Q4 2020 Upland Software Inc Earnings Call
Thank you for standing by and welcome to the Upland software fourth quarter 2020 earnings call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session instead.
Instructions will be given at that time.
The conference call will be reported in simultaneously webcast at Investor day at Upland software Dot com and a replay will be available for 12 months.
Now everyone should have access to the fourth quarter 2020 earnings release, which was distributed today at four P. M Eastern time.
If you've not received the release, it's available on uplands website.
I'd now like to turn the call over to Jack Mcdonald.
Chairman and CEO of Upland software. Please go ahead Sir.
Thank you and welcome to our Q4 2020 earnings call I'm joined today by Tim Mattox, Our President and Chief operating Officer, Rod Fab Brown, our president and Chief Commercial Officer, and Mike Hill, our CFO.
First I'll summarize our results as well as recent sales product and operations highlights following that Mike will provide some insights on the Q4 numbers and on our guidance.
And then we will open the call up for Q&A before we get started Mike is going to read the safe Harbor statement Mike.
Thank you Jack during today's call. We will include statements that are considered forward looking within the meanings 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 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.
Do not intend or undertake any duty to release publicly any updates or revisions to any forward looking statements.
On this call upland will refer to non-GAAP financial measures that when used in combination with GAAP results provide upland management with additional analytical tools to understand its operations.
Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our fourth quarter and full year 2020 results, which is available on the Investor Relations section of our website.
Please note that we are unable to reconcile any forward looking statements 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.
Thanks, Mike. So Q4 was a strong close to a year that demonstrated the strength and the resilience about loans business, we posted record organic growth in Q4, and also a record free cash flow and after the end of the quarter, we announced the.
The second street, thus restarting our M&A engine, our acquisition pipeline is robust our acquisition program.
Of course, now is self sustaining as our free cash flow on our financial resources mean that we're no longer dependent.
On the equity markets. So with that let me review the Q4 in 2020 results for the fourth quarter, 18% total revenue growth, 7% adjusted EBITDA growth now our EBITDA growth rate was lower than our revenue growth rate due to our ongoing sales and marketing investments.
And also a temporary uptick in CX and messaging costs based on high election year volumes for 2020, we're looking at a 31% total revenue growth overall with 21% adjusted EBITDA growth, our Q4 cash flow was a record.
At 21.2 million $21 2 million in free cash flow in Q4, we had only $2 6 million of acquisition expense in the fourth quarter, we had about a $6 6 million net positive change in working capital.
For 2020.
Overall free cash flow was $34 5 million and that was even with $27 1 million of acquisition related expenses on the here of course from this point forward, we're focused on generating material GAAP operating cash flow and free cash flow even after acquisition.
Net dollar retention rate came in at 94%. So despite the global pandemic our retention rates remained strong in the mid Ninety's percentage point range Q4 organic growth in reported recurring revenues came in at a record at 21%.
Net again.
Again, driven by election year CX M usage and also some acquisition grid on deferred revenue discounts. We don't view this as any kind of a new normal for organic growth and we're going to maintain a conservative organic growth outlook for 2021.
On the sales and marketing front in the fourth quarter, we expanded relationships with 242 existing customers 55 of which were major expansions. We also welcomed 111, new customers to upland in Q4, including 38 major customers we continued investing.
And our go to market initiatives, including establishing a global account sales team focused on our top 175 customers aligned by key verticals, including financial services Health care CPG High Tech and others and we also built out a new centralized Lee.
Generation sales development team and after the close of the quarter, we launched a refreshed brand and streamlined website. So we're going to continue building out. This phase one combined team now as of end of year or 24 global account salespeople and sales development reps in total.
And we continue to add to that in the first quarter on the lead Gen sales development Rep side on product, we had five major releases and 11 feature packs across upland product portfolio. So in the project and I T management product suite, we expanded our Microsoft.
All teams integration to accelerate cross team collaboration and communication for users.
And document workflow.
We announced new capabilities and integrations focus on in demand security features that you're single sign on and moving over to M&A as I mentioned earlier. After the end of Q4, we closed the acquisition of second Street, which is a leading cloud based audience engagement software platform.
