Q4 2019 Earnings Call

Hello, Ladies and gentlemen, today's conference is scheduled to begin momentarily until that time their lunch will again be police and hold. Thank you for your patience again today's conference is scheduled to begin entirely until that time. Your lines will again be placed on hold thank you for your patience.

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Ladies and gentlemen, thank you for standing by and welcome to the Avalon software fourth quarter financial results. At this time all participants are in that listen only mode. Major we will conduct a question and answer session. If you would love to ask question doing just fine simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question press the pound keep the conference call will be simultaneously webcast, an offence <unk> investor Relations website, we can be accessed investor offline.

Yep.

Upland software Dot Com as a reminder, this conference call is being recorded.

Following the completion of the conference call a webcast replay will be available for 12 months, one I plan to Investor Relations website at Investor Dod Athlon software dotcom.

By now everyone should be accessing the fourth quarter earnings release, which was distributed Judy adds approximate need P.M. central time for B M Eastern time.

If you'd knowledge, we see the really easy it's available on the Investor Relations tab off Athletics website at Investor Dod All plan software Dot com.

I'd now like to trained o'clock friends Overachieved, our host Mr., Jack Mcdonald, Chairman and CEO Oh outlet software. Please go ahead sorry.

Thank you and good afternoon, and welcome to our Q4 2019 earnings call I'm joined today by Tim Mattox, Our President Chief operating officer, and Mike ill our CFO.

I'll start by summarizing results and some recent highlights following that Mike will give you a more detailed look at the numbers and share our guidance for the first quarter and the full year 2020, and then Tim will cover sales and operations highlights from the fourth quarter after that well open the call up for QNX.

Before we get started Mike will read the Safe Harbor statement, Mike. Thank you Jack and good afternoon, everyone. During today's call. We will include statements that are considered forward looking within the meetings with the securities laws. In addition, we may make additional forward looking statements in response to your questions. These statements are subject to risks assumptions and uncertainties that could cause our.

Actual results to differ materially we caution you consider our discussion of risk factors and other uncertainties that could cause actual results to differ materially from Dell those into forward looking statements contained in the press release.

And in this conference call a detailed discussion of such risks and uncertainties are contained in our annual report on form 10-K S periodically updated as needed in our quarterly reports on form 10-Q filed with the FCC. The forward looking statements made today are based on our views and assumptions and on information currently available to up when management as of today said.

26 2020.

We do not intend or undertake any duty to released publicly any updates or revisions to any forward looking statements whether as a result of new information future events or otherwise on this call upland will refer to non-GAAP financial measures that when used in combination with GAAP results provide up on management with additional analytical tools to understand its operations upland has provide.

I did reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our fourth quarter and full year 2019 results, which is available on the Investor Relations section of our web site at Investor day, not upland software Dot com.

Please note that were unable to reconcile any forward looking non-GAAP financial measure 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.

To learn more about our outreach plans bill please feel free to contest contact us at Investor Dash relations that upland software dot com and with that I'll turn the call back over to Jack. Thanks, Mike Q4 was a strong finish to an outstanding year, we had 46% total revenue growth 49%.

Growth in adjusted EBITDA, So a very strong Q4.

We posted net dollar retention rate at 97% so more proof that opened one continues to drive customer loyalty.

Our Q4 organic growth and reported recurring revenues came in on target.

5% for the full year 2019 organic growth was 7% so both within our target range of mid single digits read that 46, three to seven that target range that we consistently talk about we had a host of product innovations in Q4. This week.

Combined focused in house R&D with our innovation through acquisition program of building out our enterprise cloud end to end to end category winners and well be covering some of those R&D innovations in greater detail I intend section of the call.

We had record expansion and new bookings in the fourth quarter I want to note. It's still early in our cross sell journey and obviously, our new go to market team and a four clouds and the innovation there are going to help with that like without ringing. The bell too loudly I'd note that we had some material cross sell success.

During the fourth quarter, Jim will talk more about it in a couple of minutes, but we saw strong uptick and cross sell activity, including some pretty major deals. So our largest was a global communications immediate company that committed to a significant knowledge management offering today.

<unk> call center efficiency and that company was already a large and a happy customer.

For our customer sentiment cloud offerings. So again, it's early days, but we're beginning to see some traction there some increasing traction there we had a record year on the M&A front for the full year, we completed a total of five acquisitions five acquisitions added 67.

Again in total annualized pro forma revenues and 30 million and annualized adjusted EBITDA when fully in model. We paid an average price of 3.3 total revenues of 3.3 times total revenues now again that excludes the typical half turn of revenue.

News of restructuring costs and the average adjusted EBITDA multiple paid on a pro forma basis was 7.4 times. So these are highly accretive acquisitions and increasingly strategic we are building out our cloud.

It's like never before to really create end to end category winners or the degree of.

Targeting now around.

Specific capabilities that we want to add in order to create end to end category cloud solutions is greater than it's ever been and I would note that our pipeline of beads targeted acquisitions and our pipeline in general is stronger than it's ever been and our position in.

The marketplace as a dependable and trustworthy IR has never been better.

