Q1 2024 Upland Software Inc Earnings Call
Okay.
Operator: Thank you for standing by, and welcome to the Upland Software First Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode.
Speaker Change: Thank you for standing by and welcome to the Upland software first quarter 'twenty 'twenty four earnings call.
At this time, all participants are in listen only mode.
Operator: Later, we will conduct a question-and-answer session, and instructions for that will be given at that time. The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the first quarter 2024 earnings release, which was distributed today at 4 o'clock p.m. Eastern Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.
Speaker Change: We will conduct a question and answer session and instructions for that you will be given at that time. The conference call will be recorded and simultaneously webcast at Investor Doc Upland software Dot com and a replay will be available there for 12 months by now everyone should have access to.
The first quarter 'twenty 'twenty four earnings release, which was distributed today at four o'clock P M Eastern time.
Operator: If you've not received the release, it's available on our plants website I'd now like to turn the call over to Jack Mcdonald, Chairman and CEO of Upland software. Please go ahead Sir.
John T. McDonald: All right, thank you, and welcome to our Q1 2024 earnings call. I'm joined today by Mike Hill, our CFO. We're going to start today's call with a Q1 review. Following that, Mike will provide some detail on the Q1 numbers and our guidance, and then we'll open it up for Q&A. But before we get started, Mike, can you read the Safe Harbor Statement?
John T. McDonald: Alright, Thank you and welcome to our Q1 2024 earnings call I'm joined today by Mike Hill, our CFO.
Michael D. Hill: We're gonna start today's call with a Q1 review following that Mike will provide some detail on the Q1 numbers and our guidance and then we'll open it up for Q&A, but before we get started Mike can you read the safe Harbor statement, yes. Thank you Jack during today's call. We will include statements that are considered forward looking within the meanings of securities law.
Michael D. Hill: Yes, thank you, 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 the 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 do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements.
Michael D. Hill: A detailed discussion of the risks and uncertainties associated with such statements is contained in our periodic reports filed with the SEC.
Michael D. Hill: Forward looking statements made today are based on our views and assumptions and on information currently available to upland management as of today we.
Michael D. Hill: We do not intend or undertake any duty to release publicly any updates or revisions to any forward looking statements on this call upland will 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.
Michael D. Hill: On this call, Upland will 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 has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our financial results, which are available on the Investor Relations section of our website. Please note that we're 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 evidence. With that, I'll turn the call back over to Jack.
Michael D. Hill: <unk> has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our financial results, which are available on the Investor Relations section of our website. Please note that we're unable to reconcile any forward looking non-GAAP financial measures to their directly comparable GAAP financial.
Michael D. Hill: <unk> because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.
Michael D. Hill: With that I'll turn the call back over to Jack Alright, Thanks, Mike.
John T. McDonald: All right. Thanks, Mike. So the headlines. We beat our Q1 revenue and adjusted EBITDA guidance midpoints, and our free cash flow came in as expected. Now we continue to execute on our growth plan, and we are seeing some green shoots emerging. For example, our core bookings exceeded core churn in the first quarter, which is step one in driving our core organic growth rate positive this year as part of our growth plan.
Michael D. Hill: Headlines.
John T. McDonald: We beat our Q1 revenue and adjusted EBITDA guidance mid points in our free cash flow that came in as expected now.
John T. McDonald: Other green shoots that we are seeing include digital marketing effectiveness and efficiency improving. We're seeing that in SEO page ranks and cost per lead. We're seeing sales and marketing qualified leads increasing. We're seeing overall sales pipeline generation increasing. And we're seeing successful closed bookings from our new inside sales teams. You'll recall that we have a multi-pronged sales organization with field sales, channel, inside sales, which is a newer movement for us, as well as, of course, our customer success sales movement.
Jack: We continue to execute on our growth plan and we are seeing.
John T. McDonald: Some green shoots emerging our core bookings exceeded core churn in the first quarter, which is step one in driving our core organic growth rate positive this year.
John T. McDonald: As part of our growth plan.
John T. McDonald: Other green shoots that we are seeing include digital marketing effectiveness and efficiency improving we're seeing that in SCO page ranks in costs per lead we're seeing sales and marketing qualified leads increasing were seeing overall sales pipeline generation increasing.
John T. McDonald: And we're seeing successful closed bookings from our new inside sales teams, you'll recall that we've got a multi pronged sales organization with field sales channel.
