Upland Software, Inc.

Thank you for standing by, and welcome to the Upland Software fourth 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 fourth quarter 2023 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.

All right. Thank you, and welcome to our Q4 2023 earnings call. I'm joined today by Mike Hill, our CFO. On today's call, I will start with a Q4 review, and following that, Mike will provide some detail on the numbers and our guidance for 2024. After that, we will open the call 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 the 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 in combination with GAAP results, provide Upland management with additional analytical tools to understand its operations. Upland has provided reconciliations of non-GAAP financial measures to the most comparable GAAP measures in our press release announcing our financial 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 a reasonable effort. And with that, I'll turn the call back over to Jack.

All right, thanks, Mike. The headlines we beat in Q4, our revenue and adjusted EBITDA guidance midpoint. We welcomed 154 new customers to Upland in Q4, making that a total of 678 new customers in 2023. In the fourth quarter, That new customer ad included 15 new major customers. On the product front, very busy in Q4. And of course, we've got a number of initiatives underway on the AI front that are very exciting. And of course, we saw some great recognition of our products. In Q4, Upland was recognized for the third year in a row as a gold medalist and leader in the 2023 enterprise content management data quadrant report from software reviews. That was for our document management and workflow automation product, which is called Filebound. The award is based on the combined knowledge of real users and placement is based on overall satisfaction with product features, vendor experience, capabilities, and emotional sentiment. In addition to that, Upland RO Innovation has launched a new customer reference activity hub to help sales, marketing, and customer success teams find and engage with their most influential customer references so they can boost brand awareness and generate more business. In December, we hosted a webinar on content search intelligence, featuring and covering how Azure AI Search, when seamlessly integrated with BA Insights' cutting-edge technology, can revolutionize how organizations access manage and derive insights from their data again just one of many exciting ai initiatives that we've got underway across a half dozen or so products or more and then also in the fourth quarter we earned 44 badges in g2's winter 2024 market reports and that was across a variety of products These included our knowledge management solutions, Upland RightAnswers and Upland Panviva, along with Upland Qvidian, our proposal management software, and our digital marketing products, Upland Adestra and Upland Second Street. And rankings on those G2 reports, of course, are based on independent data provided by real software buyers. Overall, we continue to make progress on our go-to-market growth plan. and we remain focused on building great software and delivering value for customers. We feel encouraged by the progress we've made to date on the growth plan. We are processing out the sunset assets as planned and clearing the way for core growth. And our goal, Mike's going to cover 2024 guidance in a few minutes, But our goal is to exit 2024 at a core organic growth rate of around 3%. Now, our guide will be more conservative than that, probably closer to 1% exit. But the goal is to get to a 3% exit. Again, we've spent a year building and investing and are encouraged by the progress we've seen to date and view this year as our year to turn the business back to positive core organic growth and exit with positive core organic growth. So more to come on that later. And let me now turn the call over to Mike.