A couple of updates that occurred subsequent to year end.

We closed the acquisition of local index, which has been announced.

And also announced a major initiative to create through distribution true enterprise sales distribution for uplands cloud solutions with a new go to market leadership team led by software industry veteran Rod background, who came.

Came in as President and Chief commercial Officer, and also including a new marketing customer success and global account sales leadership. So we are happy.

To welcome Rod He was on our board for five years. So he is very familiar with our model Rod and his team, which has worked together before at both spread fast and already have a successful track record of scaling the high growth enterprise software organizations Rod will be reporting to me and will be worked.

Alongside Tim Mattox, our president and Chief operating Officer.

Looking now to our guidance for 2020 as our strong guidance indicates we are positioned for a great 2020 with four compelling enterprise clouds proven new go to market leadership, and a robust acquisition pipeline I would note.

That uplands 2020 guidance also reflects increased investment in go to market initiatives, including the addition of the new go to market leadership team, but in addition to that planned hires in global account sales and additional marketing and related programs spending.

Even with these incremental investments uplands 2020 guidance reflects a 24% increase in adjusted EBITDA in 2020 over 29 team, while maintaining level adjusted EBITDA margins in 2020, 37% and with no change to our.

Billings goal of achieving 40% adjusted EBITDA margins at 500 million in annual revenue run rate.

No I've seen it before we've built this before you get to a point in a business a critical mass in people in process in products in customer as an access to capital and access to deal flow, where you start to see powerful network effects every acquisition at scale.

Strengthens product clouds adds major customers adds product solutions, which we can then pump through our growing enterprise sales for us to our over 9000 customers and are more than 1500 major accounts. It is a beautiful model and we are.

Just getting started so we couldn't be more excited about 2020 and the road beyond so with that I'm going to turn the call over to Mike will take you through the Q4 numbers and guidance Mike.

Thank you Jack Jack just said I'll take you through the financial results for the fourth quarter 29 seen or outlook for the first quarter and full year 2020.

Total revenue for the fourth quarter was 66.1 million representing growth of 46%.

Over the.

Fourth quarter of 2018, that's recurring revenue from subscription and support grew 41% year over year to 59.1 million professional services revenue was 3.4 million for the quarter, a 26% year over year increased perpetual license revenue was 3.5 million for the fourth quarter for an increase of 421%.

Year over year.

Moving down the piano to gross margins overall gross margin was 68% during the fourth quarter and our product gross margin remains strong at 70% or 74% when adding back depreciation of equipment and amortization of acquired intangible assets, which we referred to as cash gross margins are professional services.

Gross margin was 36%.

Turning to our operating expenses research and development expense net of Refundable Canadian tax credits was 8.5 million for the fourth quarter, representing 13% of total revenue.

In the fourth quarter sales and marketing expense was 11.5 million representing 17% of total revenue in the fourth quarter General administrative expense was $13.8 million for the fourth quarter, representing 21% of total revenue. However, excluding noncash stock compensation expense DNA expense was 8.2 million or 12% appeal.

Total revenue in the quarter.

Acquisition related expenses were 15.2 million for the fourth quarter, resulting from our recent significant acquisition activity with two acquisitions closing during the quarter and one acquisition closing immediately prior to the start of the fourth quarter. In fact during the period from December 2018 through December 29.

18.

We closed actually six acquisition, so capturing a desperate in there right at the end of 2018.

Representing combined annual revenue run rates of 85 million acquired all those acquisitions all six acquisitions contributed to the acquisition related expenses here in Q4 of 19, which represents an unusually high pace of acquisition activity.

We really don't believe will be sustained as we continue to target 40 to 60 million of aggregate acquired revenue run rate per year going forward.

Remember when we do an acquisition, we have temporary acquisition transaction and transformation related expenses, which generally amount to about a half a turn of acquired revenue annualized run rate when looking at an acquisition investment. We view these costs as part of the overall cost of the acquisition, but from a GAAP accounting perspective these costs.

[noise] are considered opex like other acquisitive companies out there we back them out when calculating adjusted EBITDA, but of course, they also impact operating cash flow. These expenses typically breakdown as follows about a quarter of them. Our initial transaction related expenses, such as banker fees legal and professional fees insurance.

Costs and deal bonuses and then about half of the costs are people related such as severance and compensation for transitional personnel and the final quarter of these costs are non people related costs, such as office lease terminations and vendor cancellations.

For each individual acquisition, we tend to recognize 40% to 50% of these acquisition related expenses in our PNM. During the first three months post acquisition then they stayed down quarterly and are always gone by the first anniversary of the acquisition said another way if we ceased doing acquisitions. Today then these costs.

I would dramatically decreased in the future quarters and would go away completely within a year.

Operating loss was 12.5 million in the fourth quarter compared to a loss of 4.8 million in the same period in 2018, GAAP net loss was 19.9 million or a loss of 80 cents per share compared to GAAP net income of 1.8 million, where a gain of nine cents per share.

For 2018, non-GAAP net income was 17.1 million or 67 cents per share in the fourth quarter of 2019 compared to a non-GAAP net income of 12.3 million or 58 cents per share in the fourth quarter of 2018.

