Upland Software, Inc.

Q3 2021 Earnings Conference Call

11/3/2021

spk00: Thank you for standing by and welcome to the Upland Software third quarter 2021 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 InvestorUplandSoftware.com. And a replay will be available there for 12 months. By now, everyone should have access to the third quarter 2021 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.
spk11: Thank you, and welcome to our Q3 2021 earnings call. I'm joined today by Rod Favrone, our President, and Mike Hill, our CFO. On today's call, I will start with some opening comments on our Q3 results, then Rod will provide some color around sales and customers and product developments. And following that, Mike will provide some insights on the Q3 numbers and our guidance. We will then open the call up for Q&A. But before we get started, Mike will read the Safe Harbor Statement.
spk04: Thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meetings 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 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 third 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. With that, I'll turn the call back over to Jack.
spk11: Thanks, Mike. So in terms of headlines, This was a mixed quarter. We had strong adjusted EBITDA and our free cash flow is on track, but we had a lower than expected messaging volumes, which resulted in our revenue being within our guidance range, but below the midpoint. We are lowering our Q4 guidance, our Q4 revenue guidance by 3.9 million to reflect our reduced outlook on messaging volumes and also to reflect the fact that we didn't see the uptick in new logo bookings and net dollar retention rate that we had expected in the third quarter the covid impacts on the business of the last 18 months are now fully reflected in our q4 outlook for a 75 million quarterly revenue run rate. And we will grow from that run rate as we move into and through 2022, because we see signs of real improvement in net dollar retention rate as we move through next year. Finally, our M&A outlook remains unchanged, and we are targeting 40 to 50 million of acquired revenues between now and the end of 2022. So let me dig in now a little bit on the third quarter. Revenue in the third quarter came in $1.3 million below the midpoint of our guidance range. And the biggest factor driving this change was lower than expected variable text and email messaging volumes from our progressive advocacy organization customers these accounts have not churned but they reduced their messaging volumes in the third quarter now that means their message volumes and the associated revenue could bounce back up at any time but to be conservative we're going to assume that they do not and adjust our outlook organic growth in recurring revenues in the third quarter ex-political was flat And for the full year 2021, we expect it to be 2%. Adjusted EBITDA came in at $25 million, above the midpoint of our guidance range. GAAP operating cash flow was $5.3 million in the third quarter. Free cash flow was $4.9 million in the third quarter, giving us roughly $28 million in free cash flow year-to-date So we are on path and on track to hit our 30 to 40 million free cash flow full year 21, as we've talked about, and that is after acquisition expenses. While we had some good expansion bookings in Q3, we didn't see the uptick in new logo bookings that we expected. Rod's going to talk about this in more detail. in terms of what we're seeing. But I'll note that the Q4 early bookings indicators are better than Q3. Notwithstanding that, we're going to adjust our bookings outlook to reflect the slower pace of expected improvement and to add additional conservatism until we see sustained improvement in new logo bookings. On renewals and expansions, You'll recall that using our Upland One playbook, we drove our net dollar retention rate up from 90% in 2015 to 97% in 2019. In 2020, the first year of the pandemic, our net dollar retention rate declined to 94%. Today, our net dollar retention rate is solid in the low to mid 90s, but frankly, it's not where we want it to be. The good news is that our focus throughout this year on securing multi-year customer renewals and expansions means that a higher percentage of our revenue is now contracted through 2022, all the way through next year. So that should structurally support improved and stronger net dollar retention rates next year. Again, as I noted earlier, the impacts of the last 18 months are now fully reflected in this Q4 outlook for 75 million quarterly revenue run rate. And we're going to grow from that run rate because, as I say, we see real structural signs of improvement in net dollar retention rate as we move through 2022. And of course, on top of that, between now and the end of next year, we're targeting to add another 40 to 50 million in acquired revenues. Look, we saw two plus years ago the opportunity to build out a real go-to-market and product organization. Rod joined us 18 months ago, and even in the face of the complexities of the lockdown, was able to hire our new go-to-market team by the end of 2020. and to complete key additions to the product team by the middle of this year of 2021. We are still in the early stages of executing this mission, but I remain as excited about the opportunity today as I was two years ago. As we move through this and look out over the next five years, we continue to be excited about our business and the opportunity for growth and value creation. We have a powerful cloud software library, a proven operating platform, a strong base of over 1,700 enterprise customers, and an equity compounder financial model. Over the next five-year period, this is a business that can reasonably target total revenue growth of 15% per year from the current run rate, organic plus acquisitions. And importantly, do it on a self-funded, sustainable basis and generate positive free cash flow as we go. And with that, I'm going to turn the call over to Rod.