Yeah, thank you, Jack. I'll cover the financial results for the fourth quarter of 2023. And as Jack said, our outlook for the first quarter and full year of 2024. These results and our outlook for 2024 reflect another year of significant incremental sales, marketing, and product investments. as well as the planned runoff of the sunset assets revenue. Total revenue for the fourth quarter was $72.2 million representing a decrease of 8% year-over-year. Recurring revenue from subscription support decreased 8% year-over-year to $68.2 million. Perpetual license revenue decreased to $1.8 million in the fourth quarter down from or that actually increased up from $1.6 million in the fourth quarter of 2022. Professional services revenue was $2.2 million for the quarter, a 26% year-over-year decline. These revenue declines are consistent with the planned runoff of the sunset assets revenue. Overall growth margin was 67% during the fourth quarter, and our product growth margin was 68% or 72% when adding back depreciation amortization, which we refer to as cash growth margin. Operating expenses, excluding acquisition-related expenses, depreciation, amortization, and stock-based comp, were $38.4 million for the quarter, or 53% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $0.5 million in the fourth quarter, which should represent the last of our restructuring costs from those acquisitions that we did last year. Those are the acquisitions in 2022. Acquisitions related expenses should remain insignificant going forward until our acquisition activity picks back up in the future. Our fourth quarter 2023 adjusted EBITDA was $14.1 million or 19% of total revenue down from $24.3 million or 31% of total revenue for the fourth quarter of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments and our decision regarding the sunset assets as described earlier. For cash flow for the fourth quarter of 2023, GAAP operating cash flow was $8.8 million and free cash flow was $8.6 million, bringing our full year 2023 free cash flow to $48.7 million, which was in line with our expectations. Now, as a reminder, our full year 2023 free cash flow was benefited by the liquidation of half of our interest rate swaps in Q3, adding $20.5 million of additional free cash flow in 2023. This one-time event is just a one-time event unless we decide to liquidate more swaps in the future. Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $297 million comprised of the approximate $237 million of cash on our balance sheet as of December 31st, 2023, plus our $60 million Enduron revolver. As of December 31st, 2023, we had outstanding net debt of approximately $245 million after factoring in the cash on our balance sheet. As of December 31st, 2023, our gross debt was approximately $482 million, of which approximately $259 million is still fully hedged, effectively locking our interest rate at 5.4% on that portion of our debt through the full maturity of our term debt, which is August of 2026. The remaining approximately $224 million of term debt now floats at an interest rate of SOFR plus 385 basis points, which was about 9.2% at December 31st, 2023. I will also note that we used $10.8 million of cash to buy back stock approximately 2.5 million shares of common stock during the quarter into December 31st, 2023. under our limited stock repurchase program that began in early September of 2023. This brings the cumulative total of our stock buybacks through December 31st of 2023 to $14.2 million. And as a reminder, our stock buyback plan is for a potential total of $25 million should it fully execute. Now for guidance. The following guidance reflects another year of significant incremental sales, marketing, and product investments that we are making as part of our comprehensive growth plan, as well as the effects of decreasing revenue and expenses related to the sunset assets. I will note that, as usual, our forward guidance assumes no M&A activity, so our forward guidance will, of course, be adjusted upon future acquisitions. For the fourth quarter ending March 31, 2024, Upland expects reported total revenue to be between $65 and $71 million, including subscription and support revenue between $62.5 and $67.5 million for a decline in total revenue of 12% at the midpoint from the quarter ended March 31, 2023. For the first quarter 2024 adjusted EBITDA is expected to be between $11.3 and $14.3 million, For an adjusted EBITDA margin of 19% at the midpoint, this adjusted EBITDA guidance at the midpoint is a decrease of 27% from the quarter ended March 31, 2023. For the full year ending December 31, 2024, Upland expects reported total revenue to be between $259 and $283 million, including subscription and support revenue between $247 and $267 million, for a decline in total revenue of 9% at the midpoint from the year ended December 31st, 2023. Full year 2024 adjusted EBITDA is expected to be between 49 and 61 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 15% from the year ended December 31st, 2023. So 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 Q&A.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Our first question comes from the line

of scott berg with needham and co scott the floor is yours hi jack and mike uh thanks for taking my questions here today uh so i got a couple of them you know jack i guess in your you know kind of new go-to-market strategy what you guys been working on starting roll out where do you think you are in the process of that because you feel pretty confident about exiting this year with core revenue growth of i believe you said

target a three percent but trying to understand where you are in that process and your visibility to uh drive growth in that course segment as you get through the year yeah so uh you know we're starting we've been at it now a little over a year uh you know we've uh made significant improvements on the product development and innovation side and we're starting to see those Of course, the build out of our center of excellence in India, over 130 people there now and growing. And it is enabling us within our cost envelope to innovate across our product portfolio. And again, I think we're starting to see some green shoots from that. The 44 winner badges from G2 and some of the other analyst awards that we've received, I think, are indications that that is beginning to bear fruit. I look at where we are in terms of our investments to build modern digital marketing capability. Again, we've made real progress there. I can look at a number of KPIs internally around organic search, around pipeline build, where we are really starting to see significant improvements in performance. On the sales side, more generally, we've built out the sales team, sales process, sales tools, sales hygiene. It's a different organization culturally today than it was a year ago in terms of really building a true sales culture. Most recently, we hired a new chief revenue officer, Matt Breslin, who was the... an executive at Infor, where he ran a $700 million business. Actually was a colleague at Infor with Oliver Yates, who's our head of sales. So bringing some of that team back together. And I feel very good about where we are as we move into 2024 here. And as I say, this is the year when we make the turn to positive core organic growth with that target of exiting the year at 3%. Again, we're going to guide more conservatively than that, but I feel good about the progress and encouraged by the progress we've made to date.

Got it. Helpful. Thank you, Jack. You know, Mike, as I look at the guidance here for the year, product revenue looks like it's going to be down a few million dollars quarter over quarter from q4 into q1 and your guidance suggests that your product revenue is probably flattish uh at that level for the rest of the year maybe flat that's modestly down from there i guess when we think of the non-core versus the core revenues i assume some of the items that you're sunsetting is what's impacting the q1 number to be lower than q4 But how do we think of, I don't know, the curve of the non-curve versus or non-core versus the core going through the end of this year? When will the non-core revenues be out of the model? And then when will we get to see truly what the core revenues are doing?

