Upland Software, Inc. (UPLD) Q4 2021 Earnings Report, Transcript and Summary

Thank you for standing by and welcome to the Upland Software Fourth Quarter 2021 Earnings Call. . At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. The conference call will be recorded and simultaneously webcast at investor.uplandsoftware.com and a replay will be available there for 12 months. By now everyone should have access to the fourth quarter 2021 earnings release which was distributed today at 4:00 p.m. Eastern Time. If you've not received the release it's available on Upland's website. I'd like to now turn the conference over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead sir.

Thank you and welcome to our Q4 2021 earnings call. I'm joined today by Rod Favaron, our President; and Mike Hill, our CFO. On today's call, I will start with some opening comments on our Q4 results and Rod will provide some color around customers and product developments. And following that, Mike will provide some insights on the Q4 numbers and our guidance. After that, we will open the call up for questions. But before we get started, Mike could you read the safe harbor statement?

Yes. Thanks, Jack. During today's call, we will include statements that are considered forward-looking within the meaning of the securities laws. These statements are subject to risks, assumptions and uncertainties that could cause our actual results to differ materially. A 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 us in 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 fourth quarter and full year 2020 results which is available on the Investor Relations section of our website. Please note that we are 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 back over to Jack.

Thanks Mike. So Q4 was a great quarter and we are happy to share the strong results and also to announce our latest acquisition of BA Insight. So here are the ad line. We beat on revenue and adjusted EBITDA. So coming in above the midpoint of our guidance on both revenue and adjusted EBITDA. We dramatically outperformed our targets on free cash flow. It generated over $12.9 million of free cash flow in the fourth quarter. And again, that's after acquisition expenses. And for the full year, we did over $40 million of free cash flow, $40.6 million of free cash flow for the full year. And again that's after acquisition costs. Our net dollar retention rate came in stronger than expected at 94%. On our third quarter earnings call, we said, we thought we would come in at around 93%. So again, we outperformed that came in 100 basis points better than that. And we continue to expect additional improvement in our net dollar retention rate as we move through 2022. Rod is going to speak to this a little bit later in the call, but we also had meaningful bookings rebound in Q4 up substantially from Q3 and we had a host of product improvements in the quarter which are reflective of our increased commitment to innovation. And then finally after the quarter ended, we closed two acquisitions here in Q1 both strategic and immediately accretive. And those acquisitions increase both our software library and our customer base and we continue to have a strong M&A pipeline in front of us. So finally strong guidance for 2022 and Mike is going to walk through that later in the call. So with that let me turn the call over to Rod.

Thank you, Jack. Good afternoon everyone. As Jack mentioned Q4 was a good new bookings quarter and a strong bounce back from Q3. In the quarter we expanded relationships with 285 existing customers, 55 of those expansions were major expansions. We also welcomed 121 new customers to Upland in the fourth quarter including 32 new major customers. We made continued progress on our cross-sell motion as full year 2021 cross-sell bookings grew more than 2x over 2020. As a reminder cross sell for Upland is a new product into an existing account while admittedly coming off of a relatively small base, we're encouraged by the more than double year-over-year in cross-sell bookings. Also as Jack mentioned we finished 2021 at 94% in net dollar retention above what we anticipated last quarter. And our outlook shows net salary retention continuing to improve throughout 2022 which we're excited about. From a product perspective Q4 was a very active quarter for new product achievements. We delivered four new major releases across our product library in '22 new feature packs for existing quarter. We announced our most comprehensive [indiscernible] product release to date which significantly expanding extended how we automate workflow to support our customers needing to implement digital transformation across remote and hybrid business models. Our Qvidian products introduced several new features designed to provide us the ability to create better RFP responses and proposals while increasing team efficiency, compliance and most importantly deal win rates. We also launched Simple Cloud a new capability from our simple product which is an IT financial immanent product. Simple Cloud is designed to help customers improve cost security and compliance in their complex cloud environments a very -- a growing part of the market. Our strategy for global software development took an important step forward in Q4 as we established a new center of excellence in India to further leverage our offshore operating model. This operation will serve as a key global R&D cornerstone. You will read more about this in the coming weeks. On the M&A front today, we announced the addition of BA Insight to the Upland product library. We are excited about this deal and its strategic fit for Upland and our customers. BA Insight is an enterprise search product that integrates for the customer systems but robust search in the hands of knowledge workers. As the search engine BA Insight has product integrations into over 90 document and content systems seven search engines and four leading AI engines. Their enterprise customer base is mostly in legal business services and life sciences, which as you know our wheelhouse industries ruin. BA Insight joins RightAnswers and Panviva and our growing library of enterprise knowledge management products. As you will recall RightAnswers, we acquired in 2017 delivers technology and methodology to consolidate answers to common questions to make call tenants more productive and to enable self-service. While Panviva acquired earlier in 2021 last year, delivers a workflow-based guidance to customer service agents in regulated industries such as utilities health care in financial services. In addition to how BA Insight fits with our knowledge management products, it helps it fits very well. As you can imagine within our document workflow library as it ingrate with a lot of document systems to drive enterprise search. With that, I will turn the call over to Mike.

