Q2 2022 Upland Software Inc Earnings Call
Aside we had a busy Q2 for product enhancements.
I'll defy spring 2022 release introduced Altafaj account plan, which was a long awaited capability.
It's been included for all account manager customers in this capability enables users to get going faster.
On their account plants by starting to work on assigned accounts directly from within account records inside sales force.
Our objective fluid announced a series of customer driven innovations and enhancements aimed at supporting complex business communications and digital transformation efficiency in their first major release post acquisition and genius announced that its CRM telephony integration is now available.
Premium application on the Genesis App foundry, which is the industry's largest dedicated marketplace focused on customer experience solutions.
In addition on July 14th after the close of the quarter, we announced a $115 million pipe.
Private.
<unk> equity investment.
From <unk>.
Which is a leading six $8 billion private equity firm HTC has a proven track.
<unk> track record of partnering with management teams to build shareholder value and drive growth.
And this new <unk> partnership will help us to strengthen our business and to fully capitalize on the once in a decade acquisition opportunity that we see emerging as the recent turmoil in financial markets fundamentally reshaped funding.
Valuations for the type of venture backed cloud software companies that upland acquires.
We also announced on July 14th that Rod Fab Road will be stepping down as president effective August 31.
Rod made his decision for personal reasons.
I want to thank Rob for his service and wish him the very best.
A few additional points on the H <unk> announcements.
This is an attractive growth type.
Priced at $17.50 per share conversion price with a clean structure and cash or pik dividends at the Companys option.
This investment is a validation of the upland business model.
And our platform coming as it did from a smart software investor after a rigorous strategic.
Operational and financial diligence process. This is a partnership with a major a private equity firm that's going to help us to build.
Long term value, it's also going to help us with support to strengthen our go to market.
And we believe that H <unk> is the right partner.
We've had a relationship.
And known <unk> for multiple years.
<unk> had great success in supporting software companies generally.
But in particular, M&A driven platforms like <unk> and.
And health systems, which have similar models to upland.
And we're going to have more to say later in the year about our value creation plan with HTC.
Finally, I just wanted to note that pro forma for the H <unk> investment our cash on hand will be $248 $3 million.
That together with our nearly $100 million and annual adjusted EBITDA and our attractive long term credit facility as a strong financial foundation to build on.
So with that I'm going to turn the call over to Mike.
Thank you Jack I'll cover the financial highlights for the second quarter and our outlook for the third quarter and full year 2022.
Total revenue for the second quarter was $80 2 million, representing an increase of 5% year over year.
Without the FX impact on Q2 growth would have been 8%.
Recurring revenue from subscription and support increased 4% year over year to $75 million.
Without the FX impact recurring revenue growth would have been 6%.
Perpetual license revenue increased to $1 9 million in the second quarter up from.
$4 million in the second quarter of 2021.
Professional services revenue was $3 4 million for the quarter, a 3% year over year decline.
Overall gross margin was 67% during the second quarter and our product gross margin remained strong at 69% or.
Or 73%, when adding back depreciation and amortization.
Which we refer to as cash gross margins.
Operating expenses, excluding acquisition related expenses, depreciation and amortization stock based comp.
Were $34 5 million for the second quarter or <unk>, 43% of total revenue all generally as expected.
Also acquisition related expenses were approximately $4 9 million in the second quarter, which were in line with plan.
Our second quarter 2022, adjusted EBITDA was $24 5 million or 31% of total revenue up from $23 7 million or 31% of total revenue for the second quarter 2021.
For the second quarter of 2020 to GAAP operating cash flow was $14 million in free cash flow was $13 9 million. So we are successfully generating substantial GAAP operating cash flow and free cash flow, even after acquisition related expenses.
We're targeting 30 to 40 million of free cash flow for the full year 2022.
This ongoing free cash flow generation in addition to our existing liquidity of approximately $198 million.
