Thank you for standing by, and welcome to the Upland Software Second Quarter 2021 Earnings Call. At this time, all participants are in 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 second quarter 2024 earnings release, which was distributed today at 4:00 p.m. Eastern Time. If you have not received the release, it’s available on Upland’s website. I'd now like to turn the call over to John McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

All right. Thank you, and welcome to our Q2 2024 earnings call. I'm joined today by Michael Hill, our CFO. I'm going to start with our Q2 review. And following that, Mike will provide some detail on the numbers and our guidance. After that, we'll open the call up for Q&A. But before we get started, Mike will read the safe harbor statement.

All right. 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 the 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 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 financial 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. Here are the headlines on the quarter. We beat our Q2 revenue and adjusted EBITDA guidance midpoint. So beat those midpoints. We posted core bookings in excess of core churn, just like we did in Q1. So that's two quarters in a row, and that's the key point for this year, posting quarter after quarter of core bookings in excess of core churn. That's what's going to set us up for our target 3% core organic growth rate in 2025. I'd note that in this year, the core organic growth rate will bounce around a bit based on year-over-year comparisons; it's positive this quarter. But again, the meaningful part of this is putting up core bookings in excess of core churn quarter-by-quarter. Good news also on the adjusted EBITDA front. Q2 adjusted EBITDA, $13.6 million in the second quarter. That is up sequentially from $13.1 million in the first quarter. And as you can see by the midpoint of our guidance, we expect adjusted EBITDA to continue to grow each quarter this year. So again, $13.1 million in Q1, $13.6 million in Q2, $14 million in Q3, $14.9 million in Q4. So the plan is to exit the year at nearly a $60 million adjusted EBITDA run rate. So we're setting up for 2025 with positive core organic growth. We're going to be targeting that 3% number core organic growth next year and continued expansion of adjusted EBITDA to the mid-$60 million next year. So we believe, we've made the turn, both in terms of starting to show steps towards positive core organic growth and getting past the low point on EBITDA. And now with this quarter and the quarters going forward, we are bringing EBITDA up each quarter. So again, still in the early stages, but we are starting to see the ship turn here. So we welcomed 155 new customers to Upland in Q2, and that includes 17 new major customers. We also expanded relationships with 275 existing customers, including 41 major expansions. And I will say based on the growth investment that we've made in pipeline generation, SDR capacity, sales capacity, we are starting to see chunkier deals, larger ARR deals for our lead products, and that's a critical kind of green shoot. And so good news that we are starting to see those larger deals where, and it's their marketing-sourced pipeline, right? So the work that we've done on organic search, the work that we've done in terms of accessing intent data, having an SDR capacity to qualify these leads, the product marketing work that we've done, the investment in the sales team that we've done, it's starting to bear some fruit here. Again, I'll caution that it's early, but we're seeing those green shoots including chunkier deals. A few other points. We earned 56 badges in G2's Summer 2024 market reports that was across our portfolio of products. That's up from 44 badges in the spring 2024 reports. Our AI knowledge management solutions, Up and Right Answers in Upland Panveva, continue to garner numerous badges, while Upland Covidien, our AI-powered proposal management software, increased earned recognitions for another quarter in a row. Additional products to receive badges included Uplanded Genius, which is a computer telephony integration solution, which powers personalized customer service with AI, and Upland Interfax, which is a secure cloud-based fax service; and, of course, other products also on the badge list. And again, we are beginning to see more reviews and more engagement with G2 as a platform, and we expect more goodness to come from there. I would note, Upland Covidien continues to enhance the response and sales proposal process with a new generative AI model called Covidien AI Assist. Covidien is a leader in the RFP and proposal automation industry dedicated to helping teams uncover the right processes quickly for RFP response generation and create standout proposals and RFP responses. And this beta release of Qvidian AI Assist adds these powerful new AI features. And of course, we've also got the partnership with IBM that we've talked about before integrating Watson X AI capabilities into Qvidian. So these are both examples. When you look at Right Answers and Panveva, you look at Covidien, of where we are doing deep work to integrate AI capabilities into our products. And of course, these were product initiatives that began well over a year ago that are now beginning to come to market, in some cases, in beta, in some cases, generally available. And also note a partner announcement Upland and Ramot, a global leader in cloud-based RIS, PACS radiology solutions for imaging centers and teleradiology providers, announced the milestone transmission of the 40 millionth fax through the integration of Ramot PowerServer and Upland Interfax. So it's Interface's robust security features, including HIPAA compliance and PIA compliance, complement PowerServer's secure HIPAA-compliant architecture. And so we're seeing with our secure file transfer solutions, some great growth characteristics as are also high-margin products and really seeing some success there in health care and financial services, but seeing an acceleration of that, which is great to see. I also wanted to note on Upland Altify. During the quarter, we announced the 9.12 release, which contained major enhancements to transform the customer experience with Altify's Salesforce native products. And of course, Altify is a product that enables B2B enterprise sales forces to coordinate activities, deploy methodology in a super-efficient way, and do the kind of account planning and white space analysis that can really move the needle in terms of sales generation, and of course, adding our AI capabilities to that platform. And Altify is Salesforce native, so the Salesforce partnership has been great for us and at 9.12, again, just the next step in Altify's evolution. So a great quarter, another step along the way towards driving growth and driving margin expansion. And with that, I'm going to turn the call over to Mike to review the numbers and guidance. Mike?

