Thank you for standing by, and welcome to the Upland Software Second Quarter 2020 Earnings Call. [Operator Instructions] The conference call will be recorded simultaneously, and simultaneously webcast on Upland’s Investor Relations website at investor.uplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the second quarter 2020 earnings release, which was distributed today at 4:00 p.m. Eastern Time. If you have not received the release, it is available on Upland’s website. I would now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

Thank you, and welcome to our Q2 2020 earnings call. I’m joined by Tim Mattox, our President and Chief Operating Officer; Rod Favaron, our President and Chief Commercial Officer; and Mike Hill, our CFO. I’m going to summarize today our results as well as some recent sales, product and operations highlights. Following that, Mike will provide some insights on the Q2 numbers as well as our guidance. After that, we will open the call up for Q&A. But before we get started, Mike will read the safe harbor statement.

Thank you, Jack. During today’s call, we will include statements that are considered forward-looking within the meanings of the securities laws. These statements are subject to risks, assumptions and uncertainties that could cause our actual results to differ materially. As detailed discussion of these risks and uncertainties are contained in our annual report on Form 10-K, as periodically updated 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. We do not intend or undertake any duty to release publicly any updates or revisions to any forward-looking statements. On this call, Upland will refer to non-GAAP financial measures that, when 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 second quarter 2020 results, which is available on our Investor Relations section of our website. Please note that we’re unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, I’ll turn the call over to Jack.

Thanks, Mike. This was an incredible quarter. Massive beat on revenue. We had super strong organic growth. So let’s review that. First, some background on what we’re seeing in the market. Digital transformation remains top of mind and mission-critical to organizations at a time when they have to adapt to remote work and digital engagement even more quickly. And in this current environment, now more than ever we’re seeing companies place a greater emphasis on time to value, and this is where Upland is very well positioned. The plug-and-play pragmatic nature of our products means we can quickly plug into customer organizations and deliver rapid time to value. Our cloud tools address digital transformation pain points without the need to replatform or to build from scratch. And we add to our portfolio of apps with every acquisition we make. Our customer base is well diversified across industry verticals. As a reminder, our total revenue exposure to travel and hospitality, leisure, retail and energy is only 7%. In addition to that, we’ve got a sticky enterprise customer base with approximately 1,600 major accounts averaging $160,000 per year in recurring revenue and driving 90% of our total recurring revenue. And of course, we are now building real enterprise sales distribution to further serve and expand these great customer accounts. What has become abundantly clear through the COVID period is the incredible resilience of our business model. We have seen accelerating usage during COVID. Upland CXM has been a perfect example of that, where we have seen strong upticks in CXM and mobile messaging usage in particular. When you consider the breadth and diversification across the Upland portfolio, we provide high-value solutions for digital transformation across the front and back office and across a diverse range of industries and across both B2B and…

Thank you, Jack. I’ll cover the financial highlights for the second quarter and our outlook for the third quarter and full year 2020. First, for the income statement. Total revenue for the second quarter was $71.3 million, representing growth of 35%. Recurring revenue from subscription and support grew 39% year-over-year to $67.7 million. Professional services revenue was $3.1 million for the quarter, a 16% year-over-year decline, which was expected due to the COVID-19 travel impacts. Overall, gross margin was 67% during the second quarter, and our product gross margin remained strong at 69% or actually 73% when adding back depreciation of equipment, amortization of acquired intangible assets, which we refer to as cash gross margins. Operating expenses, excluding acquisition-related expenses, depreciation, amortization and stock-based comp, were $29.4 million for the second quarter or 41% of total revenue, all as expected. Also as expected, acquisition-related expenses were approximately $5.8 million for the second quarter. And as I mentioned on last quarter’s call, these costs will continue to dramatically decline without further acquisitions to around $3 million in Q3 and to around $1 million in Q4. A final note on the income statement. I would just like to remind you that when comparing the second quarter GAAP net loss and non-GAAP net income to Q2 of 2019, we had a significant onetime noncash tax benefit included in last year’s results. Now for adjusted EBITDA and cash flow. Our second quarter 2020 adjusted EBITDA was $23.7 million or 33% of total revenue, up 24% compared to $19.1 million or 36% of total revenue in the second quarter of 2019. For the second quarter of 2020, operating cash flow was $0.8 million. Normalizing Q2 operating cash flow for temporary acquisition costs and timing differences in the working capital accounts, adjusted operating cash flow would…

