Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Third Quarter 2018 Financial Results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] The conference call will be simultaneously webcast on Upland’s Investor Relations website, which can be accessed at investor.uplandsoftware.com. As a reminder, this conference call is being recorded. Following the completion of the conference call, a webcast replay will be available for 12 months on Upland’s Investor Relations website at investor.uplandsoftware.com. By now, everyone should have access to the third quarter 2018 earnings release, which was distributed today at approximately 3:00 PM Central, 4:00 PM. Eastern Time. If you’ve not received the release, it’s available on the Investor Relations tab of Upland’s website at investor.uplandsoftware.com. I’d 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. Good afternoon. Welcome to our Q3 2018 earnings call. I’m joined by Tim Mattox, our President and COO; and Mike Hill, our CFO. On today’s call, I’ll start by summarizing our results and some recent highlights. Mike will then give a more detailed look at the numbers and guidance for Q4. And then, Tim will cover some sales and operations highlights. After that, we’ll open the call up for questions. But before we get started, Mike, would you read the safe harbor statement?

Sure, Jack, and good afternoon, everyone. During today’s call, we will include statements that are considered forward-looking within the meanings of 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 risk 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, as periodically updated, 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, November 8, 2018. 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, Upland will refer to non-GAAP financial measures that, when used in conjunction 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 third quarter 2018 results, which is available on the Investor Relations section of our website at investor.uplandsoftware.com. 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. To learn more about our outreach plans, please feel free to contact us at investor-relations@uplandsoftware.com. And with that, I’ll turn the call back over to Jack.

Thanks, Mike. It was an amazing quarter. Upland is clearly firing on all cylinders. Let’s review some of the major headlines. We had a record Q3 with better than 46% growth in recurring revenues, and we see that recurring revenue growth accelerating as we move into Q4. We had record adjusted EBITDA in the third quarter, up 57% and a 300 basis point improvement in adjusted EBITDA margins over the third quarter of 2017. We had a record quarter for both the new and expansion sales bookings, increased bookings transaction sizes. We’ve got great products, enterprise class, and we now have a team in place to sell them. This is the 17th straight quarter of Upland meeting or beating guidance. That’s every single quarter since going public. So demonstrating consistent positive results. We had a host of new product innovations in the third quarter that demonstrate our commitment to customer-driven innovation, and our products, as I say, really being well received in the market. We had strong organic growth in the third quarter. We had organic growth in recurring revenues of 7%. So 7% organic growth in recurring revenues, we’re very pleased by that. We like to the continued progress we’re seeing in bookings and customer satisfaction, in churn reduction and expansions and pricing, but we will continue to be conservative in our guidance. Just after we closed the third quarter on October 3 of this year, we strengthened our Upland Mobile Messaging platform by acquiring Rant and Rave, which is a leading provider of cloud-based customer engagement solutions, including voice of customer and voice of employee applications, that enable users to capture analyze and act on real-time customer and employee feedback across multiple channels, including SMS, mobile, email, web and social media. And so this product, added to Upland Mobile Messaging, really begins to form the broader customer engagement products suite that we’ll be talking more about in the quarters to come, and we’re very excited about that strategic addition to our product family. Our M&A pipeline continues to be strong, and we have the operational and financial resources to execute against it. And finally, our Q4 guidance, again, strong and record guidance. We see ARR growth accelerating into Q4. We see in Q4 adjusted EBITDA margins of 37%. So moving closer to that long-term adjusted EBITDA margin target of 40%. And annualized adjusted EBITDA run rates of around $63 million, around the $63 million adjusted EBITDA run rate if you take Q4 midpoint of guidance and annualize it. So accelerating growth and expanding margins, and we’re just incredibly excited about where we are as a business. Upland really hitting its stride. We remain active in the market for acquisitions, and we look forward to a strong Q4 and a great close to what has been an exceptional year. So with that, I’m going to turn the call over to Mike to give you a more detailed look at the Q3 numbers. Mike?

