Q1 2025 Upland Software Inc Earnings Call
Speaker Change: Thank you for standing by and welcome to the Upland Software first quarter 2025 earnings call. At this time all participants are in listen-only mode.
Speaker Change: By now everyone should have access to the first quarter 'twenty twenty-five earnings release, which was distributed today at 905, a M eastern time.
Speaker Change: If you're not if you've not received the release it's available on the uplands 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: Alright, Thank you and welcome to our Q1 2025 earnings call I'm joined by Mike Hill, Our CFO on today's call I will start with our Q1 review and.
Mike will provide some detail on the Q1 numbers and guidance and then we'll open the call up for Q&A before we get started Mike would you. Please 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 the securities laws, a detailed discussion of the risks and uncertainties associated with such statements is contained in our peer.
Speaker Change: <unk> 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 on this call upland will refer to non-GAAP financial measures.
Speaker Change: That when used in combination with GAAP results provide upland management with additional analytical tools to understand its operations.
Speaker Change: <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 measures because the information.
Jack McDonald: 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.
Jack McDonald: Alright, Thanks, Mike So here are the headlines.
Jack McDonald: Very solid Q1, we beat our revenue and adjusted EBITDA guidance mid points are.
Jack McDonald: Core organic growth rate in Q1 was flat, but we are seeing positive growth momentum with our core organic growth rates are moving to a 2% here in Q2.
Jack McDonald: And we see further increases in that as we move through the rest of 2025.
Jack McDonald: Q1, adjusted EBITDA was 13.1 million that resulted in adjusted EBITDA margin of 21%.
Jack McDonald: Now that's up a little bit from the 20% that we reported in 2024.
Jack McDonald: But here's the bigger point, we are seeing the momentum.
Jack McDonald: With adjusted EBITDA margins.
Jack McDonald: Moving to 26% here in Q2, and then further expanding as we move through the second half of 2025 Q1 free cash flow came in at $7 9 million, which was higher than expected.
Jack McDonald: On the go to market side, we continue to see some nice sizable product wins, including with our AI enabled products, we welcomed 107, new customers to upland in the first quarter.
Jack McDonald: Including 19, new major customers. We also expanded relationships with 245 existing customers 26 of which were major expansions and these new and expanded relationships occurred across our AI powered product portfolio. So it was a good start.
Jack McDonald: For 2025, we are excited about the progress we're seeing on our growth plans more to come on that in a moment.
Jack McDonald: With increase in core organic growth and adjusted EBITDA margin expansion through 2025 on the product front in Q1 I'll note that we earned 76 batches in G choose spring 2025 report.
Jack McDonald: And those were across our solutions upland b, a I insight our AI enablement product received valuable recognitions, along with upland interfax, our AI enabled cloud fax service AI knowledge management solutions up and right answers and up on Pan Veeva also continue to garner numerous.
Jack McDonald: <unk> again, <unk> is the world's largest and most trusted software marketplace and their rankings are based on data provided by real software buyers.
Jack McDonald: Upland Pan Veeva in the first quarter launched sidekick, which is a modern way to deliver compliant and contextualize knowledge to contact center agents as a trusted leader in highly regulated industries and Veeva delivers next generation AI powered guidance for complex and.
Jack McDonald: <unk> driven organization the product offers flexible solutions that meet customers' omni channel needs such as integrations with chat bots AI agents and CRM with the power of Gen. AI curation that is approved by business experts really providing that best of both were.
Worlds organizations can deliver real time recommendations when agents and customers need it most from a knowledge base that is trusted and secure.
Jack McDonald: And Auditable.
Jack McDonald: Our blended gastro announced a big move forward in its data driven analytics in the first quarter with the launch of audiences. The new capabilities bring the power of train of thought analytics to email marketers and data analysts, enabling them to build greater intelligence and maximize campaign for.
Jack McDonald: Formats.
Jack McDonald: Building on <unk> strong legacy of marketing and deliverability expertise are these new cutting edge capabilities.
