Upland Software Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

Key Takeaways

  • Positive Sentiment: In Q4, Upland beat revenue and adjusted EBITDA guidance, adding 154 new customers and ending 2023 with 678 total new customers.
  • Negative Sentiment: Q4 recurring revenue fell 8% year-over-year and Q4 adjusted EBITDA margin declined to 19% from 31% last year, reflecting planned runoff of “Sunset” assets and growth investments.
  • Positive Sentiment: Upland’s products earned major recognition in Q4, including a third consecutive gold medal for Filebound in Software Reviews’ ECM report, 44 G2 winter 2024 badges, and multiple AI initiatives like integrating Azure AI search with BA Insights.
  • Negative Sentiment: 2024 guidance projects total revenue down ~9% at the midpoint to $271 million and adjusted EBITDA margin falling to 20%, driven by continued Sunset asset declines and growth investments.
  • Neutral Sentiment: Upland aims to exit 2024 with ~3% core organic growth, supported by sales and marketing enhancements, India development center investments, a $25 million buyback plan, and up to two strategic acquisitions.
AI Generated. May Contain Errors.
Earnings Conference Call
Upland Software Q4 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

Thank you for standing by and welcome to the Upland Software 4th 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. Uplinstoftware.com and a replay will be available there for 12 months.

Operator

By now, everyone should have access to the 4th quarter 2023 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. Thank you, and welcome to our Q4 2023 earnings call. I'm joined today by Mike Hill, our CFO. On today's call, I will start with a Q4 review. And following that, Mike will provide some detail on the numbers and our guidance for 2024.

Speaker 1

After that, we will open the call 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 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.

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 in combination with GAAP results provide Upland Management with additional analytical tools to understand its operations. Upland has provided reconciliations of non GAAP financial measures to the most comparable GAAP measures in our press release announcing our financial results, which is 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 a reasonable effort. And with that, I'll turn the call back over to Jack.

Speaker 1

All right. Thanks, Mike. The headlines we beat in Q4 our revenue and adjusted EBITDA guidance midpoint. We welcomed 154 new customers to Upland in Q4, making that a total of 678 new customers in 2023. In the Q4, that new customer add included 15 new major customers.

Speaker 1

On the product front, very busy in Q4 and of course we've got a number of initiatives underway on the AI front that are very exciting. And of course, we saw some great recognition of our products In Q4, Upland was recognized for the 3rd year in a row as a gold medalist and leader in the 2023 Enterprise Content Management Data Quadrant Report from Software Reviews. That was for our document management and workflow automation product, which is called Filebound. The award is based on the combined knowledge of real users and placement is based on overall satisfaction with product features, vendor experience, capabilities and emotional sentiment. In addition to that, Upland RO Innovation has launched a new customer reference activity hub to help sales, marketing and customer success teams find and engage with their most influential customer references so they can boost brand awareness and generate more business.

Speaker 1

In December, we hosted a webinar on Content Search Intelligence featuring and covering how Azure AI search when seamlessly integrated with BA Insights cutting edge technology can revolutionize how organizations access, manage and derive insights from their data. Again, just one of many exciting AI initiatives that we've got underway across half dozen or so products or more. And then also in the Q4, we earned 44 badges in G2's winter 2024 market reports and that was across a variety of products. These included our knowledge management solutions, Upland RightAnswers and Upland Panviva, along with Upland Cubitian, our proposal management software and our digital marketing products Upland Adestra and Upland Second Street. And rankings on those G2 reports, of course, are based on independent data provided by real software buyers.

Speaker 1

Overall, we continue to make progress on our go to market growth plan, and we remain focused on building great software and delivering value for customers. We feel encouraged by the progress we've made to date on the growth plan. We are processing out the Sunset assets as planned and clearing the way for core growth. And our goal Mike is going to cover 2024 guidance in a few minutes. But our goal is to exit 2024 at a core organic growth rate of around 3%.

Speaker 1

Now our guide will be more conservative than that, probably closer to 1% exit, but the goal is to get to a 3% exit. Again, we've spent a year building and investing and are encouraged by the progress we've seen to date and view this year as our year to turn the business back to positive core organic growth and exit with positive core organic growth. So more to come on that later. And let me now turn the call over to Mike.

