UPLD - NASDAQ

Thank you for standing by and welcome to the Upland Software First Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a Q&A 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 first quarter 2022 earnings release, which was distributed today at 4 o'clock P.M. Eastern Time. If you've not received those release, it's available on Upland website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Thank you. And welcome to our Q1 2022 earnings call and joined today by Rod Favaron, our President, and Mike Hill, our CFO. On today's call, I will start with some opening comments on our Q1 results, then Rod will provide some color around customers and product developments. And following that, Mike will provide insights on the Q1 numbers and our guidance. After that, we'll open the call up for questions. But before we get started, Mike, could you read the Safe Harbor statements?

Yes. Thank you, Jack. And during today's call, we will include statements that are considered forward-looking within the meaning 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 on 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 to 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 first-quarter and full-year 2022 results, the first-quarter 2022 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.

All right. Thanks, Mike. So Q1 was a strong quarter and a great start to the new year. So here are the headlines. We beat our midpoints on revenue and adjusted EBITDA. And we also outperformed plan on operating and free cash flow. We generated $8 million and free cash flow in the quarter, and that's after substantial acquisition expenses from the two acquisitions we announced in the quarter. Rod is going to speak to this later in the call, but we had a good bookings quarter. In addition to that, we announced a host of product improvements in the quarter, including major new releases for AccuRoute and Kapost, and Upland mobile messaging. And all of that is reflective of our increased commitment to product innovation. In addition to that, and we announced the opening of our Center of Excellence, that development operation in India, which provides a cornerstone for our multi-market global product development strategy. We also closed two strategic and accretive acquisitions in Q1, Objectif Lune and BA Insight, further building our product library and customer base, and in particular strengthening our document workflow product family. And finally, we remain in the market for additional acquisitions and strong on our outlook for the year. So with that, let me turn the call over to Rod.

Thank you, Jack. Good afternoon, everyone. I'll start on the sales side, a little bit more detail on some of Jack's comments. As Jack mentioned, Q1 was a good bookings quarter. In the quarter, we expanded relationships with 280 existing customers. 49 of those deals were major expansions. We also welcomed 120 new logos to Upland in the first quarter, including 25 major new customers. Our new customer sales were well distributed across our products and industry verticals. We also had a good expansion quarter across our products. Specifically, our Upland Mobile Messaging product, which is our text messaging product, and Altify our sales enablement product for account-based selling, both had strong expansion quarters. Q1 was also a strong quarter for selling our Premier Success Plans. As a reminder, our Premier Success Plans are subscription services packages that give our customers high-fidelity support to help them be successful. Switching over to product. We had nine major releases and 11 feature pack minor releases. And a little bit more detail on some major accomplishments in the product innovation area. Kapost, our content operations platform, announced new functionality to support dynamic content creation processes, cross-functional collaboration, and revenue team enabling. With Kapost, we continue to help our customers scale content, engage audiences with solutions for the most complex BFB marketing organizations. We delivered a major new release for Upland mobile messaging, our enterprise messaging product, as we move that product onto the Snowflake database, dramatically improving product performance and scalability as our customers scale with that product. AccuRoute, our content capturing routing platform further submitted its position as the leading bridge between customers on-premise applications and Cloud solutions. When we announced that the product is expanded into really critical integration, like electronic medical records, and launched new machine-learning capabilities to improve data collection and overall user experience. FileBound, which was recognized as the gold medalist and a leader in the 2021 enterprise content management data quadrant report from software reviews, we're excited about this, that product focuses on document management and workflow automation. And finally, the segments and we opened our first R&D center of excellence located in India during the Q1. We've already made multiple hires for the core team and senior leadership roles. And over the course of the next 12 months to 18 months, we intend to significantly scale our full-time on R&D employee presence in that market, further leveraging our offshore operating model. With that, I will turn the call over to Mike.

