Upland Software, Inc. (UPLD) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Fourth Quarter and Full Year 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 fourth quarter and full year 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. And good afternoon, everyone. Welcome to our Q4 and full year 2018 earnings call. I’m joined by Tim Mattox, our President and Chief Operating Officer; and Mike Hill, our CFO. On today’s call, I’ll start by summarizing our results and some recent highlights. After that Mike will provide a more detailed look at the numbers and share with our guidance for the first quarter and full year 2019. Tim will cover some sales and operations highlights. And we will open the call up for Q&A after that. But before we get started, Mike is going to 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 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, March 7, 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, 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 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 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. So Q4 was a very strong finish to what was a transformational year. In 2018, we had accelerating revenue growth, expanding adjusted EBITDA margins, market leading product innovation, dramatically increasing customer loyalty and retention. Record acquisition activity and profitable international expansion. So just an incredible year of progress, a transformational year for Upland Software. In the fourth quarter, 62% total revenue growth. 72% adjusted EBITDA growth. So just an incredibly strong performance. And as of Q4, our pro forma annualized run rates are now north of $194 million in revenue and $72 million in adjusted EBITDA. That's Q4 annualized adding in the most recent acquisition. So our pro forma annualized run rate on revenue just shy of $200 million versus the $120 million, $130 million we had exiting last year. So tremendous growth nearly doubling the size of the business. Notably Q4 organic growth and reported recurring revenues was 10%, 10% organic growth. So that's double-digit organic growth for Upland Software for the first time. So a really impressive performance on organic growth and more on that in a moment. In 2018, we achieved year-over-year improvement in net dollar retention rate NDRR from 93% when we last published that number which we publish annually, we last published the 2017 number which was 93%, we've taken that to 98% so a massive improvement. This near 500 basis point improvement in NDRR is evidence that our UplandOne platform and our focus on 100% customer success are driving increased customer satisfaction and loyalty, higher NPS scores, higher renewal rates, strong expansion sales and increased pricing power. Also in 2018, we continue to make efficient high-impact investments in sales and I think it's worth taking a moment to look at where we've come over the last eight quarters. So since the first quarter of 2017 eight quarters ago, we have increased our field sales headcount from three field sales people to 28. We've increased our total sales headcount from 27 to 65 right that latter number including the inside sales teams. We have more than doubled our organic growth in reported recurring revenues during that period, and all the while we have expanded our adjusted EBITDA by nearly 1,100 basis points, taking adjusted EBITDA margins from 26% in the first quarter of 2017 to 37% in the fourth quarter of 2018. So efficient investment, supporting organic growth, consistent with a massive ramp in EBITDA margins. In the fourth quarter, we made two strategic and accretive acquisitions that further expand our capabilities in our customer experience management or CXM as we call it solution suite, and those were the acquisitions of an Adestra and Rant & Rave. And the additions of these two products added core capabilities to our CXM solution suite including marketing automation and personalization, automated campaign management and social media monitoring and customer sentiment survey and analysis capabilities with market leading voice of customer and voice of employee solution. So great ads from a strategic standpoint. For the full year, we did a total of four acquisitions that added $60 million in total pro forma revenues and $26 million in pro forma adjusted EBITDA. And I would note for these strategic acquisitions that have built out our Suites, increased our customer base driven scale and expanding margins we paid an average of 2.9x total revenues and less than 7x about 6.8x total pro forma adjusted EBITDA. So these acquisitions were not only strategic, they were