UPLD - NASDAQ

Thank you for standing by, and welcome to the Upland Software Second 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 second quarter 2022 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 Q2 2022 earnings call. I’m joined today by Mike Hill, Upland’s CFO. On today's call, I will start with our Q2 results, and then provide some color around go-to-markets and product developments. Following that, Mike will provide some insights on the Q2 numbers and our guidance. We'll then open the call up for Q&A. But before we get started, Mike, will you read the Safe Harbor statements?

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 on our quarterly reports on Form 10-Q filed with the SEC. The forward-looking statements made today are being -- 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 second 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. And with that, I'll turn the call back over to Jack.

All right. Thanks, Mike. Q2 was a strong quarter and here are the headlines. We beat our midpoints on revenue and adjusted EBITDA and we outperformed plan on operating and free cash flow. I would note that we outperformed on both even with an FX headwind in the quarter. We generated in the quarter $13.9 million in free cash flow. We also had a good bookings quarter and I'll cover that in a little bit more detail in a moment. We announced in the quarter a host of product improvements including new releases for Altify and Objectif Lune. And of course, these are reflective of our increased commitment to innovation. We continued the integration of our two acquisitions from the first quarter, Objectif Lune and BA Insight and all is proceeding there as planned, and we remain active in the market for additional acquisitions. And then finally, after the quarter closed, we announced a strategic equity investment from HGGC. So let me dig in on those headlines as we go here. Around go-to-market, again, as I mentioned Q2 was a good bookings quarter. In the quarter, we expanded relationships with 403 existing customers and 53 of those were major expansions. We also welcomed 123 new customers to Upland in the second quarter, including 27 new major customers. New customer deals were well distributed across our products and industry verticals. We had a particularly strong expansion quarter across our products in Q2 Kapost, our content operation software platform; InGenius, our CRM phone integration product; Objectif Lune, our document composition and business communication automation product; and BA Insight, our AI driven enterprise search product all had strong expansion quarters. Q2 was also a strong quarter for selling Premier Success Plans. These are subscription services packages that give our customers high fidelity support to help them be more successful. On the product side, we had a busy Q2 for product enhancements. Altify’s spring 2022 release introduced Altify Account Plan, which was a long awaited capability that's been included for all account manager customers. And this capability enables users to get going faster on their account plans by starting to work on assigned accounts directly from within account records inside Salesforce. Objectif Lune announced a series of customer driven innovations and enhancements aimed at supporting complex business communications and digital transformation efficiency in their first major release post acquisition. InGenius announced that its CRM telephony integration is now available as a premium application on the Genesys AppFoundry, which is the industry's largest dedicated marketplace focused on customer experience solutions. In addition, on July 14, after the close of the quarter, we announced a $115 million pipe private equity investment from HGGC, which is a leading $6.8 billion private equity firm. HGGC has a proven track record of partnering with management teams to build shareholder value and drive growth. And this new HGGC partnership will help us to strengthen our business and to fully capitalize on the once in a decade acquisition opportunity that we see emerging as the recent turmoil in financial markets fundamentally reshapes funding and valuations for the type of venture backed cloud software companies that Upland acquires. We also announced on July 14 that Rod Favaron will be stepping down as President, effective August 31st. Rod made his decision for personal reasons. I just want to thank Rod for his service and wish him the very best. A few additional points on the HGGC announcement. This is an attractive growth hike priced at $17.50 per share conversion price with a clean structure and cash or pick dividends at the company's option. This investment is a validation of the Upland business model. And our platform coming as it did from a smart software investor after a rigorous strategic operational and financial diligence process. This is a partnership with a major private equity firm that's going to help us to build long-term value. It's also going to help us with support to strengthen our go-to-market and we believe that HGGC is the right partner. We've had a relationship and known HGGC for multiple years. And they've had great success in supporting software companies generally, but in particular M&A driven platforms like IDERA and Health Systems, which have similar models to Upland. And we're going to have more to say later in the year about our value creation plan with HGGC. Finally, I just want to note that pro forma for the HGGC investment, our cash on hand will be $248.3 million, that together with our nearly $100 million in annual adjusted EBITDA and our attractive long term credit facility is a strong financial foundation to build on. So with that, I'm going to turn the call over to Mike.

