to $40 million, again, depending on future acquisitions and the restructure costs that come with those. Um, so, so, uh, we expect to be sort of sustainable, uh, in this call it, you know, around 30 to 40, around 40, as we grow, we're going to add more cashflow. And so for me, as I look at it, you know, I'm kind of looking at a 40 million a year, uh, and then growing, you know, with scale, um, we're at almost a hundred million of EBITDA now. So, um, So that's the way to think about it. So that's with full load of acquisition-related expenses coming through as we're active doing acquisitions right now. The 50% to 60% conversion is going to be pre-acquisition costs, right? And all that's still consistent. And, in fact, we're doing a little bit better. So timing-wise, timing differences, there was – I think the working capital changes in Q2 were about a million dollars net positive. So that didn't help us that much here in Q2 as we printed the 10.8 million of operating cash flow. So anyway, it's strong and expected to continue.

Got it. Got it. Yeah, I was picking up on like out of the 60 plus percent conversion over the last 12 months. And that was kind of the delta I was

was asking for but that's that's helpful color thank you sure and our last question is a follow-up from truth go ahead there hey guys thanks my question was actually uh around fcf as well when you initially gave the 30 at least 30 million possibly 40 million dollars in free cash flow for the year were there a number baked into the first half It seems like you're tracking ahead of where you'd probably expect it to be, but I'm just trying to see if there's any guideposts there internally.

Yeah, there is timing differences from quarter to quarter, so it's always hard to have specific milestones. We have wanted to do $10 million a quarter, but again, you can't get too specific. You kind of have to look at the year in total or trailing 12 to kind of get a clear picture as the timing differences change. work their way out of the mix. So, yeah, I do feel like we're a little bit ahead of the conservative sort of $30 million that we started with the year, which makes me feel good that we're going to at least get to the $30 and hopefully $40 as we complete the year.

Appreciate it. Thanks, guys.

This concludes our question and answer session. I would like to turn the conference back over to Jack McDonald for any closing remarks.

Great. Well, thank you all for joining us today, and we look forward to seeing you on the next earnings call.

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