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, it was 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, 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. 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. Our goal, Mike's going to cover 2024 guidance in a few minutes, but our aim is to exit 2024 at a core organic growth rate of around 3%. Our guide will be more conservative than that, probably closer to 1% exit, but the goal is to get to a 3% exit. 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, 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, and stock-based compensation, 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 made last year. Acquisition-related expenses should remain insignificant going forward until our acquisition activity picks back up in the future. Our fourth quarter 2023 adjusted EBITDA was $14.1 million, or 19% of total revenue, down from $24.3 million, or 31% of total revenue for the fourth quarter of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments and our decision regarding the sunset assets as described earlier. For cash flow for the fourth quarter of 2023, GAAP operating cash flow was $8.8 million, and free cash flow was $8.6 million, bringing our full year 2023 free cash flow to $48.7 million, which was in line with our expectations. 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 approximately $237 million of cash on our balance sheet as of December 31, 2023, plus our $60 million undrawn revolver. As of December 31, 2023, we had outstanding net debt of approximately $245 million after factoring in the cash on our balance sheet. As of December 31, 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 31, 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 31, 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, 2023 to $14.2 million. 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. As usual, our forward guidance assumes no M&A activity. For the fourth quarter ending March 31, 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 31, 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 31, 2023. For the full year ending December 31, 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 31, 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 31, 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.

Our first question comes from 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. We've been working on this for a little over a year and have made significant improvements in product development and innovation, and we're beginning to see the results. The expansion of our Center of Excellence in India, which now has over 130 team members and continues to grow, is helping us innovate within our budget across our product range. We're starting to see positive signs from these efforts, including the 44 Winner Badges from G2 and various analyst awards we've received, indicating that our hard work is paying off. Regarding our investments in modern digital marketing capabilities, we've made real strides, evidenced by various internal KPIs related to organic search and pipeline development, showing significant performance improvements. On the sales front, we've expanded our team, processes, tools, and overall sales hygiene, resulting in a cultural shift towards building a true sales culture. Recently, we appointed Matt Breslin as our new Chief Revenue Officer; he previously ran a $700 million business at Infor and worked closely with Oliver Yates, our Head of Sales. I feel confident about our position as we move into 2024. This year is crucial for us to achieve positive core organic growth, aiming to exit the year with a target of 3%. While we will guide more conservatively, I am optimistic about the progress we've made so far.

Got it. Helpful. Mike, looking at the guidance for the year, it appears that your product revenue will decrease by a few million dollars from Q4 to Q1. Your guidance indicates that product revenue will likely remain flat at that level for the remainder of the year, possibly just slightly declining. When considering non-core versus core revenues, I assume that some of the items you are discontinuing are affecting the Q1 numbers, making them lower than Q4. How should we view the dynamics of non-core compared to core revenues as we approach the end of this year? When will non-core revenues be removed from the model? And when will we be able to see the actual revenue performance?

Yes. Thanks, Scott. So the fact, like Jack described, we're turning from a core standpoint, from a little negative, negative 1% core organic growth rate in Q4 to positive here in 2024, at least by the exit and hopefully at 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 of years. Those will be a bit of a drag, but the main point here is that the core should be turning up 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 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.

Thank you. I appreciate it. I have a couple of questions. Mike, could you take a moment to explain the current sales approach? In the past, there was an emphasis on cross-selling, and there were opportunities to sell multiple products together. Is the strategy now focused solely on individual products? If that's the case, are all representatives responsible for selling every product? A brief overview of the current sales strategy would be helpful.

Yes, this is Jack. Regarding the sales approach, it is mainly product-based, supported by a field sales team. We also established an inside sales capability last year, and we're starting to see positive early results from that team, particularly with mid-market deals. Additionally, we will still have a few global account executives focused on larger cross-sell opportunities, and we've already seen some significant deals in Q4 driven by them. The model will continue to include inside sales and field sales, with a limited number of global account executives. In terms of our sales mix, we aim for a 50-50 balance between expansion and new business. Currently, we are more weighted towards expansion, and we plan to restore that balance to our historical figure of 50% expansion and 50% new this year.

I appreciate it. Mike, for 2024, what are the expectations regarding the free cash flow generated from EBITDA?

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

Okay. Just one last question from me. As we consider the organic and non-organic aspects, I think you addressed an earlier question about the decline primarily being attributed to the sunset assets, which you mentioned would take time to work off, around $30 million over several years. Could you clarify the sunset assets? Are the products in that category a one-time selection that you have decided to sunset, and it is not expected to change, or is there a possibility for variability in that selection? Please refresh my memory on how that process 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 emphasis on in terms of driving growth. At that point and as a part of that process, we identified the sunset assets. We made a revision to that about a year after where there were a couple of assets, frankly, that we realized had some growth potential, and there were others that we thought were better off being sunset. So we view that as a process that we've completed. 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 to include any election year bump. So there's none of that in there. In terms of what our longer-term target is for the business, it's for mid-single digits core organic growth. We know that once we get through 2024 and get the core organic growth motions working, we will turn our sights to some significant margin expansion beginning in 2025. We'll have the hindsight at that point to determine 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 part of this growth plan a couple of levers that we think will help us drive growth through time while reducing costs. One of those, for example, is the digital marketing capability and the ability to use organic search to drive pipeline. That involves some investment upfront but then you create a flywheel that enables you to generate ads for the sales team over time with increasing cost efficiency. In addition to that, 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 to deliver innovation and growth within a cost envelope that fits margin expansion. Where we can get a headcount arbitrage and manage our cost effectively to drive margin through time. Coming out of this, as we move into 2025 and beyond, we are targeting mid-single digits core organic growth and then targeting through time adjusted EBITDA margins between 30% and 35%, driven by those efficient motions in the growth model. We're also planning to look to turn acquisitions back on, and as we do that, we will get some operating leverage, which will 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 about the balance between M&A, potential share buybacks, and just the potential for debt pay-down? Just curious how you're thinking about capital allocation between those three buckets?

Yes. 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. We anticipate that continuing and filling the full buyback allocation of $25 million. So that, I think, is step one. On the acquisition side, again, I think we're looking at one, maybe two, but the internal plan is around one; if the right opportunities present themselves, maybe that becomes two deals this year. We've been in the market and actively looking at deals all year. 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. I wanted to spend time with the team focusing 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.

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 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 through straightforward expansion and then a new logo motion that has driven 80% by a point product sale and maybe 20% by cross-sell. That's consistent with what I was speaking of earlier regarding the composition of the sales force. We anticipate continuing to have a limited number of global account executives that are driving more of that cross-sell motion. But in general, for the vast majority, 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. 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.

Ladies and gentlemen, that concludes today's call. You may now disconnect.