Q2 2019 Earnings Call
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By now everyone should have access to the second quarter 2019 earnings release, which was distributed today at approximately three o'clock pm central.
Four o'clock PM Eastern time, if you've not received the release its available on the Investor Relations tab of uplands website at Investor thought uplift.
Upland software Dot Com I would now like to turn the conference over to our host Mr., Jack Mcdonald, Chairman and CEO of Upland software. Please go ahead Sir.
Thank you and good afternoon, everyone and welcome to our second quarter 2019 earnings call.
I'm joined today by Tim Mattox, our President and COO and Mike Hill, our CFO on today's call I will start by summarizing our results.
And some recent highlights following that Mike will provide a more detailed look at the numbers and share with you our guidance for Q3 and the full year 2019, and then Tim Mattox will cover sales and operations highlights from the second quarter.
After that well open the call up for culinary, but before we get started Mike Hill will read the Safe Harbor statement Mike.
Thank you Jack and good afternoon, everyone.
During today's call. We will include statements that are considered forward looking within the meetings that the securities laws. In addition, we may make additional forward looking statements in response to your questions. These statements are subject to risks assumptions and uncertainties that could cause our actual results to differ materially. We caution you to consider our discussion of risks factors and other uncertainties that could cause actual results to differ materially from those in the forward looking statements contained in the press release and in this conference call.
A detailed discussion of such risks and uncertainties are contained in our annual report on Form 10-K periodically as needed as needed in our quarterly reports on Form 10-Q 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 August seven 2019.
We do not intend or undertake any duty to release publicly any updates or revisions to any forward looking statements, whether as a result of new information future events or otherwise.
On this call up when will refer to non-GAAP financial measures that when used in combination with GAAP results provide.
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 second quarter 2019 results.
Which is available on the Investor Relations section of our website at Investor Dot Upland software dotcom.
Please note that we are 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.
To learn more about our outreach plans, please feel free to contact us at Investor Dash Relations and upland software dotcom and with that I'll turn the call back over to Jack.
Thank you Mike.
Wow, so really a major milestone quarter for upland phenomenal results, 47% growth in both total.
And recurring revenues, we beat the top of our guidance range beat the top of the range on both revenue and adjusted EBITDA. This is the twentyth straight quarter of off when meeting or beating guidance that every quarter.
Since going public for the first time, we exceeded 200 million dollar annualized.
Revenue run rate is actually closer to 220 million pro forma for the acquisition of post.
We closed two accretive immediately accretive and strategic acquisitions.
That continue to build out our powerful CX down.
And sales enablement solution suites.
And that bring the total revenue run rate acquired so far this year to $26 million.
We strengthened our acquisition war chest.
In two ways first the successful 150 million $59 million public equity offering about $151 million net.
And then.
Just this week.
We closed two successful $410 million credit financing and I would note that.
That financing brings a host of benefits that Mike will talk about a buck.
We lowered our effective interest rate to 5.4%. So a meaningful reduction there also lowered our annual principal repayments to 1%. This kind of term loan B facility is a seven year term and your principal amortization.
For the first six years, 1% a year, so very attractive financing, we continue to maintain a very modest leverage.
As we see it.
But this facility gives us room to grow as does that equity offering so a host of product enhancement releases on the organic side. We also saw very strong new customer acquisition and expansion bookings organic growth came in at 5% So right on target.
In the mid single digits, which was beautiful.
Our acquisition pipeline is robust.
We really have never had a pipeline is stronger than it is today our war chest has been reloaded through that equity offering and the new credit facility and our ability to successfully integrate acquired products onto the upland one platform has never been stronger so.
As our raised guidance suggests we are looking forward to a strong second half.
2019.
So with that Im going to turn the call back over to Mike to give you a more a more detailed look at the Q2 numbers and also share our guidance for Q3.
And the full year, our raised guidance for Q3 and the full year Mike.
Well, thank you Jack so, yes, covering the second quarter.
And then I'll go into guidance.
Total revenue for the second quarter was 53 million representing growth of 47% recurring revenues from subscription and support grew 47% as well year over year to $48.7 million professional services revenue was $3.7 million for the quarter, a 77% year over year increase perpetual license revenue was $8.6 million for the second quarter for a decrease of 16% year over year.
Moving down the TNL to gross margins overall gross margin was 69% during the second quarter and our product gross margin remained strong at 70%.
For 74% when adding back depreciation of equipment amortization of acquired intangible assets, which we refer to as cash gross margins.