spk09: Thank you, Jack. Good afternoon, everyone. As a reminder, this year, 2021, is our first full year in the new go-to-market model. The team has adjusted well to this model. As Jack shared, expansion sales were good. Cross-sale continues to improve, but new logo sales haven't ramped to expectations. Let's talk a bit about the new logo side of the business. The new logo sales challenge in Q3 was primarily due to a softness and new pipeline created during the second half of last year. That said, for Q3, we closed 109 new customers, with 27 of those being major customers. If you will recall, during the second half of last year, we were making a lot of changes. We were consolidating our digital presence. changing our marketing pipeline motion. We hired our sales development team, and we were in the process of shifting from our historical blend of a lot of in-person event marketing to digital marketing, while simultaneously, obviously, the world was in lockdown. As we moved into 21, we completed that shift to 100% digital lead gen. The new sales development team started in January, and the result this year is we have a 25% quarterly improvement in new pipeline generation as compared to the second half of last year. We did anticipate the second half of 20 pipeline impacting the second half of 21 sales, but frankly, we thought liftoff energy coming out of the pandemic would enable us to overcome this through quicker pipeline conversion levels, but that did not happen in Q3. Our outlook, and switching gears to revenue retention, our outlook shows net dollar retention improving. Throughout 22, as Jack mentioned, it should begin marching back up into the mid to high 90s. Our team has had success during 21 securing a bunch of large multi-year renewals and expansions. As an example, we secured multiple six-figure long-term renewals and expansions with major global financial services firms. Within the financial services industry, there's a growing interest in our knowledge management product library to help drive and facilitate more effective compliance-led knowledge sharing due to the ever-increasing and evolving global regulations. Another example is in our Altify product line, where we are having success renewing six and seven-figure customers on long-term contracts this year. Altify is a great example of the difference in committed revenue from 21 to 22. For example, Altify has nearly two-thirds of its customers renewing this year in 21, which compares to about one-third of its customer base renewing next year in 22. We will see the benefits of these successes in 22 as a higher percentage of our total ARR is contracted through next year as compared to this year on long-term contracts, which has a structural effect on net retention and would positively impact that. I want to credit our team for this progress from our support team to our customer success R&D and sales teams. In marketing, we continue to test and improve our lead gen programs and focus our individual product marketing plans to just be more efficient at driving new leads We have also adjusted how we onboard acquisitions to better preserve top of funnel history and momentum. And our new SDR team, which we've mentioned a couple of times, has produced 50% of our year-to-date new pipeline with good conversion metrics. So excited about the progress of that team. Switching to the product front, along with our normal new release cadence, we introduced a brand new product from Upland. This product, Altify Sales Reference Manager, is a new product built natively on Salesforce and integrated into our Altify sales suite. It's a next generation complement to our RO innovation product. These two products both solve the challenge of managing customer references, but appeal to different use cases. Our older product, RO, supports a centralized hub and spoke sales reference model, while the new Altify sales reference manager is a modern decentralized peer-to-peer model built natively on Salesforce. This new product is a great example of Upland innovating in our wheelhouse where we have deep category domain knowledge and it unlocks an adjacent revenue opportunity. In addition to that product, our ingenious product became one of the first service cloud voice for partner telephony integrators available on the Salesforce app exchange, helping customers maintain their existing telecom investment and infrastructure investment while taking advantage of the new service cloud voice environment within Salesforce. With that, I will turn the call over to Mike.
spk04: Thank you, Rod. I'll cover the financial highlights for the third quarter and our outlook for the fourth quarter and full year 2021. First on the income statement, total revenue for the third quarter was 76.1 million, representing growth of 3%. Recurring revenue from subscription and support grew 2% year-over-year to 72.3 million. Professional services revenue was 3.1 million for the quarter, a 12% year-over-year increase. Overall gross margin was 67% during the third quarter, and our product gross margin remained strong at 69%, or 73% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation, amortization, and stock comp, were $31 million for the third quarter, or 41% of total revenue, all generally as expected. Acquisition-related expenses were approximately $3.7 million in the third 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 the fourth quarter. For each acquisition, total 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 size and locations. 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 third quarter 2021 adjusted EBITDA was $25 million or 33% of total revenue, consistent with $25 million or 34% of total revenue for the third quarter of 2020. As expected, adjusted EBITDA margin for this quarter was lower than the year-ago quarter 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%, and we expect to exit 2021 with Q4 at about 32%, as implied by the midpoints of our guidance. Now into cash flow. For the third quarter 2021 GAAP operating cash flow was $5.3 million and free cash flow was $4.9 million, even with $3.7 million of acquisition related expenses in the quarter and some negative temporary timing differences in our working capital accounts temporarily pulling down operating and free cash flow by some $6 million or so in the quarter. With approximately $28 million of free cash flow year to date through Q3, We continue to anticipate full-year 2021 free cash flow well over $30 million and possibly closer to $40 million, depending upon the size and timing of future acquisition-related expenses. So we are generating substantial gap operating in free cash flow even after acquisition-related expenses. On the balance sheet, this ongoing free cash flow generation, in addition to our existing liquidity of approximately $240 million, comprised of approximately $180 million of cash on our balance sheet as of September 30th, 21, and our $60 million undrawn revolver. This ongoing cash flow generation, existing available liquidity, and expanding our credit facility while maintaining net debt leverage 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 at around 3.6, based on the midpoint of our 2021 adjusted EBITDA guide. As of September 30th, 2021, we had outstanding net debt of approximately $350 million after factoring in 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. With regard to income taxes, Upland currently has approximately $356 million of total tax NOL carry-forwards, and of these, we estimate that 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 December 31st, 2021, Upland expects reported total revenue to be between 73.2 and 77.2 million, including subscription and support revenue between 70.2 and 73.8 million for a decline in recurring revenue of 4% at the midpoint over the quarter ended December 31st, 2020. Fourth quarter 2021 adjusted EBITDA is expected to be between 23.4 and 25.4 million. for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a decline of 8% from the quarter ended December 31st, 2020. And by way of comparison, Q4 2020 had 6.6 million of political messaging revenue, which will not repeat in Q4 2021. For the full year ending December 31st, 2021, Upland expects reported total revenue to be between 299.5 and $303.5 million, including subscription and support revenue between $285.5 and $289.1 million for growth and recurring revenue of 4% at the midpoint over 2020. For year 2021 adjusted EBITDA, we expect between $95 and $97 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a reduction of 4% over the year into December 31st, 2020. By way of comparison, 2020 had $18.2 million of political messaging revenue, which will not repeat in 2021. And with that, I'll pass the call back to Jack.
