Upland Software Q3 2023 Earnings Call Transcript

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November 2, 2023

Key Takeaways

  • Beat Q3 revenue and adjusted EBITDA guidance midpoints driven by key customer expansions and solid product performance.
  • Total Q3 revenue of $74.1 million declined 7% year-over-year, and adjusted EBITDA fell to $16.2 million (22% margin) from $24.9 million (31%).
  • Generated Q3 free cash flow of $17.8 million, boosted by a one-time $20.5 million interest rate swap liquidation, raising full-year free cash flow outlook to $45 million–$55 million.
  • Strengthened the balance sheet by ending Q3 with ~$240 million in cash, an undrawn $60 million revolver, paying down $35 million of debt and maintaining net debt of $244 million with over half hedged at 5.4%.
  • Q4 revenue is guided at $69 million–$75 million (a 9% decline) with adjusted EBITDA of $12.6 million–$15.6 million (20% margin), and full-year adjusted EBITDA is expected at $63 million–$66 million, down 34%.
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Earnings Conference Call
Upland Software Q3 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Thank you for standing by, and welcome to the Upland Software Third Quarter 2023 Earnings Call. At this time, all participants are in 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.

Operator

By now, everyone should have access to the Q3 2023 earnings release, which was distributed today at 4 o'clock p. M. Eastern Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software.

Operator

Please go ahead, sir.

Speaker 1

All right. Thank you, and welcome to our Q3 2023 earnings call, I'm joined by Mike Hill, our CFO. On today's call, I'll start with a Q3 review and following that, Mike is going to provide some detail on the numbers and our guidance and then we'll open it up for Q and A. But before we get started, Mike, can you read the Safe Harbor statement?

Speaker 2

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 these risks and uncertainties associated with such statements is contained in our periodic reports filed with the SEC. The forward looking statements made today are based on our views and assumptions and on information currently available to Upland Management as of today.

Speaker 2

We do not intend or undertake any duty to release publicly any updates or revisions to any forward looking statements. On this call, Upland will refer to non GAAP financial measures that when used in combination with GAAP results provide Upland Management with additional analytical tools to understand its operations. Upland has provided reconciliations of non GAAP measures to the most comparable GAAP measures in our press release announcing our Q3 results, which are available on the Investor Relations section of our website. Please note that we're unable to reconcile any forward looking non GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. And with that, I'll turn the call back over to Jack.

Speaker 1

All right. Thanks, Mike. Headlines for the quarter, we beat Q3 revenue and adjusted EBITDA guidance midpoints. In the Q3, we expanded relationships with 279 customers, 28 of which were major expansions. We also welcomed 162 new customers to Upland in the 3rd quarter, including 26 new major customers.

Speaker 1

New customer deals were distributed across products and verticals. On the product front in Q3, Qubitian was listed among notable vendors in the Forrester Q3 report, which was the B2B Response Management Technologies Landscape Panviva, which is one of our knowledge management solutions went live on the Genasys AppFoundry Exchange. That was earlier this month, and that AppFoundry is the industry's largest dedicated marketplace focused on customer experience solutions. Accurite and BA Insight attended the annual legal technology event, Ilticon. Our Upland subject matter experts spoke at 2 sessions, which highlighted the implications of AI for legal teams And how intelligent search like BA Insights, SmartHub, 6.0 can enhance business process efficiency.

Speaker 1

Right Answers, our enterprise knowledge management software was included in Kilometers World's A I100 list, that's the company's empowering intelligent knowledge management. Altify announced the release of Altify Insights, its first to market solution, which is designed to reduce Sales cycle times and increased win rates for B2BSales Organizations. And then in G2's Fall 2023 market report. Upland and our products earned 33 badges, including high performer badges for Our knowledge management solution right answers and 22 badges for our audience development solution Second Street, a result of our dedication to meeting customer needs and innovation. So it's still early, but we are making progress on our new growth plan and remain focused on building shareholder value over time.

Speaker 1

And with that, I'm going to turn the call back over to Mike.

Speaker 2

All right. Thank you, Jack. I'll cover the financial results for the Q3 and our outlook for the Q4 and full year 2023. Total revenue for the Q3 was $74,100,000 representing a decrease of 7% year over year. Recurring revenue from subscription and support decreased 7 Percent year over year to $70,000,000 perpetual license revenue decreased to $1,500,000 for the Q3, down from $1,700,000 in the Q3 of 2022.