Our professional services gross margin was 47%, although we don't believe the 47% of sustainable than our PS So margins should migrate back down to our 40% steady state target.
Turning to our operating expenses research and development expense net of Refundable Canadian tax credits was $6.9 million for the second quarter, representing 13% of total revenue.
For the quarter sales and marketing expense was $8 million, representing 15% of total revenue for the second quarter.
General and administrative expense was $12 million in the second quarter, representing 23 million or 23% of total revenue. However, excluding noncash stock compensation expense DNA expense was $6.5 million or 12% of total revenue.
Acquisition related expenses were 9.3 million in the second quarter representing.
Resulting from our recent significant acquisition activity with two acquisitions during the quarter on top of the restructuring costs for our two international acquisitions closed in the fourth quarter.
Acquisition related expenses taper off to zero during the four quarters following any given acquisition unless or until we have additional acquisition activity.
Operating loss was $5.5 million in the second quarter compared to a loss of $8.7 million for the same period in 2018.
GAAP net loss was 5.4 million or a loss of 24 cents per share compared to GAAP net loss of 5.2 million or a loss of 26 cents per share in the second quarter of 2018.
non-GAAP net income was $17.9 million or 76 cents per share in the second quarter 2019, compared to non-GAAP net income of 7.5 million or 36 cents per share in the second quarter of 2008.
Our second quarter 2019, adjusted EBITDA was 19.1 million or 36% of total revenue up 52% compared to 12.5 million or 35% of total revenue for the same period last year.
Now onto our balance sheet statement of cash flows we ended the second quarter with $108.4 million in cash which was benefited by our successful follow on equity offering that Jack talked about adding approximately $151.1 billion in cash net of offerings offering costs.
To our balance sheet.
Some of which was used for our composed acquisition in the quarter.
Cash flows provided by operating activities were point $5 million for the second quarter, which would have been much higher without one time acquisition related expenses and approximately $1.6 million of acquisition earn out payments made in the quarter. We consider these acquisition related uses of operating cash as essentially portions of acquisition capital, which are being paid out of our own organically generated free cash flow.
Furthermore, upward to the cash efficient when they were looking at income taxes and capital expenditures cash taxes for the second quarter 2019 were <unk> point 9 million compared to cash taxes, a point $8 million.
In the second quarter of 2018.
Upland currently has approximately $155 million of usable tax and the wells, which is comprised of $135 million of usable.
US federal tax and allows us.
And $20 million.
UK tax and the wells, we expect to continue to pay.
Around $4 million per year in cash taxes, mostly in the form of Canada revenue agency taxes.
Ireland income taxes, and some use state income taxes.
As of June Thirtyth 2019, we had approximately $309 million gross debt outstanding making net debt approximately $201 million after factoring in the $108 million of cash on the balance sheet.
Announce yesterday, we closed a new term loan B credit facility, which includes a new $350 million term loan paying off our existing credit facility and adding over 300 over $33 million of additional cash to our balance sheet.
This brings our cash balance to approximately $141 million and our gross debt outstanding to $350 million of flying net debt at approximately $209 million for a net leverage ratio.
Of approximately 2.6 times based on our current $81 million annual run rate adjusted EBITDA.
This new term loan B facility matures in August .
2026, and structurally reduces our annual principal payments of 1% per year as Jack mentioned this new term loan B facility is expandable subject to the terms in the credit agreement. So the facility can grow as we grow.
Additionally, we have a new $60 million revolving credit facility, which remains undrawn at present and matures in August of 2024.
These new credit facilities reduce our interest.
Rate to LIBOR, plus 375 basis points, and we have entered into an interest rate hedge instruments for the full amount and duration of the term loan b facility, which effectively lowers our net interest rate to a fixed rate of approximately 5.4%.
Through maturity.
So.
The existing cash on the balance sheet.
Plus credit capital from these new credit facilities.
Plus our own growing free cash flow generation, all provide the funding to fuel our continued.
Acquisitive growth well into the future.
Now for guidance.
For the quarter ending September Thirtyth 2019, we expect reported total revenues to be between 53.5 and $55.5 million, including subscription and support revenue between 49.8 and $51.4 million for growth in recurring revenue of 49% at the midpoint over the quarter ended September Thirtyth 2018.
Third quarter 2019, adjusted EBITDA is expected to be between 19.8 $20.8 million for an adjusted EBITDA margin of roughly 37% at the midpoint representing growth of 55% at the midpoint of the quarter ended September Thirtyth 2018.
