Upland Software, Inc.

Thank you for standing by and welcome to the Upland Software fourth 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 fourth 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 like to now turn the conference over to Jack McDonald, chairman and CEO of Upland Software.

Please go ahead, sir. Thank you, and welcome to our Q4 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 Q4 results. Then Rod will provide some color around customers and product developments. And following that, Mike will provide some insights on the Q4 numbers and our guidance. After that, we will open the call up for questions. But before we get started, Mike, could you read the Safe Harbor Statement?

Yes, thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meanings of the securities laws. These statements are subject to risks, assumptions, and uncertainties that could cause our actual results to differ materially. A detailed discussion of these risks and uncertainties are contained in our annual report on Form 10-K as periodically updated in our quarterly reports on Form 10-Q filed with the SEC. The forward-looking statements made today are based on our reviews and assumptions and on information currently available to Upland Management as of today. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. On this call, Upland will refer to non-GAAP financial measures that, when used in combination with GAAP results, provide Upland Management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our fourth quarter and full year 2021 results, which is available on the investor relations section of our website. Please note that we are 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.

Thanks, Mike. So Q4 was a great quarter, and we are happy to share the strong results and also to announce our latest acquisition of EA Insight. So here are the headlines. We beat on revenue and adjusted EBITDA. So coming in above the midpoints of our guidance on both revenue and adjusted EBITDA. We dramatically outperformed our targets on free cash flow. It generated over 12.9 million of free cash flow in the fourth quarter. And again, that's after acquisition expenses. And for the full year, we did over 40 million of free cash flow, 40.6 million of free cash flow for the full year. And again, that's after acquisition costs. our net dollar retention rate came in stronger than expected at 94%. On our third quarter earnings call, we said we thought we would come in at around 93%. So again, we outperformed that, came in 100 basis points better than that, and we continue to expect additional improvement in our net dollar retention rate as we move through 2022. Rod's going to speak to this a little bit later in the call, but we also had a meaningful bookings rebound in Q4, up substantially from Q3. And we had a host of product improvements in the quarter, which are reflective of our increased commitment to innovation. And then finally, after the quarter ended, we closed two acquisitions here in Q1. both strategic and immediately accretive. And those acquisitions increase both our software library and our customer base. And we continue to have a strong M&A pipeline in front of us. So finally, strong guidance for 2022. And Mike is going to walk through that later in the call. So with that, let me turn the call over to Rod.

Thank you, Jack. Good afternoon, everyone. As Jack mentioned, Q4 was a good new bookings quarter and a strong bounce back from Q3. In the quarter, we expanded relationships with 285 existing customers. 55 of those expansions were major expansions. We also welcomed 121 new customers to Upland in the fourth quarter, including 32 new major customers. We made continued progress on our cross-sell motion as full year 2021 cross-sell bookings grew more than 2X over 2020. As a reminder, cross-sell for Upland is a new product into an existing account. While admittedly coming off of a relatively small base, we're encouraged by the more than double year-over-year in cross-sell bookings. Also, as Jack mentioned, we finished 2021 at 94% net dollar retention. above what we anticipated last quarter. And our outlook shows net dollar retention continuing to improve throughout 2022, which we're excited about. From a product perspective, G4 was a very active quarter for new product achievements. We delivered four new major releases across our product library and 22 new feature packs for a very busy quarter. We announced our most comprehensive file-bound product release to date, which significantly expanded how we automate workflow to support our customers needing to implement digital transformation across remote and hybrid business models. Our Qvidium product introduced several new features designed to provide users the ability to create better RFP responses and proposals while increasing team efficiency, compliance, and most importantly, deal win rates. We also launched Simple Cloud, a new capability from our Simple product, which is an IT financial management product. Simple Cloud is designed to help customers improve cost, security, and compliance in their complex cloud environments, a growing part of the market. Our strategy for global software development took an important step forward in Q4 as we established a new center of excellence in India. to further leverage our offshore operating model. This operation will serve as a key global R&D cornerstone. You will read more about this in the coming weeks. On the M&A front, today we announced the addition of BA Insight to the Upland product library. We are excited about this deal and its strategic fit for Upland and our customers. BA Insight is an enterprise search product that integrates with the customer systems, but robust search in the hands of knowledge workers. As a search engine, BA Insight has product integrations into over 90 document and content systems, seven search engines, and four leading AI engines. Their enterprise customer base is mostly in legal business services and life sciences, which, as you know, are wheelhouse industries for Upland. BA Insight joins Right Answers and Panviva in our growing library of enterprise knowledge management products. As you'll recall, Right Answers, we acquired in 2017, delivers technology and methodology to consolidate answers to common questions to make call center agents more productive and to enable self-service. While Panviva, acquired earlier in 2021, last year, delivers workflow-based guidance to customer service agents in regulated industries, such as utilities, healthcare, and financial services. In addition to how BA Insights fits with our knowledge management products, it also fits very well as you can imagine, within our document workflow library as it integrates with a lot of document systems to drive enterprise search. With that, I will turn the call over to Mike.

