Earnings Call Transcript - UPLD Q1 2023

Operator, Operator

Thank you for standing by and welcome to the Upland Software First Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. The conference call will be recorded and webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the first quarter 2023 earnings release, which was distributed today at 4 p.m. Eastern Standard 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. Sir, go ahead.

Jack McDonald, Chairman and CEO

All right. Thank you and welcome to our Q1 2023 earnings call. I'm joined by Mike Hill, our CFO. On today's call, I am going to start with a Q1 review, and following that, Mike will provide some detail on the numbers and our guidance. After that, we'll open it up for Q&A. But before we start, Mike will read the safe harbor statement. Mike?

Mike Hill, CFO

Thank you, Jack. So during today's call, we will include statements that are considered forward-looking. We do not intend or undertake any duty to release future-related information. Upland will refer to non-GAAP financial measures. Upland has provided reconciliations of these measures in our press release announcing our first quarter results. And with that, I'll turn the call back over to Jack.

Jack McDonald, Chairman and CEO

All right. Thanks, Mike. So the headlines for Q1 in the quarter we beat our Q1 revenue and adjusted EBITDA guidance midpoints. Our cash on hand as of March 31 was $258 million, and that's after generating $15.6 million of free cash flow in Q1. And again, we anticipate generating $30 million to $40 million of free cash flow in 2023, as we have previously indicated. In the first quarter, we expanded relationships with 333 existing customers, 38 of which were major expansions. We also welcomed 207 new customers to Upland in the first quarter, including 20 new major customers. New customer deals were distributed across our products and industry verticals. On the product front in Q1, I'll note that we hosted a webinar featuring Forrester to discuss the future of knowledge management and the beta release of Upland's Right Answers AI knowledge assistant. This new beta release utilizes open APIs so knowledge workers can streamline the creation of knowledge bases by simply requesting content related to their topic at hand and receiving real-time responses with full article content, summarization, and identification of key words. All of that is then fed into an enterprise system and knowledge base with integrations to key systems of record and enterprise workflows. On the FileBound side, we were once again recognized as a gold medalist and leader in enterprise content management in the data quadrant and the report from software reviews for document management and workflow automation capabilities. AccuRoute had another release in the quarter, this quarter extends MFP integrations with Lexmark. It increases DMS visibility and expands fax API support to ensure the security of personally identifiable information in highly regulated industries, such as healthcare. BA Insight, a product that we're very excited about, was recognized by KMWorld's 2023 list of 100 companies that matter in knowledge management. I think overall, on our growth plan, it's still early in the process, but we are making progress. We remain excited about the prospects and about building shareholder value over time. We look forward to sharing appropriate updates on our progress as we go. So with that, I'm going to turn the call over to Mike.

Mike Hill, CFO

Well, thank you, Jack. I'll cover the financial results for the first quarter, our outlook for the second quarter, and I'll reaffirm our guidance for the full year 2023. Total revenue for the first quarter was $77.1 million. Representing a decrease without FX impact; growth would have been roughly flat. Recurring revenue from subscription and support decreased 1% year-over-year to $72.9 million; without FX impact, recurring growth would have been 1% positive. Professional license revenue decreased to $2.6 million for the quarter. Overall gross margin was 67% during the first quarter, and our product gross margin remained strong at 68%. Operating expenses, excluding acquisition-related expenses and depreciation, were $37.8 million for the quarter. First quarter 2023 adjusted EBITDA was $17.6 million, or 23% of total revenue. For the first quarter of 2023, GAAP operating cash flow was $15.6 million. Working capital accounts for approximately $4.5 million, which temporarily improved our free cash flow generation in Q1. We do not expect these positive temporary timing differences to continue. As of March 31, 2023, we had $258 million of cash on our balance sheet, plus our $60 million undrawn revolver. We are issuing guidance for Q2 and the quarter ending June 30, 2023. Total revenue is expected to be between $69.8 million and $75.8 million, including subscriptions and support revenue. Full year 2023 adjusted EBITDA is expected to continue along the same lines. I'll turn the call back to Jack.

Jack McDonald, Chairman and CEO

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

Operator, Operator

Your first question comes from the line of Jeff Van Rhee.

Jeff Van Rhee, Analyst

Great, thanks, guys. A couple for me. Jack, the new growth plan. I think the outline last quarter was that you're thinking about €15 million spend, for a variety of reasons, just where are you in terms of putting that annualized amount to work, namely, what did you get done in Q1 in terms of that spending?

Jack McDonald, Chairman and CEO

It's still early, but we're moving with urgency. We've added a number of folks in digital marketing and sales. We're seeing great energy and obviously driving results as soon as we can.

Jeff Van Rhee, Analyst

Yes, I guess what I was saying is just more so if we're talking about three and a half, give or take –

Jack McDonald, Chairman and CEO

I'm not going to break out the dollar amount that we spent on the growth plan.

Jeff Van Rhee, Analyst

Could you comment on G&A being up from $14 million to $17 million sequentially?

Mike Hill, CFO

Yes, Jeff, this is Mike. Yes, we did have some accruals in the quarter on G&A added to bonus accruals. But those items tend to fluctuate from quarter to quarter. So there's a little bit of noise in Q1 but that's not unexpected.

Jeff Van Rhee, Analyst

Okay, macro conditions, we're hearing a lot of changes in buyer behavior. What did you observe at the end of the quarter and since then?

Jack McDonald, Chairman and CEO

We were pretty pleased with how the quarter turned out from a bookings perspective. We are cautious on outlook because we don't know what's coming. But in terms of our Q1 bookings, things came in where we were hoping they would come in, but again, what happens for the rest of the year is still uncertain.

Jeff Van Rhee, Analyst

Okay, that's it for me. Thanks.

Operator, Operator

And your last question comes from the line of Jake Roberge.

Jake Roberge, Analyst

Hey, thanks for taking my questions. I know there are some moving pieces with the products that need to be sunsetted. But I am curious how to manage tracking for some of your faster-growing products that you talked about prioritizing during this transition, and just on the macro as well as any product suites that have been more or less prioritized, given the changing demand environment?

Jack McDonald, Chairman and CEO

As I mentioned a moment ago, the demand environment in Q1 came in pretty much as we expected, and we had a relatively good quarter. In that regard, we'll see what the rest of the year brings. We have put in place a plan to prioritize investment behind those products that we think have the highest growth potential. It's still too early to report anything definitive there. I will say that we're seeing some nice activity in our knowledge management products, but we do see significant opportunities across a variety of our product groups.

Jake Roberge, Analyst

Great. Thanks. And then, is there any update on your plans for M&A? Given the macro uncertainty and compressions we're seeing in valuations, are you still actively looking at deals or is that something that's kind of put on pause until you sunset these products and make that the go-to-market investments that you're looking to do over the next year or so?

Jack McDonald, Chairman and CEO

We're definitely still looking at deals. We're actively in the market. I haven't seen the price adjustments in private market values that I would want to see. Of course, we've got capital, and we control the timing. So we're going to be patient and move when it makes sense. But as of right now, I haven't seen enough of a price adjustment to be super excited, but I'm sure it's coming.

Jake Roberge, Analyst

Great. Thanks for taking my questions.

Operator, Operator

There are no further questions at this time. Mr. McDonald, you'd like to close.

Jack McDonald, Chairman and CEO

Great. All right. Well, thank you so much, and we will see you on the next earnings call.

Operator, Operator

Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.