Yeah, thanks, Scott. So the fact, like Jack just described, we're turning from a core standpoint, we're turning from a little negative, negative 1% core organic growth rate in Q4 to positive here in 2024, at least by the exit, and hopefully, you know, 3% target core growth by the exit. So, core is sort of, you know, making the trough turn there, if you will. On the sunset assets, It's probably going to be a little less than $30 million of revenue here in 2024 related to the sunset assets that are going to continue to sort of run off, if you will, over the next couple, three years. So, again, those will be a bit of a drag, but the main point here is that the core should be turning up here this year.

Great, helpful. Thank you for taking my questions.

Your next question comes from the line of DJ Hines with Canaccord. Your line is open, DJ.

Hey, guys. This is Ryan on for DJ. Mike, this one's probably for you. It's related to Scott's question. I was just kind of hoping you could maybe bridge me through your revenue guide for the full year coming up. So I guess we're kind of at like $27 million now. you know, decline at the midpoint. What are your assumptions on, I guess, like natural churn, new bookings, as well as, you know, you kind of alluded to those sunset assets, but any color there would be really helpful.

Yeah, no problem. So most of that decline is going to be the sunset assets, recurring revenue. Now we do have a little bit lower perpetual license revenue and PSO revenue. that's sort of adding to that. And of course, like we said, our guide, we think our guide is a little bit conservative there. So that really sort of adds up to that 27 million, you know, walk. The headline is it's the sunset asset decline burning off.

Okay. Awesome. Thanks. I appreciate it.

Your next question comes from the line of Jeff with Craig Harlem.

Jeff, the floor is yours.

Great, thanks. I appreciate it. So just a couple, guys, maybe, Mike, with you first on the sales approach. Could you just spend a minute as I'm thinking through what the sales approach is here? I know there have been periods where cross-sell was a vision and there was opportunities potentially to cross-sell from various products. Is this now purely a standalone? We're targeting each individual product. And if so, are all reps selling all products? Just maybe a refresher on the sales approach right now.

Yeah. So this is Jack.

And on the sales approach, the motion is principally product-based. And we've got a field sales force. sales capability that we stood up last year. And again, starting to see from that inside Salesforce some good early successes in terms of getting some nice size mid-market deals done.

Now, we still will have a few global account executives

who will go after larger cross-sell opportunities. And of course, we've seen some of those, including some million-dollar-plus deals in Q4, frankly, that were brought home by those global account executives. And so that will continue to be a part of the model. So again, it's inside and field with a limited number of global account executives. And then finally, in terms of mix, you know, this is a business that should run roughly 50-50 expansion and new. It's been running higher expansion and lower new. And so, we want to bring that and expect through the course of this year to bring that back into kind of historical balance on a 50% expansion, 50% new mix. Yeah. Okay.

Appreciate it. And then, Mike, in terms of 2024, what's the expectation around what kind of free cash flow that EBITDA yields?

Yeah, Jeff, we're targeting $20 to $25 million of free cash flow this year, 2024. Okay.

All right. And then just one last for me. As we're looking at the organic and non-organic, I think you answered the early question. Most of the decline is, I guess, the sunset assets coming out of I think you said $30 million that has to work off over several years. Just refresh me on the sunsetted. Is that the basket of products that is in the sunsetted basket, was that a one and done, you kind of picked a handful of products that for whatever reason needed to be sunsetted, and then it hasn't and isn't expected to change, or is there any variability to what's in there? Just refresh me on how that works.

Yeah, so when we took the investment from HGDC, we did a strategic review of our product portfolio to examine, you know, what were those products that we really wanted to put some wood behind the arrow on in terms of driving growth. And at that point, and as a part of that process, we identified the sunset assets. We made a revision to that about a year after. where there were a couple of assets, frankly, that we realized had some growth potential, and there were others that we thought were better off being sunset. So, it was a one-time, and then with a revision to it, it is not our plan to revisit that. We view that as a process that we've completed. Now, you know, it's possible that it could come up again, but I don't anticipate anything near that kind of scale happening again.

Okay, great. Thank you.

Our next question comes from the line of Jake with William Blair. Jake, the floor is yours.

Hey, thanks for taking questions. It was good to hear the 3% organic growth expectation exiting this year. Just curious, how much of that growth is related to political messaging business, just given it's an election year? And then, Jack, if you take a step back, how should we be thinking about this business when you come out of this transition? Is there a certain kind of growth and margin profile that you're aspiring to? And then I have the one follow-up.