also highly accretive. And I would note that our pipeline is stronger than ever and our position in the marketplace continues to grow stronger as well. Circling back on organic growth. Again, we achieved 10% organic growth in Q4 per reported recurring revenue and obviously we are extremely pleased by that 10% organic rate. And it resulted from as we've talked about before a number of different motions. The efficient increase we made in sales capacity. The addition of some strategic acquisitions over the past six, seven, eight quarters to the Upland family that have been higher growth solutions. The increased customer satisfaction and loyalty that we have delivered through our UplandOne platform which is not only increased NPS scores but driven higher renewal rates which themselves support organic growth. Our strong expansion sales, again on that base of a satisfied customer cohort wanting to come back and buy more and finally increased pricing power. But before we get ahead of ourselves a couple of things. One, if you look at our organic growth quarter by quarter in 2018 right, Q1 through Q4 with 6%, 6%, 7%, 10%. So it's a nice upward ramp but on a trailing four quarter average basis that growth is closer to 7%. Moreover, if you look in organic growth on a year-over-year basis 2018 versus 2017 it's lower than that due to how we calculate it right because we only include products if they're owned through an annual cycle. So you'd be if you did a year-over-year analysis you're excluding products like RightAnswers, Waterfall, Qvidian, InterFAX, RO Innovation, Rant & Rave and Adestra. So you're going to have a lower number. And finally, I continue to believe as I said before on these calls that the way acquisition accounting works it always tends to inflate organic growth a bit. So again net-net thrilled by 10% organic growth in Q4 but we're going to maintain our conservative stance on guidance going forward being conservative here is best. So in addition just this week we announced a major new product and go-to-market strategy with the launch of seven enterprise cloud solution suites designed to maximize value for customers and to increase Upland's organic growth rate, bringing these products together in a way that is relevant and compelling that adds value for customers but is also easier not only to use but to market and sell. And to be sold by our growing enterprise sales team. So it's really setting us up for a great 2019 and look our strong guidance that Mike will discuss further in a moment reflects that. We are well set up for a great 2019. Our customer relationships are strong. Our sales channels are more productive than ever. Our pipeline of acquisitions remains robust. And we have the operating and financial resources to continue to execute on our plan on significant revenue growth and margin expansion. Look, Upland is a story of three platforms. We've got an M&A platform with a massive, highly accretive consolidation opportunity. We have a product platform that enables us to bring acquired products together in a compelling relevant way that adds value for customers and so many exciting things under development right now. Suite is number one on that we'll be rolling out additional functionality that again brings these solutions together adds more values more value for customers. And then thirdly, we have an operating platform UplandOne that delivers lights-out, best-in-class customer satisfaction and adjusted EBITDA margin. And those platforms they're working together like gears driving value and they're benefiting from three big secular tailwind. First is the enterprise demand for automated solutions. Second the transition to cloud and we're just in the early inning of that transition. And then third the tens of billions of BC investment chasing those first two trends which creates and funds companies that ultimately become acquisition pipeline for us. So it is an evergreen opportunity. I've seen it before as an entrepreneur. We are at a point today at Upland of critical mass, critical mass and people, in process, in products, in customers, in access to capital. In access to deal flow, a point of critical mass where you start to see powerful network affects. Every acquisition at scale, expands margin, strengthens our Suites, adds customers, add solutions that we can then pump through our growing enterprise sales force to our 9,000 customers. It's a beautiful model and we're just getting started and we could not be more excited about 2019 and the road beyond. So with that I'm going to turn the call over to Mike who will give you a more detailed look at the Q4 numbers and guidance. Mike?