Jack McDonald: Give marketing and data professionals the ability to answer a critical questions around who their best customers are exploring new audience segments motivating prospects increasing subscribers.
Jack McDonald: And driving lead engagement.
Jack McDonald: Now subsequent to the end of the first quarter subsequent to March 31 2025.
Jack McDonald: We sold our mobile messaging product lines.
Jack McDonald: With this divestiture, we sharpened the focus of upland to markets, where we have the strongest competitive advantage higher margins and higher growth.
Jack McDonald: Note that excluding these divestitures, our net dollar retention rate for the core business as of December 31, 2024 would have been 99% as compared to our reported 96% so really focusing the business on those products that are sticky.
Jack McDonald: That had the highest growth opportunity and that are also the highest margin now those mobile messaging divestitures lowered our 2025 revenue guidance midpoint by $25 million, but they have.
Jack McDonald: Had no impact on 2025 adjusted EBITDA guidance.
Jack McDonald: Again, we now anticipate anticipate higher core organic growth rate.
Jack McDonald: Again, starting with 2% in Q2, moving higher as we get into the back half of the year, but again drilling in on that margin point higher EBITDA margin. So.
Jack McDonald: Moving at 26% here in Q2, and then further expanding during the second half of 2025.
Jack McDonald: And I would note that we published today, our new investor deck, it's linked in.
Jack McDonald: Our earnings release and available on the Investor page of our website and I would welcome folks to take a look at it it really lays out clearly the new positioning of the company and the fact that we have now turned the corner and anticipate beginning here in Q2.
Jack McDonald: Two positive core organic growth for the business.
Jack McDonald: Together with higher margins together with higher net dollar retention rates together with a more focused product story on markets, where we've got the strongest competitive advantage now with the proceeds from our divestitures and free.
Jack McDonald: Cash flow and cash on hand in the first quarter.
Jack McDonald: We paid down debt and if you look at total pay down to date here in 2025, we paid it down by $34 2 million and now. This is in addition to a roughly 189 million of debt Paydowns that we made in 2024.
Jack McDonald: And with that net leverage has been coming down and we see net leverage declining to roughly three seven X by the end of this year.
Mike Hill: So with that I'm going to turn the call over to Mike.
Mike Hill: Thank you Jack and I think Jack covered most of the points on the financials for the quarter. So I'll just make a few additional comments here.
Mike Hill: On the income statement for Q1.
Mike Hill: Revenues came in better than expected due to some customer go lives, which allowed us to begin revenue recognition a quarter earlier than expected and our interfax product line delivered more usage volume in Q1 than we originally expected.
Mike Hill: Q1, gross margins trended up from Q4 as expected and gross margin should continue to trend up in future quarters by a few hundred basis points as a result.
As a result of our recent divestitures.
Mike Hill: As a result of this increased revenue adjusted EBITDA for Q1 came in above our guidance midpoint and adjusted EBITDA margin was 21% that's up from 19% for the first quarter of 2024 as you can see from our forward guidance mid points, we see adjusted EBITDA margin expanding to 26% here in <unk>.
Mike Hill: You too and.
Mike Hill: And expanding further in Q3 and Q4 for full year adjusted EBITDA margin of 27%.
Mike Hill: Now onto cash flow for the first quarter 2025, as Jack mentioned GAAP operating cash flow was $8 3 million free cash flow was $7 9 million, which was benefited by about $1 2 million of from the sale of some of our interest rate swaps in the quarter.
Mike Hill: On the balance sheet after paydowns of $34 $2 million of our debt during the quarter at the end of Q1, we had outstanding net debt of approximately $226 million factoring in approximately $34 million of cash on our balance sheet.
Mike Hill: At the end of Q1, our gross debt was approximately $259 million.
Mike Hill: Our variable to fixed interest rates swaps effectively fixed the interest rate at five 4% on approximately $217 million of our outstanding debt as of March 31, 2025, the remaining $43 million of our outstanding debt floats at an interest rate of <unk> 385 basis points, which was eight 2% at March 31.
