Q2 2023 Upland Software Inc Earnings Call
Okay.
Thank you for standing by and welcome to the Upland software second quarter 2023 earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. The conference call will be recorded and simultaneously webcast at investor Dot Upland software Dot com and a replay will be available there for 12 months.
By now everyone should have access to the second quarter 2023 earnings release, which was distributed today at four P. M Eastern time.
If you haven't 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.
Alright, well, thank you and welcome to our Q2 2023 earnings call I'm joined today by Mike Hill, Our CFO on today's call I will start with our Q2 review and following that Mike will provide some detail on the Q2 numbers and our guidance.
After that we'll open the call up for Q&A, but before we get started Mike.
Can you read the safe Harbor statement.
Yeah sure. Thanks, Jack during today's call. We will include statements that are considered forward looking within the meaning of the securities laws. A detailed discussion of these risks and uncertainties associated with such statements is contained in our periodic reports 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 we.
We do not intend or undertake any duty to release publicly any updates or revisions to any forward looking statements.
On this call, we'll 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.
Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our second quarter results, which are available on the Investor Relations section of our website.
Note that we're unable to reconcile any forward looking non-GAAP financial measures.
Do 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.
Alright, Thanks, Mike. So here are the headlines for Q2.
We beat our Q2 revenue and EBITDA guidance mid points.
We are in the second quarter, our expanded relationships with 313 existing customers.
<unk> 32 of which were major expansions. We also welcomed 155, new customers to upland in the second quarter, including 20, new major customers.
New customer deals were distributed across our products and industry verticals on the product front in Q2 I'll note that this was a busy quarter for our sales enablement product altafaj.
Starting with a webinar that feature at Forrester.
Which covered best practices for B to B enterprise sales.
Following that our launch of the new Altafaj book, not just another vendor, which is a collection of real experiences and best practices from outstanding sales leaders, who have used account planning to multiply pipeline and grow revenue.
Two of upland products were listed among notable vendors and recent Forrester landscape reports.
Blend Altafaj was included in the account based selling technologies landscape that.
Q2 2023 report.
And upland proposed was included in the content enablement solutions landscape again, the Q2 2023.
Port.
Covidien.
Announced its latest release.
<unk> focused on the UI and UX improvements.
It really optimizing the user experience and also a revamped significantly revamped content library.
That aims to help customers increase productivity shorten sales cycles and accelerate.
Win rates on deals.
In June Upland was awarded Hps Global partner Excellence Award for our continued efforts in providing HP customers with flexible.
Dynamic product solutions that enable modern document life cycles for their businesses.
And that align with their unique requirements.
It is still early in the process, but we are making solid progress on our new growth plan.
And remain focused on building shareholder value specifically our goal is to achieve a mid single digit core organic growth rate next year, so targeting 5%.
Core organic growth next year plus or minus.
That guidance its a goal and no guarantees but.
Our organization our team.
Is <unk>.
Laser focused on that.
Treatment, so with that I'm going to turn the call back over to Mike.
Thank you Jack So I'll cover the financial results for the second quarter and our outlook for the third quarter and full year 2023.
On the income statement total revenue from the second quarter was $74 5 million, representing a decrease of 7% year over year recurring revenue from subscription and support decreased 6% year over year to $75 million perpetual license revenue decreased to $1 3 million in the second quarter down from $1 nine.
In the second quarter of 2022.
Professional services revenue was $2 8 million for the quarter and 18% year over year decline.
These revenue declines are generally as expected pursuant to our strategic product realignments in future growth initiatives described.
On our previous calls.
Overall gross margin was 68% during the second quarter and our product gross margin remained strong at 69% or 74% 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 compensation were $37 7 billion for the quarter are 51% of total revenue all generally as expected.
Also acquisition related expenses were approximately $1 1 million in the second quarter, which represents the last of our restructuring costs from our acquisitions in Q1 of 2022 acquisition related expenses should remained insignificant going forward until our acquisition activity picks back up in the future.
Our second quarter 2023, adjusted EBITDA was $16 6 million or 22% of total revenue down from $24 5 million or 31% of total revenue for the second quarter of 2022.
This adjusted EBITDA decline as generally as expected considering our growth investments described on previous calls.