Thank you, Rod. I'll cover the financial highlights for the first quarter, and our outlook for the second quarter and full-year 2022. On the income statement, total revenue for the first quarter was $78.7 million, representing an increase of 6% year-over-year. Recurring revenue from subscription and support increased 4% year-over-year to $73.6 million. Professional services revenue was $3.3 million in the quarter, a 12% year-over-year increase. Overall, gross margin was 69% during the first quarter, and our product gross margin remains strong at 71%, or 75% 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 $36.1 million for the first quarter or 46% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $10.4 million in the first quarter, which were in line with plan. Our first quarter 2022 adjusted EBITDA was $23.4 million, or 30% of total revenue, up from $22.8 million, or 31% of total revenue for the first quarter of 2021. For the first quarter 2021 -- first quarter 2022 it is, GAAP operating cash flow was $8.2 million, and free cash flow was $8 million even with $10.4 million of acquisition-related expenses in the quarter. So we are successfully generating substantial GAAP operating cash flow and free cash flow even after acquisition-related expenses. We are targeting $30 million to $40 million of free cash flow this year in 2022, but it will be back-end weighted given the transaction and transformation costs from our two recent acquisitions. This ongoing free cash flow generation is in addition to our existing liquidity of approximately a $190 million comprised of the approximate a $130 million of cash on our balance sheet as of March 31st, 2022 plus our $60 million undrawn revolver. As of March 31st, 2022, we had outstanding net debt of approximately $397 million after factoring in cash on our balance sheet. 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 debts 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 $366 million of total tax and all carry forwards. And of these, we estimate that approximately $211 million will be available for utilization prior to exploration. I will note that we still expect around $5 million of cash taxes per year. For guidance, for the first -- for the quarter ending June 30, 2022, Upland expects reported total revenue to be between $77.5 million and $81.5 million, including subscription and support revenue between $72.7 million and $76.3 million, for growth in total revenue of 4% at the midpoint over the quarter ended June 30, 2021. Second Quarter 2022, adjusted EBITDA is expected to be between $23.4 million and $25.4 million for an adjusted EBITDA margin of 31% of the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 3% from the quarter ended June 30, 2021. For the full-year ending December 31, 2022, Upland expects reported total revenue to be between $313 million and $329 million, including subscription and support revenue between $293.1 million and $307.5 million for growth in total revenue of 6% at the midpoint over the year ended December 31, 2021. Full-year 2022, adjusted EBITDA is expected, to be between $95 million 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 31, 2021. And with that, I'll pass the call back to Jack.

Alright, thanks, Mike. We are ready to open the call up for questions.

[Operator Instructions] Our first question is from Scott Berg with Needham. Please proceed.

Jack, Rod and Mike Hill as well, congrats on the quarter and thanks for taking my questions here. I guess first question since Rags (ph) on the call, we'll probably directed his way on the sales in the quarter. You characterize did I guess is good bookings? How should we think about your progress in cross-selling modules, different modules to existing customers? I know historically a lot of your expansions and higher net dollar retention numbers are really been driven by up-sells, more than cross-sells, which is slowly getting up the in-terms of your opportunities to cross-sell other products. Thank you.

Thanks for the question. So obviously as I mentioned, bookings were good expansion was particularly good. Cross continues to be -- continues to improve and so the cross pipeline -- cross-sell pipeline continues to grow like we want it to. And the cross-sell deal closings continue really in that same good fashion as the quarter was, I would say. The thing that stood out in the quarter that I would say better than good was expansions.

Okay. Mike, from a follow-up perspective, your adjusted EBITDA margins, at least by my math, I have them just below 30% for the first time in a really long time. It looks like all of your expense areas, at least as a percentage of revenue, were nominally higher than they have been over recent quarters. Just try to help us understand a little bit what maybe drove the extra costs in the quarter. And I saw what the guidance was for the rest of the year, it sounds like you're moving it up a little bit. But how should we think about the model, maybe over the intermediate term next 12 months and 24 months? Is this low at 31%, 32% the right way to think about the near-term model, or are there some opportunities to move that needle? Thank you.

Yeah, Scott. 31% is the way to think about it for the year. That's unchanged in our guide. As you may recall, we typically see our lowest margin, EBITDA margin for the year, at the first quarter because of payroll taxes. And as those cap out, as we move through the year, our EBITDA margins move up typically seasonally throughout the calendar year. So we typically end margins at the highest, start margins at the lowest, and the average is 31%. On going forward, with additional acquisitions, we still see our back office shared service organization in G&A scale leverage. So with ongoing acquisitions, again, we're targeting $40 million of acquired revenue run rate a year. We see margins improving 50 basis points to 100 basis points, possibly more, as we -- as those cost efficiencies scale. So really no changes on margins.