Our fourth quarter 2019, adjusted EBITDA was $25 million or 38% of total revenue up 49% compared to $16.7 million or 37% of total revenue for 2018.

Q4 20 team.

Now onto our balance sheet and statement of cash flows we ended the fourth quarter with $175 million in cash.

For the year ending December 30, Onest 2019, operating cash flow was 12.1 million, which implies operating cash flow for Q4, a 7 million. However included included in our annual operating cash flow, where most of the acquisition related expenses in the year of $39.7 million.

Also included in our annual operating cash flow was a onetime nonrecurring 1.7 million dollar interest payment to settle up our old credit facility.

And a onetime acquisition earn out payment of 1.5 million normalizing operating cash flow for these adjusting items 2019, adjusted operating cash flow would've been approximately $55 million were 67% of our reported 82.5 million of adjusted EBITDA.

Although I will note that in that some of these acquisition related expenses were accrued in 2019 and will be paid in future periods. So our normalized cash flow conversion rate from adjusted EBITDA was closer to 60%.

Furthermore, upland is cash efficient when looking at isn't <unk> income taxes and capital expenditures cash taxes for 2019 were 3.6 million compared to cash taxes, a 3.3 million in 2018 upland currently has approximately $276 million attacks, a total tax and a wells.

And of these approximately 180 million or usable, which is comprised of 156 million of us federal tax and other wells and the remainder mostly in the UK, we expect to continue to pay around $4 million to $5 million per year in cash taxes, mostly in the form of Canada revenue agency income taxes, Ireland.

Income taxes in some us state income taxes.

Capex for 2019 were 1 million compared to Capex.

Point 9 million in 2018, and we generally expect about $1 million a year capex.

During the fourth quarter, we expanded our term loan b, a credit facility by $190 million and paid off our $60 million revolver, leaving it fully available now for future draws for M&A.

As of December 30, Onest 2019, we had approximately $539 million of gross debt outstanding excluding deferred debt offering costs, making net debt of approximately $364 million after factoring in the $175 million of cash on our balance sheet.

We are reaffirming our recently announced Q1 and full year 2020 guidance and for the quarter ended March 30, Onest 2020, upland expects reported total revenue to be between 62.8 $65.8 billion, including subscription and support revenue between 58.8 and 61.2 million for gas.

Growth in recurring revenue of 33% at the midpoint over the quarter ended March 30, Onest 2019.

The first quarter 2020, adjusted EBITDA is expected to be between 23.1 and $24.5 million for an adjusted EBITDA margin of 37% at the midpoint representing growth of 34 person at the midpoint over the quarter ended March 30, Onest 2019.

For the full year ending December 30, Onest 2020 up an expects reported total revenue to be between 269.5 and $281.5 million, including subscription and support revenue between 252.6, and 262.2 million for growth in recurring revenue of 20.

6% at the midpoint over the year ended December 30, Onest 2019 full year 2020, adjusted EBITDA is expected to be between 99.2 and $104.8 million for an adjusted EBITDA margin of 37% at the midpoint representing growth of 24% at the midpoint over the year ended December 31.

2019, and with that ill turn the call over to Tim Mattox, our president and COO.

Thanks, Mike and good afternoon, everyone.

I'll give you a review of our sales product and operating results for Q4 before that let me get started by highlighting some of our customer success metrics for the full year of 2019.

As a reminder, up and has an unwavering commitment to a 100% customer success, we define that as every customer realizing the full value that they expect from our software products.

We measure our performance against these commitments by serving customers twice a year using the net promoter score NPS methodology in both NPS surveys for 2019 customers continue to place upland high end of the scale, we're leading enterprise software companies and we see this customer feedback reflected in our net dollar retention rate.

Or NDR, our which we report annually.

For 2019, our NDR was 97% consistent with both our expectations and our 2018 performance of 98%.

We're pleased with these results remain committed to driving Indian are even higher.

Turning to our sales performance to Q4, specifically, we expanded our customer relationships significantly with 255 existing customers doing more business with US 51 of those customers were major expansions or over 25000 in a our expansion our annual recurring.

Revenue.

Among the larger expanding customers were in EMEA based supplier of homebuilding and renovation industries, which expanded its commitment to our customer experience management cloud.

And manufacturer and the commercial and business aircraft industry also expanded significantly with us.

Their commitment to our project to 90 management cloud and a multinational telecommunications company, which expanded its commitment to our enterprise sales and marketing cloud.

252, other existing customers expanded their commitments by more than 4.8 million in aggregate annual recurring revenue in Q4.

Turning to new customer acquisition, we welcome to 145, new customers uplift in Q4.

Included in those customers are 44, new major customers each committed over 25000 in new annual recurring revenue uplift.

Among our larger new customers were in North American insurer, who committed to our project in IP management cloud and a global Entertainment company, who committed to our customer experience management cloud another new customer communications and media company, the Jack alluded to committed to our customer experience management cloud and in addition to significant.

Recurring revenue. This customer also contributed to the large perpetual license increase in beef that Mike referenced in all 142, other new customers committed over 3.3 million in total annual recurring revenue spend with UBS.