John T. McDonald: Inside sales, which is a newer motion for us as well as of course, our customer success.
John T. McDonald: Sales motions.
John T. McDonald: That inside sales motion that those DSRs, direct sales rep teams, are starting to close deals; we saw six major customer deals closed by those inside sellers in the first quarter, including a couple of deals that averaged $200,000 in ARR. So some early green shoots there that we're happy to see.
John T. McDonald: That inside sales motion that those DSR is direct sales rep teams are starting to close deals. We saw six major customer deals closed by those inside sellers in the first quarter, including a couple of deals that averaged.
John T. McDonald: 200000, an IRR. So some early green shoots are there that we're happy to see our goal remains to exit 2024 at a core organic growth rate of plus or minus 3% as I've noted before our guidance is more conservative than that and of course, there are no guarantees that we're gonna here.
John T. McDonald: Our goal remains to exit 2024 at a core organic growth rate of plus or minus 3%. As I've noted before, our guidance is more conservative than that. And, of course, there are no guarantees that we're going to hit those goals.
John T. McDonald: Are those goals in the first quarter, we welcomed 134, new customers that included 21, new major customers and we also expanded relationships with over 250 existing customers, including 29 major expansions.
John T. McDonald: In the first quarter, we welcomed 134 new customers, that included 21 new major customers. And we also expanded relationships with over 250 existing customers, including 29 major expansions. On the product front, a number of items to highlight. We earned 44 badges in G2's Spring 2024 market reports. That's across our product portfolio. A couple to highlight.
John T. McDonald: On the product front, a number of items to highlight we earned 44 badges in G. Twos spring 2024 market reports that's across our product portfolio. A couple of highlight upland altafaj, which is our sales optimization software and.
John T. McDonald: Upland Altify, which is our sales optimization software, and Upland Interfax, our cloud-based fax service, are new to receiving badges but will be included in that badge count in Q1, which is great to see. The company's knowledge management solutions, including Upland RightAnswers and Upland Panviva, continue to garner various recognitions, while Upland Qbidian, our proposal management and response software, increased its number of leader badges quarter over quarter. I was so happy to see that.
John T. McDonald: Blend interfax, our cloud based fax service are new to receiving badges, but in in that badge count in Q1, which is great to see the Companys knowledge management solutions, including up and right answers and upland Pan VEBA continued to garner various recognitions.
John T. McDonald: While upland cubit in our proposal management and response software increased its number of leader badges quarter over quarter. So happy to see that upland software was included as a notable vendor and foresters customer solutions landscape report for our knowledge manager.
John T. McDonald: Upland Software was included as a notable vendor in Forrester's customer solutions landscape report for our knowledge management solutions, Panviva and RightAnswers. And with the continuing advances of AI technology, Upland remains committed to enhancing those solutions and guiding organizations through the transformative AI revolution, helping them embrace the future of knowledge management. So a lot of initiatives underway as far as AI is concerned; more on that in a moment. Our product development teams, of course, have worked diligently in the first quarter to innovate across our portfolio. We have 10 active AI initiatives underway, including Upland Qubidian's guided proposal automation, which is giving customers AI-powered choice. We integrate with OpenAI and with IBM Watson X.
John T. McDonald: <unk> solutions Pan Bieber and right answers.
John T. McDonald: And with the continuing advances.
John T. McDonald: AI technology upland remains committed to enhancing those solutions and guiding organizations through the transformative AI revolution, helping them embrace the future of knowledge management. So a lot of initiatives underway as AI is concerned more of that in a moment our product development team.
John T. McDonald: <unk> supports have worked diligently in the first quarter to innovate across our portfolio. We have 10 active AI initiatives underway, including upland and <unk> guided proposal automation.
John T. McDonald: Which is giving customers AI powered.
John T. McDonald: We've got an exciting partnership with IBM around Watson X and Qubidian, which we're very happy about. Upland also drove an integration of Altify with Salesforce AI for a variety of data extraction, summarization, and auto-generated form response capabilities. So we're also partnering with Salesforce on the AI front. We're excited about both the IBM and Salesforce partnerships. You know, our core focus at Upland is on the enterprise space, and our customers care deeply about security, about governance, about compliance, and about risk management.
John T. McDonald: Joyce.
John T. McDonald: We integrate with open AI and with IBM Watson X, we've got an exciting.
John T. McDonald: Partnership with IBM around Watson acts and Cupid in which we're very happy about our upland also.