In addition to our existing liquidity of $198 million comprised of approximately $138 million of cash on our balance sheet as of June 32022, plus our $60 million Undrawn revolver. Additionally, as Jack noted, we expect to close on a new $115 million.
Transaction in the coming weeks, which will raise our liquidity further to around $308 million.
As of June 32022, we had outstanding net debt of approximately $387 million after factoring in the cash on our balance sheet.
Again, after our new $115 million pipe closes in the coming weeks, our net debt should drop to around $277 million or <unk>.
And our net debt leverage should drop to around two eight 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.
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.
Now for guidance, let me start by saying that upland forward guidance remains unchanged in constant currency.
Since may four 2020 to the U S dollar strengthened resulting in a larger FX headwind in both Q3.
2022, and full year 2022.
The total impact is estimated to be approximately a one five percentage points currency headwind for 2022 revenue growth and a $1 $5 million currency headwind for 2022 adjusted EBITDA. The following adjusted guidance includes the.
Impact of estimated FX headwinds in the period.
For the quarter ending September 32020 to upland expects reported total revenue to be between 75, 7% and $81 7 million, including subscription and support revenue between 78, and $76 2 million for growth in total revenue of 3%.
The midpoint over the quarter ended September 32021.
Third quarter 2022, adjusted EBITDA is expected to be between 23, 2% and $26 2 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 1% from the quarter ended September 32021.
For the full year ending December 31, 2020 to upland expects reported total revenue to be between 310, five and $322 5 million, including subscription and support revenue between 294 and $301 2 million for growth in total revenue of five.
Percent at the midpoint over the year ended December 31 2021.
Full year 2022, adjusted EBITDA is expected to be between $94, five and $100 5 million for an adjusted EBITDA margin of 30% at the midpoint.
This adjusted EBITDA guide at the midpoint is an increase of 1% over the year ended December 31 2021.
And with that I'll turn the call back over to Jack.
Alright, Thanks, Mike, Let's open the call up for questions.
Thank you for our Q&A, if you'd like to ask a question. Please press star followed by one on your telephone keypad now.
If you change your mind, Please press star followed by two.
One for parents ask a question. Please ensure your devices on mute locally.
Our first question today comes from Scott Berg from Needham. Your line is open. Please go ahead.
Hi, everyone. This is Michael <unk> on for Scott Berg, Thanks for taking my questions today.
Could you just go a bit deeper on the cross selling and expansion success within existing customers.
Considering the strong quarter for customer expansions, maybe just a bit more on which modules are seeing strength and where.
Yes so.
The investments that we've made in go to market over the past.
A couple of years and in particular, focusing our global account managers on.
Our diamond accounts, our top 175 accounts with an eye toward.
Driving.
More cross sell.
Has created some.
Good.
Denim there.
I would say as I look at the quarter I would just call out really some strong expansion activity is really the the area where we saw.
The best traction and as I highlighted and.
My opening remarks, we saw some great expansion traction and proposed.
Genius and objective.
And NBA and site.
That's where we saw the best motion in the quarter.
Great. Thank you and then.
Then just one more are there any specific products or regions, where you're seeing a bigger macro impact or any additional headwinds.
Just with the macro environment, we're facing today.
No.
Great. Thank you.
Our next question comes from Terry Tillman from Truest Securities. Your line is open.
Great. Thanks for taking the question. This is Robert on for Terry.
Hoping to double click on the HCC partnership.
What kinds of benefits do you see accruing on the go to market side, specifically with their expertise and when can we start to see some of that benefit accrue.
Yes.
Yeah. So.
We think that HCC is.
Strong partner for us.
Loved the terms of the pipe that we put together.
At a substantial premium to market I think its a real validation of our business and our operating model coming as it did after rigorous diligence as I mentioned before and I think when you look at their track record.
<unk> has a long history of investing successfully in software companies and they bring.
Deep expertise experience and resources and.