Thank you Jack. Today, I'll cover the financial results for the fourth quarter and our outlook for the first quarter and full year 2019. Total revenue for the fourth quarter was $45.2 million representing growth of 62%. Recurring revenues from subscription support grew 69% year-over-year to $41.8 million. Professional services revenue was $2.7 million for the quarter and 34% year-over-year increase. Perpetual license revenue was $0.7 million for the fourth quarter for a decrease of 35% year-over-year. Moving down the P&L. the gross margins, overall gross margin was 67% during the fourth quarter and our product gross margin remained strong at 68% or 73% 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 44% now that we have the newer acquisitions and model. Turning to our operating expenses. Research and development expense net of refundable Canadian tax credits was $5.7 million for the quarter representing 13% of total revenue. Sales and marketing expense was $6 million representing 13% of total revenue for the fourth quarter. General and administrative expense was $8.6 million in the fourth quarter representing 19% of total revenue. However, excluding non-cash stock compensation expense G&A expense was $5.6 million or 12% of total revenue. Acquisition related expenses were $9.1 million in the fourth quarter resulting from our recent significant acquisition activity. Without further acquisitions, these acquisition related expenses taper off to zero within a year over the quarters following the acquisitions unless or until we have additional acquisition activity. Operating loss was $3.9 million for the fourth quarter compared to a loss of $2.4 million for the same period in 2017. GAAP net income was $2.7 million or income of $0.13 per share compared to a GAAP net loss of $3.8 million or a loss of $0.19 cents per share in the fourth quarter 2017. I would note that our Q4 GAAP net income was improved by a one-time non-cash tax provision benefit of $10.1 million related to acquire deferred taxes. Note that this tax benefit does not impact our non-GAAP net income or adjusted EBITDA. Non-GAAP net income was $12.3 million or $0.58 per share in the fourth quarter of 2018 compared to non-GAAP net income of $7.6 million or $0.37 per share in the fourth quarter of 2017. Our fourth quarter 2018 adjusted EBITDA was $16.7 million or 37% of total revenue up 72% compared to $9.7 million or 35% of total revenue for the same period last year. Now on to our balance sheet and statement of cash flows. We ended the fourth quarter with $16.7 million in cash. Cash flows provided by operating activities were $2.6 million for Q4 but excluding one-time M&A costs, adjusted operating cash flow would have been $11.7 million for the quarter or just under 70% of adjusted EBITDA. Furthermore, Upland is a cash efficient vehicle when looking at income taxes and capital expenditures. Cash taxes for Q4, 2018 were $0.9 million compared to cash taxes of $0.3 million in Q4 of 2017. Upland currently has approximately a $135 million of usable tax NOLs which is comprised of $115 million of US federal tax NOLs and $20 million of UK tax NOLs. We expect to continue to pay roughly $4 million per year in cash taxes mostly in the form of Canada Revenue Agency income taxes, Ireland income taxes and some US state income taxes. Our Q4, 2018 CapEx was approximately $0.3 million and we expect CapEx to remain at around $1 million per year going forward. We currently have approximately $283 million of gross debt outstanding making net debt approximately $266 million in conjunction with Rant & Rave and Adestra acquisitions during Q4 of 2018. We expanded our credit facility and lowered our effective interest rate to 6.5%. We now have approximately $105 million in available capacity on our existing credit facility including the uncommitted accordion. So we have plenty of dry powder for additional acquisitions. Now on the guidance. For the quarter ending March 31st, 2019, Upland expects reported total revenue to be between $47.9 million to $48.9 million including subscription and support revenue between $44.4 million and $45.2 million. For growth and recurring revenue of 62% at the midpoint over the quarter ended March 31st, 2018. For the first quarter of 2019 adjusted EBITDA is expected to be between $17.2 million and $17.8 million for an adjusted EBITDA margin of roughly 36% at the midpoint, representing growth of 62% to midpoint over the quarter ended March 31st, 2018. So very strong Q1, 2019 guidance and it's worth noting that there is about $500,000 bump in Q4, 2018 revenues due to seasonal factors and our CXM Solution Suite. As a reminder, note that each year our adjusted EBITDA margins tick down in the first calendar quarter due to corporate payroll taxes which reached caps and diminish in subsequent quarters. So we tend to have our lowest adjusted EBITDA margin quarter in Q1and our highest in Q4 each calendar year. Now for the full year ending December 31st, 2019, Upland expects reported total revenue to be between $194.8 million and $198.8 million including subscription and support revenue between $181.8 million and $185 million. For growth in recurring revenue of 34% at the midpoint over 2018. Full year adjusted EBITDA is expected to be between $70.8 million and $73.2 million for an adjusted EBITDA margin of 37% at the midpoint, representing growth of 36% at the midpoint over 2018. And with that I'll turn the call over to Tim Mattox, our President and COO.