Thank you Rod. I'll cover the financial highlights for the fourth quarter and our outlook for the first quarter and full year 2022. On the income segment, total revenue for the fourth quarter was $75.7 million, representing a decrease of 3% year-over-year. Recurring revenue from subscription support reduced 4% year-over-year to $72.3 million. However, I should note that Q4 of 2020 included $6.6 million of subscription and support revenue from our CXM mobile messaging product related to U.S. presidential election campaigns, which did not repeat in Q4 of 2021. So excluding these political revenues in Q4 of 2020 revenues actually increased. Professional Services revenue was $2.7 million for the quarter, a 1% year-over-year increase. Overall, gross margin was 67% during the fourth quarter and our product gross margin remained strong at 68%, or 72% when adding back depreciation and amortization, which we refer to as cash loss margin. Operating expenses excluding acquisition-related expenses, depreciation, amortization and stock-based compensation were $29.9 million for the fourth quarter, or 39% of total revenue, all generally as expected. Also, acquisition-related expenses were approximately $2.4 million in the quarter -- in the fourth quarter, which were about as expected. Our fourth quarter of 2021 adjusted EBITDA was $25.1 million, or 33% of total revenue, down from $26.6 million, or 34% of total revenue for the fourth quarter of 2020. As expected adjusted EBITDA for this quarter was lower than the year ago quarter due to the extra political revenue in Q4 2020. Cash flow. For the fourth quarter of 2021, GAAP operating cash flow was $13.1 million and free cash flow of $12.9 million even with $2.4 million of acquisition-related expenses in the quarter. So for the full year 2021, GAAP operating cash flow was $41.7 million and free cash flow was $40.6 million even with $21.2 million of acquisition-related expenses in the year. So we are successfully generating substantial GAAP operating cash flow and free cash flow even after acquisition-related expenses. We are targeting $30 million to $40 million of free cash flow this year in 2022, but it will be back-end weighted given the transaction transformation costs from our two recent acquisitions. This ongoing free cash flow generation is in addition to our existing liquidity of approximately $186 million comprised of the approximate $189 million of cash on our balance sheet as of December 31, 2021 less the cash paid at closing for our recent acquisitions of Objectif Lune $29 million and BA Insight $34 million, plus our $60 million undrawn revolver. As of December 31, 2021 we had outstanding net debt of approximately $339 million after factoring in the cash on our balance sheet. After our two acquisitions here in Q1, net debt is approximately $400 million. So our net debt leverage is currently around 4.0 times based on the midpoint of our 2022 adjusted EBITDA guide. I will note that the principal payments on our term debt, are 1% per year or about $5.4 million per year with the remaining balance maturing in August of 2026. The interest rate on our outstanding term debt is locked at 5.4%, making our annual cash payments approximately $30 million at our current debt level. Additionally, I will point out that our term debt has no financial covenants on current borrowings. With regard to income taxes, Upland currently has approximately $366 million in total tax NOL carryforwards and of these we estimate that approximately $211 million will be available for utilization prior to expiration. I will note, that we still expect around $5 million per year of cash taxes. Now for guidance. For the quarter ending March 31 2022, Upland expects reported total revenue to be between $75 million and $79 million including subscription and support revenue between $70.9 million and $74.5 million, for growth in total revenue of 4% at the midpoint over the quarter ended March 31, 2021. The first quarter 2022 adjusted EBITDA is expected to be between $22 million and $24 million for an adjusted EBITDA margin of 30% from midpoint. This adjusted EBITDA guide at the midpoint is an increase of 1% from the quarter ended March 31 2021. For the full year ending December 31 2022, Upland expects reported total revenue to be between $313 million and $329 million including subscription and support revenue between $293.1 million and $307.5 million for growth in total revenue of 6% at the midpoint over the year ended December 31 2021. Full year 2022 adjusted EBITDA is expected to be between $95 million and $103 million for an adjusted EBITDA margin of 31% at the midpoint. This adjusted EBITDA guide at the midpoint is an increase of 2% over the year ended December 31 2021. And with that I'll pass the call back over to Jack.

