Q1 2022 Upland Software Inc Earnings Call
<unk> also outperformed plan on operating and free cash flow.
We generated $8 million in free cash flow in the quarter and Thats after.
Substantial acquisition expenses.
From the two acquisitions, we announced in the quarter Rob.
<unk> is going to speak to this later in the call, but we had a good bookings quarter.
Addition to that we announced a host of product improvements in the quarter.
<unk> major new releases for Acura and kaposi.
And upland mobile messaging and all of that is reflective of our increased commitment to product innovation.
In addition to that we announced the opening of our center of excellence that.
That development operation in India, which provides a cornerstone for our multimarket global product development strategy.
We also closed two strategic and accretive acquisitions in Q1 objective loon and be a insight further building, our product library and customer base and in particular strengthening our document workflow product family and.
And finally, we remain active in the market for additional acquisitions and strong on our outlook.
For the year, so with that let me turn the call over to Rod.
Thank you Jack good afternoon, everyone I'll start on the sales side, a little bit more detail on some of Jack's comments as Jack mentioned Q1 was a good bookings quarter in the quarter, we expanded relationships with 280 existing customers 49 of those deals were major expansions. We also welcomed 120 new logos.
In the first quarter, including 25 major new customers or new customer sales were well distributed across our products and industry verticals. We also had a good expansion quarter across our products specifically.
Upland mobile messaging product, which is our text messaging product and also by our sales enablement product for account based selling both had strong expansion quarters Q1 was also a strong quarter for selling our premier success plans as a reminder, our premier success plans or subscription services packages that give our customers high fidelity support.
To help them be successful.
Switching over to product.
We had nine major releases and 11 feature pack minor releases and a little bit more detail on some major accomplishments and the product innovation area kaposi, our content operations platform.
<unk>, new functionality to support dynamic content creation processes cross functional collaboration revenue team enablement.
With <unk>, we continue to help our customers scale content engage audiences with solutions from those for the most complex B E marketing organizations.
We delivered a major new release for upland mobile messaging, our enterprise messaging product as we move that product onto the snowflake database dramatically improving product performance and scalability.
As our customers scale with that product.
Acura out our content capture and routing platform further cemented its position as the leading bridge between customers' on premise applications and cloud solutions, when we announced that the product has expanded into really critical integrations like electronic medical records and launched new machine learning capabilities to improve data collection and overall.
<unk> user experience.
File bound which was recognized as the gold medallist and a leader in the 2021 enterprise content management data Quadrant report from software reviews. We're excited about this that product focuses on document management and workflow automation.
And finally as Jack mentioned, we opened our first R&D Center of excellence located in India. During Q1, we've already made multiple hires for the core team and senior leadership roles in over the course of the next 12 to 18 months, we intend to significantly scale, our full time R&D employee presence in that market further leveraging our offshore.
Sure operating model.
With that I will turn the call over to Mike.
Well, thank you Rod I'll cover the financial highlights for the first quarter and our outlook for the second quarter and full year 2022 on.
On the income statement total revenue for the first quarter was $78 7 million, representing an increase of 6% year over year recurring revenue from subscription and support increased 4% year over year to $73 6 million.
Professional services revenue was $3 3 million in the quarter, a 12% year over year increase overall gross margin was 69% during the first quarter and our product gross margin remained strong at 71% or 75% when adding back depreciation and amortization, which we refer to as cash gross margin.
Operating expenses.
Expenses, excluding acquisition related expenses, depreciation and amortization stock based compensation were $36 1 million for the first quarter or 46% of total revenue all generally as expected.
Also acquisition related expenses were approximately $10 4 million in the first quarter, which were in line with plan.
Our first quarter 2022, adjusted EBITDA was $23 4 million or 30% of total revenue up from $22 8 million or 31% of total revenue for the first quarter of 2021.
For the first quarter 2021 first quarter 2022. It is GAAP operating cash flow was $8 2 million in free cash flow was $8 million, even with $10 4 million of acquisition related expenses in the quarter. So we are successfully generating substantial.
GAAP operating cash flow and free cash flow, even after acquisition related expenses, we are targeting $30 million to $40 million of free cash flow. This year in 2022, but it will be back end weighted given the transaction and transformation costs from our two recent acquisitions.
This ongoing free cash flow generation is in addition to our existing liquidity of approximately $190 million comprised of the approximate $130 million of cash on our balance sheet as of March 31.
2022, plus our $60 million Undrawn revolver as of March 31, 2022, we had outstanding net debt of approximately $397 million after factoring in cash on our balance sheet. So our net debt leverage is currently around four 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 interest payments of approximately $30 million at our current debt level.
Additionally, I will point out that our term debt has no financial covenants 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 of cash taxes per year.
For guidance for the first.