In Q4.

As Jack alluded to we saw a strong uptick in our cross sell activity and additional example, beyond the one that Jack referenced was a large financial services company, which committed to our project to Nike management cloud after an exceptional experience with our knowledge management offering.

Going to continue at these efforts to drive more cross sells in 2020, and we'll begin to referring them more as solution selling as we leverage the positioning of our for enterprise clients going forward.

On the product front, we continue to invest in customer informed innovation too high quality and efficient internal development.

For example, within our CSM cloud, we added support for service now agent workspace, bringing efficiency to service desk agents at joint Upland and service now customers.

In Q4, we also announced the acquisition of ingenious a computer till after the integration solution for enterprise contact centers within the CSM cloud.

That product integrates also with service now and with Salesforce Dot Com two systems of record within a lot of our customers who continue to expand our offerings all into all stages and touch points within the customer journey.

Stainless CSM for a bit here. After the end of Q4 on February 7th we announced the acquisition of local upticks as Jack referred to.

Spanning our offering and them into the mobile application personalization analytics solution. This is another great step forward for us and providing rich experiences personalization and real time sentiment analysis across every digital channel, including text mobile App browser wallet voice and email.

Moving to our enterprise sales and marketing cloud, we announced the acquisition of all defy a customer revenue optimization solution. We acquired that company in Q4, and it is a critical component of our offering as a great fit for companies working to optimize their sales processes for enterprise sales forces we all.

We completed a set of releases over the quarter to streamline our RFP automation workflows and improve overall performance security and usability of our enterprise sales and marketing cloud.

Within our project Tonight's you management cloud, we continued on our mission to connect our offering to our key customer infrastructure within our customers. For example in the fourth quarter, we integrated Google cloud usage data into our TSM offering.

And the cost management module, that's part of our project in IP management cloud.

Adding to a similar existing integration for our a ws cloud data, enabling comparisons between the cloud an on premise cost.

Structures.

Within the document workflow cloud, we had an exciting new products announcement in the quarter, our intelligent capture products. This product offers and onramp to the cloud for organizations that require a flexible deployment solutions for document workflow processes, we give them the flexibility to operate in multitenant cloud an on premise or hybrid.

Good afternoon route scenarios.

And finally, we continue our investment in the core upland platform components upland analytics and a New addition, upland works center, we added applied analytics support to one additional product in Q4, bringing to seven the number of products supported by upland analytics, our work center products, a central location for single sign on and quick access.

To frequent actions or analytics went into limited release in Q4, we are actively validating that direction with several key customers.

Lots of exciting things on the product right.

With respect to operations, we continue to invest in up in one our unified operating platform and the foundation of our 100% customer success commitment, we implemented internally developed solutions to streamline pricing cogeneration and approval processes, allowing us not only to respond to customers more quickly.

But also to avoid incremental third party licensing costs. We also completed the integration of simple into up in one and continued to execute integration plans for our ingenious in all defy acquisitions.

We further evolve our integration playbook with respect to sales and marketing processes, improving our ability to drive lead generation and sales team coordination prior to full up in one integration.

And finally, we continue to improve our performance and efficiency in our support cloud operations and back office functions, which contribute to our high customer loyalty and customer success.

Summary, our Q4 results highlight our strong finished 2019 and our significant progress for the full year remain committed to taking 2020 to the next level.

That ill pass the call back to Jack.

Thank you Tim.

We're now ready to open the call up for questions.

Again, everyone in order to ask a question you mean for Starz, followed by the number one on your telephone keypad.

Hi, This is an E roster. Please give me one moment please.

Our first question comes from Brad from Credit Suisse.

Your line is open.

Pinch hitting for Brad Congrats on the strong enter the year I guess this one's for Timur Jack a lot of excitement with raw joining the team can you just give us a sense of the changes that he is expected to make whether it's in terms of sales head count or program changes and how should we think about the timing of these returns.

So the.

Over the last three years, we began growing our sales head count.

And we've talked about this a number of times if you go back.

Three years, we were negative 1% organic growth company with maybe 32% adjusted EBITDA margins.

And when we did acquisitions we would.

Get rid of the sales team because up until that 0.3 years ago, we couldn't hold onto the sales team and make our margin targets.

About three years ago, we realize we were getting enough efficiency in the model in the back office that we could afford to retain the productive salespeople not all the marketing spend but the productive salespeople and over the past three years, we've gone from just a handful of salespeople to 80 or maybe a.

Few more than 80.

Today.

Happily at the same time.

We've taken our organic growth from flat or negative 1% to mid single digits.

And we've increased adjusted EBITDA margins from that 31, 32% up to the 37% range.

But in terms of where we stand today on the sales front I like to say that.

As the Salesforce is concerned we've got a field of soldiers, but not an army.

We needed to bring in that office or core.

Two.

Direct our sales team in a way that will drive more productivity.

And so that's why we made the move to bring in Rod and of course he comes with a team that he's worked with before successfully.

Both Lombardi and its spread fast one exited to IDN.

The other two Vista equity.

And so this is about that new leadership.