Mike Hill: 25, we plan to continue paying down debt with our excess cash flow generation.
Mike Hill: On to guidance, our core organic growth outlook is projected to improve as Jacques mentioned through approximately 2% growth right now here in Q2 and expanding in the second half of 2025 the growth rate assumes that we do not see any macro disruption from the tariffs.
Mike Hill: As mentioned subsequent to quarter end, we divested our mobile messaging product lines.
Mike Hill: This divestiture lowered our 2025 revenue guidance midpoint by about $25 million and had no impact on 2025, adjusted EBITDA guidance midpoint.
Mike Hill: For the quarter ending June 32025, we expect reported total revenue to be between 53% and $56 3 million, including subscription and support revenue between 47, 5% and $52 5 million for a decline in total revenue of 23% at the midpoint from the quarter ended June 32024.
Second quarter 2025, adjusted EBITDA is expected to be between $12, one and $15 1 million, which is which at the midpoint is flat compared to our quarter ended June 32024.
Mike Hill: Second quarter 2025, adjusted EBITDA margin is expected to be 26% at the midpoint, which is a significant increase from the 20% that we had back at the quarter ended June 30 of 2024 year ago.
Mike Hill: For the full year ending December 31, 2025, we expect reported total revenue to be between $209 five to $227 5 million, including subscription and support revenue between 197, 5% and $212 5 million for a decline in total revenue of 20% at the midpoint from the year ended December 31 2020.
Mike Hill: Sure.
Mike Hill: Full year 2025, adjusted EBITDA is expected to be between 55.
Mike Hill: Zero in 64 zero million, which at the midpoint is an increase of 7% from the year ended December 31 2024.
Mike Hill: Full year adjusted EBITDA margin is expected to be 27% at the midpoint, which is a significant increase from the 20% that we had last year for the full year of 2024.
Jack: And with that I'll pass the call back to Jack.
Jack: Alright, we are ready to open the call up for Q&A.
Jack: At this time, if you would like to ask a question Press Star then the number one on your telephone keypad.
If you would like to withdraw your question simply press Star One again, we will pause for just a moment to compile the Q&A roster.
Jack: Okay.
Speaker Change: Your first question comes from Scott Berg with Needham <unk> Company. Please go ahead.
Speaker Change: Hi, this is being black on for Scott Berg are you guys terminated your chief sales officer in April how should we view go to market strategy going forward.
Speaker Change: Okay.
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Speaker Change: Ladies and gentlemen, please hold one moment.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Again, ladies and gentlemen, thank you and please standby.
Speaker Change: Okay.
Speaker Change: To your first question comes from Scott Berg with Needham Company.
Liam: Hi, this is Liam.
Speaker Change: Yes go ahead, sorry, we lost.
Speaker Change: Our.
Speaker Change: Telephone connection there for a minute, but we're back so thank you.
Speaker Change: Great.
Speaker Change: Okay I'm glad to have you Act.
Speaker Change: This is Ian Black on for Scott Berg.
Speaker Change: You terminated your Chief sales officer in April how should review go to market strategy going forward.
Speaker Change: Yeah, we've made a ton of progress on go to market strategy and the divestitures that.
Speaker Change: As noted during the prepared remarks are a part of that we've focused the business on markets, where we've got the strongest competitive advantage higher growth rates and higher margins. So we're seeing growth turned positive here in.
Speaker Change: In Q2 of 2% and an increasing in the second half of the year as a part of those divestitures and focusing the business we have realigned sales.
Speaker Change: With our general managers of our product groups.
Speaker Change: And so do not need a centralized.
Speaker Change: Management for the sales function.
Speaker Change: And we are excited about that motion. It's one that we think is going to provide.
Speaker Change: More focus on individual products, which is where we succeed.
Speaker Change: And it's also a more efficient motion.
Speaker Change: Thank you and then you have now concluded three divestitures in 2025 should we expect additional deals as you guys streamlined towards growth.
Speaker Change: But nothing material at this point, we have completed substantially the repositioning of the business.