spk11: Thank you, Mike. We are now ready to open the call up for questions.
spk00: Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly to allow questions to generate an queue. The first question is with Bhavin Suri with William Blair. Please proceed.
spk03: Hey, gents, can you hear me okay? Yes. Great, great. So obviously a mixed quarter here. Let's walk through a couple of things just to understand how things played out. I guess maybe let's start off at a high level. Help us think through visibility. I think Rod said pipeline wasn't built in Q3, Q4 of last year, which is 12 months ago. And we're talking about 15% type of growth. Help us think through visibility and confidence in the pipeline, given that pipeline didn't convert in the past. Just help us think through what's different now versus a year ago. Rod's been there since early last 2020. And so just to help us think through those pieces together and what might have changed from six months into Rod being there versus 18 months in Rod being there. and the understanding that you have more confidence or more visibility or more control over that pipeline.
spk11: Yeah, so let me start on that and then Rod can pick it up. The point that Rod was making is that we had some ramp up in pipeline creation in the second half of last year, right? We were putting new processes in place to generate that pipeline and we're doing so amidst the lockdown. So on top of everything else, we had to move from a hybrid sort of in-person and digital lead gen effort to a totally digital lead gen effort. So given our sales cycles, we knew that that softness was going to impact potentially bookings generated in the second half of this year. However, our assumption was that the kind of energy, if you will, liftoff energy coming out of the pandemic would enable us to execute with a higher percentage of conversion, right, that the pipeline conversion will be a little bit higher. And we're not talking about huge numbers here, but that uptick that we expected in Q3 didn't happen in Q3. Now, we see some positive signs in Q4, but in order to be conservative, we're going to take down our outlook a little bit until we see a sustained improvement in new bookings. So that was one piece of it. The other piece of it, Bhavan, was on the messaging side of the business, where we saw lower volumes in variable email and text messaging in Q3. And we saw it among a specific cohort of customers. Those customers have insured. In fact, we've had renewals among that cohort of customers, and those revenues could bounce back at any point. But in order to be conservative, we're taking down our forecast on those variable revenues for the fourth quarter.
spk03: Gotcha, gotcha. And I mean, on the political messaging side and the messaging side, we've seen that even Trulio's growth rate decelerated. I think that is understandable. I think the question really is if you saw that happening earlier, should we have seen that either in guidance or should the uptick in conversions, should we have been more conservative? It is what it is. I guess, Jack, to be perfectly frank, let's play a different scenario back, which is organic growth and accelerating organic growth and bringing in a sales team is something that you and I talked about many years ago. And you chose the smart and wise move, which is we're not going to spend 20% of revenue on sales and marketing or 30%. And we're going to do this very focused 3% to 5% organic growth, drive EBITDA and grow a business. And you've executed against that strategy really well. Do you feel that the change that you've made is played out? Has it not played out? It's obviously not played out vis-a-vis expectations, but do you think that maybe the old strategy was a better strategy? Help us think through strategically. As you think about managing this business, you and team have executed amazingly well, but the organic growth was never a big driver, and you focused on that in the last, let's just say, whatever, 18, 24 months. how do you think about that strategy? Do you still feel confident in that strategy? Do you still feel like that's still the right approach? Or do you think maybe we should just maybe take the foot off the pedal a little bit and maybe refocus on our old strategy? Help us think through how you balance that out, how you and Rod are talking about that.
