Thank you for standing by and welcome to the Upland Software Second 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 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 2023 earnings release which was distributed today at 4 P.M. Eastern Time. If you haven't 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. Well thank you and welcome to our Q2 2023 earnings call. I'm joined today by Mike Hill, our CFO. On today's call I will start with our Q2 review. And following that Mike will provide some detail on the Q2 numbers and our guidance. After that we'll open the call up for Q&A. But before we get started Mike can you read the Safe Harbor statement?

Yes, sure thing 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 second 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. So, here are the headlines for Q2. We beat our Q2 revenue and EBITDA guidance midpoints. In the second quarter, we expanded relationships with 313 existing customers, 32 of which were major expansions. We also welcomed 155 new customers to Upland in the second quarter including 20 new major customers. New customer deals were distributed across our products and industry verticals. On the product front in Q2, I'll note that this was a busy quarter for our sales enablement product Altify starting with a webinar that featured Forrester, which covered best practices for B2B enterprise sales. Following that, a launch of the new Altify book not just another vendor, which is a collection of real experiences and best practices from outstanding sales leaders who have used account planning to multiply pipeline and grow revenue. Two of Upland's products were listed among notable vendors in recent Forrester landscape reports. Upland Altify was included in The Account-Based Selling Technologies Landscape that was the Q2 2023 report. And Upland Kapost was included in the content enablement solutions landscape again the Q2 2023 report. Qvidian announced its latest release, which is focused on UI and UX improvements really optimizing the user experience and also a significantly revamped content library that aims to help customers increase productivity, shorten sales cycles and accelerate win rates on deals. In June, Upland was awarded HP's Global Partner Excellence Award for our continued efforts in providing HP customers with flexible dynamic product solutions that enable modern document life cycles for their businesses and align with their unique requirements. It's still early in the process but we are making solid progress on our new growth plan and remain focused on building shareholder value. Specifically, our goal is to achieve a mid-single-digit core organic growth rate next year. So, targeting 5% core organic growth next year plus or minus. It's not guidance. It's a goal and no guarantees, but our organization and our team are laser-focused on that achievement. So, with that, I'm going to turn the call back over to Mike.

Thank you, Jack. So, I'll cover the financial results for the second quarter and our outlook for the third quarter and full year 2023. On the income statement total revenue from the second quarter was $74.5 million representing a decrease of 7% year-over-year. Recurring revenue from subscription and support decreased 6% year-over-year to $70.5 million. Perpetual license revenue decreased to $1.3 million in the second quarter down from $1.9 million in the second quarter of 2022. Professional services revenue was $2.8 million for the quarter, an 18% year-over-year decline. These revenue declines are generally as expected pursuant to our strategic product realignments and future growth initiatives described on our previous calls. Overall, gross margin was 68% during the second quarter and our product gross margin remained strong at 69% or 74% 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 $37.7 million for the quarter or 51% of total revenue all generally as expected. Also, acquisition-related expenses were approximately $1.1 million in the second quarter which represents the last of our restructuring costs from our acquisitions in Q1 of 2022. Acquisition-related expenses should remain insignificant going forward until our acquisition activity picks back up in the future. Our second quarter 2023 adjusted EBITDA was $16.6 million or 22% of total revenue, down from $24.5 million or 31% of total revenue for the second quarter of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments described on previous calls. Cash flow for the second quarter of 2023, GAAP operating cash flow was $7 million and free cash flow was $6.7 million. We continue to anticipate $30 million to $40 million of free cash flow generation for the full year 2023. Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $323 million, comprised of approximately $263 million of cash on our balance sheet as of June 30, 2023 plus our $60 million undrawn revolver. As of June 30, 2023, we had outstanding net debt of approximately $257 million after factoring in the cash on our balance sheet. Now for guidance, we are lowering our full year 2023 revenue guidance midpoint by $2 million due to accelerated sunset asset churn and lower perpetual license and PSO revenue. We are revising down our 2023 adjusted EBITDA guidance by $2.8 million due to that lower revenue level as well as some incremental growth investment in our CLA product group. With that, for the quarter ending September 30 2023, Upland expects reported total revenue to be between $70.4 million and $76.4 million, including subscription and support revenue between $65.5 million and $70.5 million for a decline in total revenue of 8% at the midpoint over the quarter ended September 30th 2022. Third quarter 2023 adjusted EBITDA is expected to be between $14.5 million and $17.5 million for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 36% from the quarter ended September 30th 2022. For the full year ending December 31st 2023, Upland expects reported total revenue to be between $292.1 million and $304.1 million, including subscription and support revenue between $274 million and $284 million for a decline in total revenue of 6% at the midpoint over the year ended December 31st 2022. Full year 2023 adjusted EBITDA is expected to be between $63.2 million and $69.2 million, for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 32% over the year ended December 31st 2022. And with that, I'll pass the call back to Jack.