All right. Thank you, Jack. I'll cover the financial results for the second quarter of 2024 and our outlook for the third quarter and full year 2024. These results and our outlook for 2024 reflect our continued incremental sales, marketing, and product investments pursuant to our growth plan as well as the previously announced runoff of the Sunset assets. So on the income statement, total revenue for the second quarter was $69.3 million, representing a decrease of 7% year-over-year. Recurring revenue from subscription and support declined 7% year-over-year to $65.5 million. Provincial license revenue increased to $1.7 million for the second quarter, up from $1.3 million in the second quarter of 2023. Professional services revenue was $2.1 million for the quarter, a 23% year-over-year decline. These revenue declines are consistent with the planned runoff of our Sunset assets. Overall gross margin was 70% during the second quarter, and our product gross margin was 31%, and that's 75% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses for the second quarter, excluding depreciation, amortization, and stock-based compensation, were $37.9 million for the quarter, or 55% of total revenue. This is in line with our expectations and reflects the sales, marketing, and product investments we have been making as part of our growth plan. Our second quarter 2024 adjusted EBITDA was $13.6 million or 20% of total revenue, down from $16.6 million or 22% of total revenue for the second quarter of 2023. This adjusted EBITDA year-over-year decline is generally as expected, considering our growth investments and our decision regarding Sunset assets. However, as Jack said, you can see our adjusted EBITDA growing sequentially each quarter this year from $13.1 million in Q1 to $13.6 million this quarter in Q2 to $14 million in Q3 and $14.9 million in Q4 based on the midpoint of our guidance. So this has us, as Jack said, exiting 2024 with almost $60 million of annual run rate adjusted EBITDA, setting us up for the mid-$60 million next year. For cash flow, for the second quarter of 2024, GAAP operating cash flow was $5.5 million, and free cash flow was $5.2 million, which is in line with our expectations. Our ongoing free cash flow generation is in addition to our approximately $232 million of cash on our balance sheet as of June 30, 2024. At the end of June, we had outstanding net debt of approximately $247 million after factoring in the cash on our balance sheet. At the end of Q2, our gross debt was approximately $479 million, of which $257 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 in August of 2026. The remaining approximately $222 million of term debt now flows at an interest rate of SOFR plus 385 basis points, which was 9.2% at June 30, 2024. I will also note that we used $3 million of cash to buy back approximately 1 million shares of common stock during the second quarter under our limited stock repurchase program that began in early September of 2023. This concluded our $25 million stock buyback plan with a cumulative total of approximately 6.5 million shares repurchased. Now on the guidance. As described on past calls, the following guidance continues to reflect a significant incremental sales, marketing, and product investments that 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. Also, I will note that we have raised our full-year 2024 guidance midpoint for total revenue and adjusted EBITDA by the amount of the Q2 guidance midpoint beats. So for the quarter ending September 30, 2024, we expect reported total revenue to be between $63.2 million and $69.2 million, including subscription and support revenue between $60.1 million and $65.1 million for a decline in total revenue of 11% at the midpoint from the quarter ended September 30, 2023. Third quarter 2024 adjusted EBITDA is expected to be between $12.5 million and $15.5 million for an adjusted EBITDA margin of 21% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 13% from the quarter ended September 30, 2023. For the full year ending December 31, 2024, we expect reported total revenue to be between $269.6 million and $281.6 million, including subscription and support revenue between $254.1 million and $264.1 million for a decrease in total revenue of 7% at the midpoint from the year ended December 31, 2023. Full-year 2024 adjusted EBITDA is expected to be between $52.6 million and $58.6 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 14% from the year ended December 31, 2023, and again, I'll point out, as both Jack and I have mentioned, that these guidance points represent sequentially growing quarterly adjusted EBITDA for every quarter this year, exiting the year in Q4 at $14.9 million at the implied guidance midpoint, which is almost $60 million of annualized run rate. So, with that, I'll pass the call back to Jack.