spk11: Well, look, I've, you know, I've seen this movie before, uh, with my last company proficient, you know, and you were very familiar with that. Uh, You know, that was a stock that was at 37 cents in, you know, early 2000s. And is it $120 a share today? In the first 10 years of that business, we used acquisitions and strong financial management to grow that business from essentially nothing to 250 million in revenue. In the last decade, the team has taken that business and turned it into one of the global leaders in solutions consulting. And I see a similar kind of transition here at Upland. And so saw that opportunity a couple of years ago to bring in the kind of leadership that could build out our sales and go to market and product organizations and position Upland for that next decade of growth. And so I'm as excited about that mission and opportunity as I've ever been. To your point, to keep things in perspective, we've taken spending on sales and marketing from 15% of revenue to 18% of revenue. So it's not like we've gone to a 40% of revenue spend on sales and marketing. I believe that at that level of spend, we've got a more repeatable, more scalable value building engine. And as I've been saying, I think that can support a total growth rate target of 15% a year. The organic part of that is going to be somewhere between 2 and 5%. In some years, it'll be higher. In some years, it'll be lower. In fact, in some years you could go above 5%, right? It depends on, you know, individual, you know, timing factors there. But in general, it's a target 15% growth rate with low to mid single digit organic with EBITDA margins here in the low 30s that we see moving up toward a target range of 40%. through time at scale, call that roughly twice the size we are today. And of course, significantly, we can do that under our own steam. We have no dependence on the equity capital markets. We can finance 40 to 50 million a year of M&A from internally generated cash flow and our debt facilities and our cash on hand. We're committed to building long-term value. The decisions we made about bringing in Rod and the team, I think we're the right ones. And as happened with Proficient, I think the same thing is going to happen here. We're going to create value through time. So no big pivot off of this. We are staying the course against the plan we put in place two years ago.
spk03: I think it's really helpful. Really, really helpful. Thank you. One last one from me. maybe for you and for Rod, are you seeing any changes competitively in the field? Are others getting more aggressive on pricing or offerings or freemium? Is there any difference you've seen in, let's say, 12, 18, 24 months, especially through COVID in the competitive environment? Love to get a sense, because even if you pick some of the stillpipes, there's plenty of competitors in each one, some offer point solutions, but I'd love to see if you're hearing anything different or changes in that environment that may be impactful or not, but I'd love to get some sense of that.
spk09: Yeah, so I'll take that. Yeah, so that's a great question. I think that, I mean, obviously, as you know, we have a pretty diverse set of products, and each of those products has maybe a small set of competitors. So I don't think we've had any what I'll call material or meaningful competitive change As I look across the products, you know, on a positive side, you know, we mentioned earlier some of the connections with Salesforce, which is one of our biggest partners. And with HP, which we didn't talk about on this call, we've really gotten a lot closer to a couple of the big platform players with a set of our products, which we think pays dividends in 22 and 23 as we look forward. So I don't think there's been... material changes competitively, minor things here and there, but nothing that would have a sort of a forward-looking material impact on the business. I will say just to add to the confidence level, I think that the way Jack and Mike and I look at this business, we have made a lot of changes over the last 18 months in the way we organize, the way we structure, the way we go to market. having the GAMs in place and their focus and having more of a named account motion, the way we're doing marketing, some of which was necessitated by the fact that we couldn't do marketing the old way anyway, right? So we had to go to this full digital model. In spite of what you're reading today and the questions you're asking today, I think the confidence level and the design of this organization and the people we put in place and the motions we put in place is very high. So I think that to Jack's point, earlier point, you know, staying the course on this mission, this is absolutely the right structure to go run this business on as we forward luck.
spk11: Yeah, I mean, we've, you know, we've built a platform here that has scaled now to, you know, $300 million of revenue that's got a strong library of products. It's a real with an incredibly strong enterprise customer base. So this is a real company generating value. And I love the changes we've made. And I think I know they're going to pay off through time as we go. Again, within a set of sober, realistic expectations, I've never said this is going to become a 20% organic grower. We're talking about 15% total growth. We're talking about locking in low to mid single digits. And as we've said, there's some optionality that it could be higher, but in terms of the core rate around which you underwrite an investment in this business, it's that 15% total target with low to mid single digit organic.
spk03: Yeah, no, no, I think that's fair. And, you know, I'll say this from, from, from having covered you a long time, I appreciate the candor, the frankness and the honesty you've, you've never said 20% organic growth. And I appreciate that. Um, you know, I think, uh, let's let it play out for the longterm. Thank you for taking my questions. And again, I said for the candor and the frankness. Thanks, gentlemen. Appreciate it.
spk11: Thanks, Ravon.
spk00: The next question is from Brent Thiel with Jefferies. Please proceed.
spk08: Great. The next question comes from Brent Thiel from Jefferies.
spk01: Hello? Mr. Phil, your line is open. Okay, operator, why don't we move to the next question or we'll circle back around.
spk00: Certainly. The next question is from Scott Berg with Needham. Please proceed.
