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UPLD Upland Software

Participants
Jack McDonald Chairman & Chief Executive Officer
Mike Hill Chief Financial Officer
Rod Favaron President & Chief Commercial Officer
Bhavan Suri William Blair
Scott Berg Needham
Call transcript
Operator

Thank you for standing by, and welcome to the Upland Software First Quarter 2021 Earnings Call. At this time, all participants are in 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 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 2021 earnings release, which was distributed today at 4:00 PM 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 Jack McDonald, Chairman and CEO of Upland Software. Please go ahead.

Jack McDonald

Thank you and welcome to our Q1 2021 Earnings Call. I'm joined today by Rod Favaron, our President and Chief Commercial Officer and Mike Hill, our CFO, I'll summarize our results. some recent sales, product and operations highlights.

Following that, Mike will provide some insights on the Q1 numbers and our guidance. Then, we'll open the call up for Q&A, but before we get started. Mike will read the Safe Harbor statement.

Mike Hill

Thank you, Jack.

During today's call, we will include statements that are considered forward-looking within meanings of 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 are contained in our Annual Report on Form 10-K, as periodically updated in 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 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 Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our First Quarter 2021 results, which is 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.

Jack McDonald

Thanks Mike. Then the First Quarter, we restarted our M&A engine. We completed two strategic and accretive acquisitions, Second Street and Blue Van, and we did that while posting strong free cash flow of $12.2 million and that's even after acquisition expenses and while there can be no guarantees, our goal is to make 2021 a strong year for acquisitions.

Our acquisition pipeline is robust and we are active in the market for additional opportunities and as we've noted before, our acquisition program is now self-sustaining as our free cash flow and financial resources mean that we're no longer dependent on the equity capital markets, in the First Quarter, we had 9% total revenue growth as expected, adjusted EBITDA came in at 31%, reflecting our go to market investments.

Our Q1 free cash flow was $12.2 million. We had 3% recurring growth in the organic side, now when you exclude political-related revenue from the First Quarter of 2020 the comparison period, our recurring revenue organic growth was 6%.

On the sales front in the First Quarter, we expanded relationships with 283 customers, 45 of which were major expansions.

We also welcomed 118 new customers to Upland in the First Quarter including 32 new major customers. Product side, we expanded security and collaboration capabilities across the Upland product portfolio with three major releases and five feature packs. In our Project and IT management products, we delivered product integrations with key partners salesforce and Sage Intacct and following the Upland and HP, Hewlett-Packard joint announcement in the fall, we released new capabilities in our document workflow product suite in support of HP work path and these apps will provide HP customers, the ability to capture and digitize documents from multiple sources for example, faxes, emails, scans, electronic content to extract and index key content and then of document for further action directly from their HP specific devices. Again on the acquisition front as I mentioned, Q1 was an active quarter for M&A. We closed the acquisition of Blue Van, which is a leading customer data platform anchoring Upland's Customer Experience Management suite with a single view of the customer that will drive deeper engagement across email, SMS, mobile applications and online.

We also closed the acquisition of second Street another nice addition to our CXM suite, second streets interactive content and context capabilities give our customers more ways to engage their consumers to drive revenue.

As I mentioned the M&A pipeline is strong and again while there could be no guarantees, it's our goal to make 2021, a very strong year for acquisitions.

We are active in the market for additional opportunities.

So with that, I'm going to turn the call back over to Mike.

Mike Hill

Thank you, Jack. I'll cover the financial highlights for the First Quarter and our outlook for the Second Quarter and full year 2021.

On the income statement, total revenue for the First Quarter was $74 million, representing growth of 9%. Recurring revenue from subscription and support grew 11% year-over-year to $70.7 million. Professional Services revenue was $3 million for the quarter, a 20% year-over-year decline, which was expected due to the COVID 19 travel impacts. Overall, gross margin was 67% during the First Quarter and our product gross margin remained strong at 68% or 72% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses excluding acquisition related expenses, depreciation, amortization and stock compensation were $30.4 million for the First Quarter or 41% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $9.6 million in the First Quarter and of course these acquisition related expenses will continue as a result of our renewed acquisition activity. I will note that $1.2 million of this Q1 expenses related to an office lease exit from last year's acquisition. Acquisition-related expenses are generally 52% to 60% of acquired annual revenue run rate and varies from acquisition-to-acquisition depending on uncontrollable factors such as geographic location. Generally for each acquisition, 45% to 50% of these transaction and transformation expenses are incurred within the first 3 months and then taper down rapidly until complete by the acquisitions First Anniversary.

Our First Quarter 2021 adjusted EBITDA was $22.8 million or 31% of total revenue, down 7% compared to $24.6 million or 36% of total revenue for the First Quarter of 2020.

As expected, adjusted EBITDA was lower due to our increased go-to-market investments compared to last year on the cash flow.

For the First Quarter of 2021, GAAP operating cash flow was $12.5 million and free-cash flow was $12.2 million even with $9.6 million of acquisition-related expenses in Q1.