Taking the 40, some odd million dollars that we currently spend as Mike just pointed out 17% of revenue on sales and marketing and directing it more effectively and is the time for us to do it because now we got back critical mass in large enterprise.

Accounts and across these four clouds, we've got those adjacent season products that can drive true cross sell our solution selling.

As Tim referred to earlier.

So job one will be making this existing salesforce, which today is principally product oriented making them more effective through time, we will evolve to more of an account based marketing and sales model. We've got a lot of fortune 2000 accounts.

Where we've got multiple products in and revenues of millions of dollars, but we lack today and effective global account management.

Program, where you've got one sales executive that is overseeing that account and helping to drive more value for the customer and seek more opportunities for optum products. So a part of what this new team will do is began to build out that global.

Account management team those global account sales executives and the hiring of that initial team.

Is reflected in our budgets for 2020 and is reflected in our.

2020 guidance and then over the next couple or three years, we will begin to migrate a larger share of our marketing and sales spend from product orientation to account based orientation.

In terms of when this will impact organic growth look we're going to maintain our conservative stance on that.

I will tell you if this new flying formation doesn't increase organic growth. It's still a good idea because it is a more scalable more efficient model that will enable us to do more acquisitions to integrate them more quickly and frankly to achieve a higher our pro forma.

You should margin on acquired products, because we will have sales distribution in place at the account level, where every new acquisition product goes into the Kitbag sales bags of that global account management team and imagine that we've gone from a start up to a $275 million business with 100 million of EBITDA.

Created a 1 billion five of enterprise value and done it without effective front office distribution and we can add front office distribution.

And the benefit could be significant.

In terms of again scalability.

The of the model in terms of margin enhancement and there could very well be.

A meaningful organic growth rate price, but I would say, let's reserve judgment on that last point for now we'll keep our.

Conservative organic growth guidance.

And we'll see what this new model brings as we move through 2020 and into 2021.

Jack that's very helpful and insightful I just a quick follow up from Mike. Mike you guys have been fairly busy in terms of M&A from the second half nights into early this quarter can you just provide some update on how some of the larger acquisitions have been performing and then how are they going in terms of the integrations.

So yeah, all integrations are on schedule on time going great we've been buying.

More semantic asset growth your assets and they've all been performing very well so.

So yes, we've gotten into a period here, where we knocked off five acquisitions last year. Six if you include adeptra at the end of 2018.

As I mentioned and.

Everything were very sort of proud of the performance.

And we want to just kind of continue to the motions.

Yes landing these acquired businesses getting them into model and the upland one platform.

Now standing up distribution, so that we can keep those that those forward momentum growth characteristics intact as much as possible, while still meeting our margin and cash flow targets.

Great. Thanks for taking my questions and congrats again.

Thanks.

Our next question comes from a lot from the line of above one from William Blair.

Your line is open.

Hi, everyone. A this is Camille meal chart on for bond, sorry, I, just want to push on I'll ask questions Laura.

Your organic revenue growth has been at 7% and the last two years and sales and marketing expense and its most recent quarter through at the highest rate it and I think something like six years.

Do you think organic growth could accelerate from the previous years or.

Or do you do a I think it's likely to remain in this mid single digit range. Thanks.

Well again, where we're putting in place investments to.

Drive a structural increase inorganic growth and to create more scalable sales distribution for our products.

We're going to maintain.

Our conservative outlook on organic growth.

Our guidance reflects organic growth of low single digits.

Our so read that two or 3% our target is higher than that we target mid single digits read that four to six.

Three to seven.

And again, we'll see how this plays out this is a long game, we've got a ton of value creation opportunity here by executing against our consolidation play where we are a differentiated buyer.

With an operating platform.

That is a real competitive advantage in terms of our ability to integrate these products chief margin, an increase customer satisfaction and build long term customer relationships.

Thats going to continue to be the primary driver of growth, but I do think there is more we can do on organic growth let's be.

Sober about the outlook on it.

Let's give this some time to work.

We will see the results from it but again that outlook for 2020 guidance reflects low single digit organic growth. Our goal remains mid single digits. So no change.

On those scores.

Okay. Thank you.

And just as follow up your adjusted free cash flow margin hit a multi year high in the quarter. What are your expectations for free cash flow generation over next year and what do you think free cash flow margin could be a once you reach your longer term target of 500 million revenue. Thanks.

Yes so.

As we've talked about we've got to slide in our IR deck that talks about the conversion of adjusted EBITDA to free cash flow and as I mentioned on the call earlier expected about 60% now we did have a good cash flow quarter here in Q4. It was good to see.

But those benefited by some timing differences in our favor here in Q4.

Some of those things will normal out so we had 67% conversion to adjusted free cash flow as I as I said, probably more normalized around 60%. So.

If you take our adjusted EBITDA run rate of 102 million.

Take cash taxes off of that.

Which is around 28 million a year.

Cash I'm, sorry, cash interest about $28 million year cash taxes, four to 5 billion a year cash sales commissions that are deferred around 5 million a year five to 7 million a year there.

And about 1 billion a year capex those the main.