John T. McDonald: <unk> drove an integration of Altafaj with Salesforce.
John T. McDonald: AI for a variety of data extraction summarization and auto generated form response capabilities. So also partnering with salesforce on the AI front.
John T. McDonald: We're excited about both the IBM and Salesforce partnerships now our core focus at upland is on the enterprise space and our customers cared deeply about security about governance about compliance and about risk management and then when it comes to introducing generative AI into their businesses.
John T. McDonald: And when it comes to introducing generative AI into their businesses, they want it and know it can greatly benefit their businesses, but only if it complies with their standards around data privacy, governance, and risk. And so our customers need to be able to trust us to use this new technology responsibly, and that is what these partnerships, like the partnerships with IBM and Salesforce, give us. And we like the way that positions us to deliver value for our customers. So with that said, I'm going to turn the call back over to Mike. All right. Thank you, Jack.
Mike: They want it.
Mike: And no it can greatly benefit their business, but only if it complies with their standards around data privacy governance and risk and so our customers need to be able to trust us to utilize this new technology responsibly and that is what these partnerships like the partnerships with IBM and sale.
Mike: <unk> force give us.
Mike: And so we like the way that positions us to deliver value for our customers.
John T. McDonald: So with that said I'm going to turn the call back over to Mike Alright. Thank you Jack.
Michael D. Hill: I'll cover the financial results for the first quarter of 2024 and our outlook for the second quarter and full year of 2024. These results and our outlook for 2024 reflect another year of significant incremental sales, marketing, and product investments pursuant to our growth plan, as well as the planned runoff of our Sunset Assets revenue, as we've talked about in the past. Total revenue for the first quarter was $70.7 million, representing a decrease of 8% year-over-year.
Michael D. Hill: I'll cover the financial results for the first quarter of 2024, and our outlook for the second quarter and full year 'twenty four.
Michael D. Hill: These results and our outlook for 2024 reflect another year of significant incremental sales marketing and product investments pursuant to our growth plan as well as the planned runoff of our sunset assets revenues, we've talked about in the past.
Michael D. Hill: Total revenue for the first quarter was $70 7 million, representing a decrease of 8% year over year recurring revenue from subscription and support declined 8% year over year to $67 1 million.
Michael D. Hill: Recurring revenue from subscription and support declined 8% year-over-year to $67.1 million. Perpetual license revenue declined to $1.5 million in the first quarter, down from $1.6 million in the first quarter of 2020. Professional services revenue was $2.2 million for the quarter, a 15% year-over-year decline. These revenue declines are consistent with the planned runoff of Sunset Asset Revenue.
Michael D. Hill: Perpetual license revenue declined to $1 5 million in the first quarter down from $1 6 million in the first quarter of 2023.
Michael D. Hill: Professional services revenue was $2 2 million for the quarter, a 15% year over year decline.
Michael D. Hill: These revenue declines are consistent with the planned runoff of sunset asset revenue.
Michael D. Hill: Overall gross margin was 70% during the first quarter, and our product gross margin was 71%, or 75% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses for the first quarter of 24, excluding acquisition-related expenses, depreciation, amortization, stock-based compensation, and impairment of goodwill, were $39.4 million for the quarter, or 56% of total revenue. This is in line with our expectations and reflects the sales, marketing, and product investments we have been making as part of our growth plan.
Michael D. Hill: Overall gross margin was 70% during the first quarter and our product gross margin was 71% for 75% when adding back depreciation and amortization, which we refer to as cash gross margin.
Michael D. Hill: Operating expenses for the first quarter 2004, excluding acquisition related expenses, depreciation and amortization stock based comp.
Michael D. Hill: Impairment of goodwill.
Michael D. Hill: $39 4 million for the quarter or 56% of total revenue. This is in line with our expectations and reflects the sales marketing and product investments, we have been making as part of our growth plan.
Michael D. Hill: I should note that we did incur a non-cash goodwill impairment charge of $87.2 million in the first quarter of 2024, which was triggered by a decline in our stock price at the end of the quarter. Had our stock price not decreased, we would likely not have had an impairment.
Michael D. Hill: I should note that we did incur a noncash goodwill impairment charge of $87 2 million in the first quarter of 2004, which was triggered by a decline in our stock price at the end of the quarter and our stock price not decreased we would likely not have had an impairment.