That will be added to our customer experience management product suite and again, we are now on a self sustaining growth basis without dependency for equity capital markets for acquisition growth capital.
Our M&A pipeline as we look out into 2021 is strong and we are actively in the market looking at opportunities so with that I'm going to turn the call back over to Mike.
Thank you Jack I'll cover the financial highlights for the fourth quarter on our outlook for the first quarter and full year 2021.
So on the income statement total revenue for the fourth quarter was $78 $2 million representing growth of 18% recurring revenue from subscription and support groups, 27% year over year to $74 9 million.
Professional services revenue was $2 7 million for the quarter, a 21% year over year decline, which was expected due to the COVID-19 travel impacts.
Overall gross margin was 66% during the fourth quarter and our product gross margin remained strong at 67% or 70% 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 $28 1 million for the fourth quarter or 36% of total revenue all generally as expected.
Acquisition related expenses were approximately $2 6 million in the fourth quarter and of course, we will continue in Q1 as a result of our renewed acquisition activity acquisition related expenses are generally 50% of acquired annual revenue run rate and are typically slightly more foreign acquisitions.
For each acquisition, 40% to 50% of these transaction and transformation expenses are incurred within the first three months and then taper down rapidly until complete by the acquisitions first anniversary.
Our fourth quarter 2020, adjusted EBITDA was $26 $6 million or 34 per cent of total revenue up 7% compared to $25 million or <unk> 38 per cent of total revenue for the fourth quarter of 2019.
Adjusted EBITDA margin was lower due to our continuing go to market investments and due to increased CX M mobile messaging telecom costs due to the high election, your volume that we experienced in Q4.
So now to cash flow for the fourth quarter of 2020, GAAP operating cash flow was $21 $5 million in free cash flow was $21 $2 million, even with $2 $6 million of acquisition related expenses. In Q4. This was a record cash flow quarter for us right.
After the record $18 $7 million of GAAP operating cash flow that we produced in Q3 I will note that Q4 cash flows were benefited by a little over $6 $6 million of net positive temporary timing differences in our working capital accounts. So adjusting for the timing differences that still over 50.
Per cent cash flow conversion from adjusted EBITDA.
Looking at the full year 2020, GAAP operating cash flow was $35 $6 million in 'twenty 'twenty free cash flow was $34 $5 million, even with $27 $1 million of acquisition related expenses on the year.
From this point forward, we are focused on generating substantial GAAP operating cash flow on free cash flow, even after acquisition related expenses.
We are estimating that even with the ongoing additional acquisitions for 12 months free cash flow should be over $30 million and possibly over $40 million, depending upon the size and timing of future acquisitions.
Yeah on the balance sheet. This ongoing free cash flow generation. In addition to our existing liquidity of $310 million comprised of the approximately $250 million of cash on our balance sheet as of December 31, 2020, and our $60 million of Undrawn revolver.
This ongoing cash flow generation existing available capital and expanding our credit facility, while maintaining net debt leverage up to a maximum of around 4.0 times should allow for self sustained growth without dependency on the equity markets and I should note that our net debt leverage is currently at around three.
Times.
With regard to income taxes I will note that upland currently has approximately $345 million of total tax NOL carry forwards and of these we estimate that approximately $211 million will be available for utilization prior to exploration.
As of December 31, 2020, we had outstanding net debt of approximately $283 $3 million after factoring in $250 million of cash on our balance sheet.
I will note that the 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 five 4%, making our annual cash interest payments of 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 to guidance for the quarter ended March 31, 'twenty 'twenty, one upland expects reported total revenue to be between 76 and $74.6 million, including subscription and support revenue between 67.6, and $70 6 million for growth in recurring revenue of <unk>.
8% at the midpoint over the quarter ended March 31 2020.
First quarter 'twenty 'twenty, one adjusted EBITDA is expected to be between 21.6, and $23 6 million for an adjusted EBITDA margin of 31% at the midpoint, representing a reduction of 8% at the midpoint over the quarter ended March 31, 2020, reflecting our incremental investment in sales head count and related regenerate.
