Earnings Call Transcript - UPLD Q1 2022

Operator, Operator

Thank you for standing by and welcome to the Upland Software First Quarter 2022 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a Q&A session. 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 first quarter 2022 earnings release, which was distributed today at 4 o'clock P.M. Eastern Time. If you've not received the release, it's available on the Upland website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Jack McDonald, Chairman and CEO

Thank you. And welcome to our Q1 2022 earnings call. I'm joined today by Rod Favaron, our President, and Mike Hill, our CFO. On today's call, I will start with some opening comments on our Q1 results, then Rod will provide some color around customers and product developments. Following that, Mike will provide insights on the Q1 numbers and our guidance. After that, we'll open the call up for questions. But before we get started, Mike, could you read the Safe Harbor statements?

Mike Hill, CFO

Yes. Thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meaning of the securities laws. These statements are subject to risks, assumptions, and uncertainties that could cause our actual results to differ materially. A detailed discussion of these risks and uncertainties is contained in our annual report on Form 10-K as periodically updated on our quarterly reports on Form 10-Q 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 to 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 first-quarter and full-year 2022 results, the first-quarter 2022 results, which is available on the Investor Relations section of our website. Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures, because the information that is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, I'll turn the call back over to Jack.

Jack McDonald, Chairman and CEO

Alright. Thanks, Mike. So Q1 was a strong quarter and a great start to the new year. Here are the headlines. We beat our midpoints on revenue and adjusted EBITDA. We also outperformed our plan on operating and free cash flow. We generated $8 million in free cash flow in the quarter, and that's after substantial acquisition expenses from the two acquisitions we announced in the quarter. Rod is going to speak to this later in the call, but we had a good bookings quarter. In addition to that, we announced a host of product improvements in the quarter, including major new releases for AccuRoute and Kapost, and Upland mobile messaging. All of that reflects our increased commitment to product innovation. Additionally, we announced the opening of our Center of Excellence, a development operation in India, which provides a cornerstone for our multi-market global product development strategy. We also closed two strategic and accretive acquisitions in Q1, Objectif Lune and BA Insight, further building our product library and customer base, particularly strengthening our document workflow product family. Finally, we remain active in the market for additional acquisitions and are positive on our outlook for the year. With that, let me turn the call over to Rod.

Rod Favaron, President

Thank you, Jack. Good afternoon, everyone. I'll start on the sales side, providing a little more detail on some of Jack's comments. As Jack mentioned, Q1 was a good bookings quarter. In the quarter, we expanded relationships with 280 existing customers. 49 of those deals were major expansions. We also welcomed 120 new logos to Upland in the first quarter, including 25 major new customers. Our new customer sales were well distributed across our products and industry verticals. We also had a good expansion quarter across our products. Specifically, our Upland Mobile Messaging product, which is our text messaging product, and Altify, our sales enablement product for account-based selling, both had strong expansion quarters. Q1 was also a strong quarter for selling our Premier Success Plans. As a reminder, our Premier Success Plans are subscription service packages that give our customers high-fidelity support to help them be successful. Switching over to product, we had nine major releases and 11 minor feature pack releases. Let me provide some detail on some major accomplishments in the product innovation area. Kapost, our content operations platform, announced new functionality to support dynamic content creation processes and cross-functional collaboration. With Kapost, we continue to help our customers scale content and engage audiences with solutions for the most complex B2B marketing organizations. We delivered a major new release for Upland mobile messaging, our enterprise messaging product, as we moved that product onto the Snowflake database, dramatically improving product performance and scalability. AccuRoute, our content capturing routing platform, further solidified its position as the leading bridge between customers' on-premise applications and Cloud solutions. When we announced that the product expanded into critical integrations, like electronic medical records, and launched new machine-learning capabilities to improve data collection and overall user experience. FileBound, recognized as the gold medalist and leader in the 2021 enterprise content management data quadrant report from software reviews, focuses on document management and workflow automation. Furthermore, we opened our first R&D center of excellence located in India during Q1. We've already made multiple hires for the core team and senior leadership roles. Over the next 12 to 18 months, we intend to significantly scale our full-time R&D employee presence in that market, further leveraging our offshore operating model. With that, I will turn the call over to Mike.

