Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software First Quarter 2020 Earnings Call. [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, a telephone replay and 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 first quarter 2020 earnings release, which was distributed today at approximately 4 p.m. Central Time, 5 p.m. 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, everyone, and welcome to our Q1 2020 earnings call. I'm joined today by Tim Mattox, our President and Chief Operating Officer; and Mike Hill, our CFO. I'd like to welcome Rod Favaron to this call for the first time. Rod has been on the ground with us now for a little over a month as President and Chief Commercial Officer. And he joins us to lead a major initiative to create real distribution for Upland's cloud solutions with a new go-to-market leadership team. Rod is a software industry veteran who knows our business well, having served on our Board for over five years. And he's brought with him a team of experienced executives in marketing, customer success and global account sales leadership. This team has a proven and successful track record from high-growth enterprise software organizations, having successfully built and exited both Spredfast [indiscernible]. Rod's leadership is already apparent as he and his team have been revitalizing our go-to-market efforts. Rod will join us for the Q&A, so please feel free to address questions directly to him. On today's call, I'll summarize our results and recent highlights and our response to the COVID-19 pandemic. Following that, Mike Hill will provide a more detailed look at the Q1 numbers and share with you our guidance for the second quarter and for the full-year 2020, and then, finally, Tim Mattox will cover sales and operations highlights from the first quarter of 2020, after which, we'll open the call up for Q&A. But before we get started, Mike Hill will 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. [Indiscernible] on information currently available to Upland management as of today, May 7, 2020. 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 first quarter 2020 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. So I'm going to start today with a review of our strong Q1 performance, then discuss why Upland is well-positioned to navigate the headwinds of COVID-19. I'll talk about actions we've taken in response to the pandemic. And then, finally, I'll discuss some of the assumptions behind our outlook for 2020. But before I begin, on behalf of Upland, I want to extend our thanks to those risking their lives every day on the front lines, doctors, nurses and first responders and the people keeping critical services running. I also want to say how proud we are of the Upland workforce, who've spent countless hours working alongside our customers to make sure that they are well equipped for the road ahead. Onto our Q1 results. We had a strong Q1 that beat guidance and consensus for both revenue and adjusted EBITDA, 40% total revenue growth, 38% adjusted EBITDA growth, so a very strong Q1. This is our 23rd consecutive quarter of meeting or beating guidance, and again, that is every quarter since going public. What's notable among other things is that our organic growth in recurring revenues, reported recurring revenues came in at a strong 6%. So, 6% organic growth at the upper end of our target range of mid-single digits. Impressive, particularly given the COVID-19 headwinds at the end of the quarter. On the M&A front in Q1, we acquired Localytics, a great strategic acquisition that added mobile app and push messaging to our CXM Cloud. We are going to be pausing M&A for the short term, probably a couple of quarters while nurturing our pipeline. There is no need to rush in for M&A right now until things clear a bit. We're going to use this time to complete all ongoing integrations. You'll recall that we…

Thank you, Jack. I'd like to start by reiterating what Jack said. While there is no doubt that COVID-19 has impacted each of us, our business remained strong and I'm extremely proud of our employees who have been steadfast in their support of our customers. With that, I'll cover the financial results for the first quarter and our outlook for the second quarter and full year 2020. Total revenue for the first quarter was $68 million, representing growth of 40%. Recurring revenue from subscription and support grew 42% year-over-year to $63.9 million. Professional services revenue was $3.8 million for the quarter, a 32% year-over-year increase. Perpetual license revenue was $0.4 million for the first quarter for a decrease of 45% year-over-year. Moving down the P&L to gross margins. Overall gross margin was 67% during the first quarter and our product gross margin remained strong at 69%, 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 40%. Turning to our operating expenses. Research and development expense, net of refundable Canadian tax credits, was $9.1 million for the quarter, representing 13% of total revenue. Sales and marketing expense was $10.9 million, representing 16% of total revenue for the first quarter. General and administrative expense was $16.7 million for the first quarter, representing 25% of total revenue. However, excluding non-cash stock compensation expense, G&A expense was $8.8 million or 13% of total revenue in the quarter. Acquisition related expenses were $15.2 million in the first quarter, resulting from our recent significant acquisition activity with an acquisition closing during the quarter and two acquisitions closing in the fourth quarter of 2019. In fact, during the period from April 2019 through March 2020, we closed six acquisitions,…