Activities.
For the full year ending December 31, 2021 up and expect reported total revenue to be between 288.6, and 306 million, including subscription and support revenue between $276, three and $286 3 million for growth in recurring.
<unk> of 1% at the midpoint over the year ended December 31 2020 full.
Full year 2021, adjusted EBITDA is expected to be between 98, and $96 8 million for an adjusted EBITDA margin of 32% at the midpoint, representing a reduction of 6% at the midpoint over the year ended December 31, 2020, reflecting our incremental.
<unk> in sales head count and related lead generation activities.
I will add that with additional acquisitions during 2021, our target is to be back to the mid 30% adjusted EBITDA margin by Q4, 2021.
Read that around 34%.
And with that I'll pass the call back to Jack Thanks, Mike and now we're ready to open the call up for Q&A. Please feel free to direct questions to Mike Tam Rod.
Hey.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on you touched on zone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, a little pause momentarily to assemble our roster.
My first question comes from Bob and Shah with Credit Suisse. Please go ahead.
Great and congrats on the strong end to the year Jack impressive organic growth. Once again was there anything to call out besides the benefit for mobile messaging are you seeing better traction across other areas of your six en suite or any early benefits from your go to market investments.
So the the bump in organic like other quarters last year was driven by principally by the <unk>.
Additional usage, we saw around the presidential.
Election cycle also a little bit of.
When from deferred revenue discount.
As well so I would say those were the two tailwind we had in Q4.
Got it and then I guess for Mike just in terms of the investments next year looking at your implied fiscal 'twenty one guidance on EBITDA applying some contraction there how are you thinking about the timeline on payback of these investments.
Yeah, Bob and so we've talked about really starting to see the payback happened towards the end of 2021 and into 2022.
We've talked about the the adding of the infrastructure. The personnel sales lead generation marketing collateral Rog can talk about that but it's going to it we've been talking about sort of targeted and 2021 for a while now and nothing has changed there.
Got it that's helpful and congrats again.
Our next question comes from Bob in theory with William Blair. Please go ahead.
Hey, everyone. Congrats on the quarter. This is actually Jake on for Bill on.
Just wanted to follow up on that organic growth comments, you made so obviously, 14% last quarter, 21%. This quarter. So really strong would just love to get a sense. If you could give us an idea of how much of that was related the messaging and how much was related to those one time benefits just as an idea for the past two quarters.
Sure I think you know and I think we mentioned this on our last earnings call as well if you back out the bump.
From election year usage, we are back into our.
Ah we're back into our mid single digits organic growth range. So no no change in that regard.
Thanks, and then just I know, it's relatively small per your entire customer base. So I was just curious if there was anything to call out in terms of your customers and more impacted verticals and how thats been trending over the first three months of the year.
The.
We posted strong net dollar retention rate.
The mid nineties.
But you know we're not we weren't on impacted.
By Covid.
Most of that was you know in verticals that are had a direct impact happily you know that was just a small percentage of our revenue. So no real change on that from what we've discussed previously.
That's great. Thanks for taking my questions.
Thank you.
Our next question comes from Brent Thill with Jefferies. Please go ahead.
Hi, This is love soda on for Brent Thill.
Congrats on a great quarter, maybe wanted to ask one.
On sort of.
On the go to market motion you guys are clearly investing it investing in it in the upcoming year.
Could you give us a sense of like are you know.
How many of these reps that you will you plan to hire.
It will be devoted to expanding versus new logos and sort of any any color into how to go to market motion is sort of forming under <unk> leadership.
Yes, Rod can you take that one.
Sure I can thanks for the question.
As Jack mentioned earlier, the global accounts team is now fully hired the there's about 10 of them.
The cover on our top 175 customers, they're very focused on not new logo, obviously, so theyre focused on a cross sell on expansion.
We talked about the verticals I will say that that team is already generally ramped.
And unlocking pipeline and actually contributed to Q4 already so so we've seen some early results. There it's still it's still new and young and it takes a while to kind of ramp their pipelines, but that.