Thank you, Mike. And again, phenomenal quarter, strong beat and raise. And again, we see early signs of strong organic growth continuing in the back half of the year, but we’re going to, as always, maintain a conservative outlook and particularly here in the environment with COVID-19. So again, we are now ready to open the call up for Q&A. And please feel free to direct your questions to Mike or to Tim Mattox, Rod Favaron or me.

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

Hey, congrats, solid results, both top line, obviously, and free cash flow here, which I think is fantastic. Jack, maybe at a high level first, and then I’ve got one for Rod, too. Just when you were at Perficient and you went through several cycles there during the downturn, some of those were economics, some was real estate, et cetera. But just talk a little bit about how that compares to what we’re seeing now and Perficient was a totally different business. It was people-based, and this is software-based, so some difference is there. But just sort of what you’re seeing the similarities and sort of the experience you bring to the table sort of to manage for this process. I think that would be helpful for people trying to understand sort of how is the company navigating this time.

Sure. Really, during the 10 years that we grew Perficient than I was running it, we took that business from eight people and $500,000 in revenue to 1,200 people and $250 million in revenue. And we really had two significant crises that we had to manage through. The first was the dot-com bubble bursting and the second, of course, was the Great Recession in 2008 and 2009. And in both cases, you really saw, I think, in contrast to what we’re seeing here with COVID, in those two earlier cases, you really saw a lapse of demand. And so you’re looking at significant hits to revenue. And I think the difference between the winners and the losers there was that those folks that confronted reality and adjusted their cost structure and who had, in fact, gone in with the right kind of solid customer base actually came out stronger than they went in, and that was the case for Perficient. In fact, the dot-com bubble bursting, probably, the best thing that ever happened to that business, taking out five or six out of 10 of our competitors and then setting us up for 10 years of great growth. But 10 years, which I guess has turned into 20 years, the business is still doing incredibly well, which we’re very proud of. By contrast, with Upland and COVID, we’re not seeing a collapse in demand. If anything, we’re seeing organic growth here at 8%, above our 3% to 7% target range. And as our strong guidance indicates, we are seeing that organic growth continuing at strong levels into the second half of the year. And I think that’s a testament to the solid customer base we’ve built, 10,000 customer accounts, 1,600 major accounts averaging $160,000 a year of recurring revenue, and as a group comprising 90%-plus of our recurring revenue. A set of products that deliver a real fix for pain points in digital transformation. And digital transformation has become more important for our clients, for enterprises, large and small that’s been accelerated by COVID. And we’ve got a very attractive set of products that enable enterprises to address digital transformation pain points with rapid time to value. Our products don’t require re-platforming. They don’t require building from scratch. They can be plug and play and up to speed and delivering value quickly. And so that’s resulted in some significant uptick in usage, particularly in CXM with – across a number of verticals. So for us, it’s about nurturing that customer base, continuing to invest in those products and also continuing our go-to-market investments with Rod Favaron, and the team that he’s brought in. We’ve made a significant investment in go to market and that’s a six to eight quarter journey.

Wait, wait, wait. Don’t get too ahead, Jack. I’ve got questions about that.

No. I’m going to let Rod take a direct whack at those. But I would say that’s what we’re doing here, making those – continuing with those investments for the future.

So let’s turn to Rod. So one, obviously, a big beat in the quarter, so it’s up to you whether you want to give Rod and the new team credit for that, which is why I was chuckling. But more importantly, you were just touching on time frame. So as you talk about time frame, with the additional resources to build out sales in 2020, how is the effort progressing? And then what is the time line and milestones that we should be looking at over the next 12, 18, 24 months, look like? And maybe that’s for both of you, but I love to understand sort of what was the beat driven by sort of this new sales team, was there an immediate impact there and sort of what are the milestones we should be looking at over the next 24 months?

