Upland Software, Inc.

for standing by and welcome to the Upland Software third quarter 2023 earnings call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions for that 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 third quarter 2023 earnings release, which was distributed today at 4 o'clock 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.

All right. Thank you, and welcome to our Q3 2023 earnings call. I'm joined by Mike Hill, our CFO. On today's call, I'll start with a Q3 review, and following that, Mike's going to provide some detail on the numbers and our guidance, and then we'll open it up for Q&A. But before we get started, Mike, can 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. A detailed discussion of these risks and uncertainties associated with such statements is contained in our periodic reports 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 results, which are 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. Headlines for the quarter, we beat Q3 revenue and adjusted EBITDA guidance midpoints. In the third quarter, we expanded relationships with 279 customers, 28 of which were major expansions. We also welcomed 162 new customers to Upland in the third quarter, including 26 new major customers. New customer deals were distributed across products and verticals. On the product front in Q3, Qvidian was listed among notable vendors in the Forrester Q3 report, which was the B2B response management technologies landscape report. Panviva, which is one of our knowledge management solutions, went live on the Genesis app foundry exchange. That was earlier this month. And that app foundry is the industry's largest dedicated marketplace focused on customer experience solutions. AccuRoute and BA Insight attended the annual legal technology event, ILTACON. Our upland subject matter experts spoke at two sessions which highlighted the implications of AI for legal teams. and how intelligent search like BA Insights Smart Hub 6.0 can enhance business process efficiency. Right answers, our enterprise knowledge management software was included in KM World's AI100 list. That's of companies empowering intelligent knowledge management. Altify announced the release of Altify Insights. It's first to market solution, which is designed to reduce sales cycle times and increase win rates for B2B sales organizations. And then in G2's fall 2023 market report, Upland and our products earned 33 badges, including high performer badges for our knowledge management solution write answers and 22 badges for our audience development solution, Second Street, a result of our dedication to meeting customer needs and innovation. So it's still early, but we are making progress on our new growth plan and remain focused on building shareholder value over time. And with that, I'm going to turn the call back over to Mike.

All right. Thank you, Jack. I'll cover the financial results for the third quarter and our outlook for the fourth quarter and full year 2023. Total revenue for the third quarter was 74.1M, representing a decrease of 7% year-over-year. Recurring revenue from subscription and support decreased 7% year-over-year to 70M. Perpetual license revenue decreased to 1.5M for the third quarter, down from 1.7M in the third quarter of 2022. Professional services revenue was 2.7M for the quarter, a 4% year-over-year decline. These revenue declines are generally as expected pursuant to our strategic product realignments and future growth initiatives described on our previous calls. Overall gross margin was 69% during the third quarter, and our product gross margin remained strong at 71% or 76% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses and excluding acquisition-related expenses, depreciation, amortization, and stock-based compensation were $39.1 million for the quarter, or 53% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately 0.4 million in the third quarter, which should represent the last of our restructuring costs for our acquisitions last year. Acquisition-related expenses should remain insignificant going forward until our acquisition activity picks back up in the future. Our third quarter 2023 adjusted EBITDA was 16.2 million, or 22% of total revenue, down from $24.9 million or 31% of total revenue for the third quarter of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments described in previous calls. For the third quarter 2023 GAAP operating cash flow was $18.3 million and free cash flow was $17.8 million. Our Q3 operating and free cash flow was significantly benefited by the liquidation of one-half of our interest rate swaps resulting in an operating cash inflow of $20.5 million. This was a one-time event unless we decide to liquidate more swaps in the future. Excluding the cash flow impact of the interest rate swaps liquidation in Q3, we anticipate $25 to $35 million of free cash flow generation for the full year 2023. with the positive impact of the swaps liquidation we anticipate 45 to 55 million of free cash flow generation in the full year 2023 our ongoing free cash flow generation is in addition to our existing liquidity of approximately 300 million dollars comprised of the two approximate 240 million dollars of cash on our balance sheet as of september 30th 2023 plus our 60 million dollar undrawn revolver During Q3, we paid down an additional $35 million of our outstanding debt. As of September 30, 2023, we had outstanding net debt of approximately $244 million after factoring in the cash on our balance sheet. As of September 30, 2023, our gross debt was approximately $483 million, of which approximately $259 million is still fully hedged effectively locking our interest rate at 5.4% through the full maturity of our term debt, which is August of 2026. The remaining approximately $224 million of term debt now floats in an interest rate of SOFR plus 385 basis points, which was 9.2% at September 30th, 2023. Additionally, I will note that we used about $3.2 million of cash to buy back approximately 783,000 shares of our common stock during the quarter ended September 30th, 2023 under our limited stock repurchase program that began in early September of 2023. For guidance, for the quarter ending December 31st, 2023, Upland expects reported total revenue to be between 69 and 75 million, including subscription and support revenue between 65.5 and 70.5 million, for a decline in total revenue of 9% at the midpoint over the quarter ended December 31st, 2022. The following adjusted EBITDA guidance reflects an estimated non-cash charge of $1.5 million related to our sunset assets. For the fourth quarter 2023, adjusted EBITDA is expected to be between $12.6 and $15.6 million for an adjusted EBITDA margin of 20% at the bid point. This adjusted EBITDA guidance at the midpoint is a decrease of 42% from the quarter ended December 31st, 2022. For the full year ending December 31st, 2023, I expect reported total revenue to be between $294.7 and $300.7 million, including subscription and support revenue between $278.9 and $283.9 million for a decline in total revenue of 6% at the midpoint over the year ended December 31st, 2022. Full year 2023 adjusted EBITDA is expected to be between $63 and $66 million, where an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 34% over the year into December 31, 2022. And with that, I'll pass the call back over to Jack.