So, we're not expecting, that target core organic growth rate does not count any election year bump.

So, there's none of that in there.

In terms of what our longer term target is for the business, it's for mid single digits, core organic growth. And we know that once we get through 2024 and get the core organic growth motions working, that we will turn our sites to some significant margin expansion beginning in 2025. You know, we'll have the hindsight at that point of which go-to-market investments and motions are yielding the highest return. So we'll be able to continue those and adjust spending on less efficient go-to-market motions. We've also put in place as a part of this growth plan a couple of levers that we think will help us drive growth through time while reducing costs. So one of those, for example, is the digital marketing capability and the ability to use organic search to drive pipeline, right? That involves some investment up front, but then you create a flywheel that enables you to generate at-bats for the sales team through time with increasing cost efficiency. And, of course, in addition to that, on the innovation side, the Center of Excellence in India and our other offshore initiatives give us the ability to really have the right hybrid mix of development capability that can deliver innovation and growth within a cost envelope that fits margin expansion, so where we can get a headcount arbitrage and manage our costs effectively and drive margin through time. So, again, coming out of this as we move into 2025 and beyond, targeting mid-single digits, core organic growth, and then targeting through time, adjusted EBITDA margins between 30 and 35 percent, driven by, again, those efficient motions in the growth model, also using AI to manage costs in various parts of our business. And then finally, we're going to look this year to turn acquisitions back on, something we didn't do last year as we were focused on our internal go-to-market plans. And as we do that, we'll get some operating leverage, which will drive margin expansion. And again, we're talking about Uh, 1, maybe 2 deals for this year. We'd like to get done. Uh, but then again, through time, we would see that ramping up.

Uh, and that will also also help to drive, uh, margin expansion.

Okay, very helpful and then, um, yeah, you kind of preempted the next question there in terms of just how you're thinking about capital allocation. Sounds like you're turning back on the acquisition motion and looking for a couple acquisitions this year, but how are you thinking kind of about the balance between M&A, potential share buybacks, and then just the potential for debt pay down? Just curious how you're thinking about the capital allocation between those three buckets.

Yeah, so as Mike mentioned, you know, the $25 million buyback is underway, and we are a good part of the way, more than half of the way through that. So we anticipate that continuing and, you know, filling the full buyback allocation of $25 million. So that, I think, is sort of step one. On the acquisition side, again, I think, you know, we're looking at one, maybe two, but, you know, kind of internal plan is around one. But if the right opportunities present themselves, maybe that becomes two deals this year. And we've been in the market and actively looking at deals all year round. And, of course, we've got the capital we need to go after those deals, and we control the timing. But we are remaining patient for the right assets that are strategic and are available at the right price. And, again, I also wanted to really spend the time with the team focused on making the investments I've described earlier and getting this business ready for core organic growth.

And I'm going to start feathering in some acquisitions on top of that. Thanks for taking the questions.

Your final question comes from the line of Alex with Raymond James.

Alex, the floor is yours.

Hi, thanks for taking the question. This is John on for Alex. Jack, I think in the past you've mentioned bundling solutions and focusing on groups and bundles of solutions. So can you give us an update on what successes you've seen there so far and if there's any learnings that you have so far as you put more muscle behind the go-to-market motion in 2024? And then I have a quick follow-up.

Yeah, the learnings there are that the most effective motion for us is going to be product centric. And it is, of course, further penetration of the existing customer base, frankly, through straightforward expansion. And then a new logo motion that is driven 80% by a point product sale and maybe 20% by cross-sell. And that is consistent with what I was speaking of earlier in response to Jeff's question regarding the composition of the sales force. So we anticipate continuing to have a limited number of global account executives that are driving more of that cross-sell motion. But in general, and for the vast majority of it, 80%,

you're going to be looking at point product sales.

Okay, thanks. That was helpful. And then, Mike, how are you thinking of the free cash flow contribution from the sunset assets here over the next two years? I appreciate you gave us color for this year, but how do you think about that over the next two years?

Yeah, well, by definition, the sunset assets are low margin, low free cash flow contributing assets. So, sort of not quite neutral, but pretty close. So, just not much impact on the, you know, on the free cash flow there for those.

Okay. Thank you very much.

I would now like to turn the call over to Jack Badano, Chairman and Chief Executive Officer.

Okay. Well, thank you for joining today.

and we will see everyone on the next earnings call ladies and gentlemen that concludes today's call you may now disconnect