Speaker 2

Yes. Thank you, Jack. I'll cover the financial results for the Q4 of 2023. And as Jack said our outlook for the Q1 and full year 2024. These results and our outlook for 2024 reflect another year Total revenue for the Q4 was $72,200,000 representing a decrease of 8% year over year.

Speaker 2

Recurring revenue from subscription support decreased 8% year over year to $68,200,000 Perpetual license revenue decreased to $1,800,000 in the 4th quarter, down from that actually increased up from $1,600,000 in the Q4 of 2022. Professional services revenue was 2,200,000 dollars

Speaker 1

for the

Speaker 2

quarter, a 26% year over year decline. These revenue declines are consistent with the planned runoff of the Sunset assets revenue. Overall gross margin was 67% during the Q4 and our product gross margin was 68% or 72% 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 comp were $38,400,000 for the quarter or 53% of total revenue, all generally as expected. Also acquisition related expenses were approximately $500,000 in the 4th quarter, which should represent the last of our restructuring costs from those acquisitions that we did last year.

Speaker 2

Those are the acquisitions in 2022. Acquisitions related expense should remain insignificant going forward until our acquisition activity picks back up in the future. Our 4th quarter 20 23 adjusted EBITDA was $14,100,000 or 19 percent of total revenue down from $24,300,000 or 31% of total revenue for the Q4 of 2022. This adjusted EBITDA decline is generally as expected considering our growth investments and our decision regarding the Sunset assets as described earlier. For cash flow for the Q4 of 2023, GAAP operating cash flow was $8,800,000 and free cash flow was 8 point $6,000,000 bringing our full year 2023 free cash flow to $48,700,000 which was in line with our expectations.

Speaker 2

Now as a reminder, our full year 2023 free cash flow was benefited by the liquidation of half of our interest rate swaps in Q3 adding $20,500,000 of additional free cash flow in 2023. This one time event is just a one time event unless we decide to liquidate more swaps in the future. Our ongoing free cash flow generation is in addition to our existing liquidity of approximately $297,000,000 comprised of the approximate $237,000,000 of cash on our balance sheet as of December 31, 2023, plus our $60,000,000 undrawn revolver. As of December 31, 2023, we had outstanding net debt of approximately $245,000,000 after factoring in the cash on our balance sheet. As December 31, 2023, our gross debt was approximately $482,000,000 of which approximately 259,000,000 is still fully hedged effectively locking our interest rate at 5.4% on that portion of our debt through the full maturity of our term debt, which is August of 2026.

Speaker 2

The remaining approximately $224,000,000 of term debt now floats at an interest rate of SOFR plus 385 basis points, which was about 9.2% at December 31, 2023. I will also note that we used $10,800,000 of cash to buyback stock approximately 2,500,000 shares of common stock during the quarter ended December 31, 2023 under our limited stock repurchase program that began in early September of 2023. This brings the cumulative total of our stock buybacks through December 31, 2023 to $14,200,000 And as a reminder, our stock buyback plan is for a potential total of $25,000,000 should it fully execute. Now for guidance, the following guidance reflects another year of significant incremental sales, marketing and product investments that we are making as part of our comprehensive growth plan as well as the effects of decreasing revenue and expenses related to the Sunset assets. I will note that as usual, our forward guidance assumes no M and A activity.

Speaker 2

So our forward guidance will of course be adjusted upon future acquisitions. For the Q4 ending March 31, 2024, Upland expects reported total revenue to be between 65 $1,000,000 and $71,000,000 including subscription and support revenue between $62,500,000 67,500,000 for a decline in total revenue of 12% at the midpoint from the quarter ended March 31, 2023. For the Q1 2024 adjusted EBITDA is expected to be between $11,300,000 14,300,000 for an adjusted EBITDA margin of 19% at the midpoint. This adjusted EBITDA guidance at the midpoint is a decrease of 27% from the quarter ended March 31, 2023. For the full year ending December 31, 2024, Upland expects reported total revenue to be between $259,000,000 $283,000,000 including subscription and support revenue between $247,000,000 $267,000,000 for a decline in total revenue of 9% at the midpoint from the year ended December 31, 2023.