Chris, it's all I have. Thanks for taking my questions, everyone.

Thank you for your question. Our next question is from Terry Tillman with Truist. Please proceed.

Oh great, thanks for taking the questions. This is Robert on for Terry. Just starting off. Curious to get a rough update on headcount and whether go-to-market hiring is going to plan. Specifically around the global accounts team, how is capacity there and said differently, I think Rod you mentioned last quarter that their mission in life is to cross-sell. So how is life going?

Yeah, that's a good question for me. Let me start with the headcount question. So not including solutions consultants, our overall sales headcount, including leadership is right at 90 people. I think that is very close to the plan number. We do have a few people that we have to replace from time-to-time like everybody else, but I think that's very close to what we planned. So there's a quick answer to the headcount question. On the global accounts side, cross-sell is an important part of that team's mission. The way to think about that team is if I'm a Global Account Manager and I have 10 customers that add up to $10 million in revenue, we challenge those guys to bring us back more revenue than they started with and so they have to make sure the customers are being retained and they have to make sure they're doing expansion or same-store sales, if you will. And then they have to cross-sell. So those three levers add up to the outcomes we're looking for from our biggest customers. And if you compare the global account cohort group, with the overall business they are outperforming and doing a nice job and they had a good Q1 for that global account cohort groups. So it's sometimes on a given quarter, sometimes it's stronger cross-sell, sometimes it's stronger expansion, sometimes it's strong renewals. We'd like all three to hit at once. They don't always all hit at once. But that's how we measure that team and we're quite happy with where they are right now on their performance relative to the overall portfolio.

That's great. Thank you. There's just one more for me. Curious to get more color on the M&A pipeline just broadly, evaluation reductions in public markets hit the private markets in a meaningful way. And if so, has there been any impact on the attractiveness of private market deals versus perhaps allocating capital to buybacks or strategical alternatives thanks.

Regarding acquisitions. We're in a position of strength here and we control timing. We've got liquidity and cash flow and a strong pipeline of deals. And so we continue to monitor the market and weigh the options and we'll execute when it makes sense. We announced two strategic and accretive acquisitions in the first quarter, so we're off to a strong start for the year. Regarding stock buybacks or other strategic alternatives, it's our policy to not comment on speculative transactions of any type involving the company's securities or the presence or absence of discussions the company may have related to such transactions.

Great. Thank you.

Thank you for your question. Our next question is from Jeff Van Rhee with Craig-Hallum Capital Group. Please proceed.

Hey guys. This is Aaron on for Jeff. Nice quarter. Thanks for taking my questions. First question, just curious from a macro-environment perspective, if you've seen inflation, fears of recession, anything going on in Ukraine, have you seen any meaningful impact to your business from that?

So thanks for the question. Regarding Ukraine and Russia, really no exposure there. We had a few contractors there, but nothing material and so no real exposure. Regarding outlook generally, as our guidance indicates we maintain a strong outlook for the year.

Okay. And then next one, just curious given some of the market uncertainty, everything else going on. Has anything changed in your outlook on the M&A front as far as capital allocation M&A versus operating free cash flow?

As I mentioned a moment ago, we're in a position of strength as it relates to M&A. We've got liquidity and we can execute when we're ready to execute. We've got a strong pipeline of deals, and a shopping list that it's not only Financial, but also somatic. So we're going to continue to monitor the market and execute when it makes sense. And as I mentioned, we've started the year strong with two strategic and accretive acquisitions in the first quarter. So off too off to a strong start there.

And then last one, Mike, just looking at some of the expense lines, it looks like G&A was a little sadder on a non-GAAP basis this quarter. Is there anything to call out there as being different than expected, and how should we think about that modeling going forward?

I think generally G&A will probably trend down as we move through the year. Again, there's some extra things in G&A this quarter, like payroll taxes that are front-end loaded generally in the calendar. But G&A, you'll probably see a trending down as we move through the year.

Perfect. Thanks. I appreciate it guys.

Thanks for your question. Our next question is from Brent Thill with Jefferies. Please proceed.

Hi. This is Luv Sodha on for Brent Thill. Thank you again for taking my questions. Maybe the first one for Jack or Rod on the overall demand environment that you're seeing. The last question talked about the macro stuff. In a rising rate environment, how -- could you just help us categorize the demand that you're seeing out there from the customers? And will they have the same appetite to spend going forward?