That team is on boarding going as.
As we've also mentioned net sales development team, so we've centralized that debt.
Lead Gen function and that is much more focused on new logo.
We will also do expansion and cross sell our lead Jim with that team, but its probably 80 20, new logo focus.
We grew that team to 16 during the quarter, so and that is a.
They're already generating successful pipeline.
It's a it's a very scalable model and sort of where sort of encouraged by the early results. So it's the sales investment is specific the salesperson investment is really on the cross sell bucket.
But the pipeline development investment is more in the in the new logo plus cross sell bucket.
Got it and maybe a quick follow up on.
On on guidance I guess what.
I know in the back half you sort of get you.
Up against some tougher compares given the magnitude of the beat these past two quarters. So I guess, what what level of organic growth are you embedding in that 1%.
Recurring revenue growth number.
Right so.
As you pointed out we've got some headwinds.
You know on organic growth in 'twenty 'twenty, one because of the outperformance in.
In CX M usage in 2020, and so that's why the guy that plus our natural predisposition to be conservative on outlook.
I've led us to guide you know sort of flattish on organic but the way I look at it.
Is what is that organic growth rate ex political and so if you and in fact as we move through the year on subsequent earnings calls I will probably wind up calling that out in the organic as reported and then the organic ex political to get a sense of the sort of core business Oh.
Organic growth and I expect that that core business organic growth will be mid single digits.
So consistent with what we've done historically again, we're making the investments that Rob described a moment ago and as Mike said earlier those are investments, we're not anticipating returns on those until the end of the year or into 2022, so again.
All of that very consistent with what we've described ex political we will see in all likelihood mid single digits, that's our target.
And and then hopefully begin to see some of the return on that organic growth investment toward the end of 'twenty one and.
222.
Got it perfect and one last one on second Street media it is.
Could you maybe talk a little bit about that acquisition and how it fits into your overall C. S N.
Portfolio and is there more room to make deals within this space. Thank you.
Well, yes, and so.
Second Street is an audience development platform cloud based.
And as a natural add on to what we're doing for our customers.
Today, So you know whether we're helping.
With marketing campaigns around email or delivered by a text or deliberate delivered by our in App and push.
Jim.
Across all of those channel, there's a need for audience development and show second Street brings a suite of.
<unk> two.
Grow those use your day.
And so we're already on the hunt in terms of cross selling the second street into our existing customer base.
Do you want to take a moment and because this is this is a new motion for US one that's really been enabled by some of the capabilities that rod and his team have brought to upland over the past year. So do you want to take a minute or two rather than talk about.
Your kind of philosophy and approach to cross sell and the and the connection with our second Street and other deals.
Sure we will do so I think one of the first things we did around cross sell last year, which we talked about it a little bit I think in one of the calls was.
Just all the debt.
It's sort of systems and compensation and alignment around around making sure. We were we were organized to cross sell cross training our reps to make sure the comp plans made sense to sell that stuff.
And then what we've done with second Street really right out of the shoot right. After we closed the deal was.
What was sort of put a different what I'll call a bundled product offering together, which we hadn't done before historically and.
And being able to bundle their interactive content and their contests with our other engagement products like our email products on our SMS text products and our mobile products.
We think it's going to deliver much quicker results from a cross sell perspective, adding those as our customers renew or they come and buy more.
So those motions are now in place we've got the systems to deal with it everybody is trained on how to do it the pricing models are known.
And as we close this deal I think much more quickly than historically, we've been able to ramp that motion on.
So will you know obviously, we as we said from the beginning this sales and marketing transformation is we're still on this is still an active project through 2021, but but we really like the early results.
Great I'll pass it along thank you.
Yeah.
Our next question comes from Scott Berg with Needham. Please go ahead.
Hi, everyone. Congrats on a nice quarter and thanks for taking my questions here.
Yes, I have two we'll start with what's rod.
