Q2 2024 Upland Software Inc Earnings Call
Speaker Change: Thank you for standing by and welcome to the Upland Software second quarter 2024 earnings call.
Speaker Change: At this time, all participants are in a listen-only mode. 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.
Jack McDonald: By now, everyone should have access to the second quarter 2024 earnings release, which was distributed today at 4 p.m. Eastern Time. If you have 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.
Jack McDonald: All right, thank you and welcome to our Q2 2024 earnings call and joined today by Mike Hill, our CFO.
Speaker Change: I'm going to start with a Q2 review, and following that, Mike will provide some detail on the numbers and our guidance. After that, we'll open the call up for Q&A, but before we get started, Mike will read the Safe Harbor Statement.
Operator: 24 Earnings.
Operator: After that, we'll open the call up for Q&A, but before we get started, Mike will read the Safe Harbor Statement.
Speaker Change: All right, thank you, Jack. During today's call, we will include statements that are considered forward-looking within the meanings 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.
Mike: The forward-looking statements made today are based on 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.
Mike: 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
Speaker Change: 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.
Speaker Change: Upland has provided reconciliations of non-GAAP measures to the most comparable GAAP measures in our press release announcing our financial results.
Speaker Change: 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 effort.
Unnamed Speaker: All right, thanks Mike. Here are the headlines for the quarter. We beat our Q2 revenue and adjusted EBITDA guidance midpoints, so we beat those midpoints, steps towards positive core organic growth and getting past the low point on EBITDA and now, with this quarter and the quarters going forward, bringing EBITDA up each quarter. So again, still in the early stages, but we are starting to see the ship turn here. We earned 56 badges in G2's summer 2024 market reports that were across our portfolio of products. That's up from 44 badges in the spring 2024 reports.
Speaker Change: And with that, I'll turn the call back over to Jack. All right, thanks, Mike. Here are the headlines on the quarter. We beat our Q2 revenue and adjusted EBITDA guidance midpoints, so beat those midpoints.
Speaker Change: We posted core bookings in excess of core churn.
Jack McDonald: just like we did in Q1. So that's two quarters in a row and that's the key point.
Speaker Change: for this year.
Speaker Change: posting quarter after quarter of core bookings in excess of core churn. That's what's going to set us up for our target.
Speaker Change: Good news also on the adjusted EBITDA front. Q2 adjusted EBITDA, $13.6 million in the second quarter. That is up sequentially from $13.1 million in the first quarter.
Speaker Change: in Q2.
Speaker Change: $14 million in Q3, $14.9 million in Q4, $14.9 million in Q5, $14.9 million in Q6, $14.9 million
Speaker Change: in Q4, so the plan is to exit the year at nearly...
Speaker Change: So we're setting up for 2025 with positive core organic growth.
Speaker Change: We're going to be targeting that 3% number, core organic growth next year, and continued expansion of adjusted EBITDA to the mid-$60 million next year. So we have, you know.
Speaker Change: We believe made the turn both in terms of starting the show
Speaker Change: steps towards positive core organic growth.
Speaker Change: and getting past the low point on EBITDA and now with this quarter and the quarters going forward bringing EBITDA up each quarter. So again, still in the early stages but we are starting to see the ship turn here.
Speaker Change: You know based on the growth investment that we've made in pipeline generation SDR capacity
Speaker Change: sales capacity. We are starting to see chunkier deals, larger ARR deals for our lead products and that's that's a critical
Speaker Change: , , , , , ,
Speaker Change: The work that we've done in terms of, you know, accessing intent data, having an SDR capacity to qualify these leads.
Unnamed Speaker: Our AI knowledge management solutions, Upland RightAnswers and Upland Panviva, continued to garner numerous badges, while Upland QBidian, our AI-powered proposal management and response software, increased earned recognitions another quarter in a row. Additional products to receive badges included Upland Ingenious, which is a computer telephony integration solution that powers personalized customer service with AI, and Upland Interfax, which is a secure cloud-based fax service. And, of course, other products also on the badge list.