All right. Thanks, Mike. We're ready to open the call up for Q&A.

Thank you, Jack. If you would like to ask a question, please press star 1 on your telephone keypad. Our first question comes from Scott Berg with Needham and Company. Please go ahead.

Hi, Jack and Mike. Thanks for taking my questions here. I guess I'll get to Jack. I know you kind of talked about how pleased you are with the go-to-market changes that the organization is making. You know, when should we think about them being kind of fully implemented or fully ramped? I know this was a transition year to kind of ramp those up, but do you think they're kind of at that right spot in the first part of next year, or does it take maybe a little additional time?

I think it takes a little additional time, I'd say, end of next year.

Okay. Thank you. And then, Mike, you're obviously buying back stock. You mentioned how many shares that you bought back, but you're also paying down some debt. Can you walk us through the thought process of if you have an incremental dollar, where that goes between buying back stock and debt? Both are kind of favorable opportunities for you here today.

Yeah, Scott, so as you know, just to repeat, $240 million approximately cash on the balance sheet. We have announced the stock buyback plan, so we'll continue to execute that. And then, of course, we've got flexibility on what we do with that capital. We've got choices to pay down debt more. We've got the potential for acquisition. So we're keeping our options open. And fortunately, we're in a good place, at least with the cash on the balance sheet.

Great. That's all I have. Thanks for taking my questions.

Our next question comes from Jeff Van Ree with Craig Hallam. Please go ahead.

Great. Thanks for taking the questions. A couple for me. Just to follow up on the sales changes, Jack, you said it's early, but you've seen nice signs of progress. Maybe just expand a little bit on what you have seen and what's going on with overall quota-carrying rep headcount.

So we're starting to see the demand generation effort beginning to work. And I want to stress it's still early days. But if you look at organic search rankings, we look at the volume of marketing qualified leads and marketing sourced pipeline, more generally, we're beginning to see some green shoots. Now, again, it's still early in the process. It's going to take time to get that to a point of full traction. And then, of course, it's got to work its way through bookings and then ultimately revenue. That's an area, I think, where we're starting to see some green shoots. In terms of quota capacity, we feel like we're in good shape there in terms of both field sales and inside sales. So we've got all of those heads in place, and we've got a good complement of SDRs as well, sales development reps. So the quota capacity is where we need it to be.

Okay, great. And then, Mike, on the debt and taking out half of the hedge and leaving the other hedge, just walk me through the thinking there.

Yeah, so, Jeff, you know, we feel like interest rates are probably topping out, at least hopefully. They may, who knows where rates are going to go, but at least we thought it was a good time for us to go ahead and liquidate half of the swaps, given their value, take that $20.5 million and use it to pay down debt and use it to buy back some stock. And so that's what we decided to do at this point in time. Just keep in mind now that, you know, now still over half of our remaining debt outstanding is still hedged. So, and of course, if we pay down more debt, you know, that ratio will improve still. So anyway, that was our thinking. Yep. Got it. That's helpful. Thank you.

Our next question comes from Jacob Zerbib with William Blair. Please go ahead.

Hi, guys. Thank you for taking my questions and congrats on the results. You've mentioned the 5% organic growth target for next year. Just wondering with all the macro developments recently how that's trending and if you still see that as an achievable goal. Thank you.

Yeah. 5% stated as a goal, right? No guarantees, and it's an aspirational goal. I think we're going to continue to execute against that. Our guidance is going to be a lot more conservative than that when we get to that point of providing a guide for 2024. As I mentioned a moment ago in my response to Scott Berg, I think we're going to, in terms of really starting to see those results kick in, It's probably more like the end of next year. So that mid single digits organic growth rate, core organic growth rate goal is really more toward, you know, the end of next year as opposed to the full year. And that's our take on it as it stands today. Got it. Thanks.

And just just to follow up on that, like solid execution this quarter with new large accounts. I'm just wondering in terms of the strategy, the mix between new customer acquisition versus expansion within existing customers to achieve your growth targets over the next few years. Thank you.

Yeah, I think we are still generating the majority of our bookings through expansion opportunities, not a little bit more than half, and I'd rather see that that balance be more like 50-50 or 60-40 new logo being the larger share of that. So that'll be part of the transition over the next year here as we, again, get those leads that we're creating through our new marketing efforts, you know, through the pipeline and start to generate bookings and revenue.

Got it. That's it for me. Thank you.

Again, if you would like to ask a question, please press star 1. Our next question comes from Alex Sklar with Raymond James. Please go ahead.

Hi, thanks for taking the question. This is John for Alex. Mike or Jack, can you guys update us on gross retention trends, even just directionally? Do you see any improvements there with more investments you put into product and success over the last few quarters? And then I have a quick follow-up.

So on net dollar retention rate, that's a KPI that we put out annually after Q4. So we'll have more detail on that on the Q4 call. In terms of trend line, it's running pretty steady.

OK, thanks. A helpful call there. And then, Mike, can you update us on the timeline of the sunset assets here? Has that timeline changed at all since you gotten into the process more? Thank you.

Yeah, it's, you know, we've talked about it taking another, you know, a couple, three years for those that we're not really in a, some of the use cases, you know, we're letting continue on for a while. Some we've got a little bit shorter life on them, but for the most part, it's that same trajectory that we've talked about on previous calls.

Okay. Thank you very much.

There are no further questions at this time. This will conclude our question and answer session. I will now turn the call back to Jack McDonald for any closing comments.

Okay. Well, thank you very much for joining, and we will see you on our next earnings call.

This concludes today's conference call. You may now disconnect.