Both M&A driven value creation as well as driving go to market improvements. So I want to say that across their 15 year history. They've executed I think it's 'twenty software platform transactions with 65 add on investments.
And total transaction value of around $15 billion in these businesses range from sort of high organic growth companies like Dinoto and hybrids to M&A platforms like health systems.
And idea and so.
Yes.
<unk> engaged.
And building a value creation plan with HG GC.
And we're going to be talking more about that.
Later in the year again final point I'd note there is that pro forma for that.
Investment, you'll have roughly $250 million of cash on the balance sheet. So.
We think in a very strong position to execute on what we see as a coming very attractive acquisition opportunity in.
And the kind of markets we play in.
That's great. Thanks again.
Our next question comes from Jeff Van <unk> from Craig Hallum Capital Group. Your line is open. Please go ahead.
Hey, guys and Duke on for Jeff I. Appreciate you taking the question. The first one maybe for Mike just looking at guidance if you would.
Take the mid point of Q3, and then back into the midpoint of Q4, it's essentially flat sequentially from Q3 to Q4.
Can you just talk to me a little bit about kind of the puts and takes of what went into that and kind of confidence around.
Growing sequentially through the back half of the year.
Yeah, Erin Thanks for the question, we're always conservative on guidance. So I think most of that is just we're being conservative on the al quarter. There in terms of just sequential flatness and again of course.
I mentioned right.
The guidance is really only been change for FX impacts. So so that's really kind of the short of the story there.
Got you that's helpful. And then next question.
Excuse me.
I'll just talk to me a little bit if anything's changed about thinking as far as investments are concerned obviously, a lot of focus on R&D and product development here over the last quarter or two but just talk about kind of the cadence of investment how you're thinking product development versus versus sales and go to market motion going forward.
Yes, I'd say no major changes there just yet.
We have increased our commitment to innovation, we've made some additional investments in go to market.
We're looking at a number of items with.
<unk> right now and internally.
I'll have more to say about our value creation plan later in the year.
Perfect. That's helpful. And then last one if I can sneak one more in I'm just curious if anything's changed in the pipeline.
Any color you can give as far as.
New versus expansion going forward his size of customer or anything like that.
I think if you look at the results in Q2, it was a kind of current course and speed.
<unk> good quarter for bookings no.
No major.
Deviations from what we have been <unk>.
Delivering.
And the team is.
Excited.
And executing here on Q3, so I would say nothing.
To highlight.
And a continuation of what we've been doing.
Awesome that's it for me appreciate it guys.
We now turn to Jacob Broberg from William Blair. Your line is open. Please go ahead.
Hey, guys. Thanks for taking my questions just wanted to could you talk a little bit more about what youre seeing in the macro environment with more particularly around customer buying behaviors have you seen any deals get pushed out as a result of the macro or is it really just been business as usual.
Over 400 expansions is the first time, we've seen that ever so that was a pretty great. Since just would love to get more color on what youre seeing in the macro.
Nothing to call out right now obviously.
You are monitoring that.
And this kind of an environment.
Nothing that I would call out.
Okay, Great and then could you talk a little bit more about your M&A pipeline. So obviously theres been a lot of turbulence in the public markets and valuations coming down are you starting with more businesses and so at the top of the funnel or do you think we're still a few quarters before companies really start to it.
For that acquisition path.
When you see funding really starts to drive more and more of that that really that up and really start to be able to capitalize.
On that macro volatility.
Well I think you make a great point, which is that whats gone on in the public markets is going to see.
<unk>.
Funding environment valuation environment for.
<unk> cloud software companies and of course, we've all seen the headlines around that.
And I've lived through this kind of cycle before.
Running a consolidation play and there is always somewhat of a delay.
In terms of the.
<unk>.
The sound in the public market echoing in the private market, but.
But we think there's going to be a once in a decade.
Of opportunity here.
And we are well capitalized to go after it.