Mike Hill, CFO

Thank you, Rod. I'll cover the financial highlights for the first quarter, along with our outlook for the second quarter and full-year 2022. On the income statement, total revenue for the first quarter was $78.7 million, representing a 6% year-over-year increase. Recurring revenue from subscription and support increased 4% year-over-year to $73.6 million. Professional services revenue was $3.3 million in the quarter, marking a 12% year-over-year increase. Overall, gross margin was 69% during the first quarter, and our product gross margin remains strong at 71%, or 75% 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 $36.1 million in the first quarter, or 46% of total revenue, all generally as expected. Acquisition-related expenses were approximately $10.4 million in the first quarter, aligning with our plan. Our adjusted EBITDA for Q1 2022 was $23.4 million, or 30% of total revenue, up from $22.8 million, or 31% of total revenue for Q1 2021. For Q1 2022, GAAP operating cash flow was $8.2 million, and free cash flow was $8 million, even with $10.4 million of acquisition-related expenses in the quarter. We are successfully generating substantial GAAP operating cash flow and free cash flow, even after acquisition-related expenses. We are targeting $30 million to $40 million of free cash flow this year in 2022, but it will be back-end weighted given the transaction and transformation costs from our two recent acquisitions. This ongoing free cash flow generation is in addition to our existing liquidity of approximately $190 million, comprised of about $130 million of cash on our balance sheet as of March 31, 2022, plus our $60 million undrawn revolver. As of March 31, 2022, we had outstanding net debt of approximately $397 million after factoring in cash. Our net debt leverage is currently around 4.0 times based on the midpoint of our 2022 adjusted EBITDA guide. I will note that principal payments on our term debts are 1% per year, or about $5.4 million per year, with the remaining balance maturing in August 2026. The interest rate on our outstanding term debt is locked at 5.4%, making our annual cash interest payments approximately $30 million at our current debt level. Additionally, I will point out that our term debt has no financial covenants on current borrowings. In regard to income taxes, Upland currently has approximately $366 million of total tax carryforwards, with around $211 million available for utilization prior to expiration. We still expect around $5 million of cash taxes per year. For guidance, for the quarter ending June 30, 2022, Upland expects reported total revenue to be between $77.5 million and $81.5 million, including subscription and support revenue between $72.7 million and $76.3 million, for growth in total revenue of 4% at the midpoint over the quarter ended June 30, 2021. In the second quarter of 2022, adjusted EBITDA is expected to be between $23.4 million and $25.4 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guidance at the midpoint represents an increase of 3% from the quarter ended June 30, 2021. For the full-year ending December 31, 2022, Upland expects reported total revenue to be between $313 million and $329 million, including subscription and support revenue between $293.1 million and $307.5 million for growth in total revenue of 6% at the midpoint over the year ended December 31, 2021. Full-year 2022 adjusted EBITDA is expected to be between $95 million and $103 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint represents an increase of 2% over the year ended December 31, 2021. With that, I'll pass the call back to Jack.

Jack McDonald, Chairman and CEO

Alright, thanks, Mike. We are ready to open the call up for questions.

Operator, Operator

Our first question is from Scott Berg with Needham. Please proceed.

Scott Berg, Analyst

Jack, Rod, and Mike Hill as well, congrats on the quarter and thanks for taking my questions here. I guess the first question since Rod is on the call, we'll probably direct this one his way on the sales in the quarter. You characterized that as good bookings? How should we think about your progress in cross-selling different modules to existing customers? I know historically a lot of your expansions and higher net dollar retention numbers have been driven by up-sells, more than cross-sells, which is slowly getting up in terms of your opportunities to cross-sell other products. Thank you.

Jack McDonald, Chairman and CEO

Thanks for the question. As I mentioned, bookings were good and expansion was particularly strong. Our cross-sell continues to improve, and the cross-sell pipeline is growing as we want it to. The cross-sell deal closings have continued in that same good fashion as the quarter was, I would say. What stood out in the quarter that was better than just good was expansions.