Thanks, Mike, and good afternoon, everyone. Before I get into the sales, product and operating results, I wanted to highlight a couple of ways in which our customers have been able to lean on our mission-critical resources and expertise. Jack alluded to this in his section, and it's, I want to provide some color as to how these customers are using our capabilities to navigate these unprecedented times. Over the course of the past several weeks, mobile messaging has become a vital resource for companies looking to reach their consumers quickly and efficiently. So far in 2020, we've seen nearly 40% increase over the prior year in the amount of monthly text and rich format MMS text messages being sent by our customers. This has reached now hundreds of millions of messages sent per month for Upland. One customer, in particular, a U.S. home goods retailer, that was significantly impacted by COVID, drove significant incremental sales between March 15 and April 15, so right in the heart of the pandemic. And these results were directly attributed to our SMS capabilities and a campaign aimed to drive online sales amid the brick-and-mortar closings that had occurred. Customer has been very enthusiastic about the success of this campaign and they see themselves continuing to run increased SMS campaigns for the long term, as do other retailers we're working with as they look to drive online success. Another example, while some companies are looking for ways to scale their mobile infrastructure through messaging, many were also in desperate need of accelerating their now-remote-support teams and their ability to respond to the unparalleled volume of consumer inquiries. One of our customers, a major North American human resource software company, had to rapidly transition over 16,000 employees from their call centers to remote work in…

Thanks, Tim. Look, I realize we just had a long call in which we've given you a lot of information to digest. But if you take nothing else from this, I would note, only a 4% revision of revenue from COVID-19, 20% revenue growth this year, 2020, with no further M&A for the remainder of the year. So, even if we do no other acquisitions, we'll still have revenue growth of 20%. $90 million in adjusted EBITDA, that's the midpoint of guidance for this year, with positive free cash flow for the rest of the year and $150 million in cash and liquidity. And finally, we're able to deliver all that and continue our go-to-market investment initiatives, so we come out of this stronger than we went in. And now, we're ready to open up the call for Q&A.

[Operator Instructions] Your first question comes from Brad Zelnick with Credit Suisse. Please go ahead.

Great. Thank you very much and thanks for all the detail. Really, really appreciate it, and it's great to see the discipline with which you're approaching -- these are certainly unprecedented times. Jack, maybe if I could start just by asking you, you've talked about how well-positioned Upland is to handle the current crisis, the low exposure to highly-impacted industries, enabling your customers to work from home, the benefits of UplandOne. But at the same time, I know you're only lowering at the midpoint the full-year guide by only 4%. But clearly, you're seeing something as we look forward, as is the rest of the world, that's causing you to take a more conservative view. Can you maybe just parse through what it is that you are seeing in terms of maybe renewal business and new business and different areas of the portfolio that you don't think will convert as well or maybe from a pipeline perspective that perhaps aren't building as well that's causing you to revise the outlook other than just the macro?

Yes. I mean, I think it's really about the bookings environment for Q2 and Q3. And we just wanted to take a conservative position on guidance and assume that we're going to see a more challenged bookings environment in Q2 and Q3, and we saw a little bit of that at the end of Q1. On the renewal side, we continue to see very solid renewals. And so, it's really more -- although we try to always have conservatism in the numbers, it's really more a bookings statement for the next couple of quarters.

Okay. That's fair. Maybe if I could, since you offered it up, I'd love to welcome Rod. You've certainly -- you've chosen a hell of a time to jump in the game in an operating role. But -- you're obviously familiar with the company having been on the Board, but now over the last few months or so on the ground level, what is it that you've learned that -- now that you've taken a more active role that you think gives you the optimism that you can really have an impact and make some change here in a positive way?

Yes, that's a great question. I think a couple of things I've learned when you get on the ground. We have a lot of really strong products, stronger than I even really could see from the Board perspective. And the customer base is solid. I mean, as Jack alluded to, we're seeing a lot of positive signs and renewals, which I think is a good indicator for. These are products that people are going to use and they're sticky. And I think that's encouraging. And the team is really solid. And I think what -- so what kind of gives me early optimism, we've had a -- we've changed some rhythms already. We've sort of updated how we forecast and we've kind of made some modifications to how we're managing renewals, just things to -- there are tweaks that make us -- give us more visibility into the business. And we've sort of begun the process of shifting -- sort of evolving our selling focus in the business to be more cross-product and account-focused as opposed to really product depth and sales. And so, again, it's early days. But I'm optimistic because we've got a really solid base to work with and I think we can build on that and get a lot better at cross-selling into our customer base.