All right. Thanks Mike. We are now ready to open the call up for questions.

[Operator Instructions] Our first question goes to Bhavan Suri with William Blair. Bhavan, your line is open. Your can go ahead.

Thank you. and thanks for taking my questions, team. Great job there. It's great to see the booking numbers come back and the RR reset is also fabulous job. I guess maybe I'll start sort of with sort of what's driving bookings Rod’s been working with a market strategy a couple of years. And you've seen that sort of start to see some of the -- but I'd love to talk Rod maybe -- what are you seeing at the top of the funnel and the pipeline that the sales team is driving and sort of how that flows down to close rates that's giving you sort of visible in the pipeline for the coming year.

Yes, thanks. That's a great question. We've really evolved from looking at our pipeline at sort of one top-level pipeline down into three. We have three deal types as you can imagine. We have new logos. We have cross-sells into our base and we have same-store sales or more of the same product into the same customer. And so we actually manage that pipeline now as separate pipelines and the motions are different. It's a bit more of a marketing sales motion as you can imagine for the new logo business. The cross-sell business is a sales motion, but it's a lot of our customer success team now engaged in pipeline creation. So we really -- I think that's one of the things we made a lot of progress with last year was engaging our customer success team and identifying both new product cross-sell as well as in product expansion. And so as we back up and look at our pipe without really get into details of conversion rates expansion converts at a better rate and cross-sell and at a better rate than new because you just have last -- the sales cycles are quicker. They already own the product and they need more. They're already using as a vendor and they need another product. or you're competing or net new logo. And so we have different versions for different parts of the pipeline. And frankly different parts of Upland are driving the top of those pipelines with different motions. And so I think we matured a lot in 2021 on sort of measuring the pipelines independently and measuring sort of top of funnel creation independently. Hopefully that has.

Yes. No, and I appreciate detailed answer. That was actually very helpful. I guess, let's touch on the cross because you did bring it up on your prepared remarks about sort of taking a promising doubling, et cetera. The question I'm asking is as you're talking about the more strategic relationships are you at a level where you bring yourself or Jack or senior executives then and say, okay talking to the CIO or whoever and showing them the whole spread of upload product suite and saying, hey you guys are only using the sliver. Are we very -- are we still got a ways to getting to those relationships where you get to say, hey you're now a trusted partner and I'm going to show you the value of my different products that you have in touch that will provide tends ROI. How you -- where are you in that sort of longer-term strategic sort of relationship with these large clients and be able to drive cross off on those?

Yes, great question. So if I back up just a little bit you'll recall we created our global accounts team back late 2020 and they really got in their seats has been had by the beginning 2021 may manage our major -- all of our biggest customers I'd say all most of our -- certainly our top 150 customers across industries. And their mission in life is to cross-sell. Obviously retaining those customers, sell them more the same but find that cross-sell. That – that is various group. I had a without naming names I literally had a call Tuesday with our executive sponsor at a very big telecom company media company. And the conversation was we love what we own from you, what else do you have, to paraphrase. So we went through a lot of other potential fits. And so that -- that was the call I happened to be dragging into by our Chief Product Officer some of our R&D leads, some of our product management folks are getting on the phone with those biggest customers really driven by the global account team. So that will continue to mature. As you know it takes a while to build those relationships to make sure you have that credibility. And -- but yes we're definitely seeing that and that is a big part of what drove the increased cross-sell bookings throughout 2021.