Speaker Change: We earned 56 badges in G2's summer 2024 market reports that was across our portfolio of products. That's up from 44 badges in the spring 2024 reports.
Speaker Change: in a row. Additional products to receive badges included Upland Genius, which is a computer telephony integration solution which powers personalized customer service with AI, and Upland Interfax, which is a secure cloud-based fax service.
Unnamed Speaker: And, again, we are beginning to see more reviews and more engagement with G2 as a platform, and we expect more goodness to come from there. Meanwhile, Upland QBidian continues to enhance the response and sales proposal process with its new generative AI model called QBidian AI Assist. QBidian is a leader in the RFP and proposal automation industry. It's dedicated to helping teams easily uncover the right processes for RFP response generation and quickly create standout proposals and RFP responses.
Speaker Change: and, of course, other products.
Speaker Change: for RFP response generation and quickly create standout proposals and RFP responses and it's a beta release
Unnamed Speaker: And this beta release of QBidian AI Assist adds these powerful new AI features. And, of course, we've also got the partnership with IBM that we talked about before integrating Watson X AI capabilities into QBidian. So, you know, these are both examples of where we are doing deep work to integrate AI capabilities into our products. And, of course, these were product initiatives that began well over a year ago that are now beginning to come to market, in some cases in beta, and in some cases generally available. So, a great quarter, you know, another step along the way towards driving growth and driving margin expansion. And with that, I'm going to turn the call over to Mike to review the numbers and guidance.
Speaker Change: It adds these powerful new AI features and of course, we've also got the partnership
Speaker Change: with IDM that we've talked about before, integrating Watson X AI capabilities in a Qbidian. So, you know, these are both examples.
Speaker Change: You know, when you look at right answers in PANVIVA, you look at QVIDIAN, of where we are doing deep work to integrate
Speaker Change: I'd also note a partner announcement, Upland and Ramsoft, Ramsoft is a global leader.
Speaker Change: and cloud-based RIS, PACS radiology solutions for imaging centers.
Speaker Change: and teleradiology providers announced the milestone transmission of the 40th
Speaker Change: 40 million FACS through the integration of Ramsoft, PowerServer, and Upland Interfax.
Speaker Change: So it's Interfax's robust security features.
Speaker Change: including HIPAA compliance and PHIPA compliance complement power service secure HIPAA compliant architecture and so you know we're seeing with our secure file transfer solutions
Speaker Change: Some great growth characteristics, these are also high margin products and really seeing some success there as we have for some time in healthcare and financial services, but seeing an acceleration of that, which is, which is great to see.
Speaker Change: Also a note on Upland Altify, during the quarter we announced the release, 9.12 release, which contained major enhancements to transform the customer experience with Altify's Salesforce native products.
Speaker Change: And of course, Altify is a product that really...
Speaker Change: enabled.
Speaker Change: B2B enterprise sales forces to coordinate activities, deploy methodology in a super efficient way, and do the kind of account planning and white space analysis.
Speaker Change: that can really move the needle in terms of sales generation. And of course, adding now AI capabilities.
Speaker Change: to that platform and Altify is Salesforce native so the Salesforce partnership has been great for us and at 9.12 again just the next step in
Speaker Change: multiplies evolution. So a great quarter, you know, another step along the way towards driving growth and driving margin expansion and with that I'm going to turn the call over to Mike to review the numbers and guidance. Mike.
Mike Hill: All right, thank you, Jack. I'll cover the financial results for the second quarter of twenty four and our outlook for the third quarter and full year twenty twenty four.
Mike Hill: So on the income statement, total revenue for the second quarter was $69.3 million, representing a decrease of 7% year-over-year. Recurring revenue from subscription and support declined 7% year-over-year to $65.5 million.
Speaker Change: Provincial license revenue increased to $1.7 million for the second quarter, up from $1.3 million in the second quarter of 2023. Professional services revenue was $2.1 million for the quarter, a 23% year-over-year decline.