All right. Thanks Mike. We are now ready to open the call up for Q&A.

Great. Thanks Jack. It looks like our first call is from Scott Berg with Needham. Please go ahead.

Hi everyone. This is Michael Rackers on for Scott today. Congrats on the quarter here. But how are you thinking about the leverage profile over time and then potentially refinancing debt as it comes due over the next few years? Thanks.

Yeah. So Michael, this is Mike. First of all, our debt is due in August of 2026, our term debt and we've got the interest rate locked at 5.4% through the remainder of that term. We have plenty of time to deal with that. We think, as hopefully the interest rate environment and the rate curve comes down over time, our leverage right now at sort of depressed EBITDA levels is about 3.9 times net debt leverage to annual EBITDA. As our growth investments kick in and EBITDA levels improve and we build cash every year with our $30 million to $40 million of free cash flow generation, that should reduce net debt over time, and those lines should get a little bit easier for us from a refinancing standpoint and we'll pull the trigger on a refinancing in the future.

And our next call comes from Jeff Van Rhee with Craig-Hallum. Jeff, go ahead.

Great. Thanks. A couple for me. Hey, guys. Just on sales, maybe Jack I know you're spending a lot of time and effort to drive that organic growth acceleration into next year. I know you've made a lot of changes. Can you just expand on what's going on? I know you said you're in the early innings but have made good progress. Maybe a little more there. What have you changed? Where are your reps structured whatever you're changing?

Sure. Our growth plan is focused on three efficient strategies, two of which relate to our go-to-market approach. The first strategy involves enhancing our inside sales alongside our field sales, supported by a complete team of sales development representatives. Additionally, we are investing in modern digital marketing to improve our pipeline generation efficiency. We have successfully filled our SDR team, and we are nearly complete in hiring for our direct sales representatives as per our schedule. There has been a significant cultural shift within the organization, and considerable effort has been dedicated to product marketing to ensure our products are positioned effectively in the market with appropriate pricing. As part of our new go-to-market initiative, we are concentrating on about 15 growth products that account for approximately 75% of our revenue and where we foresee substantial growth opportunities. Recently, we welcomed a new sales leader from Infor and a marketing leader from TIBCO. They have established their teams, and we are beginning to observe positive signs, especially in pipeline generation, which is typically the first area to show progress. Our pipeline generation has increased both sequentially and year-over-year, showing a significant rise from the first quarter and last year. Overall, we have made great strides in marketing demand generation, product marketing, sales enablement, and expanding our inside sales capabilities, along with equipping our field sales team with the necessary tools, training, and resources. This has transformed our organization significantly. Additionally, a key element of our growth strategy is our Indian Center of Excellence for development. While we will continue some product development domestically, we are aggressively expanding our India team. This move is anticipated to enhance our margins over time and boost our investment in product development. You will notice an increase in both product investment and innovation, particularly in those growth products, as we progress through the end of this year and into next year.

Yeah. No that's great. Very helpful. Thanks, Jack. And then one other, obviously with roughly the 15 core growth products about three-fourths of revenue and then the other products that make up the 25% altogether kind of the go-forward suite excluding the sunset products. In terms of the retention on those products, obviously there's the growth factor but also the retention vector. How is retention trending? And have there been any changes in terms of how you're approaching or attacking the retention issue?

So retention has been tracking in accordance with plan. So the target remains what it was, which is we focus on an NDRR KPI that we report publicly on an annual basis. The target is to get to 95% or better for this year as reported as of December 31. I would say at this point Jeff no significant changes. Now in terms of the groundwork that we are laying in to improve retention rates through time, there are a number of significant initiatives underway. One of them of course is the development side and on the product management side, so part of the process of better positioning our products to compete in the market to drive more organic growth. And by the way, I would say to you that what's been heartening as we've gone through this is the strength of a number of our products. We just need to do a better job of putting them in the marketplace and positioning them appropriately. But part of the visibility that we have as a result of that process on competitive intelligence I think is leading to some targeted investments in product innovation that we believe are going to drive higher retention through time. Secondly, on the customer success side, we have promoted a new customer success leader. We have built out a centralized customer success shared service organization that we did not have previously. We have adopted a new approach to the customer success function and will be adopting in the second half of the year a new customer success software platform. Again, this is aimed at empowering our exceptional CSMs, who are a really great team, with the strategic mindset for monitoring customer health and engaging with a longer-term view on increasing retention rates. We've also spent a good deal of time on the cross-functional cooperation that's necessary to ensure better customer health and better retention rates, specifically making sure that our sales organization, our professional services organization and our customer support organization are working hand-in-hand and doing the right kind of handoffs and kickoffs to move from that sales process and that solutions consultant creating an initial customer success plan to building more packaged implementation services from our PSO group, to ensure more robust product adoption and ultimately better customer health because that's going to drive better business returns and ROI for customers. And then as I say, giving the customer success teams the tools and methodology they need to better execute strategically and measure, manage and improve customer health and retention. So that's the main focus there. Again, happy to take any other questions on that.