Our cash flow for the second quarter 2023, GAAP operating cash flow was <unk> 7 million in free cash flow was $6 7 million, we continue to anticipate $30 million to $40 million of free cash flow generation for the full year 2023.
Our ongoing free cash flow generation is in addition to our existing liquidity of approximately 323 million <unk>.
Comprised of approximate $263 million of cash on our balance sheet as of June 32023, plus our $60 million Undrawn revolver.
As of June 32023, we had outstanding net debt of approximately $257 million after factoring in the cash on our balance sheet.
Now for guidance, we are lowering our full year 2023 revenue guidance by <unk> <unk>.
The midpoint by $2 million due to accelerated when not if sunset asset churn and lower perpetual license in PSS revenue.
We are revising down our 2023 adjusted EBITDA guidance.
By $2 8 million the midpoint by $2 8 million due to that lower revenue level as well as some incremental growth investment in our CLA product group.
With that for the quarter ending September 32023, upland expects reported total revenue to be between $74 $76 4 million, including subscription and support revenue between 65, 5% and $70 5 million for a decline in total revenue of 8% at the midpoint over the quarter ended September 32022.
Third quarter 2023, adjusted EBITDA is expected to be between 14, 5% and $17 5 million for an adjusted EBITDA margin of 22% at the midpoint.
This adjusted EBITDA guide at the midpoint is a decrease of 36% from the quarter ended September 32022.
For the full year ending December 31, 2023, upland expects reported total revenue to be between 2200, 92, one and $304 1 million incur.
Including subscription and support revenue between 274, and 284 million for a decline in total revenue up 6% at the midpoint over the year ended December 31 2022.
Full year 2023, adjusted EBITDA is expected to be between <unk> 63 to $69 2 million for an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 32% over the year ended December 31, 2022, and with that I'll pass the call back to Jack.
<unk>.
Alright, Thanks, Mike we are now ready to open the call up for Q&A.
Great. Thanks, Jack at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad once against Star and the number one and we will pause just a moment to compile the Q&A roster.
And it looks like our first call comes from Scott Berg with Needham.
Please go ahead.
Hi, everyone. This is Michael <unk> on for Scott today Congrats.
Congrats on the quarter here, but how are you thinking about the leverage profile over time, and then potentially refinancing debt as it comes due over the next few years.
Alright.
Yes, so Michael this is Mike <unk>.
First of all our debt is is due August of 2026, our term debt and we've got the interest rate locked at five 4% through the remainder of that term.
We do so we've got plenty of time to.
To deal with that we think is.
Hopefully the interest rate environment the rate curve comes down over time.
Our leverage right now at sort of depressed EBITDA levels.
Is about three nine times net debt leverage to annual EBITDA.
And so as our growth investments kick in.
EBITDA levels improve.
And we build cash every year with our $30 million to $40 million of free cash flow generation, thus, reducing net debt over time.
Those lines should get a little bit easier for us from a from a refi standpoint, and we will pull the trigger on a refi in the future.
And our next call comes from Jeff Van <unk> with Craig Hallum, Jeff Go ahead.
Great. Thanks, a couple for me Hey, guys. Just just on sales maybe Jack I know you.
Youre spending a lot of time and effort to drive that organic growth acceleration into next year I know you've made a lot of changes can you just expand on what's going on I know you said, you're early innings, but it made good progress maybe a little more there what have you changed where are you rep structure quote whatever you are changing.
Sure. So a couple of things one.
If you look at where we built our growth plan, it's really around three <unk>.
Efficient motions two of which are go to market the.
The first is inside sales so complementing our.
Our field.
Field sales motion with an inside sales capacity.
And a full complement of sales development reps or STR.
In addition to that it's really been about adding a modern digital marketing capability to provide for.
Much more efficient.
<unk> generation.
We have at this point.
Fully.
<unk> filled out.
Our SCR roster and are just a few heads short on the DSR roster, which is bringing these classes on.
According to our schedule.
The chase.
Change in the organization's culture.
There has been significant there has been.
A ton of work going on and on the product marketing side.
In terms of positioning.
Our products.
In the right place in the market with the right.
Pricing and Jeff as you know, it's a part of this.
The new go to market plan, we're really focused in on.
Group of roughly <unk> 15.
Growth products that combine.
Comprise I should say roughly 75%.