Conversion items that'll get you to about 60% now we talk about these onetime acquisition related costs. That's obviously contingent on the frequency and amount of acquisition activity we have.

We've talked about targeting 40 to 60 million of acquired revenue run rate per year.

[music].

That said and we talked about those costs being about a half a turn of acquired revenue.

So at 40 million acquired per year, that's 20 million of these costs at 60 million, that's $30 million of these costs a year that.

That would be.

Would be on our.

Affect our operating cash flow of free cash flow.

So so let me know a dozen walk it for you.

That's great. Thank you.

Our next question comes from the line of Bren.

From Jefferies Your.

Your line is open.

Thanks, just a couple of questions on the go to market Great CB investments I guess just from your perspective kind of how you expect.

The timing of those investments and when do you expect them to take hold and secondarily when we've seen past changes like this historically in the industry there has been.

Some drag and disruption that that that filters three or are you.

Anticipating any that friction in the guide are you just envisioning that it's just this is going to be just much better and there's really not going to be any friction during during this transition. Thank you.

I don't anticipate any friction during the transition what we're doing is adding more senior experienced executives.

Rod will be driving go to market, Jim Ryan who came at a spread fast and Lombardi brings a level marketing and product management expertise that we haven't had in the company before becoming a miracle on that customer success side and Joseph primary guys, who will be.

Growing the global account management team those are all additive, we're not going to be changing or reducing our existing sales motions. I think this team will be catalyzing that existing and to make it more productive again, we don't want to raise any numbers right now because we're going to be conservative in these things take time, but I don't anticipate.

Hey.

Any disruption from that we also have in the budget.

The addition of at first but team of global account managers. So again, there will be out they're ramping up their costs are in the model or assuming no productivity from them in our outlook I think we've modeled this in a conservative way.

So the the additional cost associated with these initiatives is reflected in our guidance, but there is no incremental revenue.

From these investments reflected in our guidance I think thats from an investor standpoint in terms of how were built.

As entrepreneurs and managers that as the most conservative best way to go probably not what most people do.

And but I think better way to do it.

Thanks for the color.

Our next questions come from the line of Jeff from Craig Hallum.

Your line is open.

Great. Thank you.

Several from you guys have wanted to start briefly with the on the revenue lines. There. Obviously, that's a big license quarter talk about this customer that that I think you said was was like knowledge management add on for call Center efficiency.

Obviously the size is seemingly unusual very unusual so just talk how they came to that purchase within an existing customer.

You know was everything else they have subscription and this is the first license just put a little more color around that that the big license number.

Yes, Jeff good question.

They were a very satisfied and happy customer of our customer sentiment offering in one aspect of their business there are large.

Global company.

And when they were looking for knowledge management, we are well known in the knowledge centric system or Casey us area and so we came up on their shortlist of companies.

And when they saw that we were owned.

Offering was owned by upland and they knew that they were using us another area. They talked with their colleagues as part of their evaluation process heard about our customer centric approach are defining the value that a customer receives in their terms and delivering on our commitments and that gave them comfort such that when they saw the expertise and the knowledge.

Management area. They wanted to go forward now this was interesting too and that the industry itself. It's a varies somewhat small network of people and so they talk to others within the industry that were buying this offering and heard fantastic recommendations from that as well. So this this knowledge management areas Super important.

Call Center efficiency.

Coupled with our ingenious acquisition for integrating the telephony systems to the cloud and then using this customer sentiment engine provides really a great catalyst to improve the efficiency of call centers. So early days in that solution, but that's certainly going to be one of our solution selling motions that Joe.

Jim and the marketing team is going to target and go after.

So hopefully that gives you a little more color as to how that account evolved over time. The other color I'd provide on that is that there was both a large perpetual component.

To that sale, but but in addition to that a very significant EMR component right. So there are both things not not just a big perpetual.

Upon.

Correct, and it's still a cloud offering in the cloud delivery recurring model.

Okay.

And it tomorrow Gotcha on the work center product you talked about kind of whats your learnings are as you move towards a broader rollout.

Your goals without product and what you've learned so far and when we might see that full fully available.

Sure.

That's really a powerful concept as we bring different products different features if you will force solutions and get exposure of those to customers. One of the ways. We'll do that is through our marketing and selling efforts, but we felt like with the product itself to provide this dashboard that showed real value.

Added metrics and the dynamic way would be a great way to introduce those features as well as make sure that.

The value those features we're providing was being exposed to the customer. So that was really the premise of it to bring it all together in the form of a dashboard different purse persona is could be at the executive level someone running the professional services organization as an example, who wants to see the projects and where they are.

From a delivery perspective, the costs associated with those projects that customer sentiment around those projects. The RFP is associated with new projects in new statements of work customer references that might be related to two worked as it's been delivered so bringing all those things together knowledge management of course the component as.

Well the idea was bringing that the forefront in terms of a dashboard that someone in that example, running a professional organise professional services organization could leverage.

Feedback has been very positive we're early in the product cycle here. So we're learning a lot about that.

But we're optimistic as we introduce it to more customers both existing ones, where we want to introduce the broader solution set too as well as a new opportunities to show this broader vision in each of these clouds.