Got you. Got you. We look forward to hearing more about keeping those relationships and driving the cross-sell across this part of suite. Thanks for taking my questions. And nice quarter guys.

Thank you, Bhavan. Our next question goes to Terry Tillman with Truist. Terry, your line is open.

Hi. Jack. This is Joe Meares on for Terry. Appreciate taking the question and nice job on the free cash flow. Of the 121 new customers you picked up in the quarter did any of them come from surprising or new verticals for you? And if not where do you see the biggest strength in new logos?

I don't think they came from surprising and new verticals. We've got such a wide footprint with our enterprise base now. I would say that there wasn't any one industry that jumped out. There was strength across a lot of verticals, which frankly is encouraging really keeps us from being too impacted by any given industry having a tough quarter or half so to speak.

From broad-based in is good. Just as a follow-up. We're seeing -- even though the software market generally has retrenched from a valuation perspective, private company valuations seem to be continuing to rise. So just wondering if you're seeing anything there that's not in the headlines where private company valuations are coming down. And then, if you could just remind us on what your top end your top end -- your max net leverage would be for picking up deals? Thanks so much.

Yes. So in terms of acquisitions and capital allocation more generally, I would say regarding acquisitions, we're in a position of strength here and we control the timing. We have liquidity and cash flow and we've got a strong pipeline of deals. So we're going to continue to monitor the market and execute our playbook as we move through the year and again off to a strong start with two acquisitions here during the first quarter. I'd say regarding capital allocation more generally stock buybacks and other strategic alternatives our policy is not to comment on any kind of speculative transactions and the presence or absence of any discussions. But again, we're constantly evaluating as part of our capital allocation framework, the right investments to make to drive shareholder value.

Thanks again.

Thank you, Joe. Our next question goes to Brent Thill with Jefferies. Brent, your line is open. You can go ahead.

Hi. This is Luv Sodha on for Brent Thill. Thank you again for taking my questions. Maybe the first one for Jack and Rod. Could you maybe talk about the overall demand environment cross software in this fear of a pull-forward in demand into 2021? And you have exposure to some the far-off apps and some bacon fast as well. Could you maybe talk how it impacted you and what are your expectations for 2022?

Well, look, I think we mentioned that we saw a substantial uptick in bookings in the fourth quarter. And we've put out strong guidance for 2022. So we feel good about the year and good about that guidance, in terms of what we're seeing from our customers and the demand that we see in the market.

I'll just add that. If you look across all of our products in Q4, it wasn't like one area drove the performance all our at workflow business our higher enterprise sales and marketing more CD products, our more B2C customer experience products. And frankly, our personalized managerial products and our call center products. There was a good performance across all product, suites, or sets, if you will in our library which that really takes a good indicator across the demand spectrum. And to the earlier question it wasn't driven by one industry either. So it was pretty diverse frankly. So encouraging we think.

Got it. And then a quick follow-up on the net dollar retention improvements you were expecting for the next year. How should we think of the impact from Chinese versus in the cross-sell motion taking more than the expansion improving?

Yes I think it's a good balance. The – we're seeing the same performance in gross retention as we are in net retentive. So it's not like we're dropping growth out, and covering up with extension. So we're seeing success in both of those metrics pretty much linearly. So we think there's a positive benefit in both places.

The only thing I'd add to that, again, we talked about on the Q3 earnings call that we expected to come in at 93% net dollar retention rate last year, and in fact came in at 94%, so 100 basis points better. And we do see that improvement continuing through 2022. As we've mentioned prior, we were able to secure a number of multiyear contracts. So that should set us up for continuing improvement in that net dollar attention rate as we move through 2022.

Got it. And one last one. On the margin side, could you may be confident about the investments you're making into the next year and the buckets of investment if you will are you continuing to invest in the sales and marketing side to build out that GAM process? Thank you.

Yeah. We've got the team in place that we need. And so current course and speed on the investments we're making, Rod highlighted, a moment ago some exciting new initiatives on the product side, but that's consistent with the budget and the guidance that we've got out there.

Got it. Thank you.

Thank you, Luv.

Our next question goes to DJ Hynes with Canaccord. DJ, your line is open. You can go ahead.