Speaker 2

Professional services revenue was $2,700,000 for the quarter, a 4% year over year decline. These revenue declines are generally During the Q3 and our product gross margin remained strong at 71% or 76% when adding back depreciation and amortization, which we refer to as cash Gross margin. Operating expenses excluding acquisition related expenses, depreciation, amortization and stock based compensation were $39,100,000 for the quarter for 53% of total revenue, all generally as expected. Also, acquisition related expenses were approximately $400,000 in the 3rd quarter, which should represent the last of our restructuring costs for our acquisitions last year. Acquisition related expenses should remain insignificant going forward until our acquisition activity picks back up in the future.

Speaker 2

Our Q3 2023 adjusted EBITDA was $16,200,000 or 22% of total revenue, down from $24,900,000 or 31% of total revenue for the Q3 of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments described in previous calls. For the Q3 2023, GAAP operating cash flow was $18,300,000 and free cash flow was $17,800,000 Our Q3 operating and free cash flow was significantly benefited by the liquidation of 1 half of our interest rate swaps resulting in an operating Cash inflow of $20,500,000 This was a one time event unless we decide to liquidate more swaps in the future. Excluding the cash flow impact of the interest rate swaps liquidation in Q3, we anticipate $25,000,000 to $35,000,000 of free cash flow generation for the Full year 2023. With the positive impact of the swaps liquidation, we anticipate $45,000,000 to $55,000,000 of free cash flow generation in the full year 2023.

Speaker 2

Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $300,000,000 comprised of the Approximate $240,000,000 of cash on our balance sheet as of September 30, 2023, plus our $60,000,000 undrawn revolver. During Q3, we paid down an additional $35,000,000 of our outstanding debt. As September 30, 2023, we had outstanding net debt of approximately $244,000,000 after factoring in the cash on our balance sheet. As of September 30, 2023, our gross debt was approximately $483,000,000 of which Approximately $259,000,000 is still fully hedged effectively locking our interest rate at 5.4% through the full maturity of our term debt, which is August of 2026. The remaining approximately $224,000,000 of term debt now rate of SOFR plus 385 basis points, which was 9.2% at September 30, 2023.

Speaker 2

Additionally, I will note that we used about $300,000 or $3,200,000 of cash to buyback approximately 783,000 shares of Common stock during the quarter ended September 30, 2023 under our limited stock repurchase program that began in early September of 2023. For guidance, for the quarter ending December 31, 2023, Upland expects reported total revenue to be between $69,000,000 $75,000,000 including subscription and support revenue between $65,500,000 $70,500,000 for a decline in total revenue of 9% at the midpoint point over the quarter ended December 31, 2022. The following adjusted EBITDA guidance reflects an Estimated non cash charge of $1,500,000 related to our Sunset assets. For the Q4 2023, adjusted EBITDA is expected to be between $12,600,000 $15,600,000 for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease $294,700,000 $300,700,000 including subscription and support revenue between $278,900,000 and $283,900,000 for a decline in total revenue of 6% at the midpoint over the year ended December 31, 2022.

Speaker 2

Full year 2023 adjusted EBITDA is expected to be between $63,000,000 $66,000,000 or an adjusted EBITDA margin of 22% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 34% over the year ended December 31, 2022. And with that, I'll pass the call back over to Jack.

Speaker 1

All right. Thanks, Mike. We're ready to open the call up for Q and A.

Operator

Thank you, Jack. Our first question comes from Scott Berg with Needham and Company. Please go ahead.

Speaker 3

Hi, Jack and Mike. Thanks for taking my questions here.

Speaker 2

I guess I'll get to Jack,

Speaker 3

I know you kind of talked about your how pleased you are with the go to market changes that the organization is making. When should we think about them being kind of fully implemented or fully ramped? I know this was a transition year to kind of But do you think they're kind of at that right spot in the 1st part of next year? Or does it take maybe a little additional time?

Speaker 1

I think it takes a little additional time, I'd say, end of next year.

Speaker 3

Okay. Thank you. And then Mike, you're obviously buying back stock. You mentioned how many shares that you bought back, but you're also paying down some debt. Can you walk us through the thought process of if you have an incremental dollar, where that goes between buying back stock and debt?

Speaker 3

Both are kind of favorable opportunities for you here today.

Speaker 2

Yes, Scott. So as you know, just to repeat, dollars 240,000,000 Cash on the balance sheet. We have announced the stock buyback plan, so we'll continue to execute that. And then of course, we've got flexibility on what we do with that capital. We've got Choices to pay down debt more.

Speaker 2

We've got the potential for acquisitions. So we're just we're keeping our options open. And Fortunately, we're in a good place at least with cash on the balance sheet.