What I would add to that right. So openwork center as a single pane of glass and you're going to be able to use it to consume visualize analytics take actions across multiple products. It was right and assess it becomes this powerful window.

And it.

Is the manifestation of what we're building end to end solutions in each of our cloud setter category Killers, We've got it out now in data in our professional services automation offering.

We'll continue to run the traps on that.

Through this year and then we'll begin rolling it out in additional cloud solution suite. So thats the status in terms of rollout.

Got it kind of great.

Great and then last one year checks just your thoughts with respect to the acquisition pipeline.

Specifically with respect to prices.

Your your rumblings about pricing and price pressure in terms of from expected multiples people are asking wondering if you're seeing the same and also along that theme just your latest thinking in terms of the appropriate levels Max levels that you would feel comfortable with on a debt to EBITDA range.

So in terms of acquisition multiples no real changes, we noted last year. It was an average of 7.4.

Times adjusted pro forma EBITDA 3.3 times.

Revenue, that's pre restructuring expense.

And we find in that range.

We've got a pole position and a lot of attractive schematic opportunities right because we're going after more thematic fit so pipeline has never been stronger.

Our position in the marketplace never better.

And we love, where we're playing this sub $25 million sub 20% organic growth.

Market, So love it and I think if anything you're going to see supply growing dramatically.

Over the next few years as 100 150 billion plus of VC investment in cloud software companies begins to age out of portfolios. So I feel very very good about back in terms of.

Leverage.

It's Mike I've said many times in the past the target is threex to Fourx.

We're willing to go higher than that Transitionally as long as we have a path back down into it.

And at the mid fours.

Range. Ultimately this is a de levering model.

Given the fact that we're not going to chase inorganic growth, we're going to continue to target that 40 to 60 million of M&A will have some bigger years like last year, we'll have some.

Smaller years were already off to a very strong start.

In 2020, so thats the take on that.

Got it great. Thanks.

Thank you. Our next question comes from the line the fix for.

From Roth capital.

Your line is open.

Thanks can you talk a little bit about the timing of the synergies you expect throughout 2020 with that.

The deals that you've already put in would it be more first half weighted.

Or do you think it kind of plays out throughout the year.

Well in terms of.

The outlook on those acquisitions and how the costs get rationalized.

We bring.

Acquisitions into model within 90 to 120 days of acquisition. That's the target there are some items that lag that a little bit but thats been consistent throughout this Mike was pointing out earlier in terms of how the restructuring expense Burns down.

Over the first four quarters typically and this is an average rate.

40 32010.

In terms of the cost side.

In terms of the product side and the go to market side I will tell you again I don't want to raise expectations were going to maintain a conservative outlook.

Because I do believe it will you know, we're not going to see a miraculous change overnight, but we're having conversations today.

Day, one on integration about how we're going to bring products to market.

In a way that we weren't doing even six or 12 months ago.

And so the the degree of product fit thats required for us to to bring a new product onboard and.

The go to market that we anticipate the cross sell the plus one motions that we want to activate day, one it's a different level of maturity around that go to market than it than we have even six to 12 months ago. So hopefully we'll start to see.

Quicker realization of the go to market synergies from these acquisitions and again the cost synergies will play out as described.

And can you talk about sort of the puts and takes in your analysis. We are looking at acquisition, Sir your preferences for either matching verticals you have adding a strategic verticals, where they are geographically even internationally can you stuck our toe into that.

Or even scale, how do you how do you kind of weed out which to go after first how to prioritize them.

So first we want to see a strong fanatics. It is just going to build out one of our cloud solutions. Today is this something customers want to buy from US we want adjacent disease. If you look at what we just did with local index. Most recent acquisition.

We've already got a powerful CX ATM offering and these CX platform.

Platforms are about orchestrating customer journeys right, our big customers, who have D to C motions are engaging with their customers increasingly these days online in terms of discovery in terms of nurturing in terms of purchase and ultimately advocacy and they need.

To be able to have personalize our clients do they need to be able to have personalized conversations with their customers at scale across multiple digital channels. So.

We already had part of strength in SMS texting and Rcs.

Now added onto that earlier last year I E mail marketing automation added on to that the feedback loop of customer sentiment analysis.

Added wallet.

And couponing.

Capabilities, and then with local Ltchs added in App and push messaging. So that now you can cover the entire spectrum.

Of.

Channels as our customers our clients orchestrate those customer journeys on behalf of their consumers. So it's a much more purposeful perspective, and when you do that your ability to take back in AP product and sell it to that chief marketing office.

Third a fortune 2000 company who's already using our text based products or email products well, that's just a much easier proposition than selling something that's not adjacent and on top of that.

We're doing clever integrations to bring these products together as part of our innovation through acquisition.

Strategy, So we want schematic fit we want.

Sticky products, 90% plus net dollar retention rates real software solutions not faster dies managed services place. So we want cash gross margins north of 70%, we want to see fortune 2000 customer base for at least.

80% of.

The revenue, because thats, where our land and expand model.

Works best we want to see average major accounts north of 25000, they are our and we'd like to see at least a handful of accounts in the three four or $500000 range.