Scott Berg, Analyst

Okay. Mike, from a follow-up perspective, your adjusted EBITDA margins, at least by my math, were just below 30% for the first time in a really long time. It looks like all of your expense areas, at least as a percentage of revenue, were nominally higher than they have been over recent quarters. Could you help us understand what may have driven the extra costs in the quarter? I saw what the guidance was for the rest of the year; it sounds like you're moving it up a little bit. But how should we think about the model, maybe over the intermediate term next 12 months and 24 months? Is this low at 31%, 32% the right way to think about the near-term model, or are there some opportunities to move that needle? Thank you.

Mike Hill, CFO

Yeah, Scott. 31% is the way to think about it for the year; that's unchanged in our guidance. As you may recall, we typically see our lowest EBITDA margin for the year in the first quarter because of payroll taxes. As those tax liabilities cap out, our EBITDA margins typically increase throughout the year. So we generally start with the lowest margins and end with the highest, giving an average of 31%. Going forward, with additional acquisitions, we still see our back office shared service organization in G&A scale leverage. With ongoing acquisitions, we're targeting a $40 million acquired revenue run rate a year, anticipating margins improving by 50 basis points to 100 basis points, possibly more as cost efficiencies scale. So really no changes on margins.

Scott Berg, Analyst

That's all I have. Thanks for taking my questions, everyone.

Operator, Operator

Thank you for your question. Our next question is from Terry Tillman with Truist. Please proceed.

Unidentified Analyst, Analyst

Oh great, thanks for taking the questions. This is Robert on for Terry. Just starting off, curious to get a rough update on headcount and whether go-to-market hiring is going to plan. Specifically around the global accounts team, how is capacity there and said differently, I think Rod mentioned last quarter that their mission in life is to cross-sell. So how is life going?

Mike Hill, CFO

Yeah, that's a good question for me. Let me start with the headcount question. Not including solutions consultants, our overall sales headcount, including leadership, is right at 90 people. I think that is very close to our planned number. We do have a few people that we have to replace from time to time like everybody else, but I think that's very close to what we planned. So there's a quick answer to the headcount question. On the global accounts side, cross-selling is an important part of that team's mission. The way to think about that team is if I’m a Global Account Manager and I have 10 customers that add up to $10 million in revenue, we challenge those guys to bring us back more revenue than they started with. They have to ensure the customers are being retained and they are doing expansion or same-store sales. Then they must cross-sell. So those three levers add up to the outcomes we expect from our biggest customers. If you compare the global account cohort group with the overall business, they are outperforming and doing a nice job. They had a good Q1 for that global account cohort group. Sometimes on a given quarter, it's a little stronger cross-sell, a little stronger expansion, or sometimes stronger renewals. We’d like all three to hit at once, but they don’t always align. That's how we measure that team and we're quite happy with where they are right now in performance relative to the overall portfolio.

Unidentified Analyst, Analyst

That's great. Thank you. There's just one more for me. Curious to get more color on the M&A pipeline just broadly. Have evaluation reductions in public markets hit the private markets in a meaningful way? If so, has there been any impact on the attractiveness of private market deals versus perhaps allocating capital to buybacks or strategic alternatives? Thanks.

Mike Hill, CFO

Regarding acquisitions. We're in a position of strength here and we control timing. We've got liquidity and cash flow along with a strong pipeline of deals. We continue to monitor the market and weigh our options, and we will execute when it makes sense. We announced two strategic and accretive acquisitions in the first quarter, so we're off to a strong start for the year. Regarding stock buybacks or other strategic alternatives, it's our policy to not comment on speculative transactions of any type involving the company's securities or the presence or absence of discussions related to such transactions.

Unidentified Analyst, Analyst

Great. Thank you.

Operator, Operator

Thank you for your question. Our next question is from Jeff Van Rhee with Craig-Hallum Capital Group. Please proceed.

Unidentified Analyst, Analyst

Hey guys. This is Aaron on for Jeff. Nice quarter. Thanks for taking my questions. First question, just curious, from a macro-environment perspective, if you've seen inflation, fears of recession, or anything going on in Ukraine, have you seen any meaningful impact to your business from that?