All right. Thanks, Mike. Let's open the call-up and take any questions there might be.

All right. Perfect. One on your telephone keypad. That number again is star followed by the number one. Our first question comes from the line of Ian Black from Needham.

This is Ian Black on for Scott Berg. Core bookings have exceeded core churn, again, as you note, but how far through the go-to-market changes is the Company now?

I would say that we're about halfway through that process in the sense that we've put in place the lead generation and lead qualification teams, we've put in place the demand generation teams, we put in place the inside sellers. We have upgraded our field sales force. We have brought in new sales leadership. And we are seeing the results of that in terms of significant increases in pipeline generation and now beginning to see some chunkier sales hitting, which is great to see across a few of the products. And so the work has been done, and now we're starting to see the fruits of those labors begin to ripen here. So we feel good about where we are and execution now quarter-by-quarter. At the same time, part of that growth investment was on product and cloud ops, and we're seeing the benefits of that as well in our renewals numbers. And you put those two together, and we're seeing, again, two quarters in a row of positive core net ARR. Now I realize that's only the beginning. But we're feeling good about Q3 in the second half of the year. And that should set us up to attack our 3% core organic growth target next year. And again, exiting the year at a $60 million adjusted EBITDA run rate with a goal to get to the mid-$60 million next year. So if this business troughed at sort of a core organic growth rate of negative 1% and $55 million of EBITDA, we see now we've made that turn and we're going to get this thing back to at least low single digits next year with mid-$60 million having made the turn. And then, of course, we want to take it higher from there.

Our next question comes from the line of Jeffrey Van Rhee from Craig Hallum.

This is Dan on for Jeff. Just starting off just on the Sunset assets. You guys do a great job of getting the 10-Q out promptly. Looks like there's about $8.5 million still of sunset assets. Just thoughts on the pace of roll off of that and how we should expect that to unfold. It looks like year-over-year, that's down maybe about $5 million. Should we expect sort of on an absolute value basis, roughly a similar pace of roll-off? Or just how should we be modeling that?

Yes, Daniel, this is Mike. So just from a modeling standpoint, I think it's going to be very consistent with what we've said in the past. We've got about $30 million of Sunset asset revenue here in calendar 2024. Next year, 2025, that's going to decline to about half, call it, $17 million or so next year. And then in 2026, it will have again down to somewhere around $8 million, $8 million, $9 million. So that's sort of the pace of the runoff.

And then any thoughts on, especially as a point of being considering M&A, just what the strategy is for tackling the debt balance and as we get incrementally closer to 25%, just how you envision the path toward refinancing?

Yes. This is Jack. So we anticipate doing a refinancing in the first half of 2025. So that's the plan, and we'll execute against it then.

Okay. And then just last for me. Digging down sort of to the product level, as you look to the product portfolio and for weakness.