spk07: Hi, everyone. Thanks for taking my questions here. Jack, I guess I have to start with, I don't know if you or Rob want to take this, but we've seen demand recover in most of the broader software space, especially enterprise applications over the last year. And while everyone's not firing on full cylinders, demand trends are pretty healthy in the environment. I guess to help us understand, I get the messaging part utilization. Let's move that aside. But on the new customer acquisition component, What's not kind of picking up in your business? Is it clearly just kind of the air pocket around, you know, kind of change in sales philosophy last year driving some of this? Or is there maybe a change around some of the demand or interest in the type of applications in the upland portfolio today?
spk09: Yeah, I think, this is Rod, I'll start there. I think it's, as you described it, the air pocket is an interesting way to think about it. Certainly the pipeline creation nine to 12 months ago is having an impact. And I think the other part of this business are we've been cross-training these sales guys for the last few quarters. Many of them sold one product when we got this process started and now they're selling multiple products. And so they're going through a learning curve and that's progressing well. I would say that it's more the air pocket. And then the other comment I'll add is our global account team now has generally been in their accounts for three quarters, some for four quarters. And the relationships and the depth and kind of what we're starting to see with our top accounts, as we talk about Q4 and seeing a little bit better early indicators for Q4 on the sales side, A lot of that's being driven by that team having time in their accounts to go build that pipeline up within those accounts. And so that motion has taken time to pay off because it takes a while to build a net new enterprise pipeline from scratch in those accounts. So I would say it's a combination of those things. But I don't think there's something here that's competitive or sort of systemic. I think it's more the bubble we're going through from the back half of last year from a pipeline perspective.
spk07: Got it helpful, Rob. And then from a follow-up perspective, Mike, it looks like you wrote off about $10 million in Goodwill in the quarter. Can you help us understand what that might be related to?
spk04: Yeah, Scott, there was no write-offs. We did have some adjustments in purchase accounting, which is always the case as we finalize the numbers. So any adjustments were just related to adjustments on this year's acquisitions.
spk07: Got it helpful. That's all the questions I have. Thanks for taking them.
spk03: Thanks, Scott.
spk00: The next question is from Terry Tillman with Truist. Please proceed.
spk05: Hey, good afternoon, guys. This is Connor Bassarella on for Terry. Thanks for taking my questions. To start, so with the issues that were mentioned around new logo and expansion sales, is that going to give more of a slowdown on the speed to which you'll make acquisitions? in order to kind of fix the sales execution?
spk11: No, we are remaining on the same pace we've been on, which is 40 to 50 million a year of acquired revenue. And that's the pace at which we can execute against that plan and do it on a self-funded, sustainable basis where we are funding the acquisition purchase price out of internally generated cash flow and cash on hand and our debt facilities while keeping leverage moderate at three to four times net. So no change in the pace of M&A.
spk09: Just to clarify one thing, I think your question, you said you put new logo bookings and expansion together in that question. I do want to point out that expansion bookings met expectations and have consistently been strong, which I think is a At the end of the day, this business is healthy if our base is healthy as we put together growth go-to-market motions. And the way our existing customer base is continuing to buy new products from us or to buy more of the same product from us is encouraging. So just to reflect that fact, our expansion bookings were strong.
spk11: I think one other point, Jack, here that I would add there is just the work that the team did this year as we got those global account managers in place, locking in, as well as our customer success teams, locking in more multi-year renewals so that the amount of revenue that we have up for renewal in 2022 is substantially lower than it was in 2021, and that that is going to structurally support higher net dollar retention rates. uh moving back as rod said earlier into the mid 90s or better and that's a key health indicator of the business right so i think that's a very uh favorable trend uh due to the work that got done throughout this year and driving those multi-year renewals yeah and to get that done we our gams did focus um a reasonable amount of their energy on retention and multi-year retention
spk09: as opposed to some maybe net new ads or expansion ads. And so that may have had a little bit of a capacity impact as we went through this year, because we did focus on, we had a lot of really big deals for renewal. And these guys did a great job of getting into those major accounts and getting multi-year deals in place, which will, again, help us as we move forward. And in order to sell a customer more, you have to make sure what they already have is working well and That they're retained and they have a multi year commitment and and then it's and then it's and then it's time to start selling them more. So that's the global account team spent. I would say a little bit more of their time in 21 that we probably anticipated doing that. But it's going to pay off for us long term.
spk05: Okay, that's that's really helpful. Thanks guys. And then just 1 quick follow up from me. In terms of cross-selling, I know you guys mentioned that there's been some training salespeople that are now selling multiple products. Where are you seeing the biggest opportunities in terms of cross-sell right now? Thank you, guys.