Speaker Change: These revenue declines are consistent with the planned runoff of our sunset assets.
Speaker Change: Overall growth margin was 70% during the second quarter and our product growth margin was 71%.
Speaker Change: And that's 75% when adding back depreciation and amortization, which we refer to as cash gross margin.
Mike: Operating expenses for the second quarter of 2024, excluding depreciation, amortization, and stock-based compensation, were $37.9 million for the quarter, 55% of total revenue. This adjusted EBITDA year-over-year decline is generally as expected considering our growth investments and our decision regarding sunset assets. Our ongoing free cash flow generation is in addition to our approximately $232 million of cash on our balance sheet as of June 30, 2024 under our limited stock repurchase program that began in early September 2023.
Speaker Change: Operating expenses for the second quarter of 24, excluding depreciation, amortization, and stock-based compensation, were $37.9 million for the quarter, 55% of total revenue.
Speaker Change: This is in line with our expectation and reflects the sales, marketing, and product investments we have been making as part of our growth plan.
Speaker Change: Our second quarter 2024 adjusted EBITDA was $13.6 million or 20% of total revenue down from $16.6 million or 22% of total revenue for the second quarter of 2023.
Speaker Change: This adjusted EBITDA year-over-year decline is generally as expected considering our growth investments and our decision regarding sunset assets.
Speaker Change: However, and as Jack said, you can see our adjusted EBITDA growing sequentially each quarter this year from $13.1 million in Q1 to $13.6 million this quarter in Q2, to $14 million in Q3 and $14.9 million in Q4 based on the midpoints of our guidance.
Speaker Change: For cash flow for the second quarter of 2024 gap operating cash flow was 5.5 million and free cash flow was 5.2 million which is which is in line with our expectations.
Speaker Change: Our ongoing free cash flow generation is in addition to our approximately $232 million of cash in our balance sheet as of June 30th, 2024.
Speaker Change: At the end of June , we had outstanding net debt of approximately $247 million after factoring in the cash on our balance sheet.
Speaker Change: The remaining approximately $222 million of term debt now floats at an interest rate of silver plus 385 basis points, which was 9.2% at June 30, 2024.
Speaker Change: I will also note that we used $3 million of cash to buy back approximately 1 million shares of common stock during the second quarter.
Speaker Change: under our limited stock repurchase program that began in early September of 2023. This concluded our 25 million dollar stock buyback plan with a cumulative total of approximately six and a half million shares repurchased.
Mike: This concluded our $25 million stock buyback plan with a cumulative total of approximately six and a half million shares repurchased. Now on to guidance. As described on past calls, the following guidance continues to reflect 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 those sunset assets. So for the quarter ending September 30th, 2024, we expect reported total revenue to be between 63.2 and 69.2 million, including subscription and support revenue between 60.1 and 65.1 million, for a decline in total revenue of 11% at the midpoint from the quarter ending September 30th, 2023.
Speaker Change: Now on to guidance. As described on past calls, the following guidance continues to reflect 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 those sunset assets.
Speaker Change: Also, I will note that we have raised our full year 2024 guidance midpoints for total revenue and adjusted EBITDA by the amounts of the Q2 guidance midpoint beats.
Speaker Change: So for the quarter ending September 30th, 2024, we expect reported total revenue to be between 63.2 and 69.2 million, including subscription and support revenue between 60.1 and 65.1 million for a decline in total revenue of 11% at the midpoint from the quarter ended September 30th, 2023.
Speaker Change: Full year 2024 adjusted EBITDA is expected to be between 52.6 and 58.6 million for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 14% from the year ended December 31st, 2023.
Jack McDonald: And again, I'll point out, as both Jack and I have mentioned, that these guide midpoints represent sequentially growing quarterly adjusted EBITDA for every quarter this year, exiting the year in Q4 at $14.9 million at the implied guidance midpoint, which is almost $60 million of annualized run rate.
Speaker Change: So with that, I'll pass the call back to Jack.