We also had some positive changes in some of the working capital accounts like collections on accounts receivable. 2021 free cash flow should be over $30 million and possibly over $40 million depending upon the size and timing of future acquisition, so we are focused on generating substantial GAAP operating cash flow and free cash flow even after acquisition-related expenses.

So for the balance sheet, this ongoing free cash flow generation is an addition to our existing liquidity of $246.7 million comprised of approximately 186.7 million of cash on our balance sheet as of March 31, 2021 and our $60 million undrawn revolver. This ongoing cash flow generation existing available capital and expanding our credit facility while maintaining net debt leverage of up to a maximum of around 4.0 times should allow for self-sustained growth without dependency on the equity markets. I should note that our net debt leverage is currently at around 3.5 times based on the midpoint of our 2021 adjusted EBITDA guide. With regard to income taxes, I will note that Upland currently has approximately $356 million of total tax NOL carry-forwards and of these, we estimate that approximately 215 million will be available for utilization prior to expiration.

As of March 31, 2021 we had outstanding net debt of approximately 345.2 million after factoring in the $186.7 million of cash in our balance sheet. I note that principal payments on our term debt are 1% per year or about $5.4 million per year.

With the remaining balance maturing in August of 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.

Now for guidance, for the quarter ended June 30, 2021, Upland expects reported total revenue to be between $73 and $77 million including subscription and support revenue between $70.2 and $73.2 million for growth in recurring revenue of 6% at the midpoint over the quarter ended June 30, 2020.

Second Quarter 2021, adjusted EBITDA is expected to be between $22 and $24 million.

For an adjusted EBITDA margin of 31% at the midpoint, representing a reduction of 3% at the midpoint over the quarter ended June 30, 2020, reflecting our incremental investment and our go-to-market activities.

For the full year ending December 31, 2021, Upland expects reported total revenue to be between $299 and $311 million including subscription and support revenue between $285.3 and $295.3 million.

For growth in recurring revenue of 5% at the midpoint over the year-ended December 31, 2020. Full year 2021, adjusted EBITDA is expected to be between $94.4 and $100.4 million for an adjusted EBITDA margin of 32% at the midpoint, representing a reduction of 3% at the midpoint over the year ended December 31, 2020, again reflecting our incremental investments in go-to-market activities.

So with that, I'll pass the call back over to Jack.

Jack McDonald

Thanks, Mike. And now we're ready to open the call up for Q&A. Please feel free to direct questions to Mike, Rod or me

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Bhavan Suri of William Blair. Please go ahead

Bhavan Suri

Hi, everyone. This is Jake on for Bhavan, congrats on the great quarter and just first of all, I would love to share how the [ph][/ph] BlueVenn and Second Street acquisitions are progressing. I know it's early, but just would love to hear about the initial interest from current customers

Jack McDonald

Yes. Great, thanks for the question, so very excited about both [ph][/ph] BlueVenn and Second Street acquisitions, both accretive acquisitions, but also highly strategic, both of them fit into our CXM product suite and fulfil some key functions there. BlueVenn is a CDP [Customer Data Platform] and it enables us to maintain a centralized record on behalf of our customers of their consumers, so that they can create Automated Marketing Campaigns, which they can then execute across multiple digital channels right and we've got those capabilities as part of our product portfolio around SMS and text delivery by in-app and push notification, email and web, so these adds a very powerful core platform to our CXM suite.

On the second Street side you know, a key challenge for our customers is to continue to build their database of consumers and so Second Street brings to the table a number of proven technologies and interactive content in contests that could be used to drive, subscriber and user databases and thus increase the effectiveness of our customers by consumer marketing or campaigns.

So, two great acquisitions, the integration is proceeding as planned on both of them, one of the things that we're doing differently today with Rod's leadership is beginning to drive cross-sell campaigns for these products much sooner than we would have before, really looking at that product fit and how we bring acquired products into our existing sales distribution is now a core part of our pre-closing diligence and we would really like to hit the ground running now on that.

So let me pass it over to Rod to give his thoughts on kind of early days of pushing those products through our channel cross-sell in early observations there.

Rod Favaron

Yes.

So building on that, obviously we started talking Second Street in earlier in the quarter and blue down a little bit later in the quarter and as Jack said those two products themselves and leverage each other as Second Street being that place to really gather audience data to decorate the database that we got from [ph][/ph] BlueVenn.

So it's very early an integrating both these companies by fairly crisply, we were able to get our CXM [Customer Experience Management] salespeople, cross selling those products with the Second Street and BlueVenn Sales Team, so we part of the playbook that we really worked on last year was making that much more crisp and quick process of being those in front of our customers.

And so that we're excited I just sort of how quickly we were able to get that out there look, it takes time to sell the enterprise software to people and build pipeline, but that was not so pretty quickly and the sales cycles have already begun and pipeline is getting generated for both of those products into our base

Bhavan Suri

Great, thanks for the collar and this is a follow-up on the M&A funnel. Where are you seeing the greatest opportunity? Do you think you'll continue to invest in CXM or is it likely that you will target a different segment with the next acquisition?

Jack McDonald

So we've got a very strong pipeline right now, really across all 4 key product suites and frankly in some other use cases in the enterprise, because there are really six or seven use cases or buying centers that we're addressing.