I think one of the ways, this is Rod by the way, one of the ways that we measure demand is what I'll call our inbound new logo pipeline. And so these are people who know our brands, know our products. They're coming to us and raising their hand and showing intent and indicating an interest in looking at one of our products and the pipeline created in that cohort group has been very consistent month over month for the last 12 months. And so I have not seen a inbound demand shift. An anecdote from Q1, we had our price increases. It was our I think our best price increase quarter in a while. So customers who are willing to spend a little bit more, and we do intend to continue that price increase motion as we're rolling out more price increases still [Indiscernible] which we, after talking to customers, feel like the demand is there and the strategic nature of our products allows us to do that so we are. I think all the -- all the indicators from the demand side are still healthy. No, nothing out of the ordinary.

No, that's super helpful. I guess as a quick follow-up, could you maybe talk about the magnitude of those price increases? And is there room to do more given the higher inflationary environment that we're in?

Yeah. So we actually haven't announced any numbers yet relative to magnitude and it will be somewhat different based on product and sector. So I'd rather not get into that. What I will say is we do believe there's a bit of an opportunity for those to be larger than historical and frankly, I think we're not alone in that. I think if you look around the sector that's part of this inflationary reality.

Got it. And maybe one on organic growth, if I may. Could you maybe talk about that? And how should we think about the compares? Obviously, the election-related spend compares get easier in the back half of the year, and we do have a mid-term election in the U.S. coming up. So could you maybe talk about the cadence there? And how should we think about the back half of the year in terms of organic growth? Thank you.

Yeah. So we expect core organic growth, which is backing out those presidential political revenues and backing out overage charges. The core business to strengthen in terms of organic growth through the year, and no change from our steady-state target of mid-single digits -- low-to-mid-single digits on core organic growth. In terms of what we see on the political side, the biggest impact there is the quadrennial presidential elections. And so while we could see some impact from the mid-terms, the bigger number comes with the presidential. Now, we have had some interesting progress with some large political groups. Rod, you want to talk to the Q1 UMM bookings around political?

Sure. Really only tangentially obviously not associated to any major presidential election by much smaller in volume and more of a ongoing commitment as opposed to just the mid-term related relationship. Customers we've had for a long time but we just decided to buy a lot more. I guess it's the best way to characterize it. So we do see tangential organizations related in the political world, but we're subtracting out any of that presidential peak and valley information relative to the organic growth numbers.

Got it. Perfect. Thank you.

Thank you for your question. The last question comes from Alex Sklar with Raymond from Raymond James. Please proceed.

Thanks, Jack. You hire a new Chief Product Officer last year. Now we'll get center of excellence coming online and the product release cadence definitely seems to have been up. Can you just give us an update on changes that have occurred within that part of the organization? And then I'm curious if there's any margin impact from the kind of of excellent shift.

Yes. So we did bring on a new Chief Product Officer. And as you rightly point out, that pace of product innovation has increased and Rod went through a number of those earlier in the call. So we're really pleased with the alignment and the level of execution that we've seen. We're also excited about the center of excellence in terms of really providing a cornerstone for our multi-market global R&D capability. In terms of margin impact, nothing outside of what's already contemplated in our current outlook. We think it's going to be in an efficient investment. And as it is brought online we'll be able to start transferring cost from other parts of the organization to that center of excellence. So we think we're going to get a net tick up in productive capacity while managing any change in costs. So there you go.

Perfect and Rod, I guess we talked a lot about the cross-sell and expansion. I want to ask about top of funnel pipeline creation, particularly as it relates to the new logo opportunity. Any color on the growth there relative to last year, given some of the marketing investments you made?

Yeah, I think top of funnel is pretty consistent now, we've gotten a lot better at the ITPS by-products, so we're better at spending a marketing dollar to get the right inbound lead flow with the right targeted lead flow, and the team's converting. Yeah, I would say that I'm quite comfortable with where the product -- where the pipeline is now and how it continues to evolve, so not new news. The last couple of quarters we're happy with house proceeding.

Okay. Great. Thank you.

Thank you for your question. I'll now pass the call back over to Jack for any last comments.

All right. Well, thank you all for joining and we will see you on the next earnings call.