The full year ended December 30, Onest 2019, we expect reported total revenue to be between 209.9, and $213.9 million, including subscription and support revenue between 195.4 and $198.6 million for growth in recurring revenue of 44% at the midpoint over the year ended December 31 2018.
Full year 2019, adjusted EBITDA is expected to be between 77.2 and $79.2 million for an adjusted EBITDA margin of 37% at the midpoint representing growth of 47% at the midpoint over the year ended December 31 2018.
Now with that I'll turn the call of the Tim Mattox, our president and COO.
Thanks, Mike and good afternoon, everyone today ill review, the Q2 results across sales product and operating areas.
With respect to sales Q2 was a very strong bookings quarter as Chuck alluded to we welcome to 150, new customers to upland than Q2, and these new customers committed on averaging much higher annual recurring revenue.
We also saw a record 38, new major customers, which was 10 more than in Q1.
And each of those customers committed to over 25000 annual recurring revenue.
Indeed, several new customers committed over 250000 annual recurring revenue, including a global supplier of high Tech polymer materials, we're committed to our enterprise sales enablement solution suite as well as a national media and Entertainment company and a social advocacy organization, who each committed to our customer experience management solution suite.
Hundred 47, other new customers committed over 3 million in total annual recurring revenue spend with uplift.
With respect to our existing customers Q2 was also a very strong quarter you saw a record 243 customers expand the relationship discipline.
We also saw a record 48 customers with major expansions of at least 25000 annual recurring revenue I was twice as many as we saw in Q1.
Among our larger expansion customers, averaging 200000 or more in annual recurring in additional annual recurring revenue for a global financial services firm, which expanded its commitment to our enterprise knowledge management solution suite.
Hey, multinational IP service and consulting company, which expanded its commitment to our customer experience management solution suite.
And a global publishing company, which expanded its commitment to our enterprise sales enablement solution suite.
240, other existing customers expanded their commitments by more than $4 million in aggregate annual recurring revenue in the quarter, So very strong.
On the product front, we also continue to invest in our customer driven innovation through efficient high quality internal development.
We announced several product releases in Q2, and Cuti, including major releases for our knowledge management enterprise sales enablement and document lifecycle automation solution suites.
Each of these releases enhanced usability functionality and performance for our customers. We also released 20 feature packs based on input directly from our customers.
Ways, we can improve the efficiency of their processes such as the integration between power steering our flagship project and portfolio management solution and Microsoft teams, adding robust collaboration capabilities to our enterprise grade ppm solution.
On the Q1 earnings call I discussed our April acquisition of post.
Which added sophisticated E mail and audience development solutions targeting the media and publishing verticals. So was added to our customer experience management solution suite are interviewing our integration efforts are progressing nicely there and those results are happening today.
In May we announced our acquisition of composed a leading content operations platform provider for sales and marketing.
As many of you know appliance product strategy is to complement internally developed customer driven product innovation.
Strategically relevant acquisition activity by acquiring supposed we added a cloud based marketing content operations platform with built in artificial intelligence advanced analytics and a robust set of npis. So our uplands enterprise sales enablement solution suite.
Entire upland team could not be more excited about the post and we are investing aggressively to ensure that every supposed customer benefits from uplands greater financial scale operational capabilities through up and one as well as our commitment to 100% customer success.
Turning to operations, we continue to invest in and improve the up in one platform, which forms the foundation of our 100% customer success commitment and puts customers at the center of everything we do.
We fully integrated rant Raven to up in one.
As a reminder, rant and rave is an important element of uplands customer experience management solution and is a leading provider of cloud based customer engagement solutions in the UK.
Now rant and rave can scale up we serve us customers, which is already contributing to the results I discussed earlier.
And we are introducing us products into international markets by building pipeline for up and mobile messaging into the UK and the European continent.
To further improve our integration act was execution, we migrated to our robust.
Project and portfolio management tool Powersteering.
This is from a spreadsheet based approach.
Our integration teams are now enjoying the improved collaboration visibility and reporting that power steering provides.
We expanded the comprehensiveness and completeness of our upland integration playbook by augmenting chapters on pre close contract review and post close implementation uplands Premier success plans, which allow us to take the experience of newly acquired customers to even greater levels of satisfaction loyalty.
Our investments to streamline back office operations are also paying dividends as we're seeing record efficiency levels across the entire quote to cash cycle.
And finally, we reinforced we reinforced our already strong senior leadership team by adding a senior executive highly experienced an enterprise SAS to lead our global professional services organization and to further support sustained and consistent bookings growth.