For the quarter ending June 32022, upland expects reported total revenue to be between 77, 5% to $81 5 million, including subscription and support revenue between 72, 7% and $76 3 million for growth in total revenue of 4% at the midpoint over the quarter ended June 32021.
Second quarter 2022, adjusted EBITDA is expected to be between $23, four and $25 4 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 3% from the quarter ended June 32021.
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 two.
21 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 to Jack Alright. Thanks, Mike We are ready to open the call up for questions.
If you'd like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question press Star one.
Our first question is from Scott Berg with Needham.
Please proceed.
Hey, Jack Rod and Mike Hope all is well congrats on the quarter and thanks for taking my questions here.
I guess first question, perhaps since rides on the call will probably directed his way.
Sales in the quarter you characterized it I guess is good bookings.
How should we think about your progress in cross selling modules different modules to existing customers I know historically a lot of your expansions and.
Higher net dollar retention numbers are really been driven by up selling more of the cross sells we just wanted to get an update in terms of your opportunities to cross sell products. Thank you.
Yes. Thanks for the question. So obviously as I mentioned bookings were good expansion was particularly good.
Cross continues to be to <unk> continues to improve.
It.
So the cross pipeline cross sell pipeline continues to grow like we wanted to.
And the cross sell deal closings continue.
Really in that same good fashion as the quarter was I would say.
The thing that stood out in the quarter that I would say better than good was with expansions.
Okay.
Mike from a follow up perspective, your adjusted EBIT margins at least by my math I have them just below 30% for the first time in a really long time.
It looks like all of your expense areas at least as a percentage of revenue were.
<unk> higher than than they have been over recent quarters.
I guess im just trying to try to help us understand a little bit what maybe drove the extra cost in the quarter and I saw what the guidance was for the rest of the year. It sounds like Youre moving it up a little bit, but how should we think about the model maybe over the intermediate term next 12 24 months.
The slow of 31% to 32% of the right way to think about the near term model or are there some opportunities to move that needle. Thank you.
Yes, Scott.
31%.
Way to think about it for the year that's unchanged in our guide as you may recall, we typically see low in our lowest margin EBITDA margin for the year as the first quarter because of payroll taxes and as those sort of cap out as we move through the year, our EBITDA margins move up typically.
<unk> throughout the calendar year, so, we typically and margins at the highest stock margins at the lowest and the average is 31%.
Ongoing forward with additional acquisitions, we still see.
Our back office shared service organization and G&A.
Scale leverage so with ongoing acquisitions again, we're targeting $40 million of acquired revenue run rate a year.
We see margins, improving 50 to 100 basis points, possibly more as we as that as those cost efficiency scale.
So really no changes on margins.
Great Thats all I have thanks for taking my questions everyone.
Thank you for your question.
Our next question is from Terry Tillman with Truest. Please proceed.
Oh, great. Thanks for taking the questions here. This is Robert on for Terry just starting off curious to get a rough update on head count and whether our go to market hiring is going to plan specifically around the global accounts team.
How is capacity there and said differently I think Rod you mentioned last quarter that there, they're Michigan licenses to cross sell so how is it going.
Yes.
Good question for me, let me start with the head count question, so not including solutions consultants, our overall sales head count, including leadership is right at 90 people.
I think that is very close to the plan number.
We do have a few people that we have to replace from time to time like everybody else, but I think thats very close to what we planned.
So there's a quick answer to the head count question on the on the global account side.
Cross sell is an important part of that team's mission the way to think about that team is if I'm a global account manager and I have two.
<unk> customers that add up to $10 million in revenue, we challenge those guys to bring us back.
More revenue then they start with and so they have to make sure. The customers are being retained and they have to make sure they're doing expansion in our same store sales. If you will and then they have to cross sell so those those three levers.
Levers add up to the outcomes, we're looking for from our biggest customers and.
If you compare the global account cohort group, but the overall business they are outperforming and doing a nice job and they had a good Q1.
For that for that global account cohort groups. So it sometimes on a given quarter, sometimes it's stronger cross sell sometimes it's stronger expansion.
Sometimes it's stronger renewals, we like all three of the hit once they don't always all hit at once but that's how we measure that team and we're quite happy with where they are right now in their performance relative to the overall portfolio.
That's great. Thank you and then just one more for me curious to get more color on the M&A pipeline, just broadly how valuation reductions in public markets hit the private markets in a meaningful way and if so has there been any impact on the attractiveness of private market deals versus perhaps allocating capital towards buybacks or other strategic.
Alternative.
Regarding acquisitions, we're in a position of strength here.
And we control timing, we've got liquidity and cash flow and a strong.
Our pipeline of deals and so we continue to monitor the market and weigh the options and we will execute when it makes sense, we announced two strategic and accretive acquisitions in the first quarter. So we're off to.