Thanks Mike, and good afternoon, everyone. I'm going to walk you through our Q4 results across sales, product and operating areas, as well as touch on our full-year results. As Jack mentioned in Q4, we achieved another strong quarter capping off a year of consistent customer focused executions. So I've discussed in previous calls Upland has an enduring commitment to a 100% customer success which we define as every customer realizing the full value they expect from our software products. Twice a year we ask customers for feedback on how well we deliver on this commitment using the Net Promoter Score methodology or NPS. In both surveys in 2018 customers told us that we were performing at the strong end of the scale for leading enterprise software companies. This then translates into a key metric that we report annually. Our net dollar retention rate or net DRR. The Jack mentioned for 2018, our net DRR was 98% which is a 480 basis point increase relative to 2017and in line with the impact that we projected UplandOne to have at the beginning of 2018. We are setting our sight even higher on driving net DRR in 2019. For sales, in fourth quarter, we welcomed 134 new customers to Upland including 27 major customers each committing over $25,000 in annual recurring revenue, notably a national retailer committed to our customer experience management solution suite for just shy of a $1 million in annual recurring revenue. Another three customers each committed in excess of $250,000 in annual recurring revenue. A cloud computing platform who committed to our enterprise sales enablement solution suite and a global outsourcing Services Company and a national energy provider who each committed to our enterprise knowledge management solution suite. In total, 130 other new customers committed over $2 million in annual recurring revenue with Upland. In the fourth quarter, we also expanded relationships with 204 existing customers, 28 of which were major expansions of over $25,000 additional annual recurring revenue. Several customers expanded their commitment by greater than $100,000 in annual recurring revenue. For example, a multinational IT services company expanded their commitment to our enterprise sales enablement solution. A healthcare company expanded their commitment to our project and financial management solution. And a national bank expanded their commitment to our customer experience management solution. A further 200 existing customers expanded their commitments by over $2 million in annual aggregate recurring revenue. In addition, we continued our progress with respect to cross-sell supported by our orientation around Solution Suites that Jack touched on. As one example, a large Hospital group that was an existing customer of our enterprise knowledge management solution suite expanded their commitment to Upland by purchasing our project and financial management suite. We entered 2019 with a robust cross-sell pipeline, aided by this solution suite approach. For the full year of 2018, we expanded a total of 820 customer relationships including 86 major expansions and added 482 new customer relationships including 75 major accounts. Ending 2018, we now serve over 9,000 customers and over one million global users. So we hit a pretty big milestone there. More than 1,300 of our customers are major accounts comprising approximately 80% of Upland's total annual recurring revenue for 2018. With an average of over $100,000 in our annual recurring revenue. On the product front, we continue to invest in customer driven innovation. We delivered three major releases and 16 feature packs in Q4 that improved user experience, enhanced performance and streamlined interconnectivity across several of our Solution Suites. For the full year, we delivered 12 major releases and 51 feature packs that provided significant performance, reliability, usability and functionality improvements across all of our Solution Suites. And as Jack mentioned through our acquisition efforts, we made a significant investment to further expand capabilities in our CXM or Customer Experience Management Solution Suite by acquiring Adestra, a leading provider of enterprise grade email, marketing, automation and analytics. During our Q3 earnings call, we noted that we had acquired Rant & Rave, a leading provider of cloud-based customer engagement solutions at the beginning of Q4. The addition of Adestra, Rant & Rave means that the CXM Solution Suite now includes multi-channel messaging and email, automated mobile conversations via SMS, MMS and RCS, mobile wallet functionality, voice of customer and voice of employees solutions; advanced knowledge management and marketing automation and personalization. We will continue to invest in CXM through internal development and through acquisition. On the operations front, we continue to drive differentiated value through the UplandOne platform, our foundation for 100% customer success and our Upland integration PlayBook is enabling us to integrate Rant & Rave and Adestra concurrently and consistent with the project timeline even though both businesses are located outside North America. As I said earlier our Q4 results are really a capstone to the consistent performance that we delivered throughout 2018. And we believe this positive momentum will be sustained in 2019 and beyond. With that I'll pass the call back to Jack.