In summary, the solid results of our newly acquired companies along with the consistent performance of our existing businesses support our strong guidance and future performance with that I'll hand, the call back to Jack.
Thank you Tim.
So at this point operator, we are ready to open the call up for acuity.
At this time I would like to remind everyone. In order. If you ask a question. Please press star followed by the number one on your telephone keypad, we'll pause for just a moment to compile beginning roster.
Your first question comes from the line of.
Sorry, with William Blair.
Hey, guys. Thanks for taking my question and Im really nice job there.
I guess I wanted to touch first on.
The ability to integrate Jack you talked about a little bit.
Tim you Referenceable and one but as you start making more and more acquisitions given the scale your garden.
To sustain some of the growth.
I guess, just some color on sort of your ability now integrate them.
Sort of put the put the teams together fast or have you seen some efficiencies and learn and what color can give us on sort of the ability to do that I guess more frequently thank you.
Yes, we have seen efficiencies and thanks for the question.
Vonn.
We continue to improve upland one.
Every day as well as our integration.
Capabilities.
No.
We talk about targeting $25 million to $50 million a year of acquired revenue we've already got 26 million done.
Here at the midpoint of the year.
And our gunning for the high end of that range.
Of course, there are never guarantees on M&A, but that is the goal.
And.
And thats essentially for deals and as we've talked about we want to increase our ability over the next two to three years to do.
Five to six transactions a year or so.
Already in our numbers and in our budgets, we are laying in the infrastructure to do that.
Both on the deal sourcing and deal making side.
But we'll also be doing it with our integration teams.
And our operating teams so we feel great about our ability to.
Attack this consolidation opportunity.
Our position in the market is stronger than it's ever been now 20, some odd deals into this.
Our access to capital.
Is greater than it's ever been and our ability to successfully integrate these deals is stronger than it's ever been and so.
We look forward to going after that and the increasing.
Our capacity to.
Profitably and on an accretive basis.
Increase the acquisition activity. Thank you.
Got it got it and that's really helpful. Then I guess, we talked on the M&A side, but I'll just touch on the organic side I mean the numbers.
On expansions, even the new customer logo ads.
We're all very very impressive.
Two questions, one Tim and maybe maybe Tim I guess, you know you had a slight shift or keeping them ourselves people, but what else is driving the growth.
We start to see those synergies across cross all yet I know I was asked that question.
You guys always doubly little bit I'd love to understand if you are seeing that change at all.
And I guess.
The second to that question.
Is.
As you look at sort of all those pieces do you think you continue to double down on the let's grow sales a little more than we had maybe two years ago opt to continue to drive sort of more organic cross sell how should we think about those things playing out. Thank you.
Yes so.
I'm sorry go ahead, Jim why don't you take that what did you take the first half of that one and then I'll talk a little bit about sales investment.
Sure sure so yet but on your your anything if not consistent on the cross sell question as you saw.
In prior quarter two we.
We announced a new go to market motion around solutions, where weve strategically grouped our products, we've integrated them in a purposeful basis, where it makes sense. Obviously the common you I common analytics around up when the analytics that go to market motion is certainly helping I would say early innings in terms of what we're doing there, but we are introducing more products to customers.
And the solution sell is actually enabling us to introduce multiple products, but more as features than sole separate additional product sales.
So we're learning, we're learning, which ones resonate, which ones are we're going to double down on were seeing interest from the existing base and expanded capabilities.
And we'll continue to be aggressive about introducing that in and I think you'll probably hear our terminology change more or less from cross selling more into solutions sale.
So that's how we'll we'll talk about it and you can even here in the customer examples I gave you some of the solution suites that already did contribute to significant bookings for the quarter.
These solutions are also helping to inform our M&A activity as well as continued to acquire strategically.
So to to add to the to that.
In terms of.
Sales investment we've got a very efficient sales motion right now we're paying about a dollar in sales and marketing expense roughly for every dollar they are are.
Bookings and of course, when you look at average duration of customer relationships, which we publish for ATSI six or six purposes. It's six years. So it's a very strong LTV.
To CAC.
Ratio up there with the best out of them. So.
We will continue to invest in sales and marketing consistent with getting that kind of return and also consistent with an upwardly ramping EBITDA margin to 40% at scale.
We're defining scale at $300 million of revenue above that EBITDA margin wants to go a little higher but we will take any of that overage and reinvest it.
And additional sales and marketing to support organic growth. So that is the plan.
Awesome very helpful. One quick last one for Mike.
I know you guys don't provide an RPL metric.
Bots.
And there are actually.
Normalized lot of things, but but you did talk about a really strong bookings quarter.