A strong start for the year regarding stock buybacks or other strategic.
Alternatives, it's our policy to not comment on speculative transactions of any type involving the companys securities or the presence or absence of discussions. The company you may have related such transactions.
Great. Thank you.
Thank you for your question.
Our next question is from Jeff Van <unk> with Craig Hallum Capital Group. Please proceed.
Hey, guys. This is Aaron on for Jeff Nice quarter, Thanks for taking my questions.
First question, just curious from a macro environment perspective, as you've seen.
Inflation fears of recession anything going on in Ukraine, if you're seeing any meaningful impact to your business from that.
So thanks for the question regarding Ukraine and Russia.
Really no exposure there.
We had a few contractors, there, but nothing material and so no no real exposure.
Regarding outlet generally as our guidance indicates we maintain a strong outlook for the year.
Okay.
Then the next one.
Just curious given given some of the market uncertainty everything else going on has anything changed in your outlook on that.
On the M&A front as far as capital allocation M&A versus operating cash flow.
As I mentioned, a moment ago, we are in a position of strength as it relates to M&A, we've got liquidity and we can execute when we're ready to execute we've got a strong pipeline of deals and a shopping list that.
He is not only financial but also thematic so we're going to continue to monitor the market and.
Execute when it makes sense.
As I mentioned, we started the year strong with two <unk>.
Strategic and accretive acquisitions in the first quarter so off too.
Off to a strong start there.
Thanks, and then last one Mike just looking at some of the expense lines. It looks like G&A was a little fatter on an non-GAAP basis this quarter.
Is there anything anything to call out there as being different than expected and how should we think about that modeling going forward.
I think.
Generally G&A will probably trend down as we move through the year again, there is some extra things in G&A. This quarter like payroll taxes that are front end loaded generally in the calendar but.
G&A, all youll probably see.
See it trending down as we move through the year.
Perfect. Thanks, I appreciate it guys.
Thanks for your question.
Our next question is from Brent Thill with Jefferies. Please proceed.
Hi, This is love set on for Brent Thill.
Thank you again for taking my questions, maybe the first one for Jack or Rod.
On the overall demand environment that youre seeing.
<unk>.
The last question talked about the macro stuff I guess.
Rising rate environment.
Could you just help us categorize the demand that youre seeing out there from your customers.
And they have the same appetite to spend going forward.
I think one of the ways. This is rob by the way one of the ways that we measure demand is what I'll call our inbound new logo pipeline and so these are people who know our brands our products.
They are coming to us and raising their hand, and showing intent and indicating an interest in looking at one of our products and the.
The pipeline created in that cohort group has been very consistent month over month for.
In the last 12 months and so I have not seen a inbound demand shift.
An anecdote from Q1, we had.
Our price increases.
It was it was our.
I think our best price increase quarter.
So customers are willing to spend a little bit more and we do intend to.
That price increase motion as we're rolling out more price increases July one, which we after talking to customers feel like.
The demand is there and the strategic nature of our products.
Allow us to do that so we are.
I think all the all of the indicators from the demand side are still healthy.
No nothing out of the ordinary.
Got it that's super helpful. I guess as a quick follow up.
Could you maybe talk about the magnitude of those price increases.
And.
Is there room to do more given the higher inflationary environment that we're in.
Yes, so we actually haven't announced any numbers yet relative to magnitude and it will be somewhat different based on product and sector. So I'd, rather not get into that.
What I will say it is.
We do believe this is a bit of an opportunity for those to be larger than historical.
Frankly, I think we're not alone in that I think if you look around the sector thats.
That's part of this inflationary reality.
Got it.
And maybe one on organic growth if I may.
Could you.
Maybe talk about that and how should we think about the compares obviously the election related spend compares get easier in the back half of the year.
Yes.
We do have a midterm election in the U S coming up so.
Could you maybe talk about the cadence there.
How should we think about the back half of the year in terms of organic growth.
Yes, so we expect core organic growth rate, which is backing out those.
Presidential political revenues and backing out overage charges the core business.
To strengthen in terms of organic growth through the year.
And.
No change from our.
Sure.
Steady state.
Target of mid single digits low to mid single digits on.
Core organic growth.
In terms of.
What we see on the political side the biggest impact there is the quadrennial presidential.
Elections, right and so.
Hi.
While we could see some.
Impact.
From the mid terms the bigger number.
It comes with the presidential now we have had some interesting pre.
Progress with some large political groups.
Rob do you want to talk to.
Q1.
The UNM booking around.
Political.
Sure Yes.
Really only tangentially associated not not obviously not associated to any sort of major presidential election by much smaller in volume and more of a ongoing commitment as opposed to just the midterm related relationship.