Thank you, Ron. I'll cover the financial highlights for the fourth quarter and our outlook for the first quarter and full year 2022. On the income statement, total revenue for the fourth quarter was $75.7 million, representing a decrease of 3% year-over-year. Recurring revenue from subscription support reduced 4% year-over-year to $72.3 million. However, I should note that Q4 of 2020 included $6.6 million of subscription and support revenue from our CXM mobile messaging product related to U.S. presidential election campaigns, which did not repeat in Q4 of 2021. So, excluding these political revenues in Q4 of 2020, revenues actually increased. Professional services revenue was $2.7 million for the quarter. a 1% year-over-year increase. Overall, gross margin was 67% during the fourth quarter, and our product gross margin remained strong at 68%, or 72% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation, amortization, and stock-based compensation, were $29.9 million for the fourth quarter, or 39% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $2.4 million in the fourth quarter, which were about as expected. Our fourth quarter 2021 adjusted EBITDA was $25.1 million, or 33% of total revenue, down from $26.6 million, or 34% of total revenue, for the fourth quarter of 2020. As expected, adjusted EBITDA for this quarter was lower than the year-ago quarter due to the extra political revenue in Q4 of 2020. Cash flow. For the fourth quarter of 2021, GAAP operating cash flow was $13.1 million and free cash flow of $12.9 million, even with $2.4 million of acquisition-related expenses in the quarter. So, for the full year of 2021, GAAP operating cash flow was $41.7 million and free cash flow was $40.6 million, even with $21.2 million of acquisition-related expenses in the year. We are successfully generating substantial gap operating cash flow and free cash flow even after acquisition related expenses. We're targeting 30 to 40 million of free cash flow this year in 2022, but it will be back in weighted given the transaction transformation costs from our two recent acquisitions. This ongoing free cash flow generation is in addition to our existing liquidity, of approximately 186 million, comprised of the approximate 189 million of cash in our balance sheet as of December 31st, 2021, less the cash paid at closing for our recent acquisitions of Objective Loon, 29 million, and BA Insight, 34 million, plus our $60 million undrawn revolver. As of December 31st, 2021, we had outstanding net debt of approximately 339 million, after factoring in the cash on our balance sheet. After our two acquisitions here in Q1, net debt is approximately $400 million, so our net debt leverage is currently around 4.0 times based on the midpoint of our 2022 adjusted EBITDA guide. 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 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 $366 million of total tax NOL carry-forwards, and of these, we estimate that approximately $211 million will be available for utilization prior to expiration. I will note that we still expect around $5 million per year of cash taxes. Now for guidance. For the quarter ending March 31, 2022, Upland expects reported total revenue to be between $75 and $79 million, including subscription and support revenue between $70.9 and $74.5 million for growth in total revenue of 4% at the midpoint over the quarter ended March 31, 2021. First quarter 2022 adjusted EBITDA is expected to be between 22 and 24 million for an adjusted EBITDA margin of 30% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 1% from the quarter ended March 31st, 2021. For the full year ending December 31st, 2022, Upland expects reported total revenue to be between 313 and 329 million, including subscription and support revenue between 293.1 and $307.5 million for growth in total revenue of 6% at the midpoint over the year ended December 31st, 2021. Full year 2022 adjusted EBITDA is expected to be between $95 and $103 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 2% over the year ended December 31st, 2021. And with that, I'll pass the call back over to Jack.