Let me say this, and then I’d love for Rod to kind of really talk more about this. The leadership that Rod and his team have brought in on the go-to-market side were felt immediately. And the hygiene and cadence, the customer outreach, the differences around philosophy on customer success and go-to-market generally has been marked and extremely positive. And so we’re thrilled to have Rod and the team onboard. Beyond that, let me let Rod answer your question.

Yes. So my start coincided almost exactly with COVID. So I’m not sure what that means, but what I will say is that we were very busy in the second quarter and made a lot of impacts to the business already. I think what I’ve said last time, I’ll say it again, my initial focus was on the customer base, which was perfect timing, really when you walked into this market. We needed to make sure we were focused on our customers and that played out in Q2. We expected to have a stronger bookings quarter than Q1, which we did. And we expected to have a better expansion bookings performance because we focused on our base very hard during the quarter, and that played out, too. So, I think there was some positive impact there where we’ve put in the renewals motion in with Virginia Miracle, who runs that part of the business. And then we did a really, in our customer base marketing program, during the second quarter, we call it, Connected Through Change, which really engaged our customers. I was shocked at the attendance of the webinars we put out there for our customers to really talk about how they pivot and deal with the challenges they were seeing. I think that, frankly, we exited the second quarter closely to our customers than we walked into the quarter with and we’re really kind of proud of that program. It really helped a lot. But to give some more specifics, we spent the quarter enabling our cloud sellers to shift from products to cloud, so one product to three or four products. Made a lot of progress on cross-selling and building cross-sell pipeline and a lot of training. We rolled out a new selling methodology called target account…

Got you. Got you. And the color was really helpful in terms of sales processes, what you’ve done even at the granular level, and I think that’s fantastic, and thank you for the transparency. I guess when we look at milestones, and the glib answer is you’ll see it in revenue. But is there a set of milestones that we could think about seeing? Is it dollar retentions going up? Is it organic growth rates? And again, not asking for time, like is it over the next 24 months, but how do you think you’d measure the success of what you’ve put in place?

Yes. You certainly mentioned two of the metrics, but, obviously, we would look at organic growth and we would look at the retention part of the business. And internally, we look at cross-sell. I mentioned a lot we had a – expansion sales are very important to us as a business, obviously, selling more into our base. And we’re better at selling more of the same products, and we are working very hard at cross-selling additional products. And internally, we’re measuring that success. And I feel like that we’re going to see a lot of that over the next couple of quarters as far as really driving the cross-sell part of our business.

Okay. Thank you, guys.

Okay. Operator, do we have next question?

Your next question comes from the line of Brad Zelnick from Crédit Suisse. Your line is open.

This is Marco on the line for Brad. Congrats for the quarter. So just wanted to ask about the strong top line guidance, obviously. I wanted to ask some of the assumptions you guys are making around new bookings, retention rates, renewal timing, specifically versus the first quarter. And maybe as a follow-up, how that looks between your different clouds as well.

Sure. The strong raised guidance for the second half of the year reflects the performance of the business that we saw in Q1. We saw strength, particularly in our CXM cloud suite, and some of that was driven by election year political campaigns and public advocacy, and both of those drove usage. But we also saw a strength in media and in retail. So we’re looking at the trends we’re seeing in the business around usage, around renewal rates and bookings, and that’s what’s really informing the guidance for the second half of the year. This raised guidance, which, again, reflects the signs that we’re seeing of the strength continuing in the back half of the year. At the same time, as we pointed out in the earnings release, we’re trying to maintain a conservative stance and we’re mindful of potential impacts from this COVID-19 environment, and so that informs our maintaining a degree of conservatism around that guidance.

Okay. Got it. Jack, just as a follow-up. So I understand you guys have paused the M&A strategy but curious about what are you seeing real-time and even throughout the quarter in terms of that M&A pipeline. I’m just curious if you saw any heightened seller interest for assets that you would have considered pre-COVID? And again, going forward, how do you see that pipeline evolving as you start to resume M&A?