Well, a number of products where we saw some highlights in Q2. One is Altify, which is the B2B sales enablement solution. I mentioned earlier, we saw some good chunky deals there. BAI, which is our AI-powered enterprise search solution, where we've got a growing partnership with Microsoft, where our connectors are used as a part of enterprise cognitive AI for Azure implementations. We're seeing some nice momentum there. We remain positive on our Right Answers and Paiva knowledge solutions, which have applications in contact centers in a variety of industries, including a lot of highly regulated industries. So continuing to see positive results there. We're seeing a nice turnaround in Mobile Commons, which, again, still early, but that is our mobile text messaging solution. So when we look at our key growing products, the work that we've put in over the last 1.5 years in terms of the product investment, cloud investment, positioning these products appropriately, getting them into the stream of commerce by upgrading our organic search efforts. For a lot of these products, 1.5 years ago, our search rankings were not on the first page. And now we've got pretty much all first-page rankings. We've got 18 number one rankings and double that number top five rankings. So I mentioned where we are with G2, still a ton of work to be done, but those badges are part of the recognition, also increasing the number of reviews out there. These are good products. We have not done a good enough job marketing and selling them. That's one of the reasons we brought in the HGGC investment a couple of years ago focus the product portfolio and committed to this $20 million, $19 million a year growth investment. So we've been hard at it, and we're starting to see the results of it. Obviously, we're learning month by month, quarter by quarter, making tweaks or are things we can be doing better. We're also seeing opportunities to toggle up investment in some areas, toggle down investment in others. But that's the basic take on the products where we're seeing success. And again, we feel good about where we're positioned, but we just need to execute quarter-by-quarter.

And then just one last for me for Mike. Just on gross margins, can you help us sort of cut through as the business is sort of transitioning out of the content assets? It's hard to tell the trajectory on gross margins was, let's say, 72% Q4 '23, up to 75%, down to 73%. It's hard to read the trajectory there. How should we be modeling there?

Yes. I think over time, Daniel, the margins will gradually improve a little bit as those sunset assets decline. Those are generally lower-margin products, even gross margins. So now I'm not talking about a lot, but sort of tens of basis points kind of improvement over time gradually.

Okay. That's helpful. That's it for me.

Our next question comes from the line of Alex Sklar from Raymond James.

This is John on for Alex. Jack, I was curious maybe if you could comment on sales cycles you're seeing in the market. Some companies like we have been calling out elongated sales cycles. Just curious if you could speak to what you're seeing and maybe how that trends over the last 90 days. And I have a few follow-ups.

No. We have not seen a lengthening of sales cycles. Now maybe we're idiosyncratic in that regard because we've really started ramping up our marketing efforts over the last 18 months. But gosh, if anything, we saw a couple of $250,000 ARR deals marketing source that were sourced and closed in this quarter. So for the right AI-powered solutions in the marketplace, we're seeing demand not seeing lengthening now you ask me next quarter, maybe we'll have a different result, but we didn't see that in Q2.

That's helpful there. And that leads into my next question on the major account expansions, which were up nicely sequentially and year-over-year. I know you mentioned some in the prepared remarks, but just any commentary on what's driving the success there? Commonality, maybe geographically? And how we should think about the trajectory of that metric? Do you expect to kind of hit a near-term trough here?

I want to ensure I understand your question regarding the major account expansion you mentioned. Part of our growth strategy involved bringing in new customer success leadership, including our Chief Revenue Officer, Chief Sales Officer, and Chief Customer Success Officer from Infor. We've implemented a new technology stack in customer success and have been investing in our teams to shift from a reactive to a proactive approach, focusing on delivering value. Although we are still early in this transition, the level of discipline and rigor in this area has significantly improved compared to last year. I am optimistic that we will see enhancements in both Gross Dollar Retention Rate and Net Dollar Retention Rate. Over the past year, our Net Dollar Retention Rate has increased, approximately by 100 basis points, and I believe we are currently at around 96%, according to our year-end disclosures for 2023. Our aim is to raise that by a few more hundred basis points over the next few years, and I believe we are progressing toward that goal. However, much work remains to be done. Over the last couple of years, expansions have accounted for a significant portion of our bookings, but I expect that to decrease as new client acquisition efforts ramp up. The investments we have made in generating new opportunities are primarily geared towards attracting new clients. We are also enhancing our customer marketing efforts and utilizing more of our sales capacity to engage our existing customer base, which should help drive larger expansion opportunities. There is potential value we have yet to fully tap into with our current customers, which is a key aspect of our growth strategy. So far, the indicators are promising, though there is still substantial work ahead.

Okay. That's helpful. And then just last one for me. I realize there are moving pieces internally that you've been talking about here. But just any commentary you can share on the acquisition pipeline going forward. I think last quarter, you mentioned you're always looking. Just curious what you're seeing from private multiples and how we should think about M&A as we move forward in the model?

