Upland Software Q3 2024 Earnings Call Transcript

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November 7, 2024

There are 4 speakers on the call.

Operator

Thank you for standing by and welcome to the Upland Software Third Quarter 20 24 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 2024 earnings release, which was distributed today at 4 pm Eastern Time. If you've not received the release, it's available on Upland's website. I'd now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Speaker 1

All right. Well, thank you, and welcome to our Q3 2024 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 will provide some detail on the Q3 numbers and our guidance. After that, we'll open the call up for Q and A.

Speaker 1

But before we get started, Mike will read the Safe Harbor statement.

Speaker 2

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. 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.

Speaker 2

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 most comparable GAAP measures in our press release announcing our financial results, which are available on the Investor Relations section of our website. Please note that we're unable to reconcile any forward looking non GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, I'll turn the call back over to Jack.

Speaker 1

All right. Thanks, Mike. Here are the headlines. We beat our Q3 revenue guidance midpoint and we met our adjusted EBITDA guidance mid point. We welcomed 122 new customers to Upland in Q3, which includes 18 new major customers, and we expanded relationships with 312 existing customers, including 27 major expansions.

Speaker 1

These new and expanded customers have been across our portfolio and include a number of our new generative AI solutions. We continue to execute on our growth plan. As I said on our Q2 call, our core organic growth in any given quarter this year is going to bounce around a bit based on year over year compares. But we are still forecasting to exit 2024 with positive core organic growth in the 4th quarter, setting us up for positive core organic growth in 2025. Q3 adjusted EBITDA was $14,000,000 which was up sequentially from $13,600,000 in Q2.

Speaker 1

And as you can see from the midpoint of our Q4 guidance, we expect adjusted EBITDA to continue growing next quarter to $14,900,000 roughly a $60,000,000 annualized run rate. And of course, we continue to see a meaningful increase in EBITDA next year and we're targeting adjusted EBITDA of the low to mid-sixty million dollars s next year. So we are still setting up for 2025 with positive core organic growth and continued expansion of adjusted EBITDA. On the product front in Q3, I'll note that we earned 72 badges in G2's fall 2024 market reports across our portfolio of products. That's up from 56 badges in the summer 2024 reports.

Speaker 1

Upland RightAnswers, our AI knowledge management solution garnered an impressive 17 badges, while Upland BA Insight, our enterprise search solution, secured several new recognitions. Also in the quarter, we announced the availability of Upland BA Insight for Microsoft Azure AI Search in the Microsoft Azure Marketplace and online store and Exchange providing applications and services for use on Azure. BA Insight customers can now take advantage of the productive and trusted Azure cloud platform with streamlined deployment and management. A built on Microsoft Azure AI Search, BA Insight for Azure AI Search combines the BA Insight user experience platform, which is called BA Insight Smart Hub, with over 90 connectors to enterprise systems. The solution securely brings user data into Azure AI search and delivers intelligent, actionable content search experiences without bouncing between multiple systems, looking for the right information.

Speaker 1

And again, we're excited about BA Insight because those 90 plus enterprise connectors provide that needed last mile solution for enterprises looking to implement AI platforms within their environments. For the 2nd year in a row, UP and Right Answers has been named for 2024 Kilometers World AI 100, recognizing the top knowledge management companies leveraging the power of AI and other innovative software. This achievement supports Upland's and recognizes really Upland's extensive efforts in AI, integrating the technology and the products across the portfolio. And of course, we continue to release AI powered innovations and customer solutions. With that, I'm going to turn the call over to Mike.

Speaker 2

All right. Thank you, Jack. I'll cover the financial results for the Q3 2024 and our outlook for the Q4 and full year 2024. These results and our outlook for 2024 reflect our continued incremental sales, marketing and product investments pursuant to our growth plan, as well as the previously announced runoff of Sunset asset revenue. On the income statement, total revenue for the Q3 was $66,700,000 representing a decrease of 10% year over year.