The pipeline is strong. We are seeing seller interest. We’ve got a lot of call activity, both our M&A team, and I’m involved with personally in terms of nurturing the pipeline that we had in place pre-COVID. So I think 2021 is going to be a banner year for acquisitions for us. Lord knows who got the pipeline to execute against. And who knows, we might start up in Q4 here. So I’m feeling very good about it. I think pausing was the right thing to do based on the environment as we found it in earlier part of the year. But as things continue to improve, we are ready to get back on the horse with respect to M&A. And again, we’ve used this time productively to batten down the hatches, to solidify systems, to complete integrations of the last few acquisitions we made. So, we are really ready to get moving again, on M&A.

Okay, great. Thanks. Thanks for taking my questions and congrats on the quarter.

Your next question comes from the line of DJ Hynes from Canaccord. Your line is open.

Hey. thanks, guys. Congrats, nice set of numbers here. Maybe one for Rod. As we think about the account-based sales model and the breadth of kind of your four main product functions, how many different buyers do you typically target inside of a major account? And I guess the question is like is their volume getting those folks talking to each other? How do you do that? Just trying to think about kind of the dynamics that could push that cross-sell motion forward.

Yes, that’s a great question. We’ve spent a lot of time in the second quarter, I would say, defining our buying groups a little bit tighter. Obviously, we have a set of value propositions for the CIO. We have a set for call center and service leadership. We have a set for sales and marketing and for sort of digital engagement. There’s sort of four, five buying centers within – depending on the vertical in the industry, there’s four or five buying centers within an enterprise that we’re focused on. And we’ve done, I think, a really nice job of – as we train our cloud sellers to sell wider value propositions and as we bring our global account team in, which we got started as the quarter ended, our first sort of global account owners with the – both the marketing motion and the selling motion is to those buying groups for our solution sets. And so there are four or five that we’re very focused on with different sets of products.

Yes. Okay. And maybe a follow-up for Mike. On the CXM, the mobile usage side, obviously, it sounds like lots of strength in the quarter. Just remind me the business model there. Is that a utility based or a metered model? And how significant is kind of exposure to that revenue framework these days?

Yes, DJ. So that is a usage model, but we typically structure annual contracts based on a set amount of usage. So think about the old cell phone plans where you had a certain amount of usage that you subscribe to for a year. And then if you go over that, then you pay it extra minutes, in this case, extra mobile messaging, for example. So it’s typically annual contracts, but we do have some on-demand and overage.

Got it. Got it. So, it’s high visibility on demand. Makes sense. Okay. Thanks for all the color, guys. Congrats.

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

Hey, guys. This is Josh on for Scott. Congrats on the strong quarter. Building on the acquisition theme questions. So you’ve talked about the likelihood of not making an acquisition here in 2020 except possibility in Q4 restarting. But when 2021 comes around here, does that look more like 2018 with kind of once a quarter pace of acquisitions? Or is it something potentially more active like what we saw in 2019?

It’s with M&A, you can never predict precisely. And it’s always, I think, better to maintain a more conservative stance because we don’t ever want to feel like a pressure to get an acquisition done. You want to have a measured approach to it. But those sort of caveats said, I would say, we’d want to see at least what we did in 2018, and the goal would be to get it closer to 2019.

Okay. Great. And then kind of switching gears a little bit. Have you seen any changes in gross retention during the pandemic? And then, is there – have you seen any meaningful differences between the product suites in terms of retention?

The retention that we’re seeing is consistent with what we expected coming into this. The business is incredibly resilient. And any impacts that we’ve seen from COVID relating to retention or to new logo bookings have been more than made up for by the strength we’ve seen in our CXM vertical and some of the usage there. So that’s what we’re seeing.

Okay. Great. And then I’ll just throw one more out there. How – what were the sales trends like exiting June versus April? And then were these trends in line with your expectations? Or were things – it sounds like things were stronger than what you expected, but I’m just trying to – curious on your take at this point here.