Great. Well, welcome. Thanks for taking the question. I'm going to jump back in the queue guys. Thank you.

Your next question comes from Bhavan Suri with William Blair. Please go ahead.

Hey guys, glad everyone is safe and healthy. And thank you for some of the color, especially on cash flow. I think that's very, very helpful. I guess, maybe I wanted to touch first on sort of what you're seeing from the sales front. It'd be great to sort of understand what the sales team is seeing in terms of pushback on renewal, if there is any. It feels like there isn't, but I'd love to understand that. Are people sort of saying contract terms, length of contracts, things like that? And then, I'd like to couple that with a cross-sell question and I know I'm always a cross-sell question guy. But anyway, I love to hear what the customers -- what were you hearing like that, sort of, Jack, gives you pause on the billings front, maybe on the existing base more so than new because, the new I get, but existing base, I'd love to understand what you're hearing.

Sure. Let me take one piece of that on terms and then I will toss it to Rod to address that in more detail. We really haven't seen anything material in terms of changing selling terms or pushing out payables or anything on receivables, I should say. So, nothing material there. And in terms of the rest of your question, I'll let Rod go ahead and answer that.

Yes. I think, you alluded to this. When Jack talked about bookings in Q2 and Q3 and our forecast really being a little more conservative, that's a little more driven from the new customer bookings than it is in the expansion in cross-sell. As you can imagine, a new customer requires a little bit more work. You've got to get an entire new contract in place and that generally takes more cycle time. And so generally, we're not seeing pipeline fall off. Actually, the top of the pipe is pretty strong. We've had -- we switched to more virtual events, we've had a number of record attendance webinars. Perhaps, people just have more time now because they're working from home and there's not a lot of distraction. So, we've sort of seen some encouraging engagement top of funnel. Obviously, that hasn't played through. But I think we are definitely anticipating net new customer deals taking just a little bit longer, and so that's driven most of the conservatism. Again, our expansion business is still feeling pretty good. And you mentioned cross-sell. We are good at cross-sell locally. Sort of, if I've got a rep who understands three of the products, he's really good at cross-selling two of them into the other base. What we're working on is being better really as an entire company, as a muscle, as a business to build. And so, we've got multiple quarters worth of work left to do on that. But I'm frankly very encouraged by the amount of white space we see and it's a matter of, sort of, shifting the culture and executing to that.

Yes. I know, that's helpful. I mean the white space has kind of always been there, as you think about that cross-sell. Tim and I and Jack, and I'm sure you've heard it when you were on the Board, I have sort of discussed this ad nauseam about this cross-sell. I guess maybe a little color sort of, if you can, sort of the detail on -- or maybe an updated progress on, sort of, how that move to product suites away from point solutions is going and how many Upland products does each customer have on average? Something along those lines would be helpful and sort of what you think is a reasonable target over five years, sort of a longer time frame?

Bhavan, let me jump in and take just a part of that.

Okay.

And then, I'll flip it to Rod. I think one of the things that is exciting that Rod is implementing here. And I think it's worth noting, as I did earlier, that he came in with a team, right, with our new CMO, our new Head of Customer Success and PSO, our new Head of Global Account Sales. So, we really were able to bring in the successful team from Spredfast. And then, there's a whole cohort of global account managers that we will be adding. That, frankly, when they heard Rod and the team had signed up, all of a sudden, we had a bunch of them at the door wanting to be part of that kind of a go-to-market organization. So, from the perspective of Tim and Jack and Mike, that's been very exciting. One of the things that Rod articulated early when we were really still on the discussion phase here was evolving from what had been a product-centric sales organization to an account-based sales organization. And I think given the structure that we have had up until this point, which was this product-centric focus, I don't know that we were ever going to be able to successfully execute on the broader cross-sell vision. I think Rod has put now with his new vision on how we go to market, the vision in place for getting that done. And of course, now he's going back doing the work of actually making it happen. So, with that, let me flip it to Rod.