Jack McDonald: All right. Thanks, Mike. Let's open the call up and take any questions there might be.
Operator: All right, perfect. If you would like to ask a question today, please press star followed by the number one on your telephone keypad. That number again is star followed by the number one.
Speaker Change: All right, perfect. If you would like to ask a question today, please press star followed by the number one on your telephone keypad. That number again is star followed by the number one.
Ian Black: Hi this is Ian Black on for Scott Berg. Core bookings have exceeded core churn again as you note, but how far through the grower market changes is the company now?
Speaker Change: I would say that we have
Speaker Change: The lead generation and lead qualification, we've put in place the
Jack McDonald: put in place new sales, leadership, and we are seeing the results of that in terms of significant increases in pipeline generation.
Speaker Change: and now beginning to see some chunkier sales hitting which is great to see across you know a few of the products.
Unnamed Speaker: And so, you know, the work has been done, and now we're starting to see, you know, the fruits of those labors begin to ripen here. So, you know, we feel good about where we are, and, you know, it's execution now, quarter by quarter. Part of that growth investment was in product. And, you know, you put those two together, and we're seeing, you know, again, two quarters in a row of positive Cornet ARR.
Jack McDonald: And so, you know,
Jack McDonald: The work has been done, and now we're starting to see the fruits of those labors begin to ripen here.
Jack McDonald: You know, we feel good about where we are and, you know, it's execution now quarter by quarter. You know, at the same time...
Jack McDonald: Part of that growth investment was on product.
Jack McDonald: and CloudOps and we're seeing the benefits of that as well and you know in our in our renewals numbers.
Jack McDonald: and, you know, put those two together and we're seeing, you know, again...
Unnamed Speaker: Now, you know, I realize that it's only the beginning, but we're feeling good about Q3 in the second half of the year. And that should set us up to attack our 3% core organic growth target next year. And again, exiting the year at 60M of adjusted EBITDA run rate with a goal to get to the mid-60M next year. So, you know, if this business troughed that sort of a core organic growth rate of negative 1 or negative 2 and 55M of EBITDA, we see now we've made that turn. And we're gonna get this thing back to at least low single digits next year with mid-60M having made the turn. And then, of course, we want to take it higher from there.
Jack McDonald: two quarters in a row of positive Cornet ARR. Now, you know...
Jack McDonald: I realize that's only the beginning.
Jack McDonald: and that should set us up to attack our 3%.
Jack McDonald: Core Organic Roads.
Jack McDonald: target next year and again exiting the year at 60 million adjusted EBITDA run rate with
Jack McDonald: you know, a goal to get to the mid-$60 million next year.
Jack McDonald: You know, if this business trough that sort of a core organic growth rate of negative one or negative two and fifty five million of EBITDA.
Jack McDonald: We see now we've made that turn, and we're going to get this thing back to at least low single digits next year with mid-$60 million, having made the turn, and then, of course, we want to take it higher from there.
Operator: Our next question comes from the line of Jeff Anry from Craig Hallium. Please go ahead.
Jack McDonald: Our next question comes from the line of Jeff Anry from Craig Hallium. Please go ahead.
Daniel: Hey, good evening guys. Thanks for taking my questions. This is Daniel on behalf of Jeff.
Daniel: Starting off, just on the sunset assets, you guys do a great job of getting the 10Q out promptly. It looks like there's about $8.5 million still in sunset assets. Just thoughts on the pace of the roll-off of that and how we should expect that to unfold. It looks like, year-over-year, that's down maybe about $5 million. Should we expect, on an absolute value basis, roughly a similar pace of roll-off, or just how should we be modeling that?
Jeff Henry: Just starting off, just on the Sunset Assets, you guys do a great job of getting the 10Q out promptly. It looks like there's about 8.5 million still of Sunset Assets.
Mike: Yeah, Daniel, this is Mike. So just from a modeling standpoint, I think this is going to be very consistent with what we've said in the past. We've got about $30 million of sunset asset revenue here in calendar 2024. Next year, 2025, that's going to decline to about half, call it, you know, $17 million or so next year. And then in 2026, it'll half again down to somewhere around $8 million, $8-9 million. So that's sort of the pace of the runoff.