In order to show the scalability.

The product and we'd like to see organic growth.

North of 15.

Percent. So those are the the geography is less important to us.

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We did want to create more of the international base, which we've done now across a few acquisitions.

And by geography is not the driver. So if we have those inputs than we can bring that product onto our platform. We can be running at 45% to 50% contribution margin and Hey, you know three years ago, we used to take that organic growth from 15% down to zero.

Now, we're taking it from 15% to five.

So we're taking a ton of cost out of the business.

The challenge for US is to take it from 15% to cat and that's why we're making the investments we're making.

In go to market and why we're clustering products buying more dramatically in buying higher growth.

Great. Thanks.

Our next question comes from the line of Terry you from Suntrust Robinson.

Your line is open.

Yeah, Yeah, thanks for fitting in I'll make it easy I will now slide.

Good question does this call is that's one question then it's related to one of your cloud product families around sales and marketing.

We are doing research and talking to lots of software companies just in our day to day job, we hear sales enablement like every time and they're talking about how we're doing more and sales enablement. So my question really relates to you'll get a family of products in that area of sales and marketing what are you seeing in terms of RFP activity and just strengths around sales enablement and a lot of those products.

You have.

That product family and it's also interesting to me you're talking about account based marketing that's another buzzword, we hear a lot. So I loved and I know, we hear we talked about CX them, but I would love to hear more about the vitality and sales and marketing as a growth engine, maybe even on the organic side. Thank you that's it for me.

Yes. Thank you Terry we're incredibly excited about the opportunity. There you know it's interesting in a way. The also by acquisition was really the thing that brought back entire cloud together in a sense, we bought the ornaments before we bought the tree.

We bought a first rate.

RFP automation.

Platform, we bought a first rate customer reference management platform at a first rate sales content creation collaboration and distribution.

Platform, all of which were serving large enterprise accounts right to have a principally b to b motion.

And as sophisticated.

Often times regulated but not always.

Sales process.

What we're missing was the tree to hang those ornaments on and that's what all defy does that was a fourth quarter acquisition. The category is called customer revenue optimization, and it's really about taking.

Best practices from sales methodology, and you can choose your own sales methodology or comes with a sales methodology embedded and we're used to have to rely on a consulting firm to come in and do this for you they've actually cloud aside if you will that intelligence into a software platform which guidance.

Enterprise sales forces through the entire selling process with embedded intelligence that represents next best action at various nodes in the sales process. So you can imagine the logic here when next best action is to rollout customer references.

He is and we've got that or next best action is about that RFP response preparation and we've got that and when you got sick content. That's been created on a collaboration platform that ensures compliance and integrity and you can use that to feed that sales engine. So this isn't.

An area. It is as robust of growth area for us we believe.

As CX salmon, we view the two things together they are really in my sort of P. brain, they're both customer engagement. One is for clients of ours that have a principally due to see motion.

The other is for clients that have it principally emotion.

And as we've talked about they together represent better than two thirds of our total revenue.

And they're an area of great focus for us in terms of future acquisitions.

And go to market.

Thanks Chuck.

Our last question comes from the line up for Brian from Raymond James Your line is open.

Great. Thanks, This is Alex sklar on for Brian.

Just a higher level question here, but do you think your willingness to step up on the go to market investments has any ancillary positive impact on the desirability of up when there is up as a buyer for some of your pipeline M&A targets.

Yes, I think it does because particularly as you start looking at growth year businesses.

And Thats, what we call. This we want to see at least 15% organic growth from the targets.

And these are.

Well position products being able to make the point to that seller that not only will we be a great home for your product and a great home for your customers and a subset of your high performing people that you now fit into a broader vision of how we're going to own a category, how we're going to.

Build an end to end winner in a category and this is how we're going to go to market together and this is where we share accounts today and these are the plus ones as we call them, we're going to take your product and sell it into ours and our product and sell it any yours. It was something that was talked about before but now it's being executed against on day, one that is invigorate.

Rating and level of enthusiasm. So we just had a kick off meeting for CX EM.

Sales kickoff meeting with a sales executives customer success executive solution consultants and it was wonderful because the local litigious acquisition, which just closed their team was here in Austin for that and the degree of excitement from sitting and and talking to those folks when they see the bigger picture and these are come.

Today's like in the case of local Ltchs, where they had email marketing automation in SMS text based delivery on their product roadmap as things that they were going to have to raise more money to go try to build from scratch your partner on and we bring that to the table immediately. So we are creating this whole product solution will leap frogging competitors.

We're shortening time to market, we're creating a end to end solutions that can win at particularly as cloud moves to more of a suite based or multi.

Solution deal you don't want to be a single product provider I don't think in this market. It gives us price flexibility and it gives us a wedge through which we can deliver tons of value to customers and build long term profitable relationship. So it's a great question. It's a great insight it is important.

Great. Thank you.

No foundry question presenters. Please continue.

Great all right well. Thank you all for your time this afternoon, and we look forward to seeing you on our next earnings call. Thanks very much.

And does concludes today's conference call. Thank you for participating everyone. You may now disconnect.

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No.

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