Q3 2022 Upland Software Inc Earnings Call

When stock.

On the open market.

So with that I'm now going to turn the call over to Mike.

Alright, Thank you Jack I'll cover the financial highlights for the third quarter and our outlook for the fourth quarter and full year 2022.

For the income statement total revenue for the third quarter was $79 5 million, representing an increase of 5% year over year.

Without FX impact growth would have been 7%.

Recurring revenue from subscription and support increased 4% year over year to $75 1 million and without the FX impact to recurring revenue growth would have been 6%.

Perpetual license revenue increased to $1 7 million in the third quarter up from $2 7 million in the third quarter of 2021 and professional services revenue was $2 8 million for the quarter.

And 11% year over year decline.

Overall gross margin was 68% during the third quarter and our product gross margin remained strong at 69%.

Which is 73% 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 comp.

We're at $33 7 million for the quarter or 42% of total revenue all generally as expected and as.

As we move into 2023, we expect our cost structure to increase by 2% to 3% of total revenue due to wage inflation.

Also acquisition related expenses were approximately $3 6 million in the third quarter.

Which were in line with plan.

Our third quarter 2022, adjusted EBITDA was $24 9 million or 31% of total revenue compared to $25 million or <unk>, 33% of total revenue for the third quarter of 2021.

Our cash flow for the third quarter of 2020 to GAAP operating cash flow was $1 9 million and free cash flow was $1 5 million, bringing year to date free cash flow to $23 4 million.

As expected we did have temporary timing differences in the working capital accounts, which temporarily lowered our free cash flow generation in Q3.

We should see strong free cash flow generation in Q4 still keeping us on pace for the $30 million to $40 million of free cash flow generation for full year 2022, even after absorbing acquisition related expenses.

Yeah.

This ongoing free cash flow generation is in addition to our existing liquidity of approximately $302 million comprised of the $242 million of cash in our balance sheet as of September 30, plus.

Plus our $60 million Undrawn revolver.

As of September 30th.

'twenty two we had outstanding net debt of approximately $282 million after factoring in the cash on our balance sheet.

Our net debt leverage dropped to around two nine 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 <unk>.

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 levels.

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 of cash taxes per year.

Now for guidance and let me start by saying that upland forward guidance remains unchanged in constant currency.

Since our last guidance was issued on August 3rd 20 to the U S. Dollar has strengthened resulting in a larger FX headwind in the fourth quarter.

The additional FX impact is estimated to be at two 2% currency headwind on fourth quarter revenue growth.

And.

Half a million dollars currency headwind on fourth quarter adjusted EBITDA.

The following adjusted guidance includes the impact of those FX headwinds in the fourth quarter.

So for the fourth quarter ending December 31, 2022, upland expects reported total revenue to be between $74, one and $80 1 million, including subscription and support revenue between 69, 2% and $74 6 million for growth in total revenue up 2% at the midpoint over the quarter quarter.

Ended December 31 2021.

<unk> fourth quarter 2022, adjusted EBITDA is expected to be between 22, 9% and $25 9 million for an adjusted EBITDA margin of 32% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 3%.

For the quarter from the quarter ended December 31 2021.

For the full year ending December 31, 2020 to upland expects reported total revenue to be between 312, six and $318 6 million, including subscription and support revenue between 292, nine and $298 3 million for growth in.

And net total revenue of 4% at the midpoint over the year ended December 31 2021.

Full year 2022, adjusted EBITDA is expected to be between $95 7 million to $98 7 million for an adjusted EBITDA margin of 31% 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 pass the call back to Jeff Alright, Thanks, Mike, Let's open the call up for questions.

As a reminder, if you would.

To ask a question today press star followed by the number one on your telephone keypad.

We asked today that you limit yourself to one question and one follow up.

Pause for just a moment to compile the Q&A roster.

Okay.

Your first question today comes from the line of Jeff Van <unk> with Craig Hallum. Your line is now open.

Oh, great. Thanks for taking my questions just a couple of Jack maybe just to circle back on the macro situation, obviously, most accounts called out sort of the rapid.

Pace of change during the quarter.

Circle back to that any any behavioral changes.

That were notable it sounded like you were saying.

Saying nothing definitive, but just wanted to circle back to that if anything else jump out at you.

Yeah. Thanks, as I mentioned in terms of the general environment, We did see some lengthening of sales cycles in the quarter, but at this point really it's too early to say, whether it was a one off.

Not.

Okay, Mike I think your commentary I just wanted to make sure I heard it correctly, but you talked about wage pressures and I think you mentioned 300 basis points of pressure.