spk09: Yeah, I think it's with, you know, our products are oriented to different sets of buyers and where we have the best conversion success. is where you have a buyer that owns, for example, one of our email products and wants to buy our CDP or one of our mobile investing products or our mobile app analytics products. So where we have focused that cross-sale motion is in adjacent value-added products around that buyer, around the common buyer. And that's how we train the sales team. We're not really talking about year over year, but I will say substantially improved cross-sell year over year, 20 to 21 year to date. Again, coming off a relatively small base because it wasn't something we were terribly focused on earlier. But encouraging signs on cross-sell early look at Q4 is good too. So we're just going to continue to get better at that. And as we integrate more of our products, We don't integrate all of our products together, but the product we announced in this release, our sales reference manager product, that is natively integrated with our Altify suite, which really gives us five products plus our Ingenious products, six products that are native Salesforce platform products. And then we have multiple others integrated into the Salesforce app exchange. So we're approaching six, seven, eight products around that platform. That's another way that we cross-sell. We target with that partner those accounts and go in there. In some cases, those are multiple buyers, but the anchor there is the Salesforce platform, which is where we get a lot of our leverage. And again, so those motions, they're coming along. And over time, it'll have a much bigger impact on our overall sales. But nice year-over-year growth, certainly faster growing. any of the other bookings categories if you will um and so we we expect that to have an impact as we move forward great thank you guys thank you thank you mr tillman the next question is from brent phil with jeffries please proceed thanks um i i want to make sure uh we can understand uh kind of the backdrop of what's happening
spk08: If you take the overall software environment, it's very robust. You're adding sales reps, yet the lack of organic growth, it's been three quarters of not really hitting where the street numbers are at. I'm curious, investors are just trying to put this together. What's going on? Is this just simply a pocket on the go to market? Is there something from the technology side that's not resonating well? Something's not adding up over the last three quarters. I think everyone's just trying to better understand really what's happening.
spk11: Yeah, thank you for the question. So in terms of hitting our guidance, we've done that. And again, even in this quarter, we're within our guidance range, but we're about 1.3 million below the midpoint of that range. So in terms of a the predicate that we're somehow not hitting numbers on a regular basis, I'm not seeing that piece of it. We did assume some improvement in the level of new logo bookings here in the third quarter. And that was our expectation based on when we laid some of these investments in, and just the sort of shape of the recovery that we saw. And so we didn't hit those new logo bookings numbers in Q4. They were trending the right way earlier this year, but that inflection didn't happen in Q3. Now, as I say, the early indicators on Q4 look good. But once bitten, twice shy, we're going to take our outlook down until we see a sustained improvement in those new logo bookings. And then the messaging piece, we've never had sort of a misstep on that before. Here in Q3, we did have some lower messaging volumes, which really, that's what drove the the miss to the midpoint. That was 100% of what drove the miss to the midpoint in the third quarter. We had a couple million dollars less text and email messaging revenue than anticipated. And that was partially offset by some goodness in some other parts of the business and thus the $1.3 million miss to the midpoint. But Any of the softness in new logo bookings is just a forward phenomenon as it relates to revenue. So none of that drove the Q3 number. And I would say, look, I think we've taken the outlook down to a conservative level. As I say, we're seeing some positive signs in Q4, early indicators on Q4 bookings. Clearly, as it relates to net dollar retention rate, I think we're set for some structural improvement as we move into next year because of all the multi-year renewals we were able to execute. And the thesis here is better than intact, right? I remain excited about where we're going and the M&A opportunity, and so we'll just continue to execute through this.
spk08: And Jack, what's driving that message volume? lower I mean we're in a digital disruption environment it seems like the trend's going the other way but you're not seeing that what what's causing that is that just the the political hangover still or is it what what it's a great question and it really can't yeah no exactly I think it's a great question and it really came from one customer cohort principally the principal driver of that was
spk11: among our customers that are progressive advocacy organizations. We have quite a few of them on that platform. Now, we had some big renewals from those customers in the third quarter, but there's always a small piece of revenue that is overage, that is variable usage above the minimums. And in the text and email business, it had been running at about $4 million a quarter, pretty consistently. And this quarter, it came in at $2 million. And again, the shortfall was all among those that it was really driven principally by that cohort of customers, progressive advocacy groups. So again, we've had renewals from those big customers. Those volumes could bounce back at any point. Uh, but in order to be conservative, we've taken the outlook down, uh, for that text and email variable messaging revenue to 2 million a quarter. So we've taken it from 4 million a quarter to 2 million a quarter. Uh, you know, so it's a, it's a small, uh, uh, portion of our revenues on a percentage basis. And we think, you know, uh, that that's a conservative outlook, uh, and, and we're doing that so that any surprise in the future, you know, it's hopefully to the upside. on those volumes.
spk09: Yeah, and just to sort of build on that, the contracted revenue for that cohort group, what didn't change? As a matter of fact, many of them actually renewed during the quarter for their contracted commitment. You know, as Jack put it, this is on top of contracted revenue for that cohort group. And, you know, we are staying very close to those customers operationally. Sometimes they run more campaigns than others. And in this case, You know, we didn't see them running less campaigns in Q3, and they did. And so, but again, the base of that business, the contracted base of that business is solid. This is kind of an over and above uncontracted overage and usage revenue.