And so I was wondering if you're willing to give a little color about the delta between bookings and billings.
Sort of.
What those what that might look like or if that was the delta. So we can understand sort of what's been invoiced and sort of what the winds where VW. The invoicing any color would be helpful. Thank you guys.
Yes, Bob This is Mike. Thanks for the question, Yes, we don't disclose bookings.
And you know, we've got quite a mix of different.
Billing cadences amongst all of our products some monthly some quarterly.
Little over half of them annually.
So just from a.
What's useful.
We really don't get into that type of disclosure for specific.
Hi, Mike I had to ask.
You all think they might guys congrats.
Thank you Yvonne.
Your next question comes from the line of John Difucci with Jefferies.
Thanks for taking my questions first question is for Tim and it kind of follows up on Devons first question I think it and when we look at the major account expansion. This this quarter they accelerated materially and you talked a little bit about that in your prepared remarks, but if you give us a little bit more color about what's happening there is it do.
Two the two acquisitions you did this quarter does that have something some effect on that or or was it something on the demand side.
Or any effects from the things that you may be doing to drive demand is.
All three of those probably had an impact but if you can give us a little bit more color on that that'd be helpful.
Sure. Thanks for the question John and.
Yeah, you're right there were multiple factors in play there certainly the new products are are very well received however, our older products that we've owned for a while also performed strongly I think that brings in the other elements that are helping to drive that which is we very purposely engage and focus on our existing customer base deepen that relationship. We use the net promoter score methodology in a drive for a 100% customer success to Orient the company.
And once we establish that with a customer then they're receptive both at buying additional seats of the same product.
Then as we touched on earlier looking at other products.
Typically in that same solution set.
We also have some enhanced service offerings call our Premier success program platinum and gold that certainly helps us well in terms of bringing up our.
Annual recurring revenue with each of those customers. So.
Very strong focus on it it's an efficient focus as Chuck alluded to in terms of generation of incremental revenue.
And we think that those three elements will continue to contribute.
Okay, great. So I shouldn't be thinking that these acquisitions you just acquired a bunch of large customers that really made that accelerate way beyond what we've been seeing.
No. We don't we don't count the customers that we acquire that come with the company. We buy we start count them in our metrics once we own them for a quarter and then in terms of organic growth, we don't count them until we've owned the asset for 12 months. So we're trying to take a conservative approach at looking at it.
Does that help much verify yeah. It does thank you much appreciate that and I guess Jack.
So I look at it.
So many of your acquisitions over time and more recently, especially you you mentioned composed was a little bit higher.
Multiple on recurring revenue, which is where we really focus so still a very attractive hopeful I think anyway, but but it's a little higher than its been I'm. Just curious if you're seeing any increased competition out there and M&A or were there just characteristics of kaposis. It would require a higher recurring revenue multiple and maybe there's more larger enterprises.
And that customer base or or just just to.
A question around around that the multiples you're paying yes. Thanks. Thank you John to US multiple that's most important is the multiple of adjusted EBITDA and pro forma EBITDA EBITDA that we're going to be able to get out of the business within 90 days post.
Acquisition and so if you look at propose to post up.
You are seeing acquisitions that are roughly six six and a half times.
At 20%.
Our our hurdle rate.
In addition to those financial returns on the deals.
We are building out our solution suite with every acquisition and I think this is important and it goes to your earlier question.
You know it's hard in the early going to be a disciplined buyer and also to build strong adjacent sea of products that are going into common buying centers in the enterprise such that you can begin to build a stronger strategic solutions provider relationship with your enterprise customers and also ultimately drive solution sales and cross sales, but we are starting to hit that critical mass point now we were seeing in our sales enablement, we particularly in our CSM suite and you're going to see what the next few acquisitions some activity in some of the other suites as well, where we're really trying to let now starting to lay in the third product the fourth product, where you're starting to see real adjacency to that we add the upcoming upland work center, which will be our unified desktop that enables customers to consume functionality for multiple products in one streamlined desktop.
So some very I think exciting trends coming together being driven by M&A and innovation through acquisition as we like to call. It.
That I think are going to put us in a very strong place over the next few years.
All makes sense Jack I appreciate answering the questions and nice job. Thanks.
Thank you.
Your next question comes from the line of Richard Davis with Canaccord Genuity.
Hey, thanks.
So you guys here tomorrow, but.
Quick question for you as you kind of build this.
Platform out how do you think about.
Dropping in and adjusting the augmenting your sales go to motion and you're kind of sales talent right because early on I might have been selling.