Customers, we've had for a long time, who just decided to buy a lot more I guess is the best way to characterize it so we do see sort.
Sort of tangential organizations related.
And the political world, but we're not we're sort of subtracting out any of that sort of presidential.
Peak and valley information relative to the organic growth numbers.
Got it perfect. Thank you.
Thank you for your question.
Our next question is from Jacob Broberg from William Blair. Please proceed.
Hey, guys congrats on the great quarter and thanks for taking my questions. So just wanted to take a step back and look at 2021, there were a number of headwinds impacting the business like pipeline issue caused by the sales restructuring and the tough comps related to the 2020 election, but when I look at the model today am I right in.
Thinking that the trough was likely in Q3, and Q4 of last year and that these issues should largely be behind the business and we can get back to that kind of steady cadence of low to mid single digit organic growth and margin expansion and so just trying to think about how we move throughout the year.
Yes, so I mean core organic growth for 2021 came in at around 4% right core organic excluding the presidential political revenues excluding.
Overage charges.
Any sunset it assets.
And as we look at.
This year.
We see core organic growth strengthening.
Through the year, it's Mike has talked about before we've got an average contract duration of 18 months.
So you get a little bit of a delayed.
Revenue impact on any pandemic related.
Churn.
Directionally here, we see.
Core organic growth improving as we move through the year.
Great. Thanks, and then just back to the game that we talked about earlier. So you've had those now in place for a few quarters I'm just kind of curious if you've seen any changes to your strategic relationships with larger customers, where you can really show the whole spread above blend products suite and are we out of play.
<unk> were up one is really that trusted partner of these enterprises, where the games can start driving more cross sell and new products that they have.
With those new products that they have acquired over the last few years.
Yes, I think we're getting there I think that most of these global account folks had been in place now four quarters or so.
And it takes a while as you know walking into a very big customer to get to know everybody gets into the senior leadership make sure you've got the right level of credibility.
Taken care of them with their current products selling the more of the same and crossing in in last year in the back half. We saw I would say the first solid cross sell successes out of that motion keeping in mind those are probably sales cycles that we start.
We go to the customer and say Hey, we have this ethical stuff would you like it as opposed to the customers already decided they want it and they called US so sometimes those sales cycles take a little bit longer, but but once the customers engaged we've got existing contracts, it's easier to get through the sales cycle. So we're definitely seeing that like I said the global account team has won.
One make sure the customers retained and happy to sell them more of the same and three sale of something new.
And like we've talked about but just might be worth a reminder, they are organized by industry vertical and we have isolated which part of our library of products fits better within which vertical.
So they know which of the products to focus on cross selling and which products go together.
Which is our highest probability of winning and just being efficient with that motion. So that's exactly what theyre doing you've described it and I think their relationships get deeper every quarter.
Great. Thanks for taking my questions.
Thank you for your question.
Our last question comes from Alex <unk> with Raymond from Raymond James. Please proceed.
Thanks, Jack you hire new Chief product Officer last year now, we've got a center of excellence coming online and the product release cadence definitely seems to have been up can you just give us an update on changes that have occurred within that part of the organization and then I'm curious if there's any margin impact from the center of excellence.
Yes so.
We did bring on a new chief product officer and.
As you rightly point out.
The pace of product innovation has increased and rod.
Went through a number of those.
Earlier in the call. So we're really pleased with.
The alignment and the level of execution that we've seen we're also excited about.
The center of excellence.
In terms of really providing a cornerstone for our multi market global.
R&D capability.
In terms of margin impact.
Nothing outside of what's already contemplated.
In our current outlook.
It's going to be an efficient investment.
Sure.
As it is.
Brought online.
We will be able to start transferring cost.
From other parts of the organization to that center of excellence. So we think we're going to get a net pick up and productive capacity.
<unk> managing any change in cost.
So there you go.
Okay perfect.
And Rod I guess, we've talked a lot about the cross sell and expansion I wanted to ask about top of funnel pipeline creation, particularly as it relates to the new logo opportunity any color on the growth there relative to last year, given some of the marketing investments you made.
Yeah, I think top of funnel is pretty consistent now.
We've gotten a lot better at sort of the ICP byproduct.
So we're better at kind of spending our marketing dollars to get the right inbound lead flow with the right targeted lead flow.
The team's converting.
So, yes, I would say that I'm quite comfortable with where the where the product where the pipeline is now and how it continues to evolve so.
And sort of not new news the last couple of quarters, we're happy with how it's proceeding.
Okay, great. Thank you.
Thank you for your question.
I'll now pass the call back over to Jack for any last comments.
Alright, well. Thank you all for joining and we will see you on the next earnings call.
That concludes the upland software first quarter 2022 earnings call. Thank you for your participation you may now disconnect your lines.
Okay.
Yeah.