All right, thanks, Mike. We are now ready to open the call up for questions.

Absolutely. 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, please press star one. As a reminder, if you are using a speakerphone for this call, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question goes to Bhavan Suri with William Blair. Bhavan, your line is open. You can go ahead. Thank you.

Thanks for taking my questions, team. Great job. It was great to see the bookings numbers come back, NDRR, et cetera. So, you know, fabulous job. I guess maybe I'll start sort of with sort of what's driving bookings. You know, Rod's been working on the good market strategy a couple of years. And you've seen that sort of start to see some of these fruits. But I'd love to talk, Rod, maybe what you're seeing at the top of the funnel on the pipeline that the sales team is driving and sort of how that flows down to close rates that's giving you sort of visibility in the pipeline for the coming year.

Yeah, thanks. That's a great question. We've really evolved from looking at our pipeline at sort of one top-level pipeline down into three. We have three deal types, as you can imagine. We have new logos, we have cross-sells into our base, and we have same store sales or more of the same product into the same customer. And so we actually manage that pipeline now in separate pipelines, and the motions are different. It's a bit more of a marketing sales motion, as you can imagine, for the new logo business. For the cross-sell business, it's a sales motion, but it's a lot of our customer success team now engaged in pipeline creation. So we really, I think that's one of the things we made a lot of progress with last year was engaging our customer success team and identifying both new product cross-sell as well as same product expansion. And so as we back up and look at our pipe without really getting into details like conversion rates, expansion converts at a better rate than cross-sell and at a better rate than new because you just have less, the sales cycles are quicker. They already own the product and they need more. They're already using you as a vendor and they need another product. or you're competing for a net new logo. And so we have different conversion rates for different parts of the pipeline. And frankly, different parts of Upland are driving the top of those pipelines with different motions. And so I think we matured a lot in 21 on sort of measuring the pipelines independently and measuring sort of top of funnel creation independently. Hopefully that helps.

Yeah, no, and I appreciate the detailed answer. That was actually very helpful. I guess let's touch on the cross sell because you did bring it up on your prepared remarks about sort of that being promising, doubling, et cetera. The question I'm asking is, as you start thinking about these more strategic relationships, are you at a level where you bring yourself or Jack or senior executives in and say, okay, talking to the CIO or whomever and showing him the whole spread of Upland's product suite and saying, hey, you guys are only using a sliver. Are we there yet? Are we still at a waste of getting to those relationships where you get to say, hey, you're now a trusted partner and I'm going to show you the value of, a bunch of my different products that you haven't touched that will provide tremendous ROI. Where are you in that sort of longer-term strategic sort of relationship with those large clients and the ability to drive cross-sell from those?

Yeah, great question. So if I back up just a little bit, you'll recall we created our global accounts team back late 2020, and they really got in their seats by the beginning of 2021. They manage all of our biggest customers, I say all, most of our, certainly our top 150 customers across industries. And their mission in life is to cross-sell. Obviously, retain those customers, sell them more of the same, but find that cross-sell. That bears fruit. Without naming names, I literally had a call Tuesday with our executive sponsor at a very big um telecom company media company and and the conversation was we love what we own from you what else do you have to paraphrase so we went through a lot of other potential fits and so that that was a call i happened to be drug into about our chief products officer some of our r d leads some of our product management folks um are getting on the phone with those biggest customers really driven by the global account team that's that will continue to mature As you know, it takes a while to build those relationships and make sure you have that credibility. But, yes, we're definitely seeing that, and that is a big part of what drove the increased cross-sell bookings throughout 21. Gotcha.

Gotcha. Well, we'll look forward to hearing more about deepening those relationships and driving the cross-sell across this part of Sweden. Thanks for taking my questions, and nice job, guys.

Thank you, Bhavan. Our next question goes to Terry Tillman with Truist. Terry, your line is open. You can go ahead.

Thanks. Hey, guys. This is Joe Mears. I'm for Terry. I appreciate you taking the question. And nice job on the free cash flow. Of the 121 new customers you picked up in the quarter, did any of them come from surprising or new verticals for you? And if not, where did you see the biggest strength in new logos?