Jeff Henry: Yeah, this is Jack. So, um, we anticipate, uh,
Unnamed Speaker: doing a refinancing in the first half of 2025. So that's the plan, and we'll execute against it then.
Speaker Change: Thanks for that. And then just last for me, just digging down sort of to the product level, as you look through the product portfolio, any particular product pockets to be calling out in terms of particular strength or weakness?
Unnamed Speaker: Altify, which is the B2B sales enablement solution I mentioned earlier, saw some good chunky deals there. BAI, which is our AI-powered enterprise search solution where we've got a growing partnership with Microsoft where our connectors are used as a part of Enterprise Cognitive AI for Azure implementations. We're seeing some nice momentum there. We remain positive about our RightAnswers and Panviva knowledge solutions, which have applications in contact centers and also web-based self-service applications in both, have focused the product portfolio, and committed to this $20 million, $19 million a year growth investment.
Jack McDonald: Altify
Speaker Change: Enterprise Cognitive AI for Azure implementations.
Speaker Change: We remain positive on our Right Answers and PANVIVA knowledge solutions, which have applications in contact centers and also web-based self-service applications in both
Speaker Change: in a variety of industries, including a lot of highly regulated industries. So, continuing to see positive results there. We're seeing a nice turnaround in mobile commons.
Speaker Change: The work that we've put in over the last year and a half in terms of
Speaker Change: a product investment, cloud investment.
Speaker Change: You know, for a lot of these products, a year and a half ago, our search rankings were not first page. And now, we've got pretty much all first page rankings. We've got...
Speaker Change: school you know 18 number one rankings and double that number top five rankings so
Jack McDonald: You know, and I mentioned, you know, where we are with G2, still a ton of work to be done, but those badges are a part of...
Jack McDonald: of, you know, the recognition, also increasing the number of reviews out there. These are good products. We have not done a good enough job marketing and selling them. That's one of the reasons we brought in the HCGC investment a couple years ago.
Jack McDonald: focus the product portfolio.
Speaker Change: and committed to this $20 million, $19 million a year growth investment. So we've been hard at it.
Unnamed Speaker: So, we've been hard at it, and we're starting to see the results of it. Obviously, we're learning month by month, quarter by quarter, making tweaks. There are things we can be doing better. We're also seeing opportunities to, you know, increase investment in some areas and decrease investment in others. But that's the basic take on the products where we're seeing success. And again, we feel good about where we're positioned, but we just need to execute quarter by quarter.
Jack McDonald: and we're starting to see the results of it. Obviously, we're learning month by month, quarter by quarter, making tweaks. There are things we can be doing better. We're also seeing opportunities to, you know, toggle up investment in some areas, toggle down investment in others.
Jack McDonald: Thanks for that, Jack. And then just one last for me for Mike.
Douglas Goldstein: Just on gross margins, can you help us sort of cut through, you know, as the business is sort of transitioning out of the sunset assets, it's hard to tell the trajectory on gross margins with, let's see, 72%, Q4, 23, up to 75, down to 73. It's just hard to read the trajectory there. What should we be modeling there?
Mike: Yeah, I think over time, Daniel, the margins will gradually improve a little bit as those sunset assets decline. Those are generally lower-margin products, even gross margin. So now I'm not talking about a lot, but you know, sort of 10s of basis points kind of improvement over time.
Daniel: Yeah, I think over time, Daniel, the margins will gradually improve a little bit as those sunset assets decline. Those are generally lower margin products, even gross margin. So now I'm not talking about a lot, but you know, sort of tens of basis points kind of improvement over time, gradual.
Daniel: Okay, that's helpful. That's it for me. Thanks, guys.
Daniel: Okay, that's helpful. That's it for me.
John: Hi, thanks for taking the question. This is John on behalf of Alex.