Speaker 2

Recurring revenue from subscription and support declined 9% year over year to $63,800,000 Perpetual license revenue declined to $1,100,000 in the 3rd quarter, down from $1,500,000 in the Q3 of 2023. Professional services revenue was $1,800,000 for the quarter, a 32% year over year decline. These revenue declines are consistent with the planned runoff of Sunset asset revenue. Overall gross margin was 70% during the Q3 and our product gross margin was 72% or 75% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses for the Q3 of 2024, excluding depreciation, amortization and stock based compensation were $35,600,000 for the quarter or 53 percent of total revenue.

Speaker 2

This is in line with our expectations and reflects the sales, marketing and product investments we've been making as part of our growth plan. Our Q3 2024 adjusted EBITDA was $14,000,000 or 21 percent of total revenue, down from $16,200,000 or 22% of total revenue for the Q3 of 2023. This adjusted EBITDA year over year decline is an expected is as expected considering our growth investments and our decisions regarding Sunset assets. However, you can see our adjusted EBITDA growing sequentially each quarter this year from $13,100,000 in Q1 to $13,600,000 in Q2 to $14,000,000 in Q3 here and to a projected $14,900,000 in Q4 based on the midpoint of

Speaker 1

our

Speaker 2

guidance. This has us exiting 2024 at almost $60,000,000 of annual run rate adjusted EBITDA and we are targeting adjusted EBITDA to be in the low to mid $60,000,000 next year, which we will confirm and more specifically quantify with our 2024 guidance as part of our Q4 earnings report. Also, I will note that in Q3, we recognized $9,000,000 of deferred gain from the sale of half of our interest rate swaps a year ago. This recognition of this previously deferred gain was triggered by the $177,000,000 pay down of debt during the quarter. The gain was recognized on our income statement in the interest expense net line item as a one time benefit in Q3.

Speaker 2

We anticipate continuing to steadily pay down our outstanding term loans with our cash flow generation on a monthly basis resulting in relatively insignificant amounts of the remaining swap sale deferred gains to be recognized in future quarters. After this pay down of $177,000,000 of our debt during the quarter, at the end of Q3, we had outstanding net debt of approximately $241,000,000 factoring in the approximately $60,000,000 of cash on balance sheet. At the end of Q3, our gross debt was approximately $301,000,000 We still have in place our variable fixed interest rate swaps, which effectively fixed the interest rate at 5.4 percent on approximately $257,000,000 of our outstanding debt as of September 30, 2024. The remaining $45,000,000 of our outstanding debt floats at an interest rate of SOFR plus 385 basis points, which was 9.1% as of September 30, 2024. Our revolver matured in August of 2024 with no amounts drawn or outstanding at the time of maturity.

Speaker 2

For cash flow for the Q3 of 2024, GAAP operating cash flow was $4,300,000 and free cash flow was $4,200,000 which was in line with our expectations. As a reminder, our GAAP operating cash flow and free cash flow last year in Q3 2023 was benefited by the $20,500,000 one time cash gain from the sale of half of our interest rate swaps. I will note that our ongoing free cash flow generation is in addition to the approximate $60,000,000 of cash on our balance sheet as of September 30, 2024. Now on to guidance. For the quarter ended December 31, 2024, we expect reported total revenue to be between $65,900,000 $71,900,000 including subscription and support revenue between $60,200,000 $65,200,000 for a decline in total revenue of 5% at the midpoint from the quarter ended December 31, 2023.

Speaker 2

Q4 2024 adjusted EBITDA is expected to be between $13,400,000 and $16,400,000 for an adjusted EBITDA margin of 22 percent at the midpoint. This adjusted EBITDA guidance at the midpoint is an increase of 6% from the quarter ended December 31, 2023, representing the 1st year over year quarterly increase in adjusted EBITDA since Q2 of 2022. For the full year ending December 31, 2024, we expect reported total revenue to be between $272,600,000 $278,600,000 including subscription and support revenue between $256,600,000 $261,600,000 for a decline in total revenue of 7% at the midpoint from the year ended December 31, 2023. Full year 2024 adjusted EBITDA is expected to be between $54,100,000 $57,100,000 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 31, 2023.

Speaker 2

So again, I'll point out that adjusted EBITDA has been growing sequentially every quarter this year and we expect to exit this year in Q4 at $14,900,000 at the guidance midpoint, which is almost $60,000,000 of annualized run rate. And so with that, I'll turn the call back over to Jack.