I don't think they came from surprising and new verticals. You know, we've got such a wide footprint with our enterprise base now. I would say there wasn't any one industry that jumped out. There was strength across a lot of verticals, which frankly is encouraging. You know, really keeps us from being too impacted by any given industry having a tough quarter or half, so to speak.

Broad-based strength is good. Just as a follow-up, we're seeing, even though the software market generally has retrenched from a valuation perspective, private company valuations seem to be continuing to rise. So just wondering if you're seeing anything there that's not in the headlines where private company valuations are coming down. And then if you could just remind us on what your top end, your max net leverage would be for picking up deals. Thanks so much.

Yeah, so in terms of acquisitions and capital allocation more generally, I would say regarding acquisitions, you know, we're in a position of strength here and we control the timing. We have liquidity and cash flow and we've got a strong pipeline of deals. So we're going to continue to monitor the market and execute our playbook. as we move through the year. And again, off to a strong start with two acquisitions here in the first quarter. I'd say regarding capital allocation more generally, stock buybacks and other strategic alternatives, our policy is not to comment on any kind of speculative transactions and the presence or absence of any discussions. But Again, we're constantly evaluating as part of our capital allocation framework, you know, the right investments to make to drive shareholder value.

Thanks again.

Thank you, Joe. Our next question goes to Brent Dill with Jefferies. Brent, your line is open. You can go ahead.

Hi, this is Love Soto on for Brent Hill. Thank you again for taking my questions. Maybe the first one for Jack and Rod. Could you maybe talk about the overall demand environment in, you know, across software? You know, there's this fear of a pull forward in demand into 2021. And you have exposure to some, you know, the front office apps.

um and you know some back office maps as well could you maybe talk how it impacted you and what are your expectations for 2022 well look i i think we uh mentioned that we saw uh you know substantial uptick in bookings uh in the fourth quarter uh and we've put out uh you know strong guidance for for 2022, so we feel good about the year and good about that guidance in terms of what we're seeing from our customers and the demand that we see in the market.

I'll just add that if you look across all of our products in Q4, it wasn't like one area drove the performance. You know, our document workflow business, our enterprise sales and marketing, more B2B products, our more B2C customer experience products, and frankly, our project and IT management products and our call center products. There was good performance across all product suites or sets, if you will, in our library, which I really take as a good indicator across the demand spectrum. And to the earlier question, it wasn't driven by one industry either.

um it was it was pretty diverse frankly uh so so encouraging we think got it and then a quick follow-up on the net dollar retention improvements you're expecting for the next year uh how should we think of you know the impact from churn easing versus you know the crossover motion taking more hold and the expansion improving

Yeah, I think it's a good balance. We're seeing the same performance in gross retention as we are in net retention. So it's not like we're dropping gross out and covering up with expansion. So we're seeing success in both of those metrics pretty much linearly. So we think there's positive benefit in both places.

The only thing I'd add to that, again, you know, we talked about on the Q3 earnings call that we expected to come in at 93% net dollar retention rate last year, and in fact came in at 94%. So 100 basis points better. And we do see that improvement continuing through 2022. As we've mentioned prior, you know, we were able to secure a number of multi-year contracts so that should set us up for continuing improvement in that net dollar retention rate as we move through 2022. Got it.

Then one last one, you know, on the margin side, you know, could you maybe talk a little bit about the investments you're making into the next year and, you know, the buckets of investment, if you will? Are you continuing to invest in the sales and marketing side to build out that GAM presence? Thank you.

Yeah, we've got the team in place that we need. And so, you know, current course and speed on the investments we're making. Rod highlighted a moment ago some exciting new initiatives on the product side, but that's consistent with, you know, the budget and the guidance that we've got out there.

Got it. Thank you.

Thank you. Love. Our next question goes to DJ Heinz with Canaccord. DJ, your line is open. You can go ahead.