Michael D. Hill: Our first quarter 2024, adjusted EBITDA was $13 1 million or 19% of total revenue down from $17 6 million or 23% of total revenue for the first quarter of 2023. This adjusted EBITDA decline as generally as expected considering our growth investments and our decision regarding sunset assets.
Michael D. Hill: Our first quarter 2024 adjusted EBITDA was $13.1 million, or 19% of total revenue, down from $17.6 million, or 23% of total revenue, for the first quarter of 2023. This adjusted EBITDA decline is generally as expected, considering our growth investments and our decision regarding sunset assets. For the first quarter of 24, our GAAP operating cash flow was $5.1 million, and free cash flow was $4.9 million, which was in line with our expectations. Our ongoing free cash flow generation is in addition to the approximate $232 million of cash on our balance sheet as of March 31st, 2021. As of March,
Michael D. Hill: For the first quarter of 'twenty four our GAAP operating cash flow was $5 1 million in free cash flow was $4 9 million, which was in line with our expectations.
Michael D. Hill: Our ongoing free cash flow generation is in addition to the approximate $232 million of cash on our balance sheet as of March 31 2024.
Michael D. Hill: As of March <unk>.
Michael D. Hill: On March 31st, 2024, we had an outstanding net debt of approximately $249 million after factoring in the cash on our balance. As of March 31st, 2024, our gross debt was approximately $481 million, of which approximately $258 million is still fully hedged, effectively locking our interest rate at 5.4% on that portion of our debt through the full maturity of our term debt in August of 2026. The remaining approximately $223 million of term debt now floats at an interest rate of SOFR plus 385 basis points, which was about 9.2% at March 31, 2024.
Michael D. Hill: 20, <unk> and March 31, 2024, we had outstanding net debt of approximately $249 million after factoring in the cash on our balance sheet.
Michael D. Hill: As of March 31, 2024, our gross debt was approximately 481 million of which approximately $258 million is still fully hedged effectively locking our interest rate at five 4% on that portion of our debt through the full maturity of our term debt in August of 2026.
Michael D. Hill: The remaining approximately $223 million of term debt now floats at an interest rate of sofa, plus 385 basis points, which was about nine 2% at March 31 2024.
Michael D. Hill: I will also note that we used $7 $9 million of cash to buyback approximately two 2 million shares of our common stock during the quarter ended March 31, 2024 under our limited stock repurchase program that began in early September of 2023.
Michael D. Hill: I will also note that we used $7.9 million of cash, buy back approximately 2.2 million shares of our common stock during the quarter ended March 31, 2024 under our limited stock repurchase program that began in early September of 2023. This brings the cumulative total cost of our stock buybacks through March 31, 2024 to $22.2 million for approximately 5.5 million shares. As a reminder, our stock buyback plan is for a potential, $25 million total, should it fully As described on past calls, the following guidance reflects the significant incremental, sales, marketing, and product investments that we are making as part of our comprehensive growth plan, as well as the effects of decreasing revenue and expenses related to Sunset Asset, I will note that we are raising our guidance midpoints for the full year ending December 31st, 2024, as a result of our Q1 guidance midpoint.
Michael D. Hill: This brings the cumulative total cost of our stock buybacks through March 31, 2024 to $22 2 million for approximately $5 5 million shares as a reminder, our stock buyback plan is for a potential $25 million total should it fully execute.
Michael D. Hill: As described on past calls the following guidance reflects the significant incremental.
Michael D. Hill: Sales and marketing and product investments that we're making as part of our comprehensive growth plan as well as the effects of decreasing revenue and expenses related to sunset assets I will note that we are raising our guidance mid points for the full year ending December 31, 2024, as a result of our Q1 guidance midpoint beads.
Michael D. Hill: So for the quarter ending June 32020 for upland expects reported total revenue to be between $64, four and $70 4 million, including subscription and support revenue between 61, 5% and $66 5 million for a decline in total revenue of 10% at the midpoint.
Michael D. Hill: For the quarter ending June 30th, 2024, Upland expects reported total revenue to be... $64.4 and $70.4 million, including subscription and support revenue between $61.5 and $66.5 million, for a decline in total revenue of 10% at midpoint from the quarter ended June 30, 2023. Second quarter 2024 adjusted EBITDA is expected to be between 11.8 and 14.8 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBIT For the full year ending December 31, 2024, Upland expects reported total revenue to be between $264.7 million and $282.7 million, including subscription and support revenue between $251.6 million and $266.6 million, for a decline in total revenue of 8 percent at the midpoint from the year ending December 31, 2024.