Thank you, Jack. I'll cover the financial highlights for the second quarter and our outlook for the third quarter and full year 2022. Total revenue for the second quarter was $80.2 million, representing an increase of 5% year-over-year, without the FX impact on Q2 growth would have been 8%. Recurring revenue from subscription and support increased 4% year-over-year to $75 million, without the FX impact, recurring revenue growth would have been 6%. Perpetual license revenue increased to $1.9 million in the second quarter, up from $0.4 million in the second quarter of 2021. Professional services revenue was $3.4 million for the quarter, a 3% year-over-year decline. Overall gross margin was 67% during the second quarter and our product gross margin remained strong at 69% or 73% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses excluding acquisition related expenses, depreciation, amortization and stock-based comp were $34.5 million for the second quarter or 43% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $4.9 million in the second quarter, which were in line with plan. Our second quarter 2022 adjusted EBITDA was $24.5 million or 31% of total revenue, up from $23.7 million or 31% of total revenue for the second quarter 2021. For the second quarter 2022, GAAP operating cash flow was $14 million and free cash flow was $13.9 million. So we are successfully generating substantial GAAP operating cash flow and free cash flow even after acquisition-related expenses. We're targeting $30 million to $40 million of free cash flow for the full year 2022. This ongoing free cash flow generation in addition to our existing liquidity of approximately $198 million is in addition to our existing liquidity of $198 million comprised of approximately $138 million of cash in our balance sheet as of June 30, 2022, plus our $60 million undrawn revolver. Additionally, as Jack noted, we expect to close on a new $115 million pipe transaction in the coming weeks, which will raise our liquidity further to around $308 million. As of June 30, 2022, we had outstanding net debt of approximately $387 million, after factoring the cash on our balance sheet. Again, after our new $115 million pipe closes in the coming weeks, our net debt should drop to around $277 million or -- and our net debt leverage should drop to around 2.8 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 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 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 of cash taxes per year. Now for guidance. Let me start by saying that Upland's forward guidance remains unchanged in constant currency. Since May 4, 2022 the U.S. dollar has strengthened resulting in a larger FX headwind in both Q3 2022 and full year 2022, the total impact is estimated to be approximately 1.5 percentage points currency headwind for 2022 revenue growth and a $1.5 million currency headwind for 2022 adjusted EBITDA. The following adjusted guidance includes the impact of estimated FX headwinds in the period. For the quarter ending September 30, 2022, Upland expects reported total revenue to be between $75.7 million and $81.7 million, including subscription and support revenue between $70.8 million and $76.2 million for growth in total revenue of 3% at the midpoint over the quarter ended September 30, 2021. Third quarter 2022 adjusted EBITDA is expected to be between $23.2 million and $26.2 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 1% from the quarter ended September 30, 2021. For the full year ending December 31, 2022, Upland expects reported total revenue to be between $310.5 million and $322.5 million, including subscription and support revenue between $290.4 million and $301.2 million for growth in total revenue of 5% at the midpoint over the year ended December 31, 2021. Full year 2022 adjusted EBITDA is expected to be between $94.5 million and $100.5 million for an adjusted EBITDA margin of 30% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 1% over the year ended December 31, 2021. And with that, I'll turn the call back over to Jack.

All right. Thanks, Mike. Let's open the call up for questions.

Thank you. [Operator Instructions] Our first question today comes from Scott Berg from Needham. Your line is open. Please go ahead.

Hi, everyone. This is Michael Rackers and I'm on for Scott Berg. Thanks for taking my question today. Could you just go a bit deeper on the cross-selling and expansion success within existing customers? Considering the strong quarter for customer expansions, maybe just a bit more on which modules are seeing strength and where?

Yes. So the investments that we've made in go-to-market over the past couple of years and in particular focusing our global account managers on our Diamond accounts, our top 175 accounts with an eye toward driving more cross-sell has created some good momentum there. I would say, as I look at the quarter, I would just call out really some strong expansion activity as really the area where we saw the best traction. And as I highlighted, in my opening remarks, we saw some great expansion traction in Kapost, in InGenius, in Objectif Lune and in BA Insight. So that's where we saw the best motion in the quarter.