Speaker 2

Full year 2024 adjusted EBITDA is expected to be between 49 $61,000,000 for an adjusted EBITDA margin of 20% at the midpoint. This adjusted EBITDA guide at the midpoint is a decrease of 15% from the year ended December 31, 2023. So with that, I'll pass the call back over to Jack.

Speaker 1

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

Operator

Our first question comes from the line of Scott Berg with Needham and Co. Scott, the floor is yours.

Speaker 3

Hi, Jack and Mike. Thanks for taking my questions here today. So I got a couple of them. Jack, I guess in your kind of new go to market strategy, what you guys been working on starting to roll out, where do you think you are in the process of that? Because you feel pretty confident about exiting this year with core revenue growth of, I believe you said, a target of 3%.

Speaker 3

But trying to understand where you are in that process and your visibility to drive growth in that core segment as

Speaker 4

you get through the year?

Speaker 1

Yes. So we're starting we've been at it now a little over a year. We've made significant improvements on the product development and innovation side and we're starting to see those pay off. Of course, the build out of our center of excellence in India, over 130 people there now and growing. And it is enabling us within our cost envelope to innovate across our product portfolio.

Speaker 1

And again, I think we're starting to see some green shoots from that. The 44 winner badges from G2 and some of the other analyst awards that we've received, I think, are indications that that is beginning to bear fruit. I look at where we are in terms of our investments to build a modern digital marketing capability. Again, we've made real progress there. I can look at a number of KPIs internally around organic search, around pipeline build, where we are really starting to see significant improvements in performance.

Speaker 1

On the sales side, more generally, we've built out the sales team, sales process, sales tools, sales hygiene. It's a different organization culturally today than it was a year ago in terms of really building a true sales culture. Most recently, we hired a new Chief Revenue Officer, Matt Breslin, who was an executive at Infor, where he ran a $700,000,000 business. Actually was a colleague at Infor with Oliver Yates, who's our Head of Sales. So bringing some of that team back together and I feel very good about where we are as we move into 2024 here.

Speaker 1

And as I say, this is the year when we make the turn to positive core organic growth with that target of exiting the year at 3%. Again, we're going to guide more conservatively than that, but I feel good about the progress. I'm encouraged by the progress we've made to date.

Speaker 3

Got it. Helpful. Thank you, Jack. Mike, as I look at the guidance here for the year, your product revenue looks like it's going to be down a few $1,000,000 quarter over quarter from Q4 into Q1. And your guidance suggests that your product revenue is probably flattish at that level for the rest of the year, maybe flat to just modestly down from there.

Speaker 3

I guess when we think of the non core versus the core revenues, I assume some of the items that you're sunsetting is what's impacting the Q1 number to be lower than Q4. But how do we think of, I don't know, the curve of the non curve versus or non core versus the core going through the end of this year? When will the non core revenues be out of the model? And then when will we get to see truly what the core revenues are doing? Thanks.

Speaker 2

Yes. Thanks, Scott. So the fact like Jack just described, we're turning from a core standpoint, we're turning from a little negative, negative 1% core organic growth rate in Q4 to positive here in 2024 at least by the exit and hopefully 3% target core growth by the exit. So core is sort of making the trough turn there, if you will. On the Sunset assets, it's probably going to be a little less than $30,000,000 of revenue here in 2024 related to the Sunset assets that are going to continue to sort of run off, if you will, over the next couple of 3 years.

Speaker 2

So again, those will be a bit of a drag, but the main point here is that the core should be turning up here this year.

Speaker 3

Great, helpful. Thank you for taking my questions.

Operator

Your next question comes from the line of D. J. Hynes with Canaccord. Your line is open, D. J.

Speaker 5

Guys. This is Ryan on for D. J. Mike, this one's probably for you. I guess, related to Scott's question.

Speaker 5

I was just kind of hoping you could maybe bridge me through your revenue guide for

Speaker 2

the full year coming up.

Speaker 5

So I guess we're kind of at like 27,000,000 dollars decline at the midpoint. What are your assumptions on, I guess, like natural churn, new bookings as well as you kind of alluded to those sunset assets, but any color there would be really helpful.