Obviously lots of people are asking about the sales changes, but I guess within that I know you brought in a new a new CMO I've I've said it gets me Jim do you want maybe tell us about some of the packaging and pricing changes that you've made over the last day 10 months or so and now that the sales teams are positioned and how that might help some of your on new <unk>.
Sales efforts going forward.
Yeah I appreciate the question I do want to touch on a couple marketing things around your question, but I'd be remiss if I didn't mention again that if you haven't gone to upland software dotcom, you should because it's a brand new bottoms up rewrite of both the brand and the messaging and the architecture of the web site and one of the.
One of them the infrastructure investments that Mike talked about earlier that we're making is it.
It is having a.
Is that having a digital buyers journey that we can drive buyers to that that really enable cross selling and enabled us to suggest other products. If you on certain products allow us to convert you from a lead perspective. This new web site is architected to optimize SCO. So it's just a much more modern fresh both brand message and technology. It also.
Allows us to on board at.
Acquisitions really quickly onto onto this website. So in addition to that we've centralized a lot of our marketing functions.
So that we can get leverage so we centralized our email motion our database motion, we centralized our Seo and our PPC motions.
We centralized all of our creative a lot of our campaign creation.
In order to just get leverage from the marketing dollars. We're spending and then we've obviously been working on as you mentioned sort of you know.
Skus and bundling and so now that we have the global account managers on board.
We're having conversations with customers that are more E. L. A like meaning hey, I on two of your products.
Counting unlock others.
And we're having more not individual product conversations, but more cloud based licensing models or on.
Or on an enterprise unlocks for a cloud technology suite.
This is early days on that but we weren't organized to do that because we didn't have the global account function and now we do and their their offer on them what that value prop and then well.
As we acquire things, we're bundling things together and Skus just to create really economic motivation for customers to buy more from us and I've had a lot of customer conversations in the last quarter that our help me consolidate vendors rod and they see they see our suite of products, we're doing a better job of communicating them sort of strategically.
Our buyers are seeing us as a supplier of lots of different technology solutions as opposed to the one or two they might own from us. So those are all the pieces that CMS has really been focused on in the back half of the year.
Great helpful. And then my follow up question, Mike you're on your one time expenses in the quarter I think were expecting something closer to a million.
What was the difference between the two figures.
Well, we ended up as you saw the second Street acquisition in early 2021 here, we started incurring some expenses related to to that deal.
And in addition, we had an office.
At least closure that showed up.
Debt that we took a charge for as well so so that was the difference.
Great helpful. That's all I have thanks.
Thanks for taking my questions and congrats on the new square.
Our next question comes from Terry Tillman with the cheapest. Please go ahead.
Yeah, Good afternoon, everyone and Oh, I'll say the same thing in terms of congrats on the quarter on some of these kpis metrics I guess Rod maybe my first question is for you than other put you on the spot, but if you look at your top 175 top accounts that you're targeting and what the global sales motion global sales Rep motion.
Is there any way to think about if they started going wall to wall or they started doing kind of what you know.
The prior question you answered it a little bit about like in L. A.
As an average customer in that cohort are they a million dollar customer are they a couple of million and I'd be curious.
What are some of the real products that just seem glaring in terms of yeah. They they it's a no brainer, if they're gonna buy that near term of your product families and then I had a follow up.
Yeah.
Yeah. So a couple of ways to think about that I think Terry we've got you know those 175 accounts are.
30% of our IRR, probably so there there are substantial in average size.
And they're sort of parent account organized in that we might have sub deals with different entities within those parent companies.
Which just gives us more more leverage to sell more products.
You know look we've got a portfolio of products you know I'll I'll just talk about Q4 for a minute and some of the products that debt.
Debt that we.
Close some larger deals with I mean are you know and this is an exclusive but are a right answer his knowledge manager product had a very good quarter.
A seven figure transaction.
We those kind of product we have we have a lot of products that are that are very competitive that we think this global customer group will buy it depends a little bit on vertical. So if I. If I mentioned that there are seven verticals and that kind of rattle them off but each of the seven verticals, we've mapped which products make the most sense in those verticals.
And and which ones to start cross selling first second third and there's you know of our 27 products, probably 10 11 12 have a have a really good fit in each vertical they don't some of our products are more btb's on more b to C that not every product. That's every customer right so or every industry. So what we what we spend our time doing is mapping that out and then doing use.
Our own technology to do a lot of account planning and white space planning. So you know it.
I think there is a lot of white space for adjacent products that fit that industry for these top 175 accounts and so we're obviously very focused on unlocking that.
Hence the global account investments I hope that I hope that helps answer the question.
Yeah no. It does thank you Rod and I guess, maybe Jack you know, we're talking a lot about the CX M and in these large messaging volumes, whether it's political or advocacy it kind of speaks to the strength of the platform that you could get that done. So what I'm curious about is as we look into 'twenty, one and 'twenty two kind of maybe glass half full.
How could you maybe change or take advantage of the <unk>.
Are your customers and maybe its other use cases, because it does seem like messaging is a kind of a secular growth area. So maybe there's opportunities in e-commerce or just other types of CX M use cases, but you know taking the tough comp you have and maybe actually kind of redeploying the mind share and to some other use cases that could be kind of ongoing strong activity.
Thank you.
Yeah. Thanks, Terry it's a great point and of course, our CX our customer base.
And well beyond.
Just the other.
Political sector and.
And we've built as you.
No we've built this capability.
Across multiple channels.
And there is an opportunity to drive additional penetration look we do a lot in.
And nonprofit today, we do a lot in publishing we do a lot but in retail we've got capabilities that.
Include a customer sentiment analysis, so we've really built a.
Kind of closed loop system for omni channel.
Delivery and feedback.
We're looking at opportunities too.
Take that to the next level, so I think you'll see additional activity from us.
In terms of capabilities that will enable omni channel.
Campaign development and execution.
You'll see on the sales and marketing side.
To further penetrate.
The verticals I mentioned and some new ones. So we're very bullish on <unk> and on messaging I agree I think it's a secular growth area for us over the next few years and it goes well beyond.
Politics.
Thanks, a bunch.
Our next question comes from David Hynes with Canaccord. Please go ahead.
Hey, Thanks, guys congrats on the results.
Almost 40 million on free cash flow here on the back half.
Great to see.
Jack So look you've assembled the critical mass portfolio in CX or customer engagement wherever you want to call it right and it seems like the cross sell on that segment.
It has certainly been helping to drive the organic growth. If we think about the M&A strategy going forward.
Is there a priority now around tighter.
Tighter product synergy b that ANZ ax, or maybe a new category or is it really about.
Being financially opportunistic given where valuations are these days.
It's just it's about product synergy first you know we want strong thematic fits and happily as I look at our pipeline right now we've got them.
And you started to see that happened over the past few years really going back three or four years, where we are.
Put a stronger.
Thematic lands on.
On acquisitions and so.
No we can talk to that.
Around enterprise sales and marketing right, where we have you know we brought in the off the five platform.
For customer revenue optimization, and then added on to that capabilities on customer reference management on RFP automation on content production and b to be selling tools. So we've built that capability out there and we've got additional mark.
The jewels that we can plug in through M&A and of course, that's mostly going to be to be.
Emotion and then on B to C. You've got an opportunity with all of the CX and products and we've got a number of opportunities on the M&A pipeline too.
We continue to build that out some other areas contact center, it's been a great area for us and so we've already got a couple of strong offerings there.
And there are.
It's an area that we'll look at for.
Additional.
<unk> over this year, so I'm really excited about.
Where we are in.
In call Center specifically.
Across the board and.
And now bringing on board this.
Sales and marketing team.
If you could give us the ability to.
Cross sell these products after we acquire them right. So we've laid the predicate in terms of systems in terms of the complementary nature of the products.
And now we are on a you know create.
Creating net sales distribution arm and I look at it as an entrepreneur and think about the amount of value. We've created in the past eight or 10 years frankly without sales distribution.
And you know, which is usually where you see so much operating leverage.
And in that.
Acquisitive.