Jack: Jack, I'm curious maybe if you could comment on sales cycles you're seeing in the market. Some companies lately have been calling out elongated sales cycles. Just curious if you could speak to what you're seeing and maybe how that's trended over the last 90 days, and I have a few follow-ups. We have not, you know, been sourced and closed in quarter. So, you know, for the right reasons
John: Hi, thanks for taking the question. This is John for Alex. Jack, I'm curious maybe if you could comment on sales cycles you are seeing in the market. Some companies lately have been calling out elongated sales cycles. I'm just curious if you could speak to what you are seeing and maybe how that has trended over the last 90 days. And I have a few follow-ups.
Speaker Change: We have not.
Jack McDonald: seen a lengthening of sales cycles. Now, you know, maybe we're idiosyncratic in that regard because we've really started ramping up.
Speaker Change: our marketing experts.
Speaker Change: efforts over the last 18 months, but gosh, if anything, we saw a couple of
Speaker Change: $250,000 ARR deals marketing source that
Speaker Change: You know, we're sourced and closed in quarter.
Unnamed Speaker: That's helpful there, and that leads into my next question on the major account expansions, which were up nicely sequentially year-over-year. I know you mentioned it some during the prior remarks, but just any commentary on what's driving the success there, commonality, maybe geographically, and how we should think about the trajectory of that metric. Do you expect we've kind of hit a near-term trough here? You're talking about in, in. Yeah, you know, part of this effort, our growth effort, was bringing in new CS leadership. So, you know, we brought in a team from Infor, our Chief Revenue Officer, Chief Sales Officer, and Chief Customer Success Officer. And we've deployed a new, you know, a new tech stack in CS.
Speaker Change: That's helpful there and that leads into my next question on the major account expansions which were up nicely sequentially in year-over-year. I know you mentioned some during the prior remarks but just
Speaker Change: Any commentary on what's driving the success there, commonality, maybe geographically, and how we should think about the trajectory of that metric? Do you expect we've kind of hit a near-term trough here?
Speaker Change: I just want to make sure I understand the question you're you're talking about I'm specifically talking about major...
Speaker Change: Yeah, the major account expansion that you guys called out there.
Speaker Change: Yeah, you know, part of this effort, our growth effort, was bringing in new CS leadership.
Daniel: So, you know, we brought in a team from N4, our Chief Revenue Officer, Chief Sales Officer, and Chief Customer Success Officer.
Daniel: And we've deployed a new tech stack in CS. We've been investing in enablement of our customer success teams.
Unnamed Speaker: You know, we've been investing in the enablement of our customer success teams and really moving from being reactive to being proactive partners with our customers, driving value. Again, we are early in that process, but the level of rigor and discipline in that function is a step change from where it was a year ago. And so, you know, I'm optimistic that we're going to see both an improved GDRR as well as an improved NDRR.
Daniel: really moving from being reactive to being proactive partners with our customers, driving value.
Daniel: Again, we are early in that process, but the level of rigor and discipline
Daniel: And that function is a step change up from where it was a year ago.
Daniel: And so, you know, I'm optimistic that we're going to see both improved GDRR as well as improved NDRR. You know, NDRR over the last year is up...
Unnamed Speaker: You know, NDRR over the last year is up, might keep me in check here, I think about 100 basis points, and so I think we're running now at... 96%, or at least that was the tick mark that was disclosed, year-end, 23. So the goal is to, you know, improve that another couple 300 basis points over the next couple of three years. And I think we're on our way to doing that. Again.
Daniel: Mike, keep me in check here. I think about a hundred basis points.
Daniel: Yep.
Mike Hill: Right and and so you know our and so I think we're running now it
Mike Hill: So the goal is to, you know, improve that another couple 300 basis points.
Mike Hill: over the next couple three years, and I think we're on our way to doing that. Again, we are early in that process, a lot of work.