Michael D. Hill: <unk> from the quarter ended June 32023.
Michael D. Hill: Second quarter 2024, adjusted EBITDA is expected to be between 11, 8% and $14 8 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 20% from the quarter ended June 32023.
Michael D. Hill: For the full year ending December 31, 2020 for upland expects reported total revenue to be between $264, seven and $282 7 million, including subscription and support revenue between 251, six and $266 6 million for a decline in total revenue of eight.
Michael D. Hill: <unk> percent at the midpoint from the year ended December 31 2023.
Michael D. Hill: Full year 2024, adjusted EBITDA is expected to be between 58, and $59 8 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 14% from the year ended December 31 2023.
Michael D. Hill: Full year 2024 adjusted EBITDA is expected to be between 50.8 and 59.8, for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 14% from the year end of December 31, 2020.
John T. McDonald: And with that, I'll pass the call back over to you. All right. Thanks, Mike. We are now ready to open the call up for Q&A.
Michael D. Hill: 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 Q&A.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to Asia hand, and joined the team. If you would like to withdraw your question simply press Star one again.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the team. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press. R1 to join the team. And your first question comes from the line of Jake Roberg, from William Blair. Please go ahead.
Jacob Roberge: If you are called upon to ask a question in our listening via loud speaker on your device. Please pickup your handset and ensure that your phone is not on mute.
Jacob Roberge: Asking your question.
Operator: Again.
Operator: Press.
Jacob Roberge: One to join the team.
Operator: Okay.
Operator: Yeah.
Jacob Roberge: And your first question comes from the line of Jake Roberts of William Blair. Please go ahead.
Jacob Roberge: Thank you for taking my questions.
Jacob Roberge: Thank you for taking my questions. The first one is on the sequential and year-over-year weakness in customer expansions and new customer additions. Is there any color on what's driving that weakness? Are there some macro impacts we should be aware of? And then I have a follow-up.
Jacob Roberge: Weakness in customer expansions.
John T. McDonald: The we actually, in terms of renewals, expansions, and bookings for the quarter, we had a good quarter. You're looking at just counts. It doesn't necessarily have deal size there. So that's the. This is a piece you're not factoring in.
Jacob Roberge: Got it. Oh, that makes a lot of sense. Thank you. And then just one more quick one.
Jacob Roberge: I know that last quarter you mentioned a new focus on potential acquisitions in 2024. Is there anything to call out on that end? Any progress there?
John T. McDonald: You know, we continue to be super active in the market looking at opportunities, and there are a couple of things out there that are interesting, and I would like to get something done this year. Nothing, you know, nothing to announce at this point, but we're, you know, we're actively looking. Got it. Thank you very much.
John T. McDonald: Nothing.
John T. McDonald: Nothing to announce at this point, but we are we're actively looking.
John T. McDonald: Got it thank you very much.
Operator: Your next question comes from Alex Carr of Raymond James. Please go ahead.
Johnathan M. McCary: Hey, this is Johnathan McCary. I'm for Alex.
Johnathan M. McCary: Thanks for taking the question here. So, can you update us on where you stand in terms of the pricing and packaging initiatives you've mentioned? I know you've been focused on the product groupings and bundles. I'm just curious about where you are in that process and if you've found the right balance there yet.
Johnathan M. McCary: Just curious kind of where you are in that process and if you found the right balance there yet.
John T. McDonald: Yeah, I think, you know, we implemented a price increase program last year to reflect the market realities of where pricing is amongst our competitors and the value we're delivering for customers. So that has been fully rolled out, and we are seeing a positive impact from that in terms of ARR generation. So, fully implemented and working.
Johnathan M. McCary: Okay, perfect. And then, Mike, can you give us an update on the timing of asset sunsets?
Michael D. Hill: Is the timeline there changed at all? She's kind of more earnestly beyond that process, but you're still kind of the same, same timeline there. Yeah, same timeline, two, three years for
Michael D. Hill: Yeah, same timeline, two, three years for that to wind down, so it'll be a slow burn. Okay, thank you guys.
Operator: Again, if you would like to ask a question, press star, then the number 1 on your telephone keypad. There are no more questions. I will now turn the conference back over to Jack McDonald for closing remarks.
John T. McDonald: Okay, thank you very much, and we will see you on our next quarterly earnings call. Thank you.
Operator: Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect.