Q4 2021 Upland Software Inc Earnings Call
It'll measures that when used in combination with GAAP results provide upland management with additional analytical tools to understand its operations.
<unk> has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our fourth quarter and full year 2021 results, which is available on the Investor Relations section of our website.
Please note that we are unable to reconcile any forward looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort with that I'll turn the call back over to Jack.
Thanks, Mike So Q4 was a great quarter, and we are happy to share the strong results.
And also to announce our latest acquisition.
Hey, insight so here's add lines, we beat on revenue and adjusted EBITDA, So coming in above the midpoint of our guidance on both revenue and adjusted EBITDA, we dramatically outperformed our targets on free cash flow.
Generation over $12 9 million of free cash flow in the fourth quarter and again that after acquisition expenses and for the full year.
We did over $40 million of free cash flow of $46 million of free cash flow for the full year and again Thats after acquisition costs. Our net dollar retention rate came in stronger than expected at 94%.
On our third quarter earnings call. We said, we thought we would come in at around 93%. So again, we outperform that came in a 100 basis points better than that and we continue to expect additional improvement in our net dollar retention rate as we move through.
2022, Rob is going to speak to this a little bit later in the call, but we also had meaningful bookings rebound in Q4 up substantially.
Q3, and we had a host of product improvements in the quarter, which are reflective of our increased commitment to innovation and then finally after the quarter ended we closed two acquisitions here in Q1 of.
Both strategic and immediately accretive.
And those acquisitions increase.
Both our software library, and our customer base and we continue to have a strong M&A pipeline and.
In front of us so.
Finally strong guidance for 2022, and Mike is going to walk through that later in the call. So with that let me turn the call over to Rod.
Yeah.
Thank you Jack Good afternoon, everyone. As Jack mentioned Q4 was a good new bookings quarter and a strong bounce back from Q3 in the quarter, we expanded relationships with 285 existing customers 55 of those expansions where major expansion. We also welcomed 120.
One new customers to upland.
The fourth quarter, including 32, new major customers.
We made continued progress on our cross sell motion as full year 2021 cross sell bookings grew more than two X over 2020 as a reminder, cross sell for upland is a new product into an existing account, while admittedly coming off of a relatively small base. We're encouraged by the more than double.
Year over year and cross sell bookings.
Also as Jeff mentioned, we finished 2021 at 94% net dollar retention.
What we anticipated last quarter and our outlook shows net dollar retention continuing to improve throughout 2022, which we're excited about from a product perspective Q4 was a very active quarter for new product achievements, we delivered four new major releases.
Across our product library, and 22, new feature packs for a very busy quarter, we announced our most comprehensive file bound product release to date, which significantly expanding expanded how we automate workflow to support our customers needing to implement digital transformation across remote and hybrid business models.
<unk> product introduced several new features designed to provide us the ability to create better RFP responses and proposals, while increasing team efficiency compliance and most importantly deal win rates.
We also launched simple cloud a new capability from our simple product, which is an it financial management product.
Simple cloud is designed to help customers improve cost security and compliance in their complex cloud environments are very.
A growing part of the market.
Our strategy for global software development took an important step forward in Q4, as we established a new center of excellence in India to further leverage our offshore operating model. This operation will serve as a key global R&D cornerstone, you'll read more about this in the coming weeks.
On the M&A front today, we announced the addition of <unk> insight to the upland product Library. We are excited about this deal and its strategic fit for upland and our customers.
Insight is an enterprise search product that integrates with our customer systems.
But robust search in the hands of knowledge workers as.
As a search engine <unk> insight has product integrations into over 90 document and content systems, seven search engines and for leading AI engines.
Our enterprise customer base is mostly in legal business services and life Sciences, which as you know our wheelhouse industries for upland.
<unk> insight joins right answers and Penn VEBA, and our growing library of enterprise knowledge management products as Youll recall right answers, we acquired in 2017 delivers technology and methodology to consolidate answers to common questions to make call center agents more productive and to enable self service often veeva acquired earlier.