Great. Thank you. And then just one more. Are there any specific products or regions where you're seeing a bigger macro impacts or any additional headwinds just with the macro environment we're facing today?

No.

Great. Thank you.

Our next question comes from Terry Tillman from Truist Securities. Your line is open.

Great. Thanks for taking the question. This is Robert (ph) on for Terry. I was hoping to double click on the HGGC partnership. What kinds of benefits do you see accruing on the go-to-market side specifically with their expertise and when can we start to see some of that benefit accrue? Thanks.

Yeah. So we think that HGGC is a very strong partner for us. Love the terms of the pipe that we put together at a substantial premium to market. I think it's a real validation of our business and our operating model coming as it did after rigorous diligence as I mentioned before. And I think when you look at their track record, HGGC is a long history of investing successfully in software companies. They bring deep expertise, experience and resources in both M&A driven value creation as well as driving go-to-market improvement. So I want to say that across their 15 year history, they’ve executed. I think it's 20 software platform transactions with 65 add-on investments and total transaction value of around $15 billion. And these businesses range from sort of high organic growth companies like Denodo and Hybris to M&A platforms like Health Systems and Idera. And so we're engaged in building a value creation plan with HGGC. And we're going to be talking more about that later in the year. Again, final point I'd note there is that pro forma for that investment we'll have roughly $250 million of cash on the balance sheet. So we think in a very strong position to execute on what we see as a coming very attractive acquisition opportunity in the kind of markets we plan.

That's great. Thanks again.

Our next question comes from Jeff Van Rhee with Craig-Hallum Capital Group. Your line is open. Please go ahead.

Hey, guys. This is Aaron (ph) on for Jeff. I appreciate you taking the question. First one, maybe for Mike, should look at the guidance, if you take the midpoint of Q3 and then back in the midpoint of Q4, it's essentially flat sequentially from Q3 to Q4. So just talk to me a little bit about kind of the puts and takes of what went into that and kind of confidence around growing sequentially through the back half of the year?

Yeah, Aaron. Thanks for the question. We're always conservative on guidance. So I think most of that is just we're being conservative on the out quarter there in terms of just sequential flatness And again, of course, as I mentioned right, that the guidance has really only been changed for FX impacts. So that's really kind of the short of the story there.

Got you. That's helpful. And then next question, excuse me. I just -- talk to me a little bit if anything's changed about the thinking as far as your investment is concerned. Obviously, a lot of focus on R&D and product development here over the last quarter or two, but just talk about kind of the cadence of investment, how you're thinking product development versus sales in the go-to-market motion going forward?

I'd say no major changes there just yet. We have increased our commitment to innovation. We've made some additional investments in go-to-market. And we're looking at a number of items with HGGC right now and internally, I will have more to say about our value creation plan later in the year.

Perfect. That's helpful. And then last one if I can sneak one more in. Just curious if anything has changed in the pipeline, any color you can give as far as new versus expansion going forward, the size of customer, anything like that?

I think if you look at the results in Q2, it was a kind of current course and speed quarter, good quarter for bookings, no major deviations from what we've been delivering. And the team is excited and executing here on Q3. So I would say nothing to highlight beyond continuation of what we've been doing.

Awesome. That's it for me. Appreciate it guys.

We now turn to Jake Roberge from William Blair. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my questions. Just wanted to -- could you talk a little bit more about what you're seeing in the macro environment with just more particularly around customer buying behaviors. Have you seen any deals get pushed out as a result of macro or is it really just been in business as usual? Because over 400 expansions, that's the first time we've seen that ever. So that was pretty great. So just would love to get more color on what you're seeing in the macro.

Nothing to call out right now. Obviously, you're monitoring that in this kind of an environment, but nothing that I would call out.

Okay. Great. And then could you talk a little bit more about your M&A pipeline? So obviously, there's been a lot of turbulence in the public markets and valuations coming down. Are you starting to see more businesses enter the top of the funnel or do you think we're still a few quarters before companies really start to explore that acquisition path and the VC funding really starts to drive more and more that Upland really starts to be able to capitalize on that macro volatility?