Thanks Tim. We are ready to open the call up for Q&A.

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

Hey, could you guys hear me? Hello. I was just congratulations that were just a fantastic quarter, fantastic set of results. And all the metrics were amazing, so congrats on that. I want to touch up first on the big tick up in large customer acquisition the ones above 25k ARR. There were a lot of factors going your way here cross-sells, solution sales, increase sales headcount. You better think about what's driving that specific metric maybe it's for Tim. What would you say sort of the key driver for sort of that that uptick in guys above 25k ARR.

Yes. Thanks for the question, Bhavan. In terms of new customer acquisition, I think it's a combination of things. As Jack mentioned before, we've invested in sales capacity that certainly allows us to touch more customers. With that we've invested in marketing as well to drive the pipeline there and the products that we've got that are now formed around these solutions. We offer a very compelling value proposition. So I think we're getting more at that. I think we've got more players who can hit the ball out of the park, and customers are willing to make larger commitments with us. So we like those trends and we like you as Jack mentioned the new products we've acquired as well which have also large per deal economics.

Got it. Then I went drill into a sales motion a little bit more between Jack and yourself Tim you've built a really efficient a playbook for the inside sales plus outside three salespeople. And that's worked really well. It's just incredibly efficient but the nice sort of adding layers to this. I love to understand how you're changing the go-to-market motion and sort of if you've got a similar play book here and how does that compare the price sort of model.

I would say the move to enterprise Solution Suites is an important piece of this. So historically, we spoke in terms of products. And in the first few chapters of Upland's growth M&A for critical mass getting a unified operating platform and plays driving margin expansion from 3% to 37%. That kind of taxonomy made sense. As we now move to the fourth chapter which is going to be more focused on organic growth, again measured organic growth in the context of acquisitive growth Platform Company that's running at 40% EBITDA. We are doing two things. One, we're making an efficient investment in sales. And two, we are organizing our products and adding R&D investment in product management around easier ways for our customers to consume this functionality, ways that we can add more value and also ways frankly that are easier to market and sell. So now and this is all reflected on the new website additions that were made earlier this week. You can really talk about a customer journey in CXM or in sales enablement or a process journey around secure document services or document lifecycle automation. And in addition to that we've got a professional enterprise sales team 65 folks now 29 field, the remainder inside who are arrayed to go after those opportunities. And then finally, we've done all that as we mentioned in the remarks against the backdrop of a 1,100 basis point increase in adjusted EBITDA margins. And we will continue to make that sales and sales enablement investment consistent with an efficient really a hyper efficient growth efficiency index and an upwardly ramping EBITDA margin to our long-term target of 40%. So from a product mix, sales motion, margin expansion standpoint I just love where we are positioned.

Yes, no, that's great. And then one last one for me. There are some ASPs for the Suite sweet how we should think of that ASP versus sort of the individual product sort of what does that bundling look like for the Suite offer vis-à-vis say in the individual products.

So it's really a three tiered system. One and we've got some exciting things that will be coming later this year around Upland work center which is a new dashboard that will enable us to combine functionality for multiple products. Actionable insights, today we're already providing the visualization side of that across a big chunk of our products and an expanding chunk of our products with Upland analytics. We're now really building that into a full dashboard capacity. So one piece of it will be scoped functionality for multiple products that will appear as a feature. So for example around professional services automation, we will be adding feature functionality which is scoped from Qvidian around SOW production and RFP automation. We will be adding as we've talked about before knowledge management capability in terms of creating a knowledgebase around the PSA function. We'll also be adding customer sentiment analysis to that for NPS score tracking for professional service organizations. That sort of tier one product is feature if you will where we add scoped functionality that just makes our PSA solution stronger, more renewals, more expansions no additional charge for that. There is a second piece where you start adding in multiple anchor products where somebody really wants to consume a second or a third product at scale. There you will have progressive bundle pricing. And then finally for customers above a certain ARR threshold for larger enterprise customers, there's an account planning aspect to that and enterprise license agreement. So it's that three-tiered structure that we will go with as we move forward.

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

Hey, guys. This is Josh Reilley for Scott Berg. Congrats on the strong quarter and outlook. So maybe just starting off, I think you previously disclosed you have 1.1 products per major account. How does the new suite offering, can we get some more color on how that benefits the cross-sell opportunity first of all and then what's the initial reaction from the sales force around the change to the suite sales? And have you made any changes to their incentive structures?

So the sales force reaction has been positive. In fact, the development of solutions orientation and the move to solution suites was really an organic outgrowth of our investment in sales, and bringing on senior sales professionals. Essentially saying, look, we have such a strong array of products. Can we please do two things? One, group them by buying center and so that is one way into our products now if you look at the website. So if I'm in focused on call center I can see what the array of products and solutions is that Upland has to offer there. And then secondly, can we begin to package this functionality together around certain enterprise journeys and the solutions suite. So a very positive reaction from the sales forces. The inside sales teams remain focused around solution areas. The field sales force which is the one where we've had this dramatic growth. They are focused geographically. They are cross trained to spot opportunities across Suites across solutions within Suites. And they've got an incentive system that is geared to compensating them for those referrals. And it's really interesting in a recent sales kickoff where we had the 70 plus person team in town tremendous amount of excitement. And then in just sort of detailed work of building a target list of live cross-sell opportunities. We're talking about 100-150 opportunities right. So we're seeing real opportunity here to go at the suite opportunity and the multi solution opportunity.