In 2021 last year delivers workflow based guidance to customer service agents in regulated industries, such as utilities healthcare and financial services.
In addition to how <unk> fits with our knowledge management products. It also fits very well as you can imagine within our document workflow library as it integrates with a lot of document systems to drive enterprise search with that I will turn the call over to Mike.
Thank you Ron I'll cover the financial highlights for the fourth quarter and our outlook for the first quarter and full year 2022.
On the income statement total revenue for the fourth quarter was $75 7 million, representing a decrease of 3% year over year recurring revenue from subscription and support reduced 4% year over year to $72 3 million. However, I should note that Q4 of 2020 included $6 6 million of subscription and support revenue from our <unk>.
<unk> mobile messaging product related to U S presidential election campaigns, which did not repeat in Q4 of 2021. So excluding these political revenues in Q4 of 2020 revenue has actually increased.
Professional services revenue was $2 7 million for the quarter of 1% year over year increase.
Overall gross margin was 67% during the fourth quarter and our product gross margin remained strong at 68% or 72% when adding back depreciation and amortization, which we refer to as cash gross margins.
Operating expenses, excluding acquisition related expenses, depreciation and amortization and stock based compensation were $29 9 million for the fourth quarter or 39% of total revenue. All generally as expected also acquisition related expenses were approximately $2 4 million in the quarter and the fourth quarter, which were about as <unk>.
<unk>, our fourth quarter 2021, adjusted EBITDA was $25 1 million or 33% of total revenue down from $26 6 million or 34% of total revenue for the fourth quarter of 2020 as expected adjusted EBITDA for this quarter was lower than the year ago quarter due to the extra political revenue in Q4.
20.
Cash flow for the fourth quarter of 2021, GAAP operating cash flow was $13 1 million and free cash flow of $12 $9 million, even with $2 4 million of acquisition related expenses in the quarter. So for the full year 2021, GAAP operating cash flow was $41 seven.
And free cash flow was $40 6 million, even with $21 2 million of acquisition related expenses in the year.
We are successfully generating substantial GAAP operating cash flow and free cash flow, even after acquisition related expenses.
We're targeting $30 million to $40 million of free cash flow. This year in 2022, but it will be back end weighted given the transaction and transformation costs from our two recent acquisitions.
This ongoing free cash flow generation is in addition to our existing liquidity of approximately $186 million comprised of the approximate $189 million of cash on our balance sheet as of December 31, 2021, less the cash paid at closing for our recent acquisitions of objectives.
Loon $29 million in PAA insight $34 million, plus our $60 million Undrawn revolver.
As of December 31, 2021, we had outstanding net debt of approximately $339 million after factoring in the cash on our balance sheet.
After our two acquisitions here in Q1 net debt is approximately $400 million. So our net debt leverage is currently around 4.0 times based on the midpoint of our 2022 adjusted EBITDA Guide.
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 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.
With regard to income taxes upland currently has approximately $366 million of total tax NOL carryforwards and of these we estimate that approximately $211 million will be available for utilization prior to exploration.
I will note that we still expect around $5 million per year of cash taxes.
Now for guidance.
For the quarter ending March 31, 2022, upland expects reported total revenue to be between 75, and 79 million, including subscription and support revenue between 79, and $74 5 million for growth in total revenue growth and total revenue of 4% at the midpoint over the quarter ended March 30.
One 2021 first quarter 2022, adjusted EBITDA is expected to be between 22% and $24 million for an adjusted EBITDA margin of 30% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 1% from the quarter ended March 31 2021.
For the full year ending December 31, 2022, upland expects reported total revenue to be between 313, and 329 million, including subscription and support revenue between 293, one and 307 5 million for growth in total revenue of 6% at the midpoint over the year ended December .
31, 2021 full year 2022, adjusted EBITDA is expected to be between 95 and $103 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 2% over the year ended December 31, 2021, and with that I'll pass the call back over to Jack.
Alright, Thanks, Mike we are now ready to open the call up for questions.
Yeah.
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Our first question goes to <unk> with William Blair. Your line is open you can go ahead.
Thank you and thanks for taking my questions team.
Great job, there that was great to see the bookings numbers come back.
<unk> et cetera.
Fabulous job I guess, maybe I'll start sort of.
What's sort of the.
What's driving bookings rather than working on go to market strategy couple of years and you've seen that sort of start to see some of these foods My love to talk Rod maybe.
What youre seeing on the top of the funnel of our pipeline.
The sales team is driving sort of how that flows down to close rates.
What's giving you sort of visibility to pipeline for the coming year.
Yes. Thanks.
It's a great question, we've really evolved from looking at our pipeline at sort of one top level pipeline down into three.
We have three deal types as you can imagine we have new logos, we have cross sells into our base and we have.
Same store sales or more of the same product into the same customer and so we actually manage that pipeline now at separate pipelines and the motions are different it's a bit more of a marketing sales motion as you can imagine for the new logo business from the <unk>.
Ross sell business, it's a sales motion, but it's a lot of our customer success team now engaged in pipeline creation. So it really I think that's one of the things we've made a lot of progress with last year was engaging our customer success team in identifying both new product cross sell as well as same St product expansion and so as we back up and look at our pipe.
I really get into details of conversion rates.
Pension converts at a better rate in cross sell and at a better rate than new.
Because you just have less.
Sales cycles are quicker or are they already on the product and they need more they are already using you as a vendor and they need another product or youre competing for a net new logo and so we have different conversion rates for different parts of the pipeline and frankly in different parts of upland are driving the top of those pipelines with different motions and so I think we matured a lot in 'twenty, one on sort of measuring the pipelines independently and.
Measuring sort of top of funnel creation independently.
Hopefully that helps.
Yes, and I appreciate the detailed answer there was actually very helpful. I guess, let's touch on the cross sell because you did bring it up on your prepared remarks about sort of that being promising doubling et cetera.
The question I'm asking is as you start thinking about more strategic relationships.
Are you at a level where you bring.
Yourself or Jack or senior executives and say, okay talking to the CIO or whomever and showing them the whole spread of upland products suite, and saying Hey, you guys are only using a sliver are we there yet or we still got a ways to getting to those relationships, where you get to say, hey, Youre now a trusted partner and I'm going to show you the value of.
Different products that you havent touched that will provide tremendous ROI how are you.
Where are you in that sort of.
Our longer term strategic relationship with those large clients.
<unk> been able to drive cross sell from those.
Yes, great question.
If I if I back up just a little bit Youll recall, we created our global accounts team.
Late 2020, and they really got in their seats by the beginning of 'twenty one they manage our major all of our biggest customers I'd say all most of our of our certainly our top 150 customers across industries and their mission in life is to is to cross sell obviously retain those customers sell them more of the same but the fine that cross.
Cell.
Bears fruit.
Without naming names I literally had a call Tuesday, with our executive sponsor at a very big.
Telecom Company Media company and the conversation was we love what we owned from you what else do you have.
Paraphrase. So we went through a lot of other potential fits in so that that was a call I happen to be drug into about our chief products officer. Some of our R&D leads some of our product management folks are getting on the phone with those biggest customers really driven by the global account team that thats that.
That will continue to mature as you know it takes a while to build those relationships to make sure you have that credibility.
Yes, we're definitely seeing that and that is a big part of what drove the increased cross sell bookings throughout 'twenty one.
Gotcha, Gotcha, where we look forward to hearing more about deepening.
Deepening those relationships and driving the cross sell across the product suite. Thanks, taking my questions and nice job guys.
Thank you <unk>.
Our next question goes to Terry Tillman with the Truest Terry Your line is open you can go ahead.
This is <unk>.
Joe Meares on for Terry I. Appreciate you, taking the question and nice job on the free cash flow.
Of the 121, new customers you picked up in the quarter did any of them come from surprising or new verticals for you and if not where do you see the biggest strength in new logos.
I don't think they came from surprising or new verticals, we've got such a wide footprint with our enterprise base now.
I would say there was there wasn't any one industry that jumped out there was strength across a lot of verticals, which frankly is encouraging.