Speaker 2

Yes, no problem. So most of that decline is going to be the sunset assets, recurring revenue. Now we do have a little bit lower perpetual license revenue and PSO revenue, that sort of adding to that. And of course, like we said, our guide we think our guide is a little bit conservative there. So that really sort of adds up to that $27,000,000 walk.

Speaker 2

The headline is it's the Sunset asset decline burning off.

Speaker 5

Okay, awesome. Thanks. I appreciate it.

Operator

Your next question comes from the line of Jeff with Craig Hallum. Jeff, the floor is yours.

Speaker 6

Great. Thanks. I appreciate it. So just a couple guys, maybe Mike with you first on the sales approach. Could you just spend a minute as I'm thinking through what the sales approach is here?

Speaker 6

I know there have been periods where cross sell was a vision and there was opportunities potentially to cross sell from various products. Is this now purely a standalone we're targeting each individual product? And if so, are all reps selling all products? Just maybe a refresher on the sales approach right now.

Speaker 1

Yes. So on the this is Jack. And on the sales approach, the motion is principally product based. And we've got a field sales force. We've also got an inside sales capability that we stood up last year.

Speaker 1

And again, starting to see from that inside sales force, some good early successes in terms of getting some nice size mid market deals done. Now we still will have a few global account executives who will go after larger cross sell opportunities. And of course, we've seen some of those including some $1,000,000 plus deals in Q4 frankly that were brought home by those global account executives. And so that will continue to be a part of the model. So again, it's inside and field with a limited number of global account executives.

Speaker 1

And then finally, in terms of mix, this is a business that should run roughly fifty-fifty expansion and new. It's been running higher expansion and lower new. And so we want to bring that and expect through the course of this year to bring that back into kind of historical balance on a 50% expansion, 50%

Speaker 4

new mix.

Speaker 6

Yes. Okay. Appreciate it. And then Mike, the in terms of 2024, what does that what's the expectation around what kind of free cash flow that EBITDA yields?

Speaker 2

Yes. Jeff, we're targeting $20,000,000 to $25,000,000 of free cash flow this year 2024.

Speaker 6

Okay. All right. And then just one last for me. As we're looking at the organic and non organic, I think you answered the early question like most of the decline is, I guess, the Sunset assets coming out of, I think you said $30,000,000 that has to work off over several years. Just refresh me on the Sunseted, is that the basket of products that is in the Sunseted basket, was that a one and done, you kind of picked a handful of products that for whatever reason needed to be sunsetted and then it hasn't and isn't expected to change or is it is there any variability to what's in there?

Speaker 6

Just refresh me on how that works.

Speaker 1

Yes. So when we took the investment from HTGC, we did a strategic review of our product portfolio to examine what were those products that we really wanted to put some wood behind the arrow on in terms of driving growth. And at that point and as a part of that process, we identified the Sunset assets. We made a revision to that about a year after, where there were a couple of assets frankly that we realized had some growth potential and there were others that we thought were better off being sunset. So it was a one time and then with a revision to it, it is not our plan to revisit that.

Speaker 1

We view that as a process that we've completed now. It's possible that it could come up again, but I don't anticipate anything near that kind of scale happening again.

Speaker 6

Okay, great. Thank you.

Operator

Our next question comes from the line of Jake with William Blair. Jake, the floor is yours.

Speaker 7

Hey, thanks for taking the questions. It's good to hear the 3% organic growth expectation exiting this year. Just curious how much of that growth is related to political messaging business just given it's an election year? And then, Jeff, if you take a step back, how should we be thinking about this business when you come out of this transition? Is there a certain kind of growth in margin profile that you're aspiring to?

Speaker 7

And then I have one follow-up.

Speaker 1

So we're not expect that target core organic growth rate does not count any election year bump. So there's none of that in there. In terms of what our longer term target is for the business, it's for mid single digits core organic growth. And we know that once we get through 2024 and get the core organic growth motions working, that we will turn our sights to some significant margin expansion beginning in 2025. We'll have the hindsight at that point, which go to market investments and motions are yielding the highest return.