Yes. So, I'll just build on that. I think step 1 is getting our salespeople comfortable, selling more than one product. And we're doing that in the cloud structure. So, all of our salespeople sit in one of our cloud businesses today. So, they're evolving from one product to somewhere between four and six that we're taking -- we're educating them on and teaching them how to sell. And we've shifted a lot of territories from, hey, you're the guys selling this one product to here are your 50 accounts, and here's your six products. And that's -- it's a non-trivial change. That sounds pretty simple, but teaching a salesperson how to sell a bag of tools as opposed to sell one is a slightly different model. At the same time, we're putting in this global account team this summer. These guys are not quite on the ground yet, but we'll have them on the ground so they can affect and get going in the second half. But in this case, we're going to be -- those guys are going to be representing the entire company. We're carving off a lot of our larger customers and they will be quarterbacking those major accounts and representing every product that we have, which is another new motion. You guys may know, we bought a company called Altify last year. The great thing about that company is targeted-account selling came with it. And targeted-account selling is a methodology that, I'll date myself, I learned back in the '90s when I carried a bag early in my career as a sales guy. And I think it's one of the best sales methodologies on the planet. So, we are reengineering the entire sales model. I'm making that sound more fancy than it is, but we're teaching all of our reps targeted-account selling and implementing Altify. So, we have much more visibility drinking our own champagne, so to speak, and much more visibility across our sales cycles and our ability to forecast. So, we're doing that this summer too. So, we'll sort of come out of the summer with more people capable of selling -- that are more account-focused and they have in their bag somewhere between four, six, and the global account people 20-plus products and a new methodology on top of it, that will be sort of driving sales effectiveness with. So, those are some of the pieces we're putting in place that I think gives me -- yes, you're right, I've been on the Board watching the cross-sell motion for a while. I think this is a complete sea change in how we're doing it.

Yes. That's really helpful. One quick one if I might squeeze it in. That was great color, guys. For Mr. Hill there. Mike, any update to churn metrics at all? Did you see anything even in -- that you might be able to comment on even in the month of April at all? Any impact at all? I know renewals have been great, but just anything on the churn front that we should be aware of?

No, Bhavan. As Jack mentioned, everything has been pretty strong on the renewals. So no update, no changes there.

Awesome. Thank you, guys. Appreciate the color. And glad, you're all doing well.

Thanks, Bhavan.

Your next question comes from Brent Thill with Jefferies. Please go ahead.

Hi, this is Luv Suda [ph] on for Brent Thill. Congrats on those impressive numbers, despite the current environment that we're in. Maybe one -- the first question that I had was on one number that caught my eye was the existing major account expansions which was quite impressive this quarter. Sort of wanted to ask like which of those four cloud categories are benefiting from that work-from-home trend that we are seeing? And is there the cross-sell motion, is that already taking hold? Or that is more of a long-term tailwind, if you will?

Sure. Tim, do you want to take that one?

Sure, Jack. Yes, in terms of the clouds that benefit this remote workforce the most, as I mentioned, we do have a strong mobile messaging platform and that is really helping companies drive to more of a really digital online environment from bricks and mortar. So, not so much the work remote aspect there, but more of the reality that a physical presence isn't as valuable as a digital presence in this environment. And so, all the activities around driving that are super important. And so, our CXM Cloud has been really strong in that regard, Localytics will further reinforce that with some of the mobile app capabilities, in-app, push and the like. If you look at the remote workforce or really we're also seeing probably more of a hybrid environment coming out of this though. Even if a subset of the workforce goes back into a physical office, there's going to be probably more people working remotely than before the pandemic. And we've got a really strong contact center productivity cloud offering that is connecting that physical infrastructure, the phone system, computer telephony integration. Connecting that to cloud systems of record within a customer and adding really strong capabilities for those contact center individuals, they're then able to work remotely and tap into that capability. So, that's super important as is then coupling getting the right content for those now remote contact center folks. Our knowledge management product that's within that contact center productivity suite, we're seeing a lot of interest in that. That was working fine for folks that were operating with a physical call center. But with the remote, it's even more valuable. So, that's super important. And then, to put a bow on it, you want to get feedback from the customers and from the contact center rep themselves on how that interaction went. We have a feedback tool that does that in a very simple way to analyzing the free-form text with natural language processing to get that input and then improve on the operations and the content that was delivered. So, those are some things that are helping us work effectively in a remote environment. And obviously, our offerings are cloud-based to begin with. So, a customer can still leverage them, whether they're using a browser in a physical office or a browser sitting at home doing their work there. So, just our overall offerings are helpful in that regard.