Sure.
Really keeps us from being.
Two impacted by any given industry, having a tough.
Quarter or half so to speak.
Broad based strength is because this.
Just as a follow up.
Seeing even though the software market generally has retrenched from a valuation perspective private company valuations seem to be continuing to rise. So I'm just wondering if youre seeing anything there.
That's not in the headlines were private company valuations arent coming down and then if you could just remind us on what you are.
Your top end.
Your Max net leverage would be.
Thanks, so much.
Yes, so in terms of acquisitions and capital allocation.
More generally I would say regarding acquisitions, we're in a position of strength here and we control the timing, we have liquidity and cash flow and we've got a strong pipeline of deals. So we're going to continue.
To monitor the market and execute our playbook.
As we as we move through the year and again off to a strong start.
With two acquisitions.
Here in the during the first quarter I'd say regarding capital allocation more generally.
Stock buybacks and other strategic alternatives. Our policy is not to comment on any kind of speculative transactions and the presence or absence of any discussions, but again, we're constantly evaluating as part of our capital allocation framework.
The right investments to make to drive shareholder value.
Thanks again.
Thank you Joe.
Our next question goes to Brent Thill with Jefferies. Brent. Your line is open you can go ahead.
Hi, This is <unk> on for Greg.
Thank you again for taking my questions, maybe the first one for Jack and Ron.
Could you maybe talk about the overall demand environment.
Across software.
This year of a pull forward in demand into 2021.
And you have exposure to some of the front door.
Office apps.
And some back office apps as well could you maybe talk.
The new and what are your expectations for 2022.
Well look I think we mentioned that we saw.
A substantial uptick in bookings in the fourth quarter.
And we've put out.
Strong guidance for.
For 2022, so we feel.
Good about the year and good about that guidance in terms of what we're seeing.
From our customers and the demand that we see in the market.
I'll just add that if you look across all of our products in Q4.
It wasn't like one area drove the drove the performance all.
Our document workflow business or our enterprise sales and marketing <unk> products are more BDC customer experience products.
And frankly our.
<unk> management products and our call center products.
There was good performance across all products suites, our stats if you will in our library.
Which which I really take it as a good indicator across the demand spectrum into the earlier question. It wasn't driven by one industry either so.
It was it was pretty diverse frankly, so so encouraging we think.
Got it and then quick.
Follow up on the net dollar retention improvement.
For the next year.
How should we think of.
Impact from churn easing versus.
And the cross sell motion.
More than the expansion improving.
Yes, I think it's a good balance.
The.
We were seeing the same performance in gross retention as we are net retention. So it's not like we're dropping gross out in covering up with with expansion.
We're seeing success in both.
Both of those metrics.
Pretty much linearly so we think theres positive benefit in both places.
The only thing I'd add to that again, we talked about.
On the Q3 earnings call that we expected to come in at 93% net dollar retention rate last year and in fact came in at 94%. So a 100 basis points better and we do see that improvement continuing through 2022 as we've mentioned.
<unk>.
We were able to secure a number of multiyear contracts. So that should set us up for continuing improvement in that net dollar retention rate as we move through 2022.
Got it and then one last one.
On the margin side.
Could you maybe talk about the investments you're making into the next year.
The buckets of investment if you will.
Continuing to invest in the sales and marketing side.
Dan presence.
Yes, we've got the team in place that we need.
And so.
Current course and speed on the investments, we're making rod highlighted a moment ago, some exciting new initiatives on the product side, but thats consistent with.
The budget and the guidance that we've got out there.
Got it thank you.
Thank you Luke.
Our next question goes to DJ Hynes with Canaccord P. J. Your line is open you can go ahead.
Hey, this is Luke on for DJ Thanks for taking the question.
No.
I think one of the things that investors really appreciate about how you are positioning the business.
Now is the fact that you are now self funding and can execute your strategy without accessing the equity capital markets. We.
We do get some questions on how that mechanically works sometimes.
I'm wondering if maybe you could talk through that.