Mike Hill, CFO

Thanks for the question. Regarding Ukraine and Russia, we really have no exposure there. We had a few contractors there, but nothing material — no significant exposure at all. Regarding our outlook generally, as our guidance indicates, we maintain a strong outlook for the year.

Unidentified Analyst, Analyst

Okay. And then next one, just curious, given some of the market uncertainty and everything else going on, has anything changed in your outlook on the M&A front as far as capital allocation? M&A versus operating free cash flow?

Jack McDonald, Chairman and CEO

As I mentioned earlier, we're in a position of strength when it comes to M&A. We've got liquidity, and we can execute when we’re ready. There’s a strong pipeline of deals, and we’re monitoring the market. We started the year strong with two strategic, accretive acquisitions in the first quarter, so we’re off to a good start there.

Unidentified Analyst, Analyst

And then last one, Mike, just looking at some of the expense lines, it looks like G&A was a little higher on a non-GAAP basis this quarter. Is there anything to call out there as being different than expected, and how should we think about that modeling going forward?

Mike Hill, CFO

I think generally G&A will probably trend down as we move through the year. There are some extra costs in G&A this quarter, like payroll taxes that are typically front-loaded in the calendar. But you’ll probably see a trending down as we progress through the year.

Unidentified Analyst, Analyst

Perfect. Thanks. I appreciate it, guys.

Operator, Operator

Thanks for your question. Our next question is from Brent Thill with Jefferies. Please proceed.

Luv Sodha, Analyst

Hi. This is Luv Sodha on for Brent Thill. Thank you for taking my questions. Maybe the first one for Jack or Rod on the overall demand environment that you're seeing. The last question talked about the macro stuff. In a rising rate environment, how could you help us categorize the demand that you're seeing out there from customers? And will they maintain the same appetite to spend going forward?

Rod Favaron, President

I think one of the ways we measure demand is by what I'll call our inbound new logo pipeline. These are people who know our brand and products. They're coming to us, raising their hand, showing intent and indicating interest in our products. The pipeline created in that cohort group has been consistent month over month for the last 12 months. I have not seen a shift in inbound demand. As an anecdote from Q1, we had our price increases; it was our best price increase quarter in a while. Customers showed a willingness to spend more, and we intend to continue that pricing motion as we roll out more increases which we, after discussing with customers, feel is viable as the demand is there and the strategic nature of our products allows us to achieve this. All indicators from the demand side are still healthy; nothing out of the ordinary.

Luv Sodha, Analyst

No, that's super helpful. I guess as a quick follow-up, could you talk about the magnitude of those price increases? Is there room to do more given the higher inflationary environment we're experiencing?

Rod Favaron, President

We actually haven't announced any numbers regarding the magnitude yet, and it will be somewhat different based on product and sector. I'd rather not get into specifics. What I will say is we believe there’s an opportunity for the increases to be larger than historical, and frankly, I think we're not alone in that. If you look around the sector, that's part of this inflationary reality.

Luv Sodha, Analyst

Got it. And maybe one on organic growth, if I may. Could you discuss that and how we should think about the comparisons? Obviously, the election-related spend comparisons get easier in the back half of the year, and we do have a mid-term election in the U.S. coming up. Could you talk about the cadence of that and how we should think about the back half of the year in terms of organic growth? Thank you.

Jack McDonald, Chairman and CEO

We expect that core organic growth, which backs out presidential political revenues and overage charges, will strengthen in terms of organic growth throughout the year. There’s no change from our steady-state target of low-to-mid single digits on core organic growth. Regarding the political side, the most significant impact will be from the quadrennial presidential elections. While we may see some impact from the mid-terms, the more significant numbers will come from the presidential. We have indeed made progress with some large political groups. Rod, do you want to talk about the Q1 UMM bookings around political?

Rod Favaron, President

Sure. Our related political revenue is only tangentially related to any major presidential election, focusing instead on commitments as opposed to just mid-term relationships. We've had long-term customers decide to engage us at higher volumes, but we subtract out the presidential peak and valley information when discussing organic growth numbers.