Software business. So now that we're beginning to add that in I think it gets very exciting so the pipeline of strategic deals in there the sales distribution is being built.
Yeah, it's a it's going to be fun to execute against that over the next few years.
Yeah, Yeah that makes sense I mean huge categories and the distribution will help but that's probably a good segue into my follow up so I want to hit on the dollar based net retention rate yet.
A blip this year with the pandemic, but it was 97% last year right. So we're within striking distance of triple digits.
Rod and team are obviously, pushing really hard on the cross sell upsell motion do you think net retention can get to a 100% plus or how you're thinking about that evolving over the next couple of years.
Yeah, I mean, that's the goal and I think you know what other things that impressed me. When you know Rod came in it was the first focus was on on renewals right on gross renewals because theres an understanding there that that's going to ultimately be the basis for organic growth.
And you know the.
Customer success oriented culture that we've operated under for the past day, what really since inception, I think puts us in a good place there and we've got some products that are.
Popular with customers and that are you know need to hats, and many other categories, where we operate so.
As we continue to get scale.
And sophistication around our customer success efforts I you know, it's our goal to move.
Toward 100 per cent.
As you say, we were you know, we're getting pretty close to it right climbing up a few points a year a 97% are you know.
19.
You know 300 basis point hit from the pandemic and now let's build it back up again.
Yep Yep makes sense awesome. Thanks for the color guys.
Our next question comes from Jeff Foundry with Craig Hallum. Please go ahead.
Great. Thanks, a couple from me Jack maybe just to start with you that the political I know you you you know typical conservatism not willing to bake it into the forward.
What point does that change your you know your perspective changed there and that you you see persistence and you know obviously, we're coming out of the main election season.
To me there seemed to be some pretty good arguments what you might continue to see sort of persistent strength. There just talk about the kind of the over under on whether or not that actually that business rolls back over now that we're out of out of sort of the prime election season, and then secondly.
On the M&A front I'm, just curious if you'd kind of contrast, the day the pipeline of opportunities what kind of pre during and post COVID-19 how is that pipeline of opportunities more if at all if you see any differences there.
Yeah. So I think look you know there was a ton of spending around the presidential election last year that we were the beneficiary of that I don't think he can.
Look for that to repeat I I mean, I think you can get.
A piece of it maybe you know and you could debate, whether it's 10 or 20% or whether it's 30 or 40%, but it's not going to be 100% don't repeat so that's my sort of over under bluntly on that end and obviously.
You know we are assuming no repeat of it you know in terms of outlook here, because I think we just need to be conservative about it.
And we will we will see how that develops in terms of.
Pipeline.
You know, it's a it's as strong or stronger than it's ever been.
It just is so helpful. When you've executed more than 25 acquisitions.
With.
Tegra <unk> and done the right thing by product and customers post acquisition right and so it just makes our job easier. We've also invested more in our M&A pipeline development.
I have a bigger team a higher functioning team that we've ever had before and of course our capabilities around integration.
Today our.
So much stronger than they were just a couple of years ago.
So I would say pipeline looks great pricing feels good.
The deals are more strategic than they've ever been.
Jeff it's sort of it's worth mentioning right because we we've got.
On a on a numerical basis as big a pipeline as we've ever had but our filters are a lot tighter on that right. So even saying look we want deals that are complementary to our existing product portfolio and you know the six or seven key buying centers in the enterprise, even putting that filter on it we're still ahead of where we.
Where historically because we just got that degree of presence in the market.
And pipeline development capability, so I feel great about it we're gonna be.
Measured about it we're going to drive a self sustaining acquisition model and we're gonna print material free cash flow even after acquisition expenses. So I really think we're well set up here.
As we look out over the next couple three years.
I Love Love the casual.
One last if I could sneak it in Rod you know.
With respect to the sales just back I think you've talked a lot about the structural changes you've made I'm wondering if you can kind of just look through that and give us a little better sense of the the buyer behavior slash sort of buyer's willingness and appetite to actually byproduct as we've we've progressed through COVID-19 and hopefully we're coming out the backend here it looks like the deal counts the big deals most of those numbers are steady.