Speaker 3

Great. That's all I have. Thanks for taking my questions.

Operator

Our next question comes from Jeff Van Rhee with Craig Hallum. Please go ahead.

Speaker 4

Great. Thanks for taking my questions. A couple for me. Just on to follow-up on the sales changes, Jack, you said it's early, but you've seen nice signs

Speaker 5

of progress. Maybe just Expand a

Speaker 4

little bit on what you have seen and what's going on with overall quota carrying rep headcount?

Speaker 1

So we're starting to see the demand generation effort beginning to work. And I want to stress it's still early days. But if you look at organic search rankings, we look at the volume of Marketing qualified leads and marketing sourced pipeline, more generally, we're beginning to see some green Now again, it's still early in the process. It's going to take time to get that to a point of full traction. And then, of course, it's got to work its way through bookings And then ultimately revenue.

Speaker 1

But that's an area, I think, where we're starting to see some green shoots. In terms of quota capacity, We feel like we're in good shape there in terms of both field sales and inside sales. So we've got All of those heads in place, and we've got a good complement of SDRs as well, sales development reps. So the quota capacity is where we need it to be.

Speaker 4

Okay, great. And then Mike on the debt and taking out Half of the hedge and leaving the other hedge, just walk me through the thinking there?

Speaker 2

Yes. So Jeff, we feel like interest rates are probably topping out, at least hopefully. They may who knows Rates are going to go, but at least we thought it was a good time for us to go ahead and liquidate half of the swaps, given their value, take that $20,500,000 and use it to pay down debt and use it to buy back some stock. And so that's what we decided to do at this point in time. Just keep in mind now that now still over half of our remaining debt outstanding is still hedged.

Speaker 2

So And of course, if we pay down more debt, that ratio will improve still. So anyway, that was our thinking.

Speaker 5

Yes, got it. That's helpful. Thank you.

Operator

Our next The question comes from Jacob Zurbin with William Blair. Please go ahead.

Speaker 6

Hi, guys. Thank you for taking my questions and congrats on the results. You mentioned the 5% organic growth target for next year. Just wondering if all the macro developments recently, how that's trending and if you still see that as an Thank you.

Speaker 1

Yes. So 5% I stated as a goal, right? No guarantees And it's an aspirational goal. I think we're going to continue to execute against that. Our guidance is going to be a lot more conservative than that when we get to that point of providing a guide for 2024.

Speaker 1

As I mentioned a moment ago in my response to Scott Berg, I think we're going to In terms of really starting to see those results kick in, it's probably more like the end of next year. So That mid single digits organic growth rate core organic growth rate goal is really more toward The end of next year as opposed to the full year, and that's our take on it as it stands today.

Speaker 6

Got it. Thanks. And just a follow-up on that, like solid execution this quarter with new large accounts. I'm just wondering in terms of the strategy with the mix between new customer acquisition versus expansion within existing customers to achieve Your growth targets over the next few years. Thank you.

Speaker 1

Yes. I think we are still Generating the majority of our bookings through expansion opportunities, not A little bit more than half, and I'd rather see that balance be more like fifty-fifty or sixty-forty New logo being the larger share of that. So that will be part of the transition over the next year here as we Again, get those leads that we're creating through our new marketing efforts Through the pipeline and start to generate bookings and revenue.

Speaker 6

Got it. That's it for me. Thank you.

Operator

Our next question comes from Alex Sklar with Raymond James. Please go ahead.

Speaker 5

Hi, thanks for taking the question. This is John on for Alex. Mike or Jack, can you guys update us on gross retention trends even just directionally? Do you see any improvements there with more investments you put in the product and Success Center over the last few quarters? And then I have a quick follow-up.

Speaker 1

So on net dollar retention rate, that's a KPI that we put out Annually after Q4. I think it's so we'll have more detail on that On the Q4 call in terms of trend line, it's running pretty steady.

Speaker 5

Okay. Thanks. Helpful color there. And then Mike, can you update us on the timeline of the Sunset assets here? Has that timeline changed at all since you've gotten into the process more?

Speaker 5

Thank you.

Speaker 2

Yes. It's we've talked about it taking another couple of 3 years For those that were not really in a some of the use cases we're letting continue on for a while. Some we've got a little bit shorter life on them, but for the most part it's that same trajectory that we've talked about on previous calls.

Speaker 5

Okay. Thank you very much. That's all I had.

Operator

There are no further questions at this time. This will conclude our question and answer session. I will now turn the call back to Jack McDonald for any closing comments.

Speaker 1

Okay. Well, thank you very much for joining, and we will see you on our next earnings call.

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