Hey, this is Luke on for DJ. Thanks for taking the question. So I think one of the things that investors really appreciate about how you're positioning the business. Now, it's the fact that you're now self-funding and can execute our strategy without accessing the equity capital markets. We do get some questions on how this mechanically works sometimes tough. So I'm wondering, if maybe you could talk through that say, if you buy $40 million in revenue per year at a three time multiple. That's $120 million in M&A. If you run that out three to four years that $300 million to $400 million in acquisition spend. I think you have around $150 million in cash on the balance sheet and you're cash generative, but I'm not sure that's enough to close that gap. So I assume the difference there is an incremental debt – are we thinking about that the right way? And if that's the case how high would you guys be comfortable taking your leverage ratios over time. Thanks.

Yeah. Look I think you're thinking about it the right way. And when you look at a combination of our internally generated cash flow, our cash on hand and our credit facilities we can execute at that level of M&A $40 million a year at roughly three times. In terms of leverage, today we're running at around 4x net debt leverage. And so plus or minus that number is where we're comfortable. As we said, all along we're willing to see it go up a little bit following a given transaction as long as there's a trend line back down. So no changes there.

That's helpful. Thanks. And then maybe just a quick housekeeping item. I don't think you guys disclosed organic growth in the quarter. I'm not sure if everything in there was organic already. So maybe just clarify that.

Yeah. For the full year ex political organic growth was 2%.

Great. Thank you.

Thank you Luke. Our next question goes to Jeff Van Rhee with Craig-Hallum. Jeff, you line is open. You can go ahead.

Hi guys. This is Dan [ph] on for Jeff. First question for you. Last quarter part of the guide was in part of the -- I guess part of the backdown how to do is the political messaging, sorry, not the political messaging, but messaging revenue related to advocacy groups. Just curious how that trended sequentially quarter-over-quarter? Have you seen that stabilize or come back to prior levels?

Yeah. So we've seen outcomes there consistent with our expectations. And again I think that's reflected in the guidance for 2022, which is very solid guidance on the revenue side.

Helpful. And then next question, going back to bookings, bookings number. You gave a little bit of colour on the cross-sell bookings and what that has done year-over-year. Curious on the rest of the bookings number, is there any way to quantify or provide a little more colour about the breakdown of new bookings versus up-sell or expansion there?

Yeah. We don't break that down. Obviously we track it, but we don't break that down.

Okay, fair enough. All right. That’s it for me.

Thank you, Dan. Our last question goes to Alex Sklar with Raymond James. Alex, your line is open. You can go ahead.

Thanks. Mike I don't know if you or Jack or Rod wants to take this one. But the initial 2022 outlook are a little bit wider in rains in recent years. Can you just help frame what are some of the key swing factors you're still lasting in terms of kind of the lower and upper bounds in that range?

Yes Alex. So, typically when we start off a year the full year guide is wider just because we've got a full year to go. And then as we move through the year that range tends to tighten up a bit for the remainder of the year because some of it is already put in. I think you'll find that the quarterly guide is consistent in terms of range.

Okay. Well, maybe another one for you Mike. The free cash flow results I think you paid on this in your prepared remarks but they were really impressive this year. And ex transaction costs I think this team out like a mid-60s conversion rate of I know you've talked to kind of a 55% conversion rate in the past. So, I'm curious is there anything onetime benefiting those results in the quarter, or do you think we could see kind of a higher conversion rate going forward exclusive of M&A?

No, I think that sort of 55% to 60% conversion pre-acquisition-related expenses is the right way to think about it. So, yes, I think you think about it correctly.

Okay. Maybe I'll just squeeze one more in. The $30 million to $40 million guide for $22 million on the free cash flow is that a floor regardless of future M&A, or is that just based on what you've acquired today?

Based on what we've acquired today again back end weighted because we have a couple of acquisitions here in Q1. But that's the range that we're looking at now. Of course there are timing differences and so forth. And we'll update as we go here through the year.

All right, great. Thank you.

Thank you, Alex. That concludes the Q&A session of the call. I will pass the conference back over to the management team for any closing remarks.

Great. Okay. Well, thank you so much for joining us this afternoon and we will see you on our next earnings call.

That concludes today's call. Thank you for your participation. You can now disconnect your lines.