Speaker 1

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

Operator

And your first question comes from the line of Jeff Van Rhee from Craig Hallum Capital Group. Your line is open.

Speaker 3

Hey, this is Daniel on for Jeff. Just wanted to open up congrats on the quarter. Just wanted to ask in terms of some of the cost cuts that have been going through in OpEx, it's been trending real nicely. Just any color on sort of what some of the changes are that have been made there? If those are finished, and then just how you think about those?

Speaker 3

Is this a good run rate to look at for 2025 just how to annualize those and think about them forward?

Speaker 2

Yes. So Daniel, costs are going to continue to come down. As you can tell, we've messaged and targeted increased EBITDA next year. So part of that increased EBITDA is going to be from continuing cost refinements. We've of course had an infrastructure here at the company where we could handle 4 to 5 acquisitions per year.

Speaker 2

We're obviously not doing that now. So we've got sort of some infrastructure costs and extra costs that

Speaker 3

we can take out of

Speaker 2

the business that do not relate to the growth investments that we've made. So there are cost efficiencies that we'll continue to recognize.

Speaker 1

The one thing I would add to what Mike said is that within the growth investments now that we are a year and a half plus into this cycle, we are seeing what's working and what isn't working and we're able to kind of turn up the investment on those motions on which we're getting a good return and then we can adjust our spending in other areas. So overall that gives us some efficiency and supports expanded margins.

Speaker 3

Yes. And then just a high level question, Jack, for you. Just on a very broad range of go to market changes that have been made. Maybe just highlight in a little bit more detail some of the places where you've seen the most success in terms of the correlation between those changes being made and where those are driving change?

Speaker 1

Yes. I would say 2 in particular. 1 was putting in place a modern digital marketing function at the company. And if you look across the board in terms of what we're doing around organic SEO, what we're doing around product recognition on peer review sites, What we're doing in terms of the level and quality of our product marketing and how that's supporting sales enablement, all of those things are just a step function better than they were before. And as a result of that, we're seeing some significant increases in lead generation and conversion of that lead flow into pipeline.

Speaker 1

Secondly, we've built out our sales capability and brought in new sales management. And again, the sort of rigor and hygiene around the sales teams is a step function better than it was a year or a year and a half ago. Now we are starting to see some of that flow through into bookings and that is what's going to support that organic core organic growth target of low to mid single digits in 2025. The other area there where we've made investment is in customer success and really in enabling our great CS teams with the tools that they need to engage with customers in a more strategic way and to drive more product utilization and value for our customers supporting higher renewal rates through time. And so we think we're on a nice positive trend of substantial reductions in EBITDA year over year if you look at 'twenty three, 'twenty four and what we see going into 'twenty five.

Speaker 1

So that would be my commentary there.

Speaker 3

Thanks, Jack. And then just one for Mike. In terms of the strategic thinking on paying down the debt, I assume that's sort of setting up for refinancing. Just any thoughts on why now on the payment of the debt? And then just how that sets you up for maybe the next few steps, how a process of refinancing looks like, what you'll be looking to achieve there?

Speaker 3

Thanks.

Speaker 2

Yes, Daniel. So we paid down $177,000,000 of debt in Q3. At the current interest rates, right, that's about a $7,000,000 a year of interest savings annualized. So big incentive for us just to go ahead and take some of that excess cash on our balance sheet, pay down the debt and enjoy the lower cash interest as a result. Timing for refi sometime next year, fiscal year 2025.

Speaker 2

As you know, our debt matures August of 26. The longer that we delay the refi then the more interest savings because we've got very attractive rate on our existing credit facility. So the longer that we hold in our existing credit facility the better off we'll be just from an interest cost standpoint. So yes, so that's the plan.

Speaker 3

Understood. Thanks, Jack. Thanks, Mike.

Operator

I'd now like to hand the call back over to Jack McDonald.

Speaker 1

Okay, great. Thanks very much for your time today and we will see you on next quarter's earnings call.

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Earnings Conference Call
Upland Software Q3 2024
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