So there's not really a story in those numbers, but any color you could give on sort of by your willingness to execute the way those cycles progressed in terms of the timeliness just maybe a one step deeper there would be helpful.
Sure Yeah, I would say that you.
You know.
Q4 was.
I say Q3 was felt like.
The bottom if you will of.
Of of sort of buyer awareness and slowness of deal cycles, and how long it took to get things through Q4 improved a little bit.
Well Q.
Q1 feels like it's similar to Q4.
We kind of thought coming into 'twenty, where they might improve a little bit more but we obviously didn't forecast that but it's a you know.
Where we're seeing some improvement.
The middle of last summer, but Theres still wariness Theres still were still you know COVID-19 is still real and there are a lot of issues around the world that are driving conservative behavior. It hasn't really changed that much for us I think we're just getting smarter about qualifying.
Out any any prospects, who feels like they're just too nervous to make transactions happen or they've got some macro issue that slowing them down. So I would say, we're our pipeline just doesn't have a lot of that stuff in it frankly at this point. So that's the good news.
But it's definitely it's.
It's definitely still a little bit slower we're not through this global pandemic I don't think in and hopefully by the end of this year will be all the way out of it but you know.
We're not smart enough to forecast that just yet.
Yeah, I'm with you there thanks, guys great quarter, great cash flow.
Our next question comes from Brian Peterson with Raymond James. Please go ahead.
Hi, gentlemen, thanks for taking the question and I'll Echo the comments on on the really strong close to the year. So just just one question for me on.
Jack you've mentioned strategic and product synergies and obviously the M&A pipeline is pretty large so I'm curious did the deal sizes that you looked at do they expand or you know the multiples that you are willing to pay or do you look at a different buying centers.
Guys scaled there's the math of the process change at all just because your revenue based on scale and what do you think about that thanks, Jack Yeah.
Yeah, no. Thanks, Brian its a great question and so you know look we're still in this 5% to 25 million dollar revenue.
Category, we think we can really be the de facto consolidator of that part of the market in the categories that we're playing in and as we talked about before.
Before I you know I do see deal size average deal size kind of ticking up a million or $2 million a year kind of within that within that band.
And so you've seen.
<unk> seen over the last three or four years ago from eight to 10 to 12 to 14, and you know could it get a little bit higher here as we go yes, but youre not going to see a sea change outside of that.
Category.
On the emphasis for US right now is.
He is on.
Strong somatic debt.
And again, having the kind of.
Sticky.
Applications a day.
Kind of enterprise customer base.
That we seek and and you know the set up that enables us with our model to quickly transform these businesses to 40% to 50%.
Contribution margin on the pipeline looks really strong.
And.
Say, we are in a great position to execute against that.
Good to hear keep up the good work.
Our next question comes from Richard Baldry with Roth Capital. Please go ahead.
Thanks for building on recent questions is there a way to think about your M&A capacity either total revenue you could pull on in a year. The number you could concurrently do what's your current scale and you know in the past it's been pretty rapid at times does that change at all under sort of near term on.
Or a virtual integration or work from home environment does that cause any sort of headache to getting back to a rapid pace like we've seen at times. Thanks.
Thanks with your to answer your second question first no.
There were 60 per cent remote pre COVID-19.
We'll probably go back to 80 per cent post COVID-19, so those motions around.
The acquisition and integration have not been negatively impacted net debt what that won't affect our pace in terms of what pace we're targeting.
<unk> 50, 40 50 million a year of acquired revenue.
And that at that pace.
We are self sustaining we can finance the acquisition.
Costs out of internally generated cash flow and cash on hand.
And our debt facilities, while maintaining reasonable amounts of.
Leverage.
On the sort of three to Forex.
You know EBITDA.
<unk> net leverage.
That's the pace, we like and it enables us to be selective and they still put up some nice total growth numbers. So that's what the planets.
Alright, thanks, congrats on a per quarter.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Jack Mcdonald for any closing on.
Great well. Thank you everyone for your time this afternoon, and we look forward to seeing you on the next earnings call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.