Unnamed Speaker: We are early in that process. There is a lot of work yet to be done. Expansions have been a disproportionate share of bookings for us over the past couple of years. I expect the share of bookings comprised by expansions to decline as new logo activity increases, right? Because all of this investment that we've been making in pipeline generation has been new logo opportunities, and there's also work we're doing around customer marketing and, frankly, directing more of our sales capability at the existing customer base to supplement the efforts of our customer success teams and to drive larger expansion opportunities because, you know, there's value we can be bringing to our customer base. I think we're leaving it on the table today.
Mike Hill: yet to be done.
Mike Hill: Expansions have been a disproportionate share of bookings for us over the past couple years.
Mike Hill: I expect the share of bookings comprised by expansions to decline as new logo activity increases, right, because all of this investment that we've been making in pipeline generation
Mike Hill: has been New Logo Opportunities.
Mike Hill: And there's also work we're doing around customer marketing, and frankly,
Mike Hill: Bye.
Mike Hill: directing more of our sales capability at the existing customer base to supplement the efforts of our customer success teams and to drive larger expansion opportunities because, you know, there's value we can be bringing to our customer base I think we're leaving on the table today.
Unnamed Speaker: So it's a core part of our growth plan, and thus far, the signs look good. But, you know, again, lots of work to do. Private multiples remain high.
Mike Hill: So, it's a core part of our growth plan, and thus far, the signs look good, but, you know, again, still lots of work to do.
Unnamed Speaker: I see our focus, and we will stay in the market and continue to monitor opportunities and be opportunistic, but we are focused on driving organic growth. That's how we're going to create value over the next couple of years. We're also focused on margin expansion and, of course, generating cash flow and continuing to pay down debt. So that's, you know, as we look out over the next twelve months, that's really the core twelve to twenty-four months.
Speaker Change: Private multiples remain high.
Mike Hill: But we are focused on driving
Mike Hill: Organic growth, that's how we're going to create value over the next couple of years here. We're also focused on margin expansion.
Speaker Change: And then, of course, you know, generating cash flow and continuing to pay down debt. So that's, you know, as we look out over the next 12 months, that's really the core, 12 to 24 months. That's really the core focus. But, of course, we always keep our eyes open. And I have not...
Unnamed Speaker: That's really the core focus. But, of course, we always keep our eyes open, and I haven't seen any kind of screaming opportunities out there. I just think those private market multiples have been, have remained too high, at least for us, based on where our stock's trading today. It's just hard to make a case for it.
Mike Hill: You know, I just have not seen any kind of screaming opportunities out there. I just think those private market multiples have been, have remained too high, at least for us, based on where our stock's trading today. Just hard to make a case for it.
Unnamed Speaker: That helpful color there; thank you so much.
Speaker Change: That helpful color there. Thank you so much.
Operator: And as a reminder, if you would like to ask a question, please press star 1. Our next question comes from David Hynes from Conocord Genuity. Please go ahead.
Speaker Change: And as a reminder, if you would like to ask a question, please press star 1. Our next question comes from the line of David Hynes from Conocord Genuity. Please go ahead.
Dan Regan: Hey guys, this is Dan Regan on Fit DJ from here, and then also just any thoughts around the productivity of these investments as they continue to ramp up?
Mike Hill: Hey guys, this is Dan Regan. I'm Fit DJ.
Speaker Change: from here, and then also just...
Unnamed Speaker: So I think, you know, we are fully invested in terms of the execution of the plan we originally laid out. You'll recall it was a $19 million annual investment. Five million of that was on the product side, and a lot of that had to do with, a chunk of that had to do with standing up our Indian center of excellence, where we've gone from zero to 150 developers and the opportunity to grow that further with super efficient development pods that we're able to put in place there. Then you had a 14 million dollar spend.
Speaker Change: So I think you know we are we are fully invested in terms of execution of the plan we originally laid out. So you'll recall it was a 19 million dollar annual investment.
Unnamed Speaker: As we move forward there, we don't see a need to increase that investment. In fact, we are seeing opportunities to, you know, better target the money we're spending. You know, we've got all the systems in place. We've got the processes in place. Now, it's about tuning it. Many of these measures, you think about organic search, for example, cost more to get those rankings in place than it does to maintain them.