<unk> of our revenue and where we think we can really drive.
Outsized.
Growth.
We brought in a couple of quarters ago, a new sales leader, who came out of in for a new marketing leader.
Came out of kimco. So those folks are fully in they built out their teams.
And we are starting to see.
Some early green shoots.
Particularly around <unk>.
Pipeline generation, which is where you would expect to see signs of progress.
<unk>.
If you look at the pipe generation sequentially and year over year, if you look at the second quarter.
It's.
A pretty healthy uptick from what we were seeing a healthy uptick sequentially from Q1 healthy uptick.
Year over year.
So really across the board.
In terms of marketing demand Gen.
In terms of product marketing.
And sales enablement.
In terms of adding a new inside sales capacity in terms of radically expanding our STR.
Capacity.
And in terms of providing our field sales force with a full complement of tools and training and collateral.
They need to successfully execute.
It's really a completely different organization.
In addition to that the third leg of our growth plan.
It was really centered around our Indian.
<unk> Center of excellence for development and while we will continue to have some.
Some portion of our product.
Product development onshore.
Our expanding aggressively.
Size of our India Coa and this enables us to not only we believe expand margins through time, but.
But also increase our product investment so youll see that the pace of our product investment in product innovation.
In those.
Particularly in those growth products.
The increase here as we move through the end of this year.
And then the next year, So let me stop there.
Kind of a summary overview and I'd be happy to take any other questions from you on that topic, yes, no thats great very helpful. Thanks, and then one other.
Obviously with the with roughly the 15 core growth products are about three quarters of revenue and then the other products that make up to 25%.
Altogether kind of the go forward suite, excluding the sunset products in terms of the retention on those products, obviously theres the growth factor, but also the retention vector how is retention trending and have there been any changes in terms of how youre approaching or attacking.
The retention issue.
So retention has been tracking in.
Accordance with plan.
So the target remains.
What it was which is a.
We focus on an N D R R.
K Ti that we report publicly on an annual basis and so the target is to get to 95% or better.
For this.
This year right.
As reported.
As of December 31.
And so I would say at this point, Jeff no significant.
Changes now in terms of.
The groundwork that we are laying in to improve retention rates through time.
There are a number of significant initiatives underway.
One of them of course is in the.
On the development side and on the product management side.
So.
Part of the process of better positioning our products to compete in the market to drive more organic growth and by the way I would say to you that what's been heartening as we've gone through this is the strength of a number of our products and really we just need to do a better job of.
Putting them in the marketplace.
And positioning them appropriately.
But part of the.
Visibility that we have as a result of that process on competitive intelligence I think is leading to some targeted.
<unk> and product innovation.
That we think are going to drive higher retention through time.
Secondly.
On the customer success side.
We have <unk>.
Promoted a new customer success leader, we have built out.
Central lives customer success shared service organization that we did not have previously.
We.
<unk> adopted a new.
<unk> approach to the.
Customer success function and we'll be adopting in the second half of the year on new customer success.
<unk> software platform.
Again with a goal to.
Get our exceptional CSM. So we have really a great team of CSM.
But to enable them to add to their great customer care responsibilities are more strategic mindset on both monitoring customer health and.
And also being able to engage with a longer term view on increasing retention rates and we've also.
Spent a good deal of time on the cross functional cooperation.
Thats necessary to ensure better customer health and better retention rates, and specifically, making sure that our sales organization.
At our professional services organization and that our customer support organization are working hand in hand, right and doing the right kind of Handoffs.
And kickoff for moving from that sales process in that solutions consulting, creating an initial customer success plan to.
To building more packaged implementation services from our TSS group.
To ensure.
More robust product adoption, and ultimately better customer health, because you're going to drive better business returns and ROI for customers.
And then as I say, giving the customer success teams the tools.
Methodology, they need to better execute strategically.
And measure and manage and improve customer health and retention. So that's the main focus there again happy to take any other questions on that yes.
Yes, that's a handful I appreciate it thanks for the color.
My apologies just one more reminder, folks if you'd like to ask a question press star and the number one on your telephone keypad and our next question comes from Jay <unk> with William Blair Jay Go ahead.
Hey, guys. Congrats on the quarter. This is Jacob on for Jacob There's just.
Wanted to ask on.