Smaller deals on a kind of point solution basis announced starting to sell as you point out you know solutions and things like that you may not be quite at the full lay level, but you're getting close so.
How do you how do you prepare for that how do you think about it how should we think about it as outsiders. Thanks.
Well I'd say.
You're keying in on a very important point because.
We are assembling a very.
Strong.
A complement here of.
Solution suite.
And we are constantly.
Upgrading.
Our go to market.
Around that so.
As I've said, many times to investors when it comes to the acquisition side when it comes to repositioning products for.
Margin generation when it comes to existing customer success.
Upland I think is really executing beautifully we know we have opportunity around marketing and sales and so consistent with what I said earlier, we're going to continue to invest in those areas, we're going to continue to bring on more senior talent.
We're holding onto that to the best talent out of the acquisitions, we do.
We're starting to cluster those sales forces more around solution suites, and we're going to continue to invest in bring it on the organic side senior sales leadership.
To drive that forward. So a lot of work to be done there. The good news is we havent baked we essentially take the cost of those investments into our model, but we havent assumed anything in terms of material goodness from them. So I like the way that physician.
And.
When as and if those investments generate return it will be icing on the cake to the numbers.
Perfect. Thank you so much.
Thank you.
Your next question comes from Jeff Van Rhee with Craig Hallum.
Great. Thanks, I'll Echo the congratulations guys looks great here.
A number for me just to follow up on the last few on sales just maybe talk a little more clarification around where are you now with quota reps and then what has been the mix of the incremental reps, namely how many are coming inorganic versus.
The inherited and then I had one more in that area, but also a pause there for that one.
Yes, so still in that roughly 60.
Heads.
That's excluding account management.
And some of the CSM folks and so and of that it's still roughly half.
Between field.
And inside.
Sales and in terms of.
Where the bulk of the head count is coming.
It has been.
Principally by retaining.
Productive salespeople.
At the acquisitions that we do.
But we've also had some room in the budget and we're starting to add.
Some additional heads now organically, but on a on a sort of trailing 12 or 18 kind of basis really.
You know 80% of that new sales head. Count addition has come through acquisition and about 20% organic those are rough numbers, but to give you a sense of magnitude.
Yes very helpful.
How do you think about channels and partners and any goals in terms of channel and partner influence going forward.
Well, we've got multiple go to markets and.
This growing field motion and of course inside sales and we've got in our workflow automation products very healthy channel and also some very strong OEM relationships with the major technology provider. So.
It's a multi.
Channels sort of go to market.
You know as you scale.
Developing relationships with some of the bigger size becomes more relevant that's something.
That we are looking at.
As an area of.
Some additional investment.
As we.
Scale.
Our sales team generally.
Nothing material that went out there as of yet, but it is something that's being considered.
Great and then I guess, just one last one for me on the professional services side, obviously, bringing some talent.
Had some some good movement there at least in terms of variance to my numbers in the quarter just.
How do you think about that over the next few years and I don't know growth percent of revenue just a little better sense of what you have in mind with the professional services side.
Yes, so a couple of things one as Mike pointed out you know, we don't expect to run 47% gross margin on professional services on an ongoing basis right. Our target 40% is beautiful very different right that most companies out there where you see folks running professional services are far lower gross margins.
Sometimes it negative gross margins using them the subsidized product sales, which based on our heritage of professional services, we we just could never.
Could never do.
Tim alluded earlier to the solution suite.
Selling motion and as we bring those solution suites to market professional services plays a very important role of glu and bringing these.
Individual a cloud products together into solution suites.
Before during and after the time when we bring up with work Senator market. So that was one of the reasons why we invested and.
Additional leadership in the professional services area that scale.
SaaS experience and so.
It will continue to be very important in terms of percentage of revenue I don't know that we're going to see any kind of drastic change.
You could see a few hundred basis points here or there, but there is not there is not a plan to dramatically change the mix I like we all do having a.
A.
Revenue mix that.
90%.
Contractually recurring but again it could be marginally higher.
As we do more of the higher end professional services work associated with.
Bringing these products together into solution suites.
Got it okay sounds good thanks a lot.
Thank you.
And your next question is from Scott Berg with Needham.
Hey, guys. This is Josh on for Scott.
Nice job on the quarter, how should we think about the organic growth rate of the XM versus the other solution suite and how.
Could this be impacted.
Impact the consolidated organic growth rate for the company Stx becomes bigger within the overall mix.
Well, obviously, we're managing a portfolio of products, we've seen some good organic growth out of CX down and we're adding products through acquisition that have.