Well, sure. I mean if you – they were considerably stronger than we had guided to. I mean if you look at the guide that we put out for Q2, once we were inside of this COVID environment, it was significantly lower in terms of bookings and net ARR than where we came out. So clearly, the business is resilient. The results came in on the revenue and EBITDA lines above expectations, blew through our guidance revenue. I think, frankly, blew through our pre-COVID implied revenue guidance for the second quarter. And as Rod indicated, we’re seeing a lot of activity on the sales side. So thus, our raised guidance for the second half of the year and our statement that we see the strength continuing. And again, putting up 8% organic growth for this business really beyond the top end of our 3% to 7% range is significant.

Great. Thanks, guys.

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

Great, thanks. My congrats as well. Several from me guys. The organic, real nice uptick there. To be clear, ex the usage benefits, particularly on the messaging side, would that have been enough to move the needle? Or would it still have been 8%?

Well, I mean, I think we don’t really break out the organic growth rate by segment. But I think the totality of the business, which is the way the things should be viewed, incredibly resilient. And we saw great trends in terms of the activities we’ve got going on with go-to-market and customer outreach. As Rod indicated, we came out of this quarter having strengthened a number of significant customer relationships and this continuity through change, webinar series. So we look at it overall. I feel great about the business and, again, that’s why the strong outlook for the second half of the year.

On the cost structure, the cost structure that’s implied in Q3, Q4, anything unusual in there? And I know you’re not obviously giving 2021 guidance, but outside of acquisitions, anything obvious to think about? I mean, obviously, you’ve bulked up and Rod’s really got some momentum and got some more resources. But anything to think about in that Q3, Q4 implied cost structure? Is that a good baseline going forward?

I think it is – I mean, look, we are – go ahead, Mike.

Yes, I was just going to say that, yes, I think it is a good baseline. Go ahead, Jack.

No, I was just going to say, the investment that we’re making, which is built into these numbers, this new senior go-to-market team, our first group of global account managers, these global account execs, who’ve really deepened and build relationships with our top customer accounts. So we’re going to be adding a significant additional number of those global account executives, but we’ve got that budgeted in. And then we just think this is the right time to do that. And that is a six to eight quarter journey, right? But we’ve got a set of products here that are powerful that directly address digital transformation pain points, that are plug-and-play, that have quick time to value that don’t require replatforming or rebuilding from scratch and that deserves, frankly, a better kind of go-to-market motion. And so we are making that investment. And I think the opportunity that we have just within our own accounts, we’ve got 10,000 customers, 1,600 major accounts. We add additional major logos with every acquisition we do. And today, we still got one point x, right, products in there, 1.2, 1.5, pick your number. Less than two products per major account, and so the opportunity here to grow that through cross-sell is significant. We’ve never really had the team or the motions in place to get that done historically. But I think with Rod and his team onboard now, that’s really a game changer. And again, we want to be measured and conservative, and we know this is six to eight quarter journey, but the potential is there. We see runway there.

Yes. For sure. Two last brief ones, then. Cash flow from operations in the quarter, did it meet your internal expectations coming into the quarter? And then just lastly, on the pipeline, maybe just a little more compare and contrast. I’m kind of curious what stands out as being different in terms of the composition of the pipeline now versus the pre-COVID makeup?

Jeff, it’s Mike. I’ll take the cash flow. Yes, that – the operating cash flow, free cash flow number for Q2 came in really exactly as we had expected. You saw the acquisition-related costs drop significantly from Q1 to Q2. And as we talked about, those will continue to decline in the coming quarters, and we should see a continued increase in operating and free cash flow as we move sequentially, quarterly forward here until we get to some new acquisitions.

This is Rod. I’ll take the pipeline question. I think relative to pre-COVID, it’s pretty strong. We had, surprisingly, the digital engagement in the second quarter where nobody could go to events anymore. So we did a lot of virtual events and we shifted to webinars and we shifted to other ways of building top of funnel. And so we continue to strengthen the pipe throughout the quarter, and we break it down into multiple pieces, but really all 3: the sort of new logo, the same product expansion and cross-sell have all improved since pre-COVID. And it’s a little bit counterintuitive, but I think that buyers working from home, working remotely, might have had a little more time to hop on to webinars. We had some of the best attendance at top of funnel activities that we’ve seen during the second quarter. So, I would just say, not dramatic change pre-COVID, but pipeline is still in a really solid place.