Speaker 1

So we'll be able to continue those and just spending on less efficient go to market motions. We've also put in place as a part of this growth plan, a couple of levers that we think will help us drive growth through time while reducing costs. So one of those, for example, is the digital marketing capability and the ability to use organic search to drive pipeline, right? That involves some investment upfront, but then you create a flywheel that enables you to generate at bats for the sales team through time with increasing cost efficiency. And of course, in addition to that on the innovation side, the center of excellence in India and our other offshore initiatives give us the ability to really have the right hybrid mix of development capability that can deliver innovation and growth within a cost envelope that fits margin expansion.

Speaker 1

So where we can get a headcount arbitrage and manage our costs effectively and drive margin through time. So again, coming out of this as we move into 2025 and beyond targeting mid single digits core organic growth and then targeting through time adjusted EBITDA margins between 30% 35%, driven by again those efficient motions in the growth model, also using AI to manage costs in various parts of our business. And then finally, we're going to look this year to turn acquisitions back on, something we didn't do last year as we were focused on our internal go to market plans. And as we do that, we'll get some operating leverage, which will drive margin expansion. And again, we're talking about one, maybe 2 deals for this year we'd like to get done.

Speaker 1

But then again, through time, we would see that ramping up and that will also help to drive margin expansion.

Speaker 7

Okay, very helpful. And then yes, you kind of preempted the next question there in terms of just how you're thinking about capital allocation. It sounds like you're turning back on the acquisition motion and looking for a couple of acquisitions this year. But how are you thinking kind of about the balance between M and A, potential share buybacks and then just the potential for debt paydown? Just curious how you're thinking about the capital allocation between those three buckets?

Speaker 1

Yes. So as Mike mentioned, the $25,000,000 buyback is underway and we are a good part of the way, more than half of the way through that. So we anticipate that continuing and filling the full buyback allocation of $25,000,000 So that I think is sort of step 1. On the acquisition side, again, I think we're looking at 1, maybe 2, but kind of internal plan is around 1. But if the right opportunities present themselves, maybe that becomes 2 deals this year.

Speaker 1

And we've been in the market and actively looking at deals all year round. And of course, we've got the capital we need to go after those deals that we control the timing. But we are remaining patient for the right assets that are strategic and are available at the right price. And again, I also wanted to really spend the time with the team focused on making the investments I've described earlier and getting this business ready for core organic growth and then we'll start feathering in some acquisitions on top of that.

Speaker 7

Thanks for taking my questions.

Operator

Your final question comes from the line of Alex with Raymond James. Alex, the floor is yours.

Speaker 4

Hi, thanks for taking the question. This is John on for Alex. Jack, I think in the past you've mentioned bundling solutions and focusing on groups and bundles of solutions. So can you give us an update on what successes you've seen there so far? And if there is any learnings that you have so far as you put more muscle behind the go to market motion in 2024?

Speaker 4

And then I have a quick follow-up.

Speaker 2

Yes. The learnings

Speaker 1

there are that the most effective motion for us is going to be product centric. And it is, of course, further penetration of the existing customer base, frankly, through straightforward expansion. And then a new logo motion that is driven 80% by a point product sale and maybe 20% by cross sell. And that is consistent with what I was speaking of earlier in response to Jeff's question regarding the composition of the sales force. So we anticipate continuing to have a limited number of global account executives that are driving more of that cross sell motion.

Speaker 1

But in general and for the vast majority of it 80%, you're going to be looking at product, point product sales.

Speaker 4

Okay, thanks. That was helpful. And then Mike, how are you thinking of free cash flow contribution from the Sunset assets here over the next 2 years? I appreciate you gave us color for this year, but how do you think about that over the next 2 years?

Speaker 2

Yes. Well, by definition, the Sunset assets are low margin, low free cash flow contributing. So sort of not quite neutral, but pretty close. So just not much impact on the free cash flow there for those.

Speaker 4

Okay. Thank you very much.

Operator

I would now like to turn the call over to Jack McDonald, Chairman and Chief Executive Officer.

Speaker 1

Okay. Well, thank you for joining today, and we will see everyone on the next earnings call.

Operator

Ladies and gentlemen, that concludes today's call. You may now disconnect.

Powered by Quartr