Yes. That’s helpful. I appreciate it. Thanks for the color. All set.

My apologies. And our next question comes from Jake Roberge with William Blair. Jake, go ahead.

Hey, guys. Congrats on the quarter. This is Jacob Zerbib on for Jake Roberge. Just wanted to ask on the reduced full year guide. What do you attribute it more to the general macro impacts, or are there any execution issues we should be aware of? Is there I guess an accelerated sunsetting of your legacy products? And just to follow up on that given the macro are you still active on the M&A front with the valuations these days? Thank you.

Yes. So regarding the first question, this is Jack. The main reason for that is the quicker turnover of sunset assets, which is actually beneficial for us as it's better to clear them out sooner rather than later since they are non-core assets. That was the key factor. Naturally, with the phasing out of assets, there will be a slight dip in PSO because it relies on new logo activity and new implementations. When it comes to perpetual revenue, it largely hinges on the timing of some of our OEM partnerships, so we anticipate that to be a short-term issue. This isn't due to our execution and, at this stage, isn't influenced by the macro environment; it's more about specific factors that I just mentioned. If you have a follow-up on that, I'd be happy to address it or we can move on to the M&A question.

No, yes, you can go to the M&A question. Thank you, sorry about that.

On M&A, we are actively in the market. We are looking at a number of acquisition opportunities. As we build out our go-to-market capabilities, of course, it starts to make some of these acquisitions more attractive because we are positioning ourselves to not only drive the cost synergies that we have historically but to better drive revenue synergies. I see it in some of the recent acquisitions, that we did like BAI Insight, which is an enterprise search tool where we drove the integration of that product, with more of the new Upland mindset around go-to-market. We're seeing growth rates on that product that are really strong. So we're going to keep building out this capability so that we can go and do additional acquisitions and again, not only drive margins but continue to drive revenue growth. Now, we're well positioned. We've got plenty of capital. We're known in the market. We've got a pipeline of deals but we control timing on it. So we're going to execute, at the right time. We are being purposeful and thoughtful about it. We don't feel rushed to have to get something done this quarter, but we anticipate getting back in the business of closing deals within the next few quarters and feel like we're well positioned for that.

Got it.

Yes. Our final question will come from Alex Sklar with Raymond James. Alex, please go ahead.

Hi, gentlemen. This is Johnathan McCary on for Alex. Just one from us. So I know you kind of touched on the innovation engine already, but you've had the R&D center up and running for a little over a year now. You've had a nice cadence of new products and functionality announcements. So, what can you tell us about how we should think about how product velocity should trend over the next year? And how should we think about monetization of those investments? Thanks.

Yes, I think the first and most significant way in which we'll monetize those investments is taking this business from a negative 1% to 2% organic growth rate in 2023, to a positive mid-single digits organic growth rate next year. Now again, that's a goal. It's not guidance and there are no guarantees. But this organization is laser-focused on the levers that can drive that growth. I think that is a game changer for this business. And we're not saying that's a ceiling. We're saying that is a target for next year. Long term, our goal is 5% to 10% organic growth and 30% to 35% EBITDA margins. I think that's just an absolute game changer for how the company will be viewed and valued on an ongoing basis. And then of course, turning back on the M&A engine, and doing it in the context of a business that has a working go-to-market motion and levers to pull around the Indian Center of Excellence, the product side, and the ability to generate pipeline and support any acquired field sales personnel, but also to add an inside selling capacity to the products that we acquire, a scaled inside selling capacity where we can now plug in inside sales pods on a systematic basis. Look, I'm not saying that everything is humming right now, because we are in the process of laying this all in, but we are seeing real and solid progress operationally on creating this capability that we believe is going to drive that growth and that return on investment and as I mentioned, there are some early green shoots particularly around pipeline generation that I think give us increased optimism for the future.

Thank you.

All right. So that's our final question. So let me just thank everyone for joining the call and we will see you after the next quarter. So, we'll see you on the Q3 call. Thank you very much.

Thank you, Jack. And ladies and gentlemen, that does conclude today's call. Thank you all for joining and you may now disconnect. Have a great day, everyone.