On the reduced full year guide what are you attributed more to the general macro impacts or are there any execution issues. We should be aware of is there I guess an accelerated sunsetting.
Of your legacy products and just to follow up on that given the macro are you still active on the M&A front with devaluations. These days. Thank you.
Yeah. So on the first question this is Jack.
Really the primary driver of that is accelerated sunset asset churn, which frankly is it's better for us to burn that off sooner as opposed to later, but because those are noncore assets.
And so.
So that was the primary driver of that now of course with that Youre going to have and with the sun setting of assets youre going to have a little bit.
<unk> right that is a.
Driven by our.
New logo activity new implementations.
And in terms of the perp revenue, it's really mostly about timing of some of our OEM relationships and so we expect that to be.
Temporary so.
Not related to execution.
And.
At this point not related to the macro environment really related more to those kind of idiosyncratic factors that I just outlined.
In terms of.
Alright.
I'm sorry, if you have a follow up on that happy to take it or I can go to the M&A question.
So yes. It can go to the only question. Thank you sorry about that.
No works.
On M&A, we are actively in the market we.
We are looking at.
A number of acquisition opportunities.
As we build out our go to market capabilities.
Of course, it starts to make some of these acquisitions more attractive because.
We are positioning ourselves we believe too.
Not only drive the cost synergies that we have historically.
But to better drive.
Revenue synergies.
I I see it in some of the recent acquisitions that we did like VII insight.
Which is a an enterprise search tool where.
Really we drove the integration of that product.
With more of the new upland mindset around.
Go to market.
And we're seeing growth rates on that product that are.
Really strong and so are we.
We're going to keep building out this capability. So that we can go and do additional acquisitions and again not only drives margin.
But continue to drive revenue growth now we're <unk>.
Well positioned we've got plenty of capital.
None in the market, we've got a pipeline of deals, but we control timing on it.
So we're going to execute.
At the right time.
We are being purposeful and thoughtful about it don't feel rushed to have to get something done this quarter.
But we anticipate.
Paid.
Getting back in the business of closing deals by.
Within the next few quarters.
And and feel like we're well positioned for that.
Got it.
Oh.
Sure.
Yes, our final question will come from Alex Sklar with Raymond James Alex. Please go ahead.
Hi, gentlemen, this is jonathan to carry on for Alex just one from US. So I know you kind of touched on the innovation engine already but you kept the R&D center up and running for a little over a year now.
Had a nice cadence of new products and functionality announcements. So what can you tell us about how we should think about how product velocity should trend over the next year and how should we think about monetization of those investments. Thanks.
Yes, I think the first.
And most <unk>.
Significant way.
And which will monetize those investments is taking this business from.
Minus one minus 2% organic growth rate in 2023 to a.
Positive mid single digits organic growth rate.
Next year now again, that's a goal it's not guidance and there are no guarantees.
But this organization is laser focused on.
The levers that can drive that growth I think that is a game changer.
For this business.
And we're.
We're not saying Thats a ceiling, we're saying that.
That is a target for next year long term.
Our goal there is 5% to 10% organic.
30% to 35% EBITDA margins I think that's just an absolute game changer for how the company will be viewed and valued on an ongoing basis and then of course.
Turning back on the M&A engine.
And doing it in the context of a business that has a working go to market motion and levers to pull.
Around the Indian Coa on the product side.
And the ability to generate pipeline and the ability to.
Not only support any acquired field sales personnel, but also to add an insider selling capacity to the products that we acquire are scaled.
Inside selling capacity, where we can now plug in.
Inside sales pods on a pretty systematic basis, so look I'm not saying that.
Yeah.
Everything is humming right now because we are in the process of laying this all in but we are seeing real.
And solid progress operationally.
Creating this capability that we believe is going to drive that growth in that.
Return on investment.
And as I mentioned, there are some early green shoots.
Particularly around pipeline generation that I.
Thank you.
Give us increased optimism.
For the future.
Thank you.
Okay.
Alright, so thats our final question. So let me just thank everyone for joining the call and we will see you.
Hi.
After after the next quarter. So we'll see you on the Q3 call. Thank you very much.
Thank you Jack and ladies and gentlemen that does conclude today's call. Thank you all for joining and you may now disconnect have a great day everyone.
Which we call. Thank you very much.