Speaker Change: And we look at our core business today, we look at core revenue of about.
Speaker Change: $194 million.
Speaker Change: Our core organic growth rate of between two and 3% this year.
Speaker Change: With <unk>.
Speaker Change: Very strong gross margins, 27% EBITDA increasing.
Speaker Change: As we move through the year and a substantially delever business.
Speaker Change: In the markets, where we're focused in today are stickier.
Speaker Change: So we see a net dollar retention rate moving up here to 99%. So we loved the product focus the blue chip customer base.
Speaker Change: And we've got at <unk>.
Speaker Change: Again, a strong and growing market opportunity. So I think it's a it's a significant turn for the business is one that we've been working on.
Speaker Change: For the past couple of years.
Speaker Change: And of course more to come as we report quarter by quarter from here.
Speaker Change: Thank you so much.
Speaker Change: Your next question comes from D. J Hynes with Canaccord. Please go ahead.
Speaker Change: Hey, guys nice to see D improving outlook over the balance of the year our.
Speaker Change: Ill Amazon at Mike, but Jack would love to get your thoughts.
Speaker Change: Mike as an outsider it it's hard to tell whats driving the faster organic growth improving margins just qualitatively like how much of that is just narrowing in on your better products and kind of divesting underperforming assets versus those better products actually getting better or is there any way to kind of frame that.
Speaker Change: That conversation for us.
Jack McDonald: Yes, DJ it's Jack I'll take that one.
Jack McDonald: Narrowing in and focusing on where we have the strongest competitive advantage.
Jack McDonald: The highest growth the highest margin is driving the bulk of that improvement.
Paul: So so that's that answer to the first part of the question, but I would say Paul.
Paul: Part of this growth plan over the past couple of years has been building.
Paul: Our centralized digital marketing capability.
Paul: And we have seen a real progress there and if you look at our business over the past six or eight quarters. When we look at internal kpis around marketing sourced bookings. It has been a stair step function up quarter by quarter in terms of increased marketing source bookings in.
Paul: These are the basics that we put in place.
Around.
Paul: Organic S E O <unk> era.
Paul: Intent data the investments we've made in our sales development reps are the investments we've made.
Paul: In product marketing.
Paul: And I would say the final piece of that is what we've done on the product side.
Paul: Over the past couple of years, we've completed the build out of our India offshore development Center.
Paul: And using that capability as well as the talented developers we've got around the world are.
Paul: We have made substantial investments and improvements to our products performance capabilities, but we've also been AI, enabling our products and we're starting to see.
Paul: The benefits of that in terms of bookings so right here in the first quarter.
Paul: I think about one one.
Paul: Important sale, we made a half a million dollars plus and a R. R. Two a major tech company.
Paul: That was doing a substantial enterprise L. L M.
Paul: And the customer implementation and in around customer support and this is Ed.
Paul: Business that has got tens of millions of customer touches a year.
Paul: Well known Blue Chip company.
Paul: And that.
Paul: That kind of.
Speaker Change: Clemente Sheehan is pulling forward products like upland right answers.
Speaker Change: <unk> provide the knowledge base as the trusted secure auditable knowledge bases that are needed and that these enterprise L. L. Ams.
Speaker Change: Are trained on <unk>.
Speaker Change: So again. This is just one example of how the product innovation.
Speaker Change: <unk> is driving this growth that deal.
Speaker Change: It was a marketing sourced booking.
Speaker Change: So it's an example, as well of the progress we've had in building demand Gen and again when you now focus the business on those highest margin highest growth highest renewal rate products. When you take your N. D. R are from the mid <unk> to the high Ninety's up to.
Speaker Change: 99% it provides a much more solid platform for.
Speaker Change: For organic growth.
Speaker Change: Yes, so we are targeting some increases through the back half of the year and then even higher next year sorry.
Speaker Change: No. It makes sense, it's a helpful explanation and nice to see the progress. Thank you Jeff.
Speaker Change: Your final question comes from Jeff Van <unk> with Craig Hallum. Please go ahead.