Private multiples remain high. I see our focus, and we will stay in the market and continue to monitor opportunities and to be opportunistic. But we are focused on driving organic growth. That's how we're going to create value over the next couple of years here. We're also focused on margin expansion and then, of course, generating cash flow and continuing to pay down debt. So that's, as we look out over the next 12 months, that's really the core focus. But of course, we always keep our eyes open. And I have not seen any kind of screaming opportunities out there. I just think the private market multiples have remained too high, at least for us based on where our stock is trading today, making it hard to justify.

That's helpful color there.

And as a reminder, our next question comes from the line of David Hynes from Canaccord Genuity.

This is Dan Reagan on for DJ. Maybe one for Jack to start. So you guys are seeing some nice returns from your sales and marketing investments across areas like search intent, SDR capacity. So clearly, you guys are positioned to have that nice EBITDA guidance path from here. But I'm wondering how you're thinking about the pace of sales and marketing investments from here? And then also just any thoughts around the productivity of these investments as they continue to ramp.

So I think we are fully invested in terms of execution of the plan we originally laid out. So you'll recall, it was a $19 million annual investment, $5 million of that was on the product side, and a lot of that had to do with a chunk of that has to do with standing up our Indian center of excellence; we went from zero to 150 developers with opportunities to grow that further, super-efficient development pods that we're able to put in place there. Then you had a $14 million spend on sales and marketing, and that has been fully deployed. There, as we move forward, we don't see a need to increase that investment. In fact, we are seeing opportunities to better target the money we're spending. We've got all the systems in place. We've got the processes in place. Now it's about tuning it. Many of these motions, you think about organic search, for example, it costs more to get those rankings in place than it does to maintain them. So the intent data that we are accessing now, the forward roll starts to get on positive reviews, getting your content out in the market. So a lot of those things have been done. And I think those motions, frankly, are getting more efficient through time. And that's one of the reasons why we're starting already to see some margin enhancement, and I think you'll continue to see that in the next year, again, where we're targeting mid-60s. And then we'll be targeting something with a seven handle on it for 2026. Again, all organic.

Got you. Awesome. And then you highlighted chunkier deals in larger ARR lands for core products. Can you talk a little bit about what the average deal size increase is looking like? And where you're seeing the most traction?

Yes. So if you look at our business, 1,800 enterprise customers drive more than 90% of our revenue, and the average ARR across those customers is $150,000. Now sometimes you go right in with a chunky opportunity that's in that size range or bigger. Sometimes you're starting with $25,000 or $50,000 kind of land and expand opportunity. Over the last couple of years, not to put too fine a point on it, but we're just seeing more of the small stuff. And what we're seeing now, and again, I want to emphasize it's early, but the investment in product marketing, the investment in demand gen, the new sales leadership that we've got, getting tools in the hands of some of the great salespeople we've always had on board, and then adding new sales talent, kind of getting our mojo back a little bit on going after bigger opportunities. And the investment we've done on the product side, Dan Doman's team has done a tremendous job over the past couple, three years, getting us set up for this. So addressing any stability issues, addressing product feature issues, getting us to where we needed to be, seeing the opportunity around AI, and starting these efforts well over a year ago so that for products like Right Answers, we were able to really be the first contact center platform out there, one of the first to bring to market a chat GPT integration. So that's what we're starting to see; some of those chunkier deals. And again, it's going to be quarter-by-quarter, but we're optimistic.

Awesome. And then just as a final one, circling back to the customer expansion discussion and kind of building off comments that you just made here. What does the current growth mix look like between expansion revenue and net new revenue today? And then with the progress that you're making with all of those sales and marketing investments, where do you expect that this mix will go over the next few years?

Yes. I would say at the trough for us a couple of years ago, you were looking at 70% expansion, 30% new. The historical average for this business has been 50-50, which is where it should be running, and we're sort of getting back to that now. But with the investment we're making, I would see it going to more like 60-40. 50 new, 40 expansion. I don't know that, that will be this year's statement; it's probably more of a next year statement. But that's roughly where I see it.

At this time, there are no more questions in the queue. I'll turn it back over to Jack McDonald for closing remarks.

Okay. I just want to thank everyone for their time today, and we will see you on our next quarterly earnings call. Thank you so much.

And that does conclude today's presentation. Have a pleasant day.