Speaker Change: to better target the money we're spending. We've got all the systems in place. We've got the processes in place. Now it's about tuning it. Many of these motions, you think about organic search, for example, it costs more to get those rankings.
Unnamed Speaker: So, you know, the intent data that we are accessing now, the forward roll you start to get on positive reviews, getting your content out in the market. So, a lot of those things have been done, and I think those processes, frankly, will get more efficient over time. And that's one of the reasons why we're already starting to see some margin enhancement. And I think you'll continue to see that in the next year, again, where we're targeting the mid-60s. And, you know, and then, you know, we'll be targeting something with a seven handle on it for, you know, 2026. Again, all organic.
Speaker Change: reviews getting your content out in the market.
Speaker Change: And that's one of the reasons why we're starting already to see some margin enhancement. And I think you'll continue to see that in the next year, again, where we're targeting mid-60s.
Unnamed Speaker: Gotcha. Awesome. And then you highlighted chunkier deals and larger ARR lands for core products. Can you talk a little bit about what the average deal size increase is looking like and, you know, where you're seeing the most traction?
Unnamed Speaker: Yeah, so. You know, if you look at our business, 1,800 enterprise customers drive more than 90% of our revenue, and the average ARR across those customers is 150,000. Now, you know, sometimes you go right in with a chunky opportunity that's in that size range or bigger. Sometimes you're starting with a.
Speaker Change: You know, if you look at our business, 1,800 enterprise customers drive more than 90% of our revenue, and the average ARR across those customers is 150,000.
Speaker Change: Now, you know,
Unnamed Speaker: $25,000 or $50,000 kind of land and expand opportunity. What we're seeing now, and again, I want to emphasize it's early, but the investment in product marketing, the investment in demand generation, the new sales leadership that we've got getting tools in the hands of some of the great salespeople we've always had on board and then adding new sales talent, kind of getting our mojo back a little bit on going after bigger opportunities and the investment we've made on the product side.
Speaker Change: Over the last couple of years,
Unnamed Speaker: The Andomans team has done a tremendous job over the past couple, three years getting us set up for this. So addressing any stability issues, addressing product feature issues, getting us to where we needed to be seeing the opportunity around AI and starting these efforts well over a year ago. So, for products like Right Answers, we were able to really be the first contact center platform out there, one of the first to bring to market a chat GPT integration.
Speaker Change: and the investment we've done on the product side, Dan Doman's team.
Dan Doman: has done a tremendous job over the past couple three years getting us set up for this.
Unnamed Speaker: So, you know, that's what we're starting to see start to see some of those chunkier deals. And again, it's going to be quarter by quarter. But we're, you know, we're optimistic.
Dan Doman: You know, that's what we're starting to see, starting to see some of those chunkier deals. And again, it's going to be quarter by quarter But we're, you know, we're optimistic.
Unnamed Speaker: And then, just as a final one, circling back to the customer expansion discussion and kind of building off of comments that you just made here, with all of those sales and marketing investments, where do you expect that this mix will go over the next few years?
Speaker Change: With all of those sales and marketing investments, you know, where do you expect that this mix will go over the next few years?
Unnamed Speaker: Where it's sort of getting back to now. But with the investment we're making, I would see it going to more 60-40. 60 new, 40 expansion. And, you know, that will, I don't know that that will be a this year statement; it's probably more of a next year statement. That's roughly where I see it.
Speaker Change: 60 new 40 expansion and you know that will I don't know that that will be a this year statement it's probably more of a next year statement
Speaker Change: Awesome. All right. Well, thank you. Appreciate it. Thank you.
Operator: Okay, just want to thank everyone for their time today, and we will see you on our next quarterly earnings call. Thank you so much.
Speaker Change: Okay, just want to thank everyone for their time today, and we will see you on our next quarterly earnings call. Thank you so much.
Speaker Change: And that does conclude today's presentation. Have a pleasant day.