Thank you, Jack. Today I’ll cover the financial results for the third quarter and our outlook for the fourth quarter and full year 2018. To begin with, I’ll note that these third quarter financial results exclude the financial results from our most recent acquisitions since Rant & Rave was acquired at the beginning of Q4. Total revenue for the third quarter was $37.1 million, representing growth of 42%. Recurring revenues from subscription and support grew 46% year-over-year to $33.9 million. Professional services revenue was $2.3 million for the quarter, a 13% year-over-year increase. And perpetual license revenue was $0.9 million for the third quarter, for an increase of 7% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 67% during the third quarter, and our product gross margin remained strong at 70%, or 75% 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 34%, which is below our target of 40%, resulting from newly-acquired businesses, which are not yet fully in the model. We expect professional services gross margin to improve back up to our target of 40% within the next quarter or two. Turning to our operating expenses. Research and development expense, net of refundable Canadian tax credits was $5.3 million for the third quarter, representing 15% of total revenue for the third quarter. Sales and marketing expense was $5.3 million, representing 14% of total revenue for the third quarter. General and administrative expense was $8 million in the third quarter, representing 22% of total revenue. However, excluding non-cash stock compensation expense, G&A expense was $5 million or 13% of total revenue. Acquisition-related expenses were $2.5 million in the third quarter, resulting from our recent significant acquisition activity. Without further…

Thanks, Mike, and good afternoon, everyone. I’m going to take you through our Q3 results across sales, product and operations areas. As Jack mentioned, we are in the early days of our organic growth journey, but our efforts and the impact of the UplandOne operating platform are starting to pay off. With respect to sales, we had a record quarter for sales bookings. We welcomed 130 new customers to the Upland family, and landed a dozen major accounts that averaged over $140,000 in annual recurring revenue each, more than double the last quarter. Notably, we landed a leading global technology company, who committed to over $600,000 in annual recurring revenue to our RFP automation solution. Several other new customers across a range of industries and products each committed more than $100,000 in annual recurring revenue, including a state agency who committed to our IT Financial Management solution, a global bank who committed to our knowledge management solution, a payroll processor who committed to our customer reference solution and an advocacy group who committed to our Mobile Messaging platform. In total, another 125 new customers committed over $1 million in annual spend on Upland solutions. We expanded relationships with 208 existing customers in Q3, including 17 major expansions that averaged over $100,000 in recurring revenue each. In addition, 47 of our expanding customers increased their annual recurring revenue by at least 25%. These results speak to the strength and scalability of the Upland product portfolio. Our innovation and market positioning, the power of the UplandOne platform and our improved enterprise sales capability. Put more simply, we have enterprise-grade products that are scalable, and we now have a team in place to sell them. With respect to product, we continued our commitment to delivering customer-driven product innovation through our efficient and high…

Thank you, Tim. And we’re ready to open it up for questions.

[Operator Instructions] Your first question comes from the line of Bhavan Suri from William Blair. Your line is now open.

Really nice job there. Can you hear me, okay?

Yes, we can.

Great. So I feel like I ask this question every quarter given sort of the strength we’ve seen over the last, I want to say now 1.5 years on organic growth. But just sort of as you look at that organic growth there, I guess, is it because – maybe I’ll drill into it a little bit. Maybe this is for you, Tim or Jack. But specific products or product sets where you’re seeing reduced churn or larger expansions, what are you doing different from a sales and marketing perspective resulting in this increased organic growth? Is the cross-sell finally – and I know, Tim, you’ll say we can’t predict it, but it has been six quarters. But is that working? How do we think about that? Obviously, UplandOne platform has part to do with it, but just sort of what’s driving this? Because this is a really healthy uptick even from the low single-digits to five, now seven. And then, also the size of the deals you’re landing and the frequency you’re doing it. I just want to understand what’s driving that.