Hey, this is Luke on for DJ. Thanks for taking the question. So I think one of the things that investors really appreciate about how you're positioning the business now is the fact that you're now self funding and can execute your strategy without accessing the equity capital markets. We do get some questions on how this mechanically works sometimes though. So I'm wondering if maybe you could talk through that. Say if you buy 40 million in revenue per year at a three times multiple, that's 120 million in M&A. If you run that out three to four years, that's 300 to 400 million in acquisition spend I think you have around 150 in cash on the balance sheet and your cash generative, but I'm not sure that's enough to close that gap. So I assume the difference there is in incremental debt. Are we thinking about that the right way? And if that's the case, how high would you guys be comfortable taking your leverage ratios over time? Thanks.

Yeah, look, I think you're thinking about it the right way. And when you look at a combination of our internally generated cash flow, our cash on hand, and our credit facilities, we can execute at that level of M&A, you know, 40 million a year at roughly three times. In terms of leverage, today we're running at around 4X net debt leverage. And so plus or minus, you know, that number is where we're comfortable. As we've said all along, you know, we're willing to see it go up a little bit following a given transaction as long as there's a trend line back down. So no changes there.

That's helpful. Thanks. And then maybe just a quick housekeeping item. I don't think you guys disclosed organic growth in the quarter. I'm not sure if everything in there was organic already. So maybe just clarify that.

Yeah, for the full year, ex-political organic growth was 2%.

Great. Thank you.

Thank you, Luke. Our next question goes to Jeff Benry with Craig Hallam. Jeff, your line is open. You can go ahead.

Hey, guys. This is Aaron on for Jeff. First question for you. The last quarter part of the guide was in part of the – I guess part of the guide down had to do with the political messaging – or sorry, not the political messaging, but messaging revenue related to advocacy groups. Just curious how that trended sequentially quarter over quarter. Have you seen that stabilize or come back to prior levels?

Yeah, so we've seen outcomes there consistent with our expectations. And, again, I think that's reflected in the guidance for 2022, which is, you know, very solid guidance on the revenue side.

Okay. And the next question, you know, going back to bookings, that bookings number, you gave it a little bit of color on the cross-sell bookings and what that's kind of done year over year. I'm curious on the rest of the bookings number, is there any way to quantify or provide a little more color about the breakdown of new bookings versus upsell or expansion there?

Yeah, we don't break that down. Obviously, we track it, but we don't break that down.

Okay, fair enough.

I think that's it for me.

Thank you, Aaron. Our last question goes to Alex Sklar with Raymond James. Alex, your line is open. You can go ahead. Thanks.

Mike, I don't know if you or Jack or Rod want to take this one, but the initial 2022 outlooks are a little bit wider in range than recent years. Can you just help frame what are some of the key swing factors you're still watching in terms of kind of the lower and upper bounds in that range?

Yeah, Alex. So typically when we start off a year, the full year guide is, you know, wider just because we've got a full year to go. And then as we move through the year, that range tends to tighten up a bit, you know, for the remainder of the year because some of it's already put in. I think you'll find that the quarterly guide is consistent in terms of range.

Okay. Well, maybe another one for you, Mike. The free cash flow results, I think you hit on this in your prepared remarks, but they were really impressive this year. And X transaction costs, I think it came out to like a mid-60s conversion rate of EBITDA. I know you've talked to kind of a 55% conversion rate in the past. So I'm curious, was there anything one time benefiting those results in the quarter? Or do you think we could see kind of a higher conversion rate going forward, exclusive of M&I?

No, I think that sort of 55% to 60% conversion pre-acquisition related expenses is the right way to think about it. So yeah, I think you're thinking about it correctly.

OK, maybe I'll just squeeze one more in. The $30 to $40 million guide for 22 on the free cash flow, is that a floor regardless of future M&A, or is that just based on what you've acquired today?

Based on what we've acquired today, Again, you know, back-end weighted because we have a couple acquisitions here in Q1, but that's the range that we're looking at now. Of course, there's timing differences and so forth, and we'll update it as we go here through the year.

All right, great. Thank you.

Thank you, Alex. That concludes the Q&A session of the call. I will pass the conference back over to the management team for any closing remarks.

Great. Okay. Well, thank you so much for joining us this afternoon, and we will see you on our next earnings call.

That concludes today's call. Thank you for your participation. You can now disconnect your line.