spk08: Great. And then just last question, just on the go-to-market on, I think in Q1 you said you had 15 sales development reps and nine nine GAMs in Q1. Can you give us an update? Are you expanding that? Are you keeping that stable to get those reps productive? Just help us better understand the shape of that.
spk09: Yeah, so no, we are not expanding. We are really holding sales headcount flat as we grow into and get this team trained and retooled and aimed and more account-oriented. So we haven't We haven't added capacity from a sales perspective this year.
spk04: Great. Thanks for the call.
spk00: Thank you, Mr. Thiel. The next question is with Jeff Sonry with Craig Havlin. Please proceed.
spk06: Hey, guys. It's Aaron on for Jeff. Just first question, just curious to get a little bit more color around the messaging volume. Um, so you mentioned obviously that cohort and, you know, I think I caught they're running less campaigns. Um, is there a particular driver of that or anything you're seeing? Is it just bad luck? What's what's going on there?
spk11: So, um, again, the principal driver, uh, that we saw was lower variable messaging volumes among our progressive advocacy organization customers. And again, just to size this, prior to this quarter, we were looking at roughly 4 million a quarter in variable messaging revenue from all customers, not just progressive advocacy organization customers, but all customers. And so we've taken that down to 2 million a quarter, which we think is a conservative number. And I'm sure some of this, you know, depends on political environment and Obviously, that's a fluid environment, even as recently as this election yesterday. So maybe we'll see increased volumes here. Again, as Rod indicated, we saw some meaningful renewals in this customer group. in the third quarter. So it's not like these customers have gone away. We're staying close to them and working with them and that revenue could bounce back at any point. But, you know, we're going to take the outlook down to be conservative.
spk09: But to be clear, there wasn't there's no systemic product issues. There's no, you know, the customers didn't go away. You know, they just they just didn't spend at an over level. like they had historically in numerous quarters. So when will they get back into that? We'll see. But what we don't want to do is count on that until we see it again.
spk06: Gotcha, gotcha. That's helpful. And then obviously you've mentioned you've been really clear about not seeing any churn in that part of the business on the messaging side. But anything else unusual in any other parts of the business as far as churn is concerned?
spk11: So, you know, again, you know, we took our net dollar retention rates from 90% back in 2015 and 97% in 2019. In 2020, the first year of the pandemic, those retention rates fell to 94%. And this year, 2021, has been a troughing process, right, where we have sort of found bottom on that net dollar retention rate. We are, again, we're in this sort of low to mid 90s range, but frankly, 100 basis points lower than where we expected to be at this point. That said, as Rob mentioned earlier, we've done a lot of work this year on locking in multi-year renewals. And so that if you look at the amount of revenue that we have up for renewal next year. That's not pre-renewed, right, under a multi-year deal. It's substantially less revenue up for renewal. So that should structurally support an increase in net dollar retention rate as we move through next year, because we've already contracted a higher percentage of that revenue. Effectively, we've already renewed that revenue for next year. And so that's the basis for Rod's statement that we start marching back up in the mid to high 90s. So we feel good about that. as we go forward.
spk09: Yeah, I think really to get that done, we added or changed a little bit the way our customer success managers were running the accounts, really retrained them on some commercial capabilities to make them better and stronger from a commercial perspective. We made sure the GAMs were focused on their accounts happiness and those type of things. And I think that that is really starting to pay off. And I think that as we, as Jack said, both in the way, this is just part of that go-to-market is everything that touches our customers. And we've put in so many better, stronger, faster processes that that's having an impact, as well as, as Jack put it in, where these customers are committing to longer-term deals, which I think is a great vote of confidence. in their relationship with us and their confidence in the products. So anecdotally, I really like that. And then, you know, the byproduct is, you know, we have this, we have less up for renewal next year. So we anticipate the net dollar retention rate climbing back up steadily as we move through 2022. And with the team continuing to be focused with the new processes we're running and how they're focused on the multi-year commitments and expansion continues to be okay and good and strong, all those things together, I think it just gives us a really solid base of net dollar retention moving forward. So we're sort of happy with that.
spk06: Gotcha. That's helpful. That's it for me.
spk00: Thank you. The next question is from DJ Hines with Ken Accord. Please proceed.
spk02: Hey, guys. Um, so Jack, look very clear in the strategy. I get the new logo commentary. I get the messaging headwinds. I want to dig in a little bit on that last question around, um, some of the churn dynamics. I mean, you've talked about strong expansion bookings, but lower net revenue retention, right? I think that implicitly means there's some heightened, you know, gross churn somewhere in the business. Is that all the messaging business? Like does the variable overage piece that you discussed impact net revenue retention?