So I would say a couple of things, Bhavan. First, it’s UplandOne and the investments that we’re making in customer success and the impact that, that’s having on increasing gross dollar retention rates. So that’s number one. Secondly, we’re seeing additional strength of expansions. Tim mentioned some of the larger expansions we’ve seen. And again, when you’re delivering a high level of customer satisfaction, you’re setting the table for increased expansion opportunity. We’re also seeing some strength in the pricing area, which is good. And I would say that on the new logo side, we’re also seeing some success. We mentioned a record quarter for sales bookings, again, both on the expansion and on the new logo side. And I think with respect to what’s driving the bookings success, having a more fully formed sales team in place is very important. We’ve had a head of sales onboard now for, I guess, it’s been about three quarters. We’ve also been keeping the sales forces of the products that we’ve been acquiring, and that started maybe about a year ago, and that was a change from what we had done prior to that. But we have reached a point in scale where we’re able to retain some of that sales investment and still achieve the contribution margins we need to drive the kind of strong EBITDA margins that we’re putting up, right, 35% this quarter, 37% in Q4. So a sequential 200 basis-point improvement there on the way to our long-term EBITDA margin target of 40%, which we want to hit, at about $250 million of revenue. So I’m happy to say that it’s really a game of inches, right? It’s a number of different factors across the board. I’d also say, we’ve got a great family of products, and some…

Got it, got it. And I guess, one quick follow-up here, maybe two. But first – actually two. How is the initial traction on the RFP automation solution at the revamp? And then, Rant & Rave, just given the size, if you think about puts and takes, how do you view risk to that integration given that it’s pretty big? It’s sort of your first fairly sizable acquisition. So just two questions. Thank you.

So we’ve got – we’ve had some great success on the Qvidian side. Tim mentioned a significant win there. Do you want to take a minute and talk a little bit more about that particular win?

Yes. Well, more broadly, some of the more impressive technology names have evaluated, and we have a really good customer base, so we’re seeing continued momentum and landed a pretty significant customer this past quarter. We went through a pretty grueling procurement process and evaluation process of our enterprise capabilities. We came through it with really a strong report card on that. So that was a testament, as Jack mentioned, to all our efforts with the UplandOne platform. The other thing I’d note is that with our customer reference automation platform that we purchased a couple of quarters ago, it’s very relevant to that customer base, and it really rounds out the offering. So when you’re talking about doing effective business proposals, automating the customer reference process and making sure you’re not wearing out those customer references is critical. And so our offering actually got more compelling with that acquisition. And as Jack alluded to, the solution or suite type of approach, I think, is something that has legs in the future. So the pipeline looks good in that area for both of those products. Obviously, we’re introducing one product to the other’s customer base, and then marketing them more jointly in the actual bids that we’re doing with customers. I’ll note also that we’re adopting the technology internally, and that’s helping us standardize our business proposals or security language around our proposals. So we’re seeing the benefits that our customers are seeing as well. So that’s what’s happening in that area.

So it’s really pretty exciting. And we talked a bit in some earlier releases about the product, the sales enablement, the market opportunity and how we were beginning to build a sales enablement suite. And I think Tim really just hit the nail on the head with that, how bringing these two products together, you do get into a one plus one equals something more than two in terms of relevance to both new and existing customers. So look for us to begin doing that same thing in a variety of different areas. And you raised a question about Rant & Rave. I would tell you that, that integration is already well underway. We see a very exciting opportunity to combine the capabilities of the Upland Mobile Messaging platform with the voice of customer and voice of employee customer experience capabilities of Rant & Rave. And there’s an AI component to the Rant & Rave platform in their natural language processing engine, which we see as a powerful technology that we can employ across the Upland mobile messaging platform and, frankly, across some additional products as well, potentially, like our RightAnswers Knowledge Management solution. And we’ve got some other acquisitions in the hopper that we think can really start to round out this customer engagement solution in a powerful way. And so look for us to be talking more about that. And additional opportunities in our project in IT Management product family and in document automation and Workflow Automation as well. The other thing I’d add about Rant & Rave, which is exciting, is the – and it just starts to happen, Bhavan, right? We’re reaching that critical mass that we talked about where you’d get to a point where you get critical mass around people, around process, around access…

That’s really helpful. Thanks, guys, and congrats. Thanks for taking my questions.

Your next question comes from the line of Scott Berg from Needham. Your line is now open.

Hey guys, this is Josh for Scott. Just one question from us. With public company’s SaaS valuation fluctuating over the last few months, have you seen any changes in private market valuations for opportunities for you guys?