Targeted organic growth rate, the 10% to 15% of course once we restructure from that those growth rates will come down a bit but.
The goal is for those growth rates to be accretive to what we have today. So we're very pleased with the organic growth rate.
This quarter our.
Targets remain what they have said which is.
We will we will target mid single digit organic growth. That's a four to six 3% to 7%. We will continue to guide more conservatively than that we will continue to say to investors on these calls and in individual meetings. We have that you know you should underwrite the investment at flat to five and anything better than that.
It will be a bonus.
Okay, Great and then.
Whats the initial feedback from customers in the U.S. to rant and rave and then vice versa for upland mobile messaging in the UK. It seems like this is a strong combination of products.
It really is a strong combination and we had a.
A couple of interesting opportunities Tim do you want to take a moment I know, we're not going to give a client name, but I think you know the one I'm speaking of where we were able to bring it over.
Bring rant and rave over and sort of the reception we got in that account.
Yes, absolutely so.
Yeah, Josh you hit on a really important focus area for us and so we're using the existing channels here in the us to introduce rent rave and obviously, we're going to go after our existing installed base to do that.
But we're also in this particular case said, a very strong and large customer in the UK and a big presence in the us in the.
The theater area and they had gotten significant results in terms of operating their individual businesses and setting up competitions between managers and the like and rent rate was providing them real time feedback customer sentiment analysis through.
Natural language.
Capabilities and when we talked about the capabilities of up in one and what that was going to do in terms of offering rent rave in the us the.
The mother ship in the UK. So while this is great we need to bring you guys into the U.S. and actually in this particular case the customer did a lot of the selling we're obviously there to help enable them to have all the facts right and build out the implementation plan and the professional services as Jack alluded to but that is a very powerful interaction that just underscored.
The success that we can have.
Bringing that product over to the U.S.. So we're going to we're going to continue to focus on that and then the flip is true as well we have a number of highly satisfied customers of rent rave in the UK and now were bringing.
Other products, whether it's our mobile messaging.
Our robust E mail platform industrial which is already in the UK, but we're introducing that product into rent rave customers and seen a lot of interest there too the other product. It starts to have relevance in this area as well as our knowledge management solution.
And that is also getting some interest from rent and rave customers as well as the the the flip so hopefully that gives you a little bit of color, we're seeing more opportunities in the pipeline, we're going to learn more in terms of what resonates, but some of these initial successes have been really encouraging.
Great. Thanks, guys.
Thank you.
Your next question is from Brian Peterson with Raymond James.
Hi, gentlemen, and congrats on the quarter. So just one question for me. So so Jack I think you mentioned that a lot of your acquisitions are that's where you're really kind of keeping or investing in some of the sales capacity. I'm curious is there anything different about your recent acquisitions in terms of the growth profile versus what we've seen historically and with some more I guess sales and marketing resources with those companies.
Should we expect that organic growth profile to accelerate as they kind of anniversary from the acquisition related contribution thanks guys.
Yes. Thank you for that question. So starting a couple of years ago, we really started to.
Look.
More closely at organic growth of acquired products.
You know earlier in our history were more on a scale and margin March.
And now we turned our attention more to organic growth. So again, we like to see 10% to 15%.
Organic growth pre acquisition now remember these companies are losing money before we buy them and.
Repositioning them.
It has an impact on that and so the goal is to maintain an organic growth rate in that.
5% to 10% range.
Post that restructuring.
Now as we move these.
Product and the solution suites as we cluster as we continue to upgrade sales talent as we continue to.
To gain scale in the market increase MPS scores increase retention rates.
All of that could have a beneficial impact on organic growth.
But that said as always the.
The target for organic growth mid single digits.
We will guide more conservatively than that.
And I really don't want to be forecasting anything on anniversaries.
That's going to.
Cause people to bake in.
A different set of expectations. There there is so much value creation opportunity that we have in front of us in the next 234 or five years. We've taken this business from nothing a few years ago, two with $220 million annual run rate the deal flow that we've got in front of us the resources that we have now financial.
Operating acumen to onboard these businesses to reposition them for sustainable growth to deliver value to customers because customers want. This I look out three four years from now and see a business. That's 500 million in revenue run rate again with M&A, that's M&A depend to 200 million of EBITDA generating tremendous per share value tremendous upside from here.
We get there if we're at 5% organic 3%, 7%. So the value creation is massive we understand the.
Benefit of.
Keeping the nose the airplane pointing up but we also understand the benefit of keeping expectations in check.