Got it. Maybe one more, if I could squeeze it in. Just around -- given the impact that you're seeing this year, obviously not a lot of impact, but what impact does that have on the long-term goal of getting to $500 million in revenue? Would that be pushed back or do you see like growth rebounding in like 2021 and beyond?

I think I see it rebounding in 2021 and beyond. Having lived through these types of situations twice before, both, in managing as Chairman and CEO, Perficient, through the Dotcom bubble bursting and then the 2008 Great Recession. You often see a great growth environment in the wake of these crises, particularly inorganic growth, right on the M&A side. So, as I alluded to in my comments at the front, we are fortifying our systems, fully integrating the acquisitions that we've done to date. And then, we're going to be ready to hit the ground running on M&A. And I think 2021 is going to be a busy and exciting year on acquisitions. We are continuing to nurture our pipeline. We don't see a reason to rush out and catch falling knives right now. But as we get toward the end of the year, and in the next year, I think we're going to see a ton of opportunity.

Awesome. Thank you. I'll pass it on.

Thank you.

Your next question comes from Scott Berg with Needham. Please go ahead.

Hey, this is Alex Narum on for Scott. I was just hoping you could give us a little bit additional color on any markets for customers that you've seen a strong uptick in the last month? And then, also any kind of customer segments that you've seen more -- that they've switched their purchasing habits in the last month, besides those like leisure and retail, like the ones that you'd normally think about?

Sure. I think, again, if you look at our product offerings around CXM, around digital sales engagement, workflow and professional service automation and IT management, really, we've seen very solid renewals and expansion opportunities across all of those because we're helping our customers in this kind of an environment. Tim alluded earlier to a major North American human resource software company that had to move -- rapidly transition their contact centers to remote work environment in a matter of days, 16,000 employees, and being able to do that from a technical standpoint, from a licensing standpoint to support them. So, it's been those kind of engagements, or in retail. And it's interesting on the usage side, right? You've seen a pickup in certain areas, obviously a decline in some others, but ones that we think could bounce back nicely. So, we've seen some increase in messaging volumes, right, helping retailers, transition customers from brick-and-mortar to online or you've got a delivery or other items that are directly related to work from home. But for example, elective medical procedures, right, an area where we do a lot of usage-based business. It's been very quiet as that industry has been sort of in a lockdown during the tenancy of COVID. Well, those lockdowns are starting to come off now, right? So, I am thinking you're going to see a burst of activity there on the usage side. On the Professional Services side, again, remote global workforces. Our products are set up to enable that sort of in their native mode. So, we've seen some good activity there as well. And so, it's really been in each one of those areas. I think if you look more broadly, as some analysts have noted, the system shock of COVID-19 is going to drive these analysts' belief, longer-term uptick in demand for some of the key areas where Upland plays, including customer experience management and the messaging component of that, including digital sales engagement and workflows. So, I like where we're positioned relative to those trends.

Okay, great. And then, as the company has moved its debt to a term facility last year, given the changing rate environment, is there an opportunity to reduce that interest rate on this facility?

Not really. We locked that rate at a little over 5%. And so -- but the -- it's a reasonable rate on it. I think the real point on the facility is that we were smart. We got both the equity offering done, we got that great new credit facility, pushed out maturity until 2026, just 1% a year principal amortization and no financial covenants on any of the current borrowings. So, we are really in great shape from a capital standpoint, $150 million of cash and liquidity. And as Mike mentioned earlier, comfortably cash flow positive for the rest of the year. So, this puts us in a position not only to survive, but to thrive coming out.

Okay, great. Thank you.

[Operator Instructions] There are currently no further telephonic questions at this time.

Great. Okay. Well, again, thank you all for your time today and we will see you on our next earnings call. So, thank you, and good afternoon.

This concludes today's conference call. Thank you for joining. You may now disconnect.