Okay, great. And then just one more questions for me, Adestra and Rant & Rave where there's two largest acquisitions in your company's history. How much more or how should we think about what you can digest in 2019? I know you talked about a $100 million credit facilities still open. Should we expect smaller deals in 2019 as you digest the two larger acquisitions or is anything up in the air?

Yes. The UplandOne model is highly scalable and four acquisitions a year for us very, very doable. And the truth is that the slightly larger acquisitions in a certain sense are easier to get done than the smaller ones or there are there at least as much the small ones are at least as much work. And in some case you get that sort of inverted deal where on a smaller transaction small issues become more material. It gets more complicated. So no issue there. Pipeline is stronger than it has ever been. We are invited into sales opportunities that we used to have to claw our way into. We have got competitive structural advantages now around M&A that are coming from critical mass. The ability to convert these products seemingly overnight from breakeven or money losing to 45% to 50% contribution margins means we can be a very competitive bidder on price perspective, but of course, we remain disciplined and our brand is known in the market for that. We are the best home for products and customers and a subset of high-performing people. We have got a track record of closing of not being re-trader. I've signed across three companies, four companies in the last 20 years, 44 letters of intent, closed 40 acquisitions been sued zero times across that. So we have a reputation in the marketplace of being people of our word that bring speed and certainty to the process. A great home for products for customers for a subset of high-performing people not re-traders. We've got a scalable platform. We've got the capacity to get these deals done. We've got a bigger pipeline than we've ever had. And we've got the war chest to go execute against it. So full steam ahead on acquisitions.

And your next question comes from the line of Jeff Van Rhee from Craig-Hallum. Your line is open.

Great. I'll add my congratulations, everything looks really good here guys. A number of questions, first on the NDRR the uptick. Can you give us maybe is it more bias towards consumption more modules or seat driven just maybe a second tier look at NDRR improvement?

Yes. Good question, Jeff. So we are seeing more seat consumption certainly as organizations are adopting the products and solutions more deeply. Certainly introducing other products into play is a factor, but not major at this point although as Jack alluded to we are seeing a good front of funnel pipeline from introducing these solutions concepts into the sales organization. We also have premier success offerings that contribute to our annual recurring revenue as well. So that certainly helped and as we talked about before we instituted standard price increases across the products and that is helped too. So not really one factor although I would say out of all of those seat expansions is probably the most important.

And I would just add to Tim's comment there. Look, this has been a multi-year effort in building out a customer success culture at Upland. And delivering that at scale and that is having an impact because a big piece of this is improvement in gross dollar retention rate. Customer sat is up, NPS scores are up and renewal rates are up right. So you're starting from a higher base and on to that you're going to be able to expand more into a happy customer account. You're going to be able to cross-sell more into a happy customer account. You're going to have more pricing power as it relates to a happy customer account. And the opportunity I think it's more customers have seen the benefits of the platinum support program. So it is a love the fact that it is a sort of game of inches multi-part equation and kudos to Tim and the team taking that to 98%. And again this is not a 98%. This is an important point I think this is not a 98% net dollar retention rate that's coming from a company that's spending 48% of its revenues on sales and marketing and distorting the expansion motion right. This is a 98% net dollar retention rate that's coming from a company that's spending 14% or 15% on sales and marketing. So this is the real stuff which I think is we feel good about.

Yes, that's a good point. I think and then just to follow up on that just with respect to contracts, the new customer signing this quarter for instance. What's the typical billing? Namely, I'm interested in duration of these contracts and to what degree are you getting sort of one-year contracts or more with a one-year upfront billing? Just to help me understand billing and contract duration.

Yes. The duration is consistent with what we've seen in the past. So there's no hesitation for customers making longer-term commitments. Our contracts have roughly 18-month duration today. Although one of the benefits that the Jack touched on with solutions is that we think that that will help us with both renewals and commitments. And so we think we'll see that continue as well. And we do it and send our sales force to sell longer-term deals so they get paid more. If they sell a three-year deal versus a one year deal and make sure that customers also receive the appropriate incentive to sign longer-term deals.