Luv Sodha, Analyst

Got it. Perfect. Thank you.

Operator, Operator

Thank you for your question. Our next question is from Jake Roberge from William Blair. Please proceed.

Jake Roberge, Analyst

Hey guys, congrats on the great quarter and thanks for taking my questions. I wanted to step back and look at 2021. There were several headwinds impacting the business, including pipeline issues from the sales restructuring and tough comps related to the 2020 election. But when I look at the model today, am I correct in thinking that the trough was likely in Q3 and Q4 of last year, and that these issues should largely be behind the business? Can we get back to a steady cadence of low-to-mid single-digit organic growth and margin expansion? I'm trying to think about how we move throughout the year.

Mike Hill, CFO

Yes. So core organic growth for 2021 came in at around 4%. Core organic growth excluding presidential political revenues and overage charges, as you mentioned, was impacted by pandemic-related churn. As we look at this year, we see core organic growth strengthening through the year. Additionally, as I’ve said before, we have an average contract duration of 18 months; thus, any pandemic-related churn has a delayed revenue impact. However, directionally, we see core organic growth improving as we progress throughout the year.

Jake Roberge, Analyst

Great, thanks. Also, regarding the games we talked about earlier, you've had those in place for a few quarters now. Have you seen any changes to your strategic relationships with larger customers, where you can demonstrate the complete product suite? Are we at a point where Upland is genuinely a trusted partner for these enterprises, allowing games to drive more cross-sell?

Rod Favaron, President

Yes, I think we're getting there. Most of these global account folks have been in place for four quarters or so. It takes time to acclimate with significant customers, earn credibility, and deepen relationships. Last year in the back half, we saw solid cross-sell successes from that strategy. The sales cycles are typically longer, but once customers engage, existing contracts ease the process. Our global account team's mission is to ensure customer satisfaction and retention, induce expansion, and cross-sell. That focus is organized by industry vertical. We identify which products fit best within which vertical, increasing the efficiency of our sales processes. We're increasingly confident in our growing relationships each quarter.

Jake Roberge, Analyst

Great. Thanks for taking my questions.

Operator, Operator

Thank you for your question. The last question comes from Alex Sklar with Raymond James. Please proceed.

Alex Sklar, Analyst

Thanks, Jack. You hired a new Chief Product Officer last year, and with the Center of Excellence now coming online, the product release cadence seems to have increased significantly. Can you give us an update on the changes that have occurred within that part of the organization? I'd also like to know if there’s any margin impact from the kind of excellence shift.

Jack McDonald, Chairman and CEO

Yes. We did bring on a new Chief Product Officer, and as you noted, the pace of product innovation has increased significantly. We're pleased with the alignment and execution levels we've seen. We're excited about the Center of Excellence as it provides a cornerstone for our multi-market global R&D capability. In terms of margin impact, nothing outside of what's already projected in our current outlook. We expect it to be an efficient investment. As it comes online, we’ll be able to start reallocating costs from other parts of the organization to that Center of Excellence. Therefore, we anticipate a net improvement in productive capacity while managing any change in costs.

Alex Sklar, Analyst

Perfect. And Rod, we’ve discussed a lot about cross-selling and expansion. I want to ask about top-of-funnel pipeline creation, particularly regarding new logo opportunities. Any updates on growth compared to last year, considering the marketing investments you've made?

Rod Favaron, President

Top-of-funnel metrics have remained consistent. We've improved our effectiveness at generating targeted leads and are better at converting them with our marketing expenses. I'm comfortable with where the pipeline stands, and the evolution continues positively. We're pleased with how things have progressed in recent quarters.

Alex Sklar, Analyst

Okay. Great. Thank you.

Operator, Operator

Thank you for your question. I'll now pass the call back to Jack for any last comments.

Jack McDonald, Chairman and CEO

Alright, well, thank you all for joining. We will see you on the next earnings call.

Operator, Operator

That concludes the Upland Software first quarter 2022 earnings call. Thank you for your participation. You may now disconnect your lines.