We haven’t seen any real change. What we’re seeing and have been seeing over the last year is being able to pay between 5 and 8 times pro forma EBITDA, and hitting most of those deals, roughly in the middle of our target range. And so no real change on that front.

Okay, great. Thank you.

Your next question comes from the line of Brian Peterson from Raymond James. Your line is now open.

Hi gentlemen and congrats on the solid quarter. So just starting on the product investments that you guys have referenced. Just reading the press releases and even the time on the call, it feels like the pace of product innovation has really picked up. And I just want to make sure I understand, how much ceiling and headroom you guys have to kind of sell – taking cross-sell out of it, if we just think about the up-sell of customers that are using one particular product solution today, what does a lot of this product innovation do for that opportunity?

Well, it’s a great question. So if you sort of took it from the top, rough numbers here, right, 4,000 customers, roughly 1,200 major accounts. Those major accounts driving about 80% of our recurring revenues. So roughly $150 million of – $140 million, $150 million of recurring revenue that are just in those major accounts. And if you look at the average ARR per major account, it’s about $100,000. And these are Fortune 2000 and major mid-sized organizations. The UplandOne 100% customer success philosophy and practices are resonating there. I think we’re laying the groundwork for being able to expand those customer relationships and bring more value to our customers. But $100,000, right, average, and one. One products on average. So we are just scratching the surface. There’s an opportunity here to double, triple, quadruple the size of this business just within the accounts where we currently have a foothold. And so we think that’s an exciting opportunity. It’s one of the reasons why existing customer success is so important as a focus for our business. Now we’re adding great new logos every quarter, but that existing customer opportunity is significant. And the pace of innovation, we put in place the UplandOne platform on the development side. We’ve invested in analytics, in automation, in outsourcing and in off-shoring. We’ve adopted a product management philosophy, which is tied to the foundational elements that enterprise customers want around performance and speed and scalability and security. And then, for customer-driven innovation, above that, in terms of key features, we are leveraging R&D investment across multiple – from multiple acquisitions, right, and deriving synergies there. And Tim mentioned an example before around customer reference enablement and RFP automation solutions that we have acquired, and we’re seeing similar opportunities. We saw that, for example, with the InterFAX’s cloud fax capability and the tremendous kind of hand-in-glove fit that that had with our AccuRoute document management and FileBound workflow solutions. So we can really get a one plus one equals something more than two outcome. And then in addition to that, we are spending 15% of revenue roughly on research and development in a very efficient manner. And so that enables us to drive that kind of product innovation that you’ve seen. So let me kick it to Tim. We’ve talked about a few of these things in your comments, but there may be some areas you want to highlight on the product innovation front.

Yes, I think you covered the main ones, Jack. Another example, and you saw our recent press release, Brian, on this was Upland Analytics, and that’s based on our comps, our IT Financial Management analytical engine. So we effectively internally OEM that and now share that analytical engine across multiple products for today, but we’ll spread that more broadly across the portfolio with very little incremental R&D investment to accomplish that. So we’re getting really a very strong analytical and reporting engine for free effectively across our products. And it becomes a common experience for our customers as they buy multiple products. So that’s exciting. We’re also doing purposeful integrations of our products as well, and we’re using the Upland Integration Platform, which is powered by an underlying technology from Dell called Boomi. So integrating cloud products very efficiently and effectively, not only the Upland products to each other, but also Upland to the third-party world as well. So we’re linking to the customers’ other systems of records to make the Upland products even more relevant in a customer’s environment. You take that, and then you wrap our Gold and Platinum service success offerings around that, and you’ve got a pretty compelling enterprise-grade solution for our customers. One of the things that we also saw, particularly when we win these larger bids, is when customers are drilling into our approach to security, not only our cloud operations but also our development of the products themselves, it’s really a differentiator for us certainly against smaller competitors but also mid-sized competitors as well. So we fare quite well when large technologically savvy customers kick the tires on our security aspect of our offerings. And that certainly is heartening in terms of our approach and how we’re going to go after other large customers as well. Hopefully, that gives you some more insight.