So, it's a pretty strong pipeline across those my guess would be the next one will be outside of CXM and you know, there is a lot that we're looking at on Contact Center. There are some opportunities and document workflow as well as in PICM.

So I think you'll see activity in all of those areas as we move through the year.

Bhavan Suri

Right, thanks for taking my questions.

Operator

Our next question comes from Brent [ph] of Jefferies. Please go

Unidentified Analyst

This is [indiscernible]. Congrats on the free cash flow number in this quarter. Maybe the first question is for both Rod and Jack. I guess it's been a little bit over year since Rod joined the team and I know you mentioned, It's still early, but I wanted to ask like if we were to frame this and like baseball terminology what innings of the cross-sell journey are we in and maybe like when could we see that cross-sell motion really taking hold in terms of driving organic revenue growth?

Rod Favaron

Yes.

So, this is Ron. I'll start in Jack and collar commentary here, so I appreciate you pointing out that I've been here for a year.

We have made a lot of progress over the last year and go-to-market infrastructure and the flying formation just sort of as a refresher, we've added new executive leadership in marketing, sales, customer success, had a global accounts, we hired the team of a global account managers to manage our top 175 customers vertically, so those teams are now in place and ramping on their knowledge of the customers and building pipeline and we like what we see there.

The other thing we did was retooled demand Gen bottom up.

So you'll see a new Upland website we launched in late January really designed to drive pipeline, frankly and then the other thing we did which we stood up late last year, but building out in Q1 is qualifying Sales Development Rep Team in SDR team. We now have a team of 15 STRs centrally located, really catching and qualifying all of our lead flow that the marketing team is focused on generating.

So we've been doing a lot of foundational work to get the team in a place to continue to grow.

As part of that demand gen machine if you will, a lot of the proactive campaigns were running now are very cross sell specific and the cross-sell pipeline is showing good growth, again these deals take time to convert a couple of things I'll point out.

While we have made a lot of good progress and go to market, remember our net dollar retention rate did decrease about 300 basis points last year due to COVID and obviously in recurring revenue business, we have to wait until we fully lap that COVID impact in order to see and appreciate really the improvements in and go to market.

So I'll just sort of add to that, this is in a multi-quarter journey in 2022 and as we say, there are no guarantees and outcomes, but we think this work is definitely preparing us to scale to the next level as a company.

Jack McDonald

Yes.

I think so, the only thing I would add is, I think, Rod is really catalyzed a different kind of go-to-market culture here Upland and he's walked through the key moves, he has made on personnel and on process and now increasingly on product as well as the distribution piece.

And so, we couldn't be more excited about it. We consistent with what he said from the beginning of what Mike and I have said, it is a multi-quarter journey and I think you start to see this really beginning ahead as you move in 2022 and it's Rod said there can be no guarantees on outcomes, but we've got a great suite of products here a tremendous customer base and we think the opportunity is there to really drive cross-sell and new logo acquisition as we go forward, so we're excited about where we can take it.

Unidentified Analyst

Pardon me, one quick follow-up if I may on the overall demand environment. Obviously and as Rod pointed out, last year you did see some impact [ph] not a whole lot from COVID, but some impact, so as, we see the economy open back up with folks coming back to work and stuff of that. Are you seeing overall spend on par and would be going into the back half of the year will that benefit you to a certain extent?

Jack McDonald

Thank you.

Rod Favaron

I think that's consistent with our outlook now, we'll see how the year plays out and you're right, the business proved to be incredibly resilient last year in the phase of COVID and so that the net dollar retention rate was still mid '90s even given the pandemic, which is impressive and I think you're seeing the demand environment begin to move back toward a more normal pre COVID environment.

Our guide is that that takes a few more quarters to fully play out, so we're going to maintain a conservative outlook on that, but in terms of trend seems to be positive.

Jack McDonald

Got it. Thank you.

Operator

Next question comes from Scott Berg of Needham. Please Go Ahead

Unidentified Analyst

Hi everyone, this is John [ph] on for Scott. Thank you for taking my question.

As far as the mobile messaging products grow and obviously a lot during the last election cycle, what are you seeing as far as usage those products today relative to 6 months ago, obviously they're going to be going down a lot but not. Is there anything you can quantify are you stretching out. Thank you.

Jack McDonald

Yes, I know. Thanks for the question.

So what we wanted to do and we talked about this last year was share with investors a transparent view of demand with and without the political revenue that we saw last year. Obviously we had a spike in usage, not related to the presidential election cycle.

So that's why we're breaking at that organic growth number.

And so that's coming in that organic growth number ex politics mid single-digit 6% this quarter. But right where we would have expected a and then there are a lot of applications for messaging beyond politics and obviously we're focused on growing that business and feel great about CXM as a long-term offering for Upland.

Rod Favaron

Great, thanks guys.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Jack McDonald for any closing remarks.

Jack McDonald

Great. Well, thank you, everyone for your time this afternoon, and we look forward to seeing you on the next earnings call.

Operator

The conference is now concluded. Thank you for attending today’s presentation.

You may now disconnect.