Well, I think you make a great point, which is that what's gone on in the public markets is going to seep into the funding environment, valuation environment for VC backed cloud software companies. And of course, we've all seen the headlines around that. And I've lived through this kind of cycle before running a consolidation play. And there's always somewhat of a delay in terms of the sound in the public market echoing in the private market. But we think there's going to be a once in a decade kind of opportunity here and we are well capitalized to go after it. and we think the pipeline looks good, but we're going to be patient and we're going to -- we're in control of the timing and we're going to execute when and where it makes sense.

Sounds great. Thanks for taking my questions and congrats on the great quarter.

We now turn to Alex Sklar from Raymond James. Your line is open. Please go ahead.

Thanks. Mike, really strong cash generation again this quarter. As far as the guidance goes, $30 million to $40 million dollars Does that contemplate additional M%A or said another way? Should we think about that being a floor and it could be higher absent any additional deals?

Yeah, Alex. So last year, we did a little over $40 million of free cash flow generation in 2021. So this year, we're expecting the same. We did $8 million in Q1, $14 million here roughly in Q2, so $22 million here year-to-date. So we're concerned, $30 million to $40 million seems appropriate. We'll be obviously shooting for the upper end of that range and it's possible we could beat it. Again, obviously too early to tell given timing differences and that kind of thing in the working capital accounts. You asked whether or not that has future acquisitions assumed in it and it does not simply because obviously, we wouldn't know the timing and extent and size of future acquisitions. So it excludes future acquisitions.

Okay. Thank you. Very helpful. And then Jack, kind of following up on some of the go-to-market questions, have there been any changes in the sales organization following Rod’s (ph) announced departure? And in terms of kind of anything we should expect going forward in terms of the overall structure of that team?

Yeah. We've got a team in place that is energetic. I was on a bookings call with our team this morning, great leadership there. The team is excited in going after the opportunities in front of us. And as I say, we see an opportunity with HGGC to avail ourselves of their support and insights in terms of strengthening our go-to-market efforts and making our existing team even more successful. So we'll have more to say on that later in the year.

Okay, great. Thank you.

Our final question comes from Brent Thill from Jefferies. Your line is open. Please go ahead.

Thank you for taking my questions. This is Luv Sodha on for Brent Thill. Maybe the first one, following up on that go-to-market question. Wanted to ask if the cross-sell motion is still a top priority. And then could you just talk a little bit about the GAMs (ph) and the productivity and investment there?

Yeah. If you look at Upland's sales motion generally, obviously expansion is a key part of what we do through our customer success, organization and also through our product AEs and our GAMs and so no big changes there. I don't know that there is really much to say we're executing against our current plan.

Got it. One quick one for Mike. if I may on a lot of the companies in our coverage are embedding more conservatism given the macroeconomic environment. Are you embedding any additional conservatism into the guide?

Yeah, Luv. Of course, we've always tried to be conservative on our guides and remain so. So there is, so we feel like there's a normal healthy decent amount, typical Upland conservatism in our guide.

Got it. And one last question on the HGGC investment. I guess given the healthy cash position and that you're generating free cash flow. I guess, could you maybe talk through the rationale of doing the raise at these levels? Thank you.

Yeah. Look, we're incredibly excited to have HGCC take a significant stake in Upland. This is an attractive growth pipe, which was priced Luv that $17.50 per share conversion price. So it's significant premium to our current price. It's got a clean structure in cash or pick dividend at our option. I think it's a real validation of our business model and a partnership with a firm that can help us build long-term value that's got a track record of getting that done as a successful and smart software investor. So we think we've got the right partner. We think we've got the support to help strengthen go-to-market. It gives us $250 million of cash. It reduces our leverage to 2.8 times and really that plus our cash flow and our attractive long term credit facility give us a strong financial foundation to build on and to execute against this M&A opportunity that we see coming over the next couple years here.

Got it. Thank you.

This concludes our Q&A. I'll now hand back to Jack McDonald, Chairman and CEO for final remarks.

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