So that we can deliver consistent value through time.
Thank you.
Your next question is from Richard Baldry with Roth capital.
Thanks.
Sort of curious your early thoughts on.
The international acquisition front, given the experience you've had sort of perceived value of targets over there the differences and integration.
Yeah, whatever helps you to open up new geographies and as as more incremental Tam opportunity for the broader business. So.
Do you think Thats a trend we could see continue or is it harder to source the deals. So maybe once in a while but not not anything we should be focused on.
So great question, one that we discuss internally.
Yes, we will do more acquisitions in Europe .
But we have done three you know in the last.
18 months or so so we are consolidating those together that's going very well.
And we've got a strong base, which we needed in Europe , but I wanted to do this at the right time, and we said.
Richard from the early days that lets get to 150 million revenue run rate before we do anything in Europe , and we do it lets do it in a meaningful way. So that we can create a real European base of operations not only for the products, we acquired but so that we can bring all of our products there and we've done that.
So I feel very good about.
Where we are with respect to that we'll digest that now we've got a ton of pipeline in the U.S. in Canada.
That we're going to.
Tack again never any guarantees on M&A and pipeline can go one way or another but we see a very very strong pipeline and then.
Beginning again as we get into 2020, we'll start looking at acquisitions in Europe .
And then I'll join the chorus feel sorry for beating on the question of organic growth, Let me ask a different way when when you can get a dollar of a our front dollar spend.
No.
Step back a bit it feels like you're buying revenue for one times revenue.
Our paying one times revenue for organic growth.
Because you know.
Arguably more attractive even the inorganic growth. So how do you balance that how do you think about going into a quarter, where maybe you think you've got some upside versus expectations.
What would it make sense to spend that away into faster organic growth or is the expansion of EBITDA. So much more important to the ability to raise incremental capital that it doesn't make sense to do that short term. Thanks.
Thank you that other great question. So again, our philosophy is.
We will continue to invest in sales and sales enablement consistent with two things right first that dollar for dollar so that efficient growth index, a dollar sales and marketing spend for a dollar they are our bookings that's a blend of new and expansion.
But in addition, an upwardly ramping EBITDA margin from where we are now up to 40% at scale.
So, let's assume 300 million for scale and then above that.
Margin wants to go a little bit higher EBITDA margin does but we will then redirect that overage back into additional.
Sales and marketing to support organic growth should generate a little bit of it the growth dividend.
Above 300 million. So that is that is the plan.
Great. Thanks.
Your final question comes from the line of Eric Lemus with Suntrust Robinson.
Thanks, guys for taking my question nice job on the quarter and also congrats on enhancing that the balance sheet and I guess on that topic.
You have a lot more cash and availability cash for potentially larger acquisitions or larger or more volume of acquisitions any year. So.
Thinking about that I assume that you probably get pulled into conversations with larger size potentially larger size deals. So is there any change in thought around.
Making acquisitions larger than historically made in the past or any change in the volume of deals per rig per year.
So.
Great question. So from day one we this thing was just.
On a sheet of paper as the plan.
We said five to 25 million and Thats really where we want to play so the targets. We go after $5 million to $25 million revenue.
And these are businesses growing at roughly 10% to 15% organic we think we can really own a big chunk of that.
Segment of the market.
You know our average acquisition is.
Trended up.
A couple of million Bucks, a year and we'll probably continue to do that but you know look we also see interesting $789 billion tuck ins right $689 million tuck ins as we build out the solution suite, so there'll still be some of those in there.
But but you're right. We now have the financial wherewithal, if theres a $25 million of business something at the top end of our range, we can execute against that so.
A long winded way of saying five to 25 remains the target range I think you'll continue to see the average deal size increase couple of million Bucks a year.
And in terms of number of deals I think for now we're in that four year range again, no guarantees, but that's the target, but we've talked about this we want to increase that to five to six over the next two to three years. So we are laying in the infrastructure now to do that both in terms of.
Opportunity generation dealmakers.
And integration team.
And operating teams in order to support a larger volume again, not larger we're going to do 10 year 20 year, nothing like that but that we would take it up to five to six over a two or three year period, we want to be responsible we want to be.
Building a company that's going to generate real value through time.
And.
And we don't need to go any faster than that.
Okay. Thank you.
And there are no further questions at this time your closing comments please.
Great all right well, thank you everyone for.
Joining us for todays call and we look forward to seeing you on the Q3 call.
And again, thank you and good afternoon.
Thank you. This does conclude today's conference call you may now disconnect.