Thank you for standing by, and welcome to the Upland Software Third Quarter 2024 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 investoruplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the third quarter 2024 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.

All right. Well, thank you, and welcome to our Q3 2024 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 will provide some detail on the Q3 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.

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 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 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. We beat our Q3 revenue guidance midpoint, and we met our adjusted EBITDA guidance midpoint. We welcomed 122 new customers to Upland in Q3, which includes 18 new major customers, and we expanded relationships with 312 existing customers, including 27 major expansions. These new and expanded customers have been across our portfolio and include a number of our new generative AI solutions. We continue to execute on our growth plan. As I said on our Q2 call, our core organic growth in any given quarter this year is going to bounce around a bit based on year-over-year compares, but we are still forecasting to exit 2024 with positive core organic growth in the fourth quarter setting us up for positive core organic growth in 2025. Q3 adjusted EBITDA was $14 million, which was up sequentially from $13.6 million in Q2. And as you can see from the midpoint of our Q4 guidance, we expect adjusted EBITDA to continue growing next quarter to $14.9 million, roughly a $60 million annualized run rate. And of course, we continue to see a meaningful increase in EBITDA next year, and we're targeting adjusted EBITDA of the low to mid-$60 million next year. So we are still setting up for 2025 with positive core organic growth and continued expansion of adjusted EBITDA. On the product front, in Q3, I'll note that we earned 72 badges in G2's Fall 2024 market reports across our portfolio of products. That's up from 56 badges in the summer 2024 reports. Upland RightAnswers, our AI knowledge management solution garnered an impressive 17 badges, while Upland BA Insight, our enterprise search solution, secured several new recognitions. Also in the quarter, we announced the availability of Upland BA Insight for Microsoft Azure AI Search in the Microsoft Azure Marketplace and online store and exchange providing applications and services for use on Azure. BA Insight customers can now take advantage of the productive and trusted Azure cloud platform with streamlined deployment and management. Built on Microsoft Azure AI Search, BA Insight for Azure AI Search combines the BA Insight user experience platform, which is called BA Insight SmartHub with over 90 connectors to enterprise systems. The solution securely brings user data into Azure AI Search and delivers intelligent actionable content and search experiences without bouncing between multiple systems, looking for the right information. And again, we're excited about BA Insight because those 90-plus enterprise connectors provide that needed last mile solution for enterprises looking to implement AI platforms within their environments. For the second year in a row, Upland RightAnswers has been named to the 2024 KMWorld AI 100, recognizing the top knowledge management companies leveraging the power of AI and other innovative software. This achievement supports Upland's and recognizes really Upland's extensive efforts in AI, integrating the technology and the products across the portfolio. And of course, we continue to release AI-powered innovations and customer solutions. With that, I'm going to turn the call over to Mike.

All right. Thank you, Jack. I'll cover the financial results for the third quarter of 2024 and our outlook for the fourth 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 Sunset asset revenue on the income statement. Total revenue for the third quarter was $66.7 million, representing a decrease of 10% year-over-year. Recurring revenue from subscription and support declined 9% year-over-year to $63.8 million. Perpetual license revenue declined to $1.1 million in the third quarter, down from $1.5 million in the third quarter of 2023. Professional services revenue was $1.8 million for the quarter, a 32% year-over-year decline. These revenue declines are consistent with the planned runoff of Sunset asset revenue. Overall gross margin was 70% during the third quarter, and our product gross margin was 72% or 75% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses for the third quarter of 2024, excluding depreciation, amortization, and stock-based compensation, were $35.6 million for the quarter or 53% of total revenue. This is in line with our expectations and reflects the sales, marketing, and product investments we've been making, as part of our growth plan. Our third quarter 2024 adjusted EBITDA was $14 million or 21% of total revenue, down from $16.2 million or 22% of total revenue for the third quarter of 2023. This adjusted EBITDA year-over-year decline is as expected, considering our growth investments and our decisions regarding Sunset asset. However, you can see our adjusted EBITDA growing sequentially each quarter this year from $13.1 million in Q1 to $13.6 million in Q2 to $14 million in Q3 here and to a projected $14.9 million in Q4 based on the midpoint of our guidance. This has us exiting 2024 at almost $60 million of annual run rate adjusted EBITDA, and we are targeting adjusted EBITDA to be in the low to mid-$60 million next year, which we will confirm and more specifically quantify with our 2024 guidance, as part of our Q4 earnings report. Also, I will note that in Q3, we recognized $9 million of deferred gain from the sale of half of our interest rate swaps a year ago. This recognition of this previously deferred gain was triggered by the $177 million paydown of debt during the quarter. The gain was recognized on our income statement in the interest expense net line item, as a one-time benefit in Q3. We anticipate continuing to steadily pay down our outstanding term loans with our cash flow generation on a monthly basis, resulting in relatively insignificant amounts of the remaining swap sale deferred gains to be recognized in future quarters. After this paydown of $177 million of our debt during the quarter, at the end of Q3, we had outstanding net debt of approximately $241 million, factoring in the approximately $60 million of cash on our balance sheet. At the end of Q3, our gross debt was approximately $301 million. We still have in place our variable fixed interest rate swaps, which effectively fixed the interest rate at 5.4% on approximately $257 million of our outstanding debt, as of September 30th, 2024. The remaining $45 million of our outstanding debt floats at an interest rate of SOFR plus 385 basis points, which was 9.1%, as of September 30th, 2024. Our revolver matured in August of 2024 with no amounts drawn or outstanding at the time of maturity. For cash flow, for the third quarter of 2024, GAAP operating cash flow was $4.3 million and free cash flow was $4.2 million, which was in line with our expectations. As a reminder, our GAAP operating cash flow and free cash flow last year in Q3, 2023 was benefited by the $20.5 million one-time cash gain from the sale of half of our interest rate swaps. I will note that our ongoing free cash flow generation is in addition to the approximate $60 million of cash on our balance sheet, as of September 30th, 2024. Now on to guidance. For the quarter ended December 31st, 2024, we expect reported total revenue to be between $65.9 million and $71.9 million, including subscription and support revenue between $60.2 million and $65.2 million for a decline in total revenue of 5% at the midpoint from the quarter ended December 31st, 2023. Fourth quarter 2024 adjusted EBITDA is expected to be between $13.4 million and $16.4 million for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guidance at the midpoint is an increase of 6% from the quarter ended December 31st, 2023, representing the first year-over-year quarterly increase in adjusted EBITDA since Q2 of 2022. For the full year ending December 31st, 2024, we expect reported total revenue to be between $272.6 million and $278.6 million, including subscription and support revenue between $256.6 million and $261.6 million for a decline in total revenue of 7% at the midpoint from the year ended December 31st, 2023. Full year 2024 adjusted EBITDA is expected to be between $54.1 million and $57.1 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 14% from the year ended December 31st, 2023. So again, I'll point out that adjusted EBITDA has been growing sequentially every quarter this year, and we expect to exit this year in Q4 at $14.9 million at the guidance midpoint, which is almost $60 million of annualized run rate. And so, with that, I'll turn the call back over to Jack.