Okay. And, Jack, you obviously you guys have established a really solid track record of under promising and over delivering with respect to the organic, in terms of a great mark you commented that you want to keep expectations low. But are we supposed to still think of this as a zero to five or are we at least going to instead up a little bit? What do you --how are you thinking about a target organic growth rate?

I think if you look at our forward guidance, we're going to --no change from where we've been historically and so we continue to talk about flat to 5 guidance is going to reflect 1 to 2. And we're just going to keep with a conservative stance here on that.

Okay. I appreciate that and last one from me then on the sales side. You've got the telesales or but as you as you called out. I mean this is a new phase, you're keeping a lot of people you're hiring a lot of people in the direct rep count can you just color that in a little bit, they're geographically focused. To what extent are those reps right now qualified and ready to go sell all these Suites just as we think about the maturation of the sales force is also another point of uplift on revenue growth? Where are we in the maturity of that sales org? And how are you thinking about the year?

Maturity, we are very early innings in this process. So it's one of those sort of bad news is good news kind of situations because we're just bringing it all together today. We brought sales management on within the last 12-months, really had our first sort of united sales kick-off which was an incredibly successful event here in Austin. We haven't had one of those before. So there is an organization around sales. There is a sales methodology in place. There is thoughtfulness around how the sales people are arrayed geographically. There is thoughtfulness around incentive programs that compensate for referrals. There is training. There is collateral both what you see publicly on the website. And a whole bunch of thought leadership materials and other collateral happening behind the scenes. So it's the good news there is that we're now starting to take those basic steps and you're not -- that's built in from a cost standpoint, but we haven't modeled in any of the goodness from that. So it's going to be very exciting to see how that plays out. And as we've talked about our --we're paying maybe a $1 for a $1 of acquired ARR with ASC606 we have to quote average customer duration. It's six years so that's $6 a value high gross margin at a discount rate $4 -$54.5. So it's a very good return on investment. We will continue to invest in sales enablement and sales consistent with that kind of efficient growth index. And with an upwardly sloping EBITDA margin to 40% at scale and figure out as we go right where the efficient frontier is. Does that level of spend, the growth of your products we're consuming. The solution suite go-to-market motion. Does that result in a sustainable 5% organic growth, 3%, 9%, and 10%? We're going to discover that over the next few years here. But we like what we're seeing thus far.

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

Thanks for taking the question and congrats on the real solid results. So Jack or Tim, I don't know who wants to take this but as we think about the build out of the field sales team, I'm curious how distributed those reps are in terms of selling your seven solution Suites? Is that focus on a few or is it spread out across the Suites and how should we think about the magnitude of field rep growth going forward?

Look, it's --we cross train the reps particularly the field reps now. So they are array geographically; 80% of that numbers in the US, 20% of the numbers in Europe. Standard sort of geographic distribution cross-training to spot opportunities. Now look these are athletes. They're capable enterprise sales professionals, but they each have a domain expertise and the products they came from. And what we made purposeful decision right. You can do these two ways. You can say I'm going to grow this Salesforce completely organically, going to hire people off the street going to believe what they tell us about what they're going to get sold, going to wait a year or a year and a half to see if they deliver. Or we can look at the acquisitions we're doing where we see their sales results. They're up and running and trained and we can say, no, we've now got the capacity within our model to hold on to more of them. So that latter approach is the one we took. So cross train them the spot off, array them geographically, provide incentive for cross-sell, cross train them to spot opportunities and then they refer it over to a sales professional that is a domain expert in that area. And that's --that is the approach.

Understood, thanks Jack. And just maybe on the M&A strategy. As you see EBITDA margins getting close to 40%, I'm curious with the breadth of the deals that you'll consider has changed at all? I mean just with margins at level, does the ability of you could look at an asset that might grow a little faster and have more revenue synergies, look more appealing than something that delivers that like incremental EBITDA margin right away.