Saying, a few by $40 million in revenue per year at three three times multiple that's $120 million in M&A. If you run that out three to four years that $300 million to $400 million in acquisition spend I think you have around $1 50 in cash on the balance sheet.
And your cash generative, but im not sure that is not to close that gap. So I assume the difference there is an incremental debt are.
Are we thinking about that the right way and if thats the case.
How high would you guys be comfortable taking your leverage ratios over time. Thanks.
Yes look I think you're thinking about it the right way.
And when you look at the combination of our internally generated cash flow our cash on hand NR.
In our credit facilities, we can execute.
At that level of M&A.
$40 million a year at roughly three times in terms of leverage today, we're running at around Forex.
Net debt leverage and so plus or minus.
That number is where we're comfortable as.
As we've said all along.
We're willing to see it go up a little bit following a given transaction as long as there is a <unk>.
Trend line.
Back down so no changes there.
That's helpful. Thanks.
And then maybe just a quick housekeeping item I don't think you guys disclosed organic growth in the quarter.
I'm not sure if everything in there was was organic already so maybe just clarify that.
Yes for the full year.
X political organic growth was 2%.
Great. Thank you.
Thank you Luke.
Our next question goes to Jeff Van <unk> with Craig Hallum, Jeff. Your line is open you can go ahead.
Hey, guys. This is Aaron on for Jeff first question for you in last quarter part of the guide was and part of the.
I guess part of the guide down on how to deal with the political messaging or sorry, not the political messaging, but messaging revenue related to advocacy groups. Just curious how that trended sequentially quarter over quarter or have you seen that stabilize or come back to prior levels.
Yes, so we've seen.
Outcomes, they're consistent with our expectations and again I think thats reflected in.
The guidance for 2022, which is very solid guidance on the revenue side.
And then next question going back to bookings that bookings number you gave me a little bit of color on the cross sell bookings and what that has kind of done year over year and curious on the rest of the bookings number is there any way to quantify or provide a little more color about the breakdown of new bookings.
Versus versus up sell or expansion there.
Yes, we don't break that down.
Obviously, we track it but we don't break that down.
Okay Fair.
Fair enough I think that's it for me.
Thank you Erin.
Our last question goes to Alex Sklar with Raymond James Alex. Your line is open you can go ahead.
Thanks, Mike I don't know if you were exactly rod wants to take this one but the initial 2022.
Outlooks are a little bit wider range than in recent years can you just help frame what are some of the key swing factors you are still watching in terms of kind of the lower and upper bounds in that range.
Yes, Alex so typically when we start off a year that full year guide is wider just because we've got a full year to go and then as we move through the year that range tends to tighten up a bit for the remainder of the year because some of it's already but and I think youll find that the quarterly.
It is consistent in terms of range.
Okay.
Well maybe another.
One for you Mike the free cash flow results I think you hit on this in your prepared remarks, but they were really impressive this year and ex transaction cost I think it came out to like a mid sixties conversion rate of EBITDA I know you've talked to kind of a 55% conversion rate in the past I'm curious was there anything onetime benefiting those results in the quarter or do you think.
You could see kind of a higher conversion rate going forward exclusive of M&A.
No look I think that sort of 55% to 60% conversion pre.
Acquisition related expenses is the right way to think about it.
So, yes, I think youre thinking about it correctly.
Okay, maybe I'll just squeeze one more in the $30 million to $40 million guide for 'twenty two on the free cash flow is that a floor regardless of the future M&A or is that just based on what you've acquired today.
Based on what we've acquired today.
Again back.
Back end weighted because we have a couple of acquisitions here in Q1.
But thats the range that we're looking at now of course, there is timing differences and so forth.
We'll update it as we go here through the year.
Alright, great. Thank you.
Thank you Alex.
That concludes the Q&A session of the call I will pass the conference back over to the management team for any closing remarks.
Great. Okay, well. Thank you so much for joining us this afternoon, and we will see you on our next.
Earnings call.
Okay.
That concludes.
<unk> today's call. Thank you for your participation you can now disconnect your lines.
Okay.