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

And your first question comes from Jeff Van Rhee from Craig-Hallum Capital Group.

This is Daniel on for Jeff. I want to congratulate you on the quarter. I have a question regarding the recent cost reductions in OpEx, which have been showing positive trends. Can you provide some details about the changes that have been implemented and whether those adjustments are complete? Additionally, how do you view these changes? Should we consider this as a good run rate for '25, and how should we think about annualizing and projecting these figures moving forward?

Yes. So Daniel, costs are going to continue to come down. As you can tell, we've messaged and targeted increased EBITDA next year. So part of that increased EBITDA is going to be from continuing cost refinements We've, of course, had an infrastructure here at the company, where we could handle 4 to 5 acquisitions per year. We're obviously not doing that now. So we've got sort of some infrastructure costs and extra costs that we can take out of the business that do not relate to the growth investments that we've made. So there are cost efficiencies that we'll continue to recognize.

The one thing I would add to what Mike said is that within the growth investments, now that we are 1.5 years plus into this cycle, we are seeing what's working and what isn't working, and we're able to kind of turn up the investment on those motions on which we're getting a good return, and then we can adjust our spending in other areas. So overall, that gives us some efficiency and supports expanded margins.

Yes. And then just a high-level question, Jack, for you. Just on a very broad range of go-to-market changes that have been made, maybe just highlight in a little bit more detail some of the places, where you've seen the most success in terms of the correlation between those changes being made and where those are driving change.

I would highlight two main areas. First, we have established a modern digital marketing function within the company. Our efforts in organic SEO, product recognition on peer review sites, and the quality of our product marketing that supports sales enablement have all significantly improved compared to the past. This has resulted in notable increases in lead generation and the conversion of leads into our pipeline. Secondly, we have enhanced our sales capability by bringing in new sales management. The rigor and discipline in our sales teams are significantly better than they were a year or a year and a half ago. We're beginning to see this translate into bookings, which will help us achieve our organic growth target of low to mid-single digits in 2025. Additionally, we have invested in customer success, equipping our excellent customer success teams with tools for more strategic customer engagement, driving greater product utilization, and enhancing value for them, which will support higher renewal rates over time. Overall, we believe we are on a positive trajectory with substantial year-over-year reductions in EBITDA when looking at 2023, 2024, and projected trends into 2025.

And then just one for Mike. In terms of the strategic thinking on paying down the debt, I assume that's sort of setting up for refinancing. Just any thoughts on why now on the payment of the debt? And then just how that sets you up for maybe the next few steps, how a process of refinancing looks like, what you'll be looking to achieve there?

Yes, Daniel. So we paid down $177 million of debt in Q3. At the current interest rates, right, that's about $7 million a year of interest savings annualized. So there's a big incentive for us just to go ahead and take some of that excess cash on our balance sheet, pay down the debt, and enjoy the lower cash interest as a result. The timing for refinancing is sometime next year, fiscal year 2025. As you know, our debt matures in August 2026. The longer that we delay the refinancing, then the more interest savings because we've got a very attractive rate on our existing credit facility. So the longer that we hold in our existing credit facility, the better off we'll be just from an interest cost standpoint. So yes, that's the plan.

I'd now like to hand the call back over to Jack McDonald.

Okay. Great. Thanks very much for your time today, and we will see you on next quarter's earnings call.