UPLD - NASDAQ

Thank you for standing by, and welcome to the Upland Software Fourth Quarter 2023 Earnings Call. At this time, all participants are in a 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 4:00 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.

Hi. 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 is 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. 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 add 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 one -- 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 gross margin was 67% during the fourth quarter, and our product gross margin was 68% or 72% when adding back depreciation amortization, which we refer to as cash gross margin. Operating expenses, excluding acquisition-related expenses, depreciation amortization, 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, gap 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 in our balance sheet as of December 3one, 2023, plus our $60 million undrawn revolver. As of December 3one, 2023, we had outstanding net debt of approximately $245 million after factoring in the cash on our balance sheet. As of December 3one, 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 3one, 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 3one, 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 31 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. 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 3one, 2024, Upland expects reported total revenue to be between $65 million and $71 million, including subscription and support revenue between $62.5 million and $67.5 million for a decline in total revenue of 12% at the midpoint from the quarter ended March 3one, 2023. For the first quarter 2024 adjusted EBITDA is expected to be between $11.3 million 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 3one, 2023. For the full year ending December 3one, 2024, Upland expects reported total revenue to be between $259 million and $283 million, including subscription and support revenue between $247 million and $267 million for a decline in total revenue of 9% at the midpoint from the year ended December 3one, 2023. Full year 2024 adjusted EBITDA is expected to be between $49 million 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 3one, 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..

[Operator Instructions] Our first question comes on the line of Scott Berg with Needham & Company. The floor is yours.

Hi, Jack and Mike. Thanks for taking my questions here today. So I got a couple of them. Jack, I guess, in your kind of new go-to-market strategy, what you guys have been working on starting to 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 a target of 3%. But trying to understand where you are in that process and your visibility to drive growth in that core segment as you get through the year?

Yes. So we're starting -- we've been at it now a little over a year. We've made significant improvements on the product development and innovation side, and we're starting to see those pay off. 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 analysts 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. I'm encouraged by the progress we've made to date.

Got it. Helpful. Mike, as I look at the guidance here for the year, your 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 at that level for the rest of the year, maybe flat to just modestly down from there. I guess when we think of the noncore versus the core revenues, I assume some of the items that you're sun setting is what's impacting the Q1 number to be lower than Q4. But how do we think of, I don't know, the curve or the non-curve versus -- or noncore versus the core going through the end of this year? When will the noncore revenues be out of the model? And then when will we get to see truly what the actual revenues are doing.

Yes. 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 3% target core growth by the exit. So core is sort of 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.

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

This is Ryan on for DJ. Mike, this one is probably for you, I guess, 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 like $27 million decline at the midpoint. What are your assumptions on, I guess, like natural churn, new bookings as well as you kind of alluded to the sunset assets, but any color there would be really helpful.

Yes. No problem. So most of that decline is going to be the sunset assets with 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 walk. The headline is, it's the sunset asset decline burning off.

Your next question comes from the line of Jeff with Craig-Hallum. 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 how -- 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 stand-alone, 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.

Yes. So on the -- this is Jack. And on the sales approach, the motion is principally product-based and we've got a field sales force. We've also got an inside sales capability that we stood up last year and again, starting to see from that inside sales force 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 have 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, 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.

Yes. Okay. I appreciate it. And then, Mike, the -- in terms of '24, what does that -- what's the expectation around what kind of free cash flow that EBITDA yields?

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

Okay. All right. And then just one last for me. The -- as we're looking at the organic and nonorganic I think you answered the early question, like 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 sunset is that the basket of products that is in the sun setted basket, was that a one and done, you kind of picked a handful of products that, for whatever reason, needed to be sun-setted and then it hasn't -- and isn't expected to change? Or is it -- is there any variability to what's in there? Just refresh me on how that works.

Yes. So when we took the investment from HGGC, we did a strategic review of our product portfolio to examine 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 are 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 we -- it was a onetime 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 it's possible that it could come up again, but I don't anticipate anything near that kind of scale happening again.

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 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 is 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 sights to some significant margin expansion beginning in 2025. We'll have the hindsight at that point, which go-to-market investments and motions are yielding the highest return that 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 upfront but then you create a flywheel that enables you to generate ads 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 and 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 cost 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 an adjusted EBITDA margins between 30% and 35%, 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 one, maybe two deals for this year, we'd like to get done. But then again, through time, we would see that ramping up, and that will also help to drive margin expansion.

Okay, very helpful. And then yes, 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 of 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?

Yes. So as Mike mentioned, 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 filling the full buyback allocation of $25 million. So that, I think, is sort of step 1. On the acquisition side, again, I think we're looking at one, maybe two, but 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 around. 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 in getting this business ready for core organic growth and then we'll start feathering in some acquisitions on top of that.

Your final question comes from Alex with Raymond James. Alex, the floor is yours. Alex, the floor is yours.

All right, 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.

Yes. 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 has 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 limited number of global account executives that are driving more of that cross-sell motion. But in general, and for the vast majority of 80% you're going to be looking at product -- point product sales.

Okay. 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?

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

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

Okay. Well, thank you for joining today and we will see everyone on the next earnings call.