All right, great. Well, great execution in the tough environment, guys. Thanks.

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

Hey, guys. Kevin here on for Brian. Thanks for taking my call. I know you have pretty minimal exposure to some of the more impacted verticals. But curious if you’re seeing any changes in the behavior of those customers. And maybe did you see any change in the cadence there or the tone of those conversations over the past several months?

Jack, do you want me to take that?

Yes. Would you take that one, please? Thank you.

Sure, you bet. I have to say we expected to hear a lot more than we heard just because you see the affected companies and you read the news. But I would say the sort of customers calling in who were in really difficult situations was just such a small number relative to our base. And now we’ve obviously talked about our exposure to certain industries and the good news on that obviously. But I would say we haven’t – we sort of expected to have to deal with more of it than we’ve done. And frankly, it’s been – we haven’t had a big influx of customers calling and doing things out of character because of COVID. So it’s been pretty solid, though not – as we said earlier in the call, not a big change in the renewal situation year-over-year, really.

So if you want – just to add one point to that, just looking at overall exposure, right? So if you look at highly impacted verticals, our exposure is only about 7% of revenue. So that would be travel, hospitality, energy, retail, that whole group together comprise about 7% of revenue. So relatively limited exposure.

Sure. Okay. And then curious on any updated thoughts around rolling out the WorkCenter product. What was the adoption look like there? And what has been some of the early feedback on that offering?

Well, the core of WorkCenter has been the shared analytics engine. And that’s already been rolled out and well received. And we are looking now through a product portfolio review that Rod has initiated at what the next phase should be for rolling out that technology. So more to come on that in the next few quarters.

All right. Thanks, guys.

[Operator Instructions] Your next question comes from the line of Terry Tillman from Truist Securities. Your line is open.

Hey, guys. This is Nick on for Terry. So the first one is digging a little deeper into the sales strength. So I guess, are you guys currently seeing more strength on the new business side or in expansion sales? And then is your ability to provide quick time to value with your solutions kind of enabling you to maybe mitigate any potential COVID-19 disruption you might be seeing on the new business side?

Rod, do you want to take those?

Sure. If we look at mix of bookings, I think it was slightly stronger for expansion in the second quarter. And I think that’s sort of as expected. Like I said, we spend a lot of time focusing on our base and making sure our customers had what they needed to kind of get through COVID. And a lot of our products, frankly, they used to do things like service their clients remote, helping their employees work remotely. So we sort of did a very much of focus on the base during the quarter. So we had a bit more sales in the base as a mix. But honestly, as we forward look, I think the – both the new logo, new business pipeline, the cross-sell pipeline and the sort of same product expansion pipeline are all strong. And I don’t think we saw a huge change in any of those cycles.

Got it. That’s helpful. And then just a follow-up for me. So I guess considering the breadth and depth of your overall product portfolio and individual cloud suites, do you believe you could potentially be benefiting from somewhat of a vendor consolidation theme as well? Or are you guys seeing that play out in the market?

No, I do think that’s a potential benefit for us and as we execute on our acquisition strategy, we are staying focused in the areas where we’re currently playing. We see a lot of potential acquisition activity in CXM and in enterprise sales and marketing, but also in our other two cloud suites. I think as you continue to build up that adjacency, it just gives you a stronger and stronger position. And now with this team of global account managers being built, we have the ability, I think, for the first time, to really get in there and make the broader case to these great clients as to how we can serve them even better. And bring more value to those accounts and also increase our footprint in those accounts. So again, I would say, watch this space as we roll this out over the next few quarters here.

Got it. Thanks, guys.

Mr. McDonald, that was our final question.

Great. Okay. Well, thank you all for participating, and we will see you on the next earnings call. Thank you.

That concludes today’s conference call. You may now disconnect.