23 can you just hit that again, what are you seeing there.

Yes, you bet, Jeff So we do expect straw.

Structural cost increases due to wage inflation in 2023.

To the tune of 2% to 3% of total revenue.

Okay.

Got it Okay, and then I'll talk a bit about HTC obviously.

Balance sheets in great shape, but you talked about the focus there going to be on a couple of things sales execution or go to market.

Some product.

And in particular understanding it's early but I think you referenced sort of go to market bundle just talk about the early thinking and what might be changing there with respect to go to market.

Yes, I think.

I would.

To summarize it as follows we have been doing a lot of work together with CGC.

And their operating advisers, they've been a really great team of folks.

To work with.

And our.

Management team here at upland is super energized and excited.

We are focusing on a number of.

Different elements.

One is bringing more focus to our go to market.

Product bundles, and really identifying those products that have higher growth potential.

Putting more energy.

<unk> knows.

And that will take a couple of forms both in terms of more focused.

Marketing and demand Gen efforts.

And of course, a continuation of what we've been doing on the product side.

With investment in those products and doing a lot of that as I mentioned through our Indian Center of excellence, Although that's obviously just one piece of our global staffing.

Our strategy where.

Product is concerned so.

It is early in the process and there will be more to be said on this in subsequent quarters, but we're very pleased with.

The partnership and the work thus far.

Got it good to see the inside advisory quarter, Thanks for taking the questions.

Okay.

Your next question comes from the line of Jake We're bearish with William Blair. Your line is now open.

Hey, guys. Congrats on the great results, so really strong quarter on the new customer front, adding 171, new logos to the platform was that driven by any specific product suite or is it more result of your recent sales investments would love to get some more color on what's driving that acceleration in new logos, given I think the highest quarter in the last.

Year. So it was actually in the $1 30 range, so a pretty big acceleration there.

Okay.

Yes, I would say as I mentioned that our.

The bookings were well distributed across.

Products and across verticals, so I wouldn't call out.

Any specific area, we're continuing to work on.

As I say sharpening our focus around higher growth products.

And on driving additional.

<unk>.

Both expansion and new bookings of major customers and.

And so that work continues.

Great. Thanks, and then it sounds like Theres been a slowdown in sales cycles, but would love to hear how the pipeline has been tracking over the past few months our deal still entering the top of funnel at a similar pace in cadence as before but just taking longer longer to close now in this uncertain macro and love to hear kind of what you've been seeing over the past few months.

Yes, I think without putting too fine a point on it.

We saw a little bit of lengthening of sales cycles in the third quarter.

And it's really too early to tell whether that.

One off or not but we will have more to say on it as we get into Q4.

The sales team is energized.

And working.

A number of opportunities.

<unk>.

So we could see.

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So we'll see whether the lengthening of sales cycles that we saw in Q3 as a one off or not as we move further through the through the quarter.

Great. Thanks for taking my questions.

As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.

Your next question today comes from the line of Alex Skylar with Raymond James Your.

Your line is now open.

Hi, Thanks for taking the question. This is John on for Alex can you talk about how youre thinking about the opportunity for your long tail of customers outside of your top 200, or so global account I know, they're a much smaller contributor today, but I'm curious if you see any opportunity to re target some of those customers moving forward and then I have a quick follow up.

Well there've been a number of initiatives that we've rolled out in the past year, one I would I would highlight with respect to smaller customers.

Is introducing more self service e-commerce capabilities for those accounts and order.

For those customers to both transact and the self service so.

Yes, we're trying to leverage technology to.

Serve those customers in the most efficient way we can.

Okay perfect Thats helpful color, there and then just as a quick follow up here.

For Michael or for Jack.

How are you thinking about pricing as a growth lever in the coming years. So obviously youre seeing the inflation pressure on head count expense, but any opportunity for some maybe outsized pricing increases on renewals moving forward.

Well.

Yes, so John .

We have started rolling out price increases.

Of course, it's going to take a while we've got an average year and a half customer contract terms. So it takes a while to get to the renewal dates and have that those price increases take hold.

They're not outsized there is sort of normal in the context of the macro environment.

We see broadly with inflation so so.

So anyway, it's going to take a while to realize those but nothing outsized.

Okay. Thank you very much.

That was our last question for today back to you Jack.

Great well. Thank you all and we will see you on the next earnings call. Good afternoon.

This concludes today's conference call. Thank you for attending you may now disconnect.

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Okay.