Yes, that’s great color, guys. And maybe one for Mike or Jack, I don’t know if you want to take this. But just, obviously, the ramp to kind of 35% EBITDA margins this year, that’s been really impressive. Just as we think about that going forward, how should we think about the balance of growth versus margins? Obviously, this is a first-class problem, but I just want to make sure we’re understanding that as we think about M&A and margin expansion in the next few years. Thanks, guys.

Sure. So as we look at M&A – as we look at margin expansion from here, it’s really as much about G&A leverage as anything else, right? We’ve put in place a highly efficient UplandOne platform in areas that range from account management to customer support, to R&D, to product management, to back office. And that has enabled us to take EBITDA margins from 3% in the first quarter of 2015 to 35% this quarter, 37% in Q4. And the expansion to 40% will come as we layer on additional revenue. Some of that will be organic, but the bulk of it is really going to be M&A driven. And our target remains hitting that 40% EBITDA margin target at around $250 million in revenue. And we feel that we can do that and still make the investments that we’ve been talking about on this call, both in product innovation, but also in sales and marketing, right? We continue to expand our sales force. So we feel very good about being able to get both of those things done. And again, though, we do want to say that having managed a couple of – and grown a couple of public businesses over the years, we want to stick to a conservative guidance as it relates to organic growth, and I want to emphasize that we can deliver some pretty significant value creation on a flat model, and we invite investors to look at it that way. But of course, we’re going to work every quarter to deliver more than that. Mike, would you – anything you want to add to that?

No, that’s well-put.

Thanks a lot, guys.

Next question comes from the line of Terry Tillman. Your line is now open.

This is Eric Lemus on for Terry. Nice job on the quarter for the 17th time. Looking at this Rant & Rave acquisition, obviously, a fairly large-sized acquisition, and I know it’s base in the UK and it appears a lot of the customers are European, an international focus. And a quick question on what’s your thoughts around M&A in international markets? Is that a good opportunity for you guys? Or should I more so be thinking about it as buying acquisitions that have good products that could fit into your overall product suites? Or just a little bit color on international M&A.

Yes, absolutely. So it’s really the second one. The core driver is the product fit. Are we building out solution sets that are more relevant and more compelling for our customers? That is the principal strategic lens through which we look at acquisitions. Now we have a number of financial lenses as well, right? We want sticky applications, better than 90% net dollar retention rates, at least mid-80s gross dollar retention rates. We want real software solutions, not bastardized managed service displays. So we want to see cash gross margins that are north of 70%. We want to see a Fortune 2,000 customer base where you’ve got average revenue from major accounts of at least $50,000, $75,000 annually, and you want to see some implementations that are $200,000, $300,000, $400,000, $500,000 to kind of prove out, if you will, the scalability of the solution. And we like to see organic growth rates before we restructure the business in that sort of 10% or 12% or 15% range. So you’re going to lose some of that when you go from a breakeven model to a 40% to 50% contribution model like we have, but we think if you start with those predicates, we know that if you start there, then what you get on the other side is a business that can support our overall organic growth objectives and deliver the contribution margins that we need. So that’s the primary strategic, and those are the financial criteria. It so happens that we have begun to see more compelling acquisition opportunities in Europe. And what’s sort of an added bonus, right, because you’ve had InterFAX, you’ve had Rant & Rave, there are other opportunities in the pipeline. And the sort of added benefit to that as our product portfolio has grown is the need, the desire, to expand our sales and customer support capabilities in Europe. So these acquisitions give us – you start putting that capability together, and we’ve got a great organic team over there as well. And so you put those together when we built a nice base and start cross-selling now all of our products more deeply in Europe. And that – again, this is an opportunity that we are just scratching the surface on. So it’s exciting in terms of where that can take us. So we’re excited about the opportunity in Europe. We’re seeing more European opportunities, and that’s all good news.

Thanks, Jack. Nice job.

There are no further questions at this time. Please continue.

Okay. Well, thank you for your time this afternoon, and we look forward to seeing you on the Q4 call. Thanks very much.