Well, it's a great question. I will say that we are more cognizant of organic growth and our acquisition targets now. So that in a perfect world in addition to 90% plus net dollar attention rate, 70% plus cash gross margins, 80% of revenue coming from Fortune 2000 and major mid-sized accounts. Average revenue recurring per major account north of $25,000 and a domain fit into our solution suites. We'd also now like to see organic growth of 10% to 15%. Now again, remember these companies are breakeven or losing money. So once we put them onto our platform, you're going to slow down that organic growth a bit, but if you start from that 10% to 15% and when you're done, you should wind up with something in the 5% to 10% range. So a little bit more cognizant of that but you have to continue to target that 45%-50% contribution margin. The margins are magnetic right. And it's easy to let your guard down on that on the hygiene around that. You're not doing anybody any favors. There's beauty in striving to hit those targets. It forces people to do things more efficiently. It kills -- it's a disinfectant for a waste and an incredibly powerful one. As long as you're doing it in a process-oriented way which is what we've done with UplandOne as opposed to a hack job fine coffee, where you're just willy-nilly trying to hack cost. That's not sustainable but the way we're doing it is. So we're not letting our guard down on margin. But, yes, we are looking at --and look this has been proven out by the products we bought over the last five, six, seven, eight quarters. We are buying some growth of your assets.

And your next question comes from the line of Richard Baldry from Roth Capital. Your line is open.

Thanks, my congrats too. It looks like major accounts now are really dominating the revenue stream. Can you talk a little bit about the economics between the major account levels? Are they averaging above your norm? I assume they are. And how do you think about the accounts that are below that level? Is there a way to think about them either life cycling up into a major account or if you look at some that are at the smaller end and their economics aren't as attractive and maybe not as important for you to try to retain. Will that be one of the avenues that your EBITDA continues to climb? Thanks.

Yes, great question, Richard. Tim here. Taking it from the small end first, certainly if you have a very small customer it's probably not profitable for you to service that customer. So for us we're looking at is it a strategic into a larger account. Does it have the potential to grow over time? Can we apply our expansion platinum success offerings solution approach to grow that into a bigger opportunity? And if we can then taking that small customer on or small size customer at that point makes sense. Without those dynamics we shouldn't be doing those deals. And we do try to have a discipline around that. As you work your way up, obviously, the economics as you point out get improve and certainly doing larger deals can have an impact much quicker on the P&L and we are --the capability with up in one and our approach to 100% customer success to deliver what those kind of large customers are expecting when they do business in the enterprise cloud space. So we feel very comfortable going after those opportunities. We are seeing a pipeline of those and have been able to take those down. But I will say our model does allow for us to do the deals that are not quite at that level. And grow them over time and retain them over time and we're quite comfortable bringing in the mid-size account and growing that strategically over time. In addition, as we buy more and more products we have more and more arrows in the quiver, if you will, to bring up that annual recurring revenue. And we're happy with the way those motions are playing out. We certainly when we acquire a company bring those best practices to that customer base as well. And unlock value in that dimension not only through retention through higher customer satisfaction, but also through expansion, premiere success offerings and solution sales.

Lastly, if I look at Q4 versus Q3, the change in adjusted EBITDA versus revenues about 45% of the incremental revenue dropped down which is obviously a pretty high conversion rate. Is there anything unusual in that? Do you feel like that was just a matter of blocking and tackling or are there any one time things that made that a very strong result this quarter? Thanks.

No, no, no one-time things, just the scale that we've talked about as our revenue growth enables us to amortize the cost of our shared service organizations over a larger base. We just see this gently ramping EBITDA margin up through 40%. Again even with things like a substantial incremental sales investment as we go.

And your next question comes from the line of Eric Lemus from SunTrust. Your line is open.

Hey, guys. Really nice job on closing out the year. Sounds like things are going well. I just had one question. When you look at the M&A pipeline and you look at across your seven enterprise solution suite areas. Is there any particular domain or area that is more attractive in terms of M&A? Whether that be CXM or any other that you think could be a focus for M&A in 2019?

So we've got a very diverse pipeline. We're seeing some great assets in sales enablement. Continue to see great opportunities in CXM but I love document lifecycle automation. The security document services. There are a lot of opportunities to verticalize there and continue to like as well the core project and IT management area. So I'd say it's diversified right now we look bottom of the funnel seeing a lot of stuff in CXM and sales enablement. But we've got strength across all and the aggregate pipeline. Again, as I mentioned stronger than it's ever been. End of Q&A

And this concludes the Upland Software fourth quarter and full year 2018 financial results conference call. Thank you for joining. You may now disconnect.