And we think the pipeline looks good, but we're going to be patient.
And we're going to we're in control of the timing and we're going to execute when and where it makes sense.
Sounds great. Thanks for taking my questions and congrats on the great quarter.
Now to answer Alex Sklar from Raymond James Your line is open. Please go ahead.
Thanks, Mike really strong cash generation again this quarter.
As far as the guidance goes the $30 million to $40 million does that contemplate additional M&A or said another way could we think about that being a floor and it could be higher ups and any additional deals.
Yes, Alex So last year, we did a little over $40 million of free cash flow generation in 2021.
This year, we're expecting.
We're expecting the same we did $8 million.
In Q1 <unk>.
<unk> thousand $14 million or roughly in Q2.
So $22 million here year to date.
Sure.
So we're concerned.
$30 million to $40 million seems appropriate will be obviously shooting for the upper end of that range and it's possible we could beat it.
Again.
Obviously too early to tell given timing differences and that kind of thing in our working capital accounts, you asked whether or not that has future acquisitions assumed in it and it does not simply because obviously, we wouldn't know the timing and extent of the size of future acquisitions, So excludes future acquisitions.
Okay. Thank you very helpful. And then kind of following up on some of the go to market questions.
And any changes in the sales organization following Rob's announced departure and in terms of kind of anything we should expect going forward in terms of the overall structure of that team.
Yeah.
We've got a team in place that is energetic Arizona bookings call with our team this morning.
Great leadership there.
The team is excited and going after the <unk>.
The opportunities in front of us and.
As I say, we see an opportunity with HTC to.
To avail ourselves of their support and insights in terms of strengthening.
Our go to market efforts.
And making our existing team even more successful so we'll have more to say on that later in the year.
Okay, great. Thank you.
Our final question comes from Brent Thill from Jefferies. Your line is open. Please go ahead.
Thank you for taking my questions Love soda on for Brent Thill.
Maybe the first one following up on that go to market question.
I wanted to ask if the cross sell motion is still a top priority and then could you talk a little bit about the gans and.
The productivity and investment there.
Yes, if you look at upland.
Our sales motion generally obviously expansion is a key part of what we do through our customer success.
Organization and also through our product and our games and so no big changes there I don't know that theres really much to say.
We're executing against our current plant.
Got it.
One quick one for Mike if I may on a lot of the companies in our coverage embedding more conservatism given the macroeconomic environment.
Are you.
Are you embedding any.
Additional conservatism into the guide.
Yes.
Of course, we've always tried to be conservative on our guides and remained so so there is.
So we feel like there is a.
Normal healthy decent amount typical upland conservatism in our guide.
Got it and one last question.
On the <unk> investment I guess, given the healthy cash position and that you are generating free cash flow.
Yes.
Could you maybe talk through the rationale of doing that.
The raise at these levels. Thank you.
Yeah.
Yes look we're in.
Incredibly excited to have.
<unk> take a significant stake in upland. This is an attractive growth pipe, which was priced love that $17 50 per share.
Conversion price so a significant premium to our current price, it's got a clean structure.
Cash or Pik.
Dividend at our option I think its a real validation of our business model and a partnership with a firm that can help us build.
Long term value that's got a track record.
Getting that done and as a successful and smart <unk>.
Software investors. So we think we've got the right partner, we think we've got the support to help strengthen go to market.
It gives us.
$250 million of cash it reduces our leverage to two eight times and really that plus our cash flow and our.
Our attractive long term credit facility gives us a strong financial foundation to build on and execute against this M&A opportunity that we see coming.
Over the next couple of years here.
Got it thank you.
Okay.
This concludes our Q&A I will now hand.
Thanks, Jack Mcdonald, Chairman and CEO for final remarks.
Okay, well. Thank you very much and we will see you on the next earnings call.
Today's call is now concluded. Thank you for your participation you may now disconnect your lines.
Okay.
Okay.
Yeah.
Okay.
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