Jeff Van: Great. Thanks, Hey, Jack Mike a couple a couple of quick ones just on the India. If you can revisit that just refresh me I think you said that played out over a few years. One was the full build out completed whenever we started to see the benefits of that increased productivity for the dollar rolling into the product. So I'm just trying to get a little better sense of the timing there.
Speaker Change: Yeah full build out completed at the end of last year.
Jeff Van: And.
Jeff Van: And the if you look at our spend our R&D spend as a percentage of revenue.
Jeff Van: That will stay relatively constant here in the mid teens, but the degree of throughput that we're getting for that is increasing substantially.
Jeff Van: Mhm.
Mike Hill: That's helpful and Mike on the on.
Mike Hill: On the free cash flow if I have it right. I think you were looking for $23 million last quarter, you bumped it down to 20 and I think you called out on this slide show there was a $5 million I think it was a one timer related to a divestiture just reconcile the changes in the free cash flow outlook, there and if I had that 5 million correct.
Speaker Change: Yeah, you do Jasmine and so $20 million of free cash flow this year before that $5 million.
So we've got these one time costs that are really divestiture related expenses.
Speaker Change: As you know.
Speaker Change: Restructure of the business here around the divestitures so.
Speaker Change: From a cash flow standpoint, yes $20 million.
Speaker Change: If we ignore that $5 million.
Speaker Change: Additional bullet here in Q2.
Okay, and just back follow up on just the prior questions around pipeline and visibility Jack any other cause.
Speaker Change: Metairie about the visibility into that top line acceleration and specifically speaking to baby you know it sounds like the digital marketing lead Gen side has really picked up for you. I think you spent a lot of time to try to get better quantification and measure ability in pipelines just any color from a pipeline standpoint in those businesses, rather its coverage ratios or others that just gives you conviction.
Speaker Change: Under 2% for the quarter getting up to five and beyond and just how visible that is and what the metrics are telling you.
Speaker Change: Yeah, So a couple of things on visibility.
Speaker Change: Some basics here, it's a strong visibility business in the sense that 93% of our revenue was recurring net dollar retention rate pro forma for those divestitures, Jeff is now up to 99%.
Speaker Change: Our average contract term is up to two years now and our average customer lifetime.
Speaker Change: If you look at that.
Speaker Change: Core business today, it's up over eight years close to nine years. So those are all positives.
Speaker Change: <unk> build has continued to strengthen our quarter by quarter over the last six to eight quarters.
Speaker Change: Coverage ratios are decent you know you always want them to be better.
Speaker Change: We have.
Speaker Change: A pretty good degree of confidence here that we're going to beat the 2% in the second half of the year and get <unk>.
Speaker Change: Closer to three and then we're looking at.
Speaker Change: Our our internal forecasts are showing something north of 4% next year and obviously, we got to execute to get that done, but if you look at this business over the past few years that is a real turn from where we were.
Mary: And again, it's Mary too.
Mary: EBITDA margins that are going to be closing in on 30% here in the second half of the year and as we move forward into next year Joe.
Mary: And as a business is not seeing that sort of rule of mid Thirty's territory in quite some time.
Mary: Positive yes.
Mary: Understood and one last one on the debt real nice progress.
Speaker Change: In terms of paying the paying down the debt going forward the thoughts still targeting paying down $2 million a month I think that was what you had commented previously although we've had some lump sums in between here and there.
Speaker Change: Yes, we have had some lump sum so.
Speaker Change: But yes.
Speaker Change: Cash flow dependent that is the target.
Speaker Change: Going forward, yes.
Speaker Change: Got it okay, great. Thanks, so much.
Speaker Change: Alright, thank you.
Speaker Change: There are no further questions at this time I will now turn the call back over to Jack Mcdonald for closing remarks.
Speaker Change: Okay. Thank you very much sorry for that telephone line interruption in the middle there.
Speaker Change: We appreciate the questions and we will see you on our next earnings call. Thank you.
Speaker Change: Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Speaker Change: [music].