spk11: no no that's uh it doesn't and again i i want to say that the the net dollar retention rate which as you know we report uh annually right and again 97 percent in 19 94 percent in uh in 2020 and here we are in 2021 you know in that same sort of you know, low 90s range, right, and sort of 100 basis points below where we'd like to be. So, you know, we may wind up reporting, you know, 93%, you know, plus or minus for this year, you know, exact numbers to be determined based on Q4. But that's sort of where we are. So it's about 100 basis points lower than we would like it to be overall. But, again, trending up structurally, Because we've locked in a lot of big renewals this year under multi-year deals. And thus, more of our revenue as we move into last year is contracted through the full year. And so structurally, we're going to see some improvement in that dollar retention rate.
spk02: Okay. So not miles off and feeling good that it gets better next year. Yeah.
spk11: I mean, it's $150. Sorry, I was just saying, yeah, about 100 basis points off where we want to be, not miles off. But look, we're not happy with it. And again, I think we've locked in an upward trend here with the work we've done on multi-year renewals.
spk02: Yeah. Rod, how much of your expansion activity happens at the time of renewal?
spk09: A lot. I don't have the actual number off the top of my head, but certainly more than half.
spk02: Okay. I guess that, I mean, if we're locking customers into longer contracts, we have less renewal activity next year, does that mean we have two or shots on goal to drive expansion?
spk09: Yeah, I think, I'm not sure how I would draw that math out, but I think we, a lot of them are done, more than half are done in renewal. And but it depends. I mean, we have customers who we, who expand and add a division or a group or users or, um, another country or if the house of brands, another brand as they go. Um, and so for sure. Um, so could, I don't think that's going to have a major impact on expansion, uh, next year, but, um, but, but yeah, sure. More than 50% happen every real time.
spk02: Okay. And then, uh, last one for me, uh, Brent had asked about kind of growing the sales organization. How much have you grown the sales organization in your 18 months at the firm? I know you said no growth this year, but just curious kind of in the totality of your, your time there.
spk09: Yeah. So, so you can really think of this in three pieces. Um, we've acquired a couple of companies. So in those, in those cases, we pick up salespeople. Um, we added the global account managers from scratch. So that's kind of the eight or nine guys in that group. Um, And we built the lead sales development team, which between the SDRs and a couple of leaders, I think there's 18 or 19 or 20 people in that group total. So we have gone from 60s to 80s in headcount starting almost two years ago.
spk02: Got it. Okay. Thank you for all the color.
spk00: Thank you, Mr. Hines. The last question is from Alex Schuyler with Raymond James. Please proceed.
spk10: Hi, thanks for taking the question. This is John for Alex. Just a quick one for me, for Jack or Rod. I know retention's been a big focus here, and you have a lot of multi-year renewals here that you've been mentioning on the call. It should help as we look towards next year, but curious to hear more broadly if you can give any more commentary or any commonality you're seeing surrounding these renewals. I know you mentioned financial services and knowledge management product library there, but any additional color there would be great. Thanks.
spk11: Yeah, look, let me just start on that one and then pass it to Rod. I think, you know, what I've seen in the business in the 18 months since Rod got here is building on the foundation we had in place uh to create a real platform uh and strengthening uh those major customer relationships focusing in on those major and uh diamond accounts and really doing a deeper level of uh of enterprise selling and engagement and again i think we're you know we have to take keep in mind the fact that that happened during some significant cross currents uh you know uh in in in the economy. But I think we're seeing some positive signs on that in terms of the retention setup that we've got as we move in the next year. And again, we saw Q3 as an inflection point. But we still believe that inflection point is going to happen. And again, we see some early positive signs on Q4. And I think we're on the right course in terms of where we're taking that.
spk09: Rod, what would you add? I'll just add one thing to that, which we haven't really talked about yet, which I think is long-term really critical here. We brought in some company-level product leadership back in the second quarter. And this team's remit is to make sure we're really optimizing what we're spending on all of our products. We have a lot of products in a lot of different markets. Um, those markets, some markets are more dynamic than others relative to product, um, demands. Um, and I think one of the things were, you know, we, we, you know, we're getting better at every day. I think we were good at it. I think we had a lot of, we had our products funded in the right way. I don't want, I don't want to give a sense that we didn't, but what I, what I will say is that, uh, you know, with, with this more, with this more portfolio view of our products, because customers ultimately renew products that are successful. And adding a bit more of a portfolio view to how we invest in each product from an R&D perspective is just making us smarter. And so not every product renews at the exact same rate. Some have more opportunities than others. And so really getting our R&D investments optimized. Another long-term thing we started in the second quarter of this year, which I think just bears fruit long-term, just adding to our confidence level in the model and what we're doing and our ability to continue to take these products to market for the next decade or two, which is what the focus is. So hopefully that helps.
spk10: Thank you.
spk00: Thank you, Mr. Schuyler. I will now pass the conference over to Jack for any closing remarks.
spk11: Okay. Well, thank you all for your time, and we look forward to seeing you on the next earnings call. Thank you.
spk00: That concludes the conference call. Enjoy the rest of your day.
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