Thank you for standing by, and welcome to the Upland Software Third Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions for that will be given at that time. The conference call will be recorded and simultaneously webcast at investoruplandsoftware.com, and a replay will be available there for 12 months. By now, everyone should have access to the third quarter 2024 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 now like to turn the call over to Jack McDonald, Chairman and CEO of Upland Software. Please go ahead, sir.

All right. Well, thank you, and welcome to our Q3 2024 earnings call. I'm joined by Mike Hill, our CFO. On today's call, I'll start with a Q3 review. And following that, Mike will provide some detail on the Q3 numbers and our guidance. After that, we'll 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. A detailed discussion of the risks and uncertainties associated with such statements is contained in our periodic reports 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 financial results, which are available on the 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. And with that, I'll turn the call back over to Jack.

All right. Thanks, Mike. Here are the headlines. We beat our Q3 revenue guidance midpoint, and we met our adjusted EBITDA guidance midpoint. We welcomed 122 new customers to Upland in Q3, which includes 18 new major customers, and we expanded relationships with 312 existing customers, including 27 major expansions. These new and expanded customers have been across our portfolio and include a number of our new generative AI solutions. We continue to execute on our growth plan. As I said on our Q2 call, our core organic growth in any given quarter this year is going to bounce around a bit based on year-over-year compares, but we are still forecasting to exit 2024 with positive core organic growth in the fourth quarter setting us up for positive core organic growth in 2025. Q3 adjusted EBITDA was $14 million, which was up sequentially from $13.6 million in Q2. And as you can see from the midpoint of our Q4 guidance, we expect adjusted EBITDA to continue growing next quarter to $14.9 million, roughly a $60 million annualized run rate. And of course, we continue to see a meaningful increase in EBITDA next year, and we're targeting adjusted EBITDA of the low to mid-$60 million next year. So we are still setting up for 2025 with positive core organic growth and continued expansion of adjusted EBITDA. On the product front, in Q3, I'll note that we earned 72 badges in G2's Fall 2024 market reports across our portfolio of products. That's up from 56 badges in the summer 2024 reports. Upland RightAnswers, our AI knowledge management solution garnered an impressive 17 badges, while Upland BA Insight, our enterprise search solution, secured several new recognitions. Also in the quarter, we announced the availability of Upland BA Insight for Microsoft Azure AI Search…

All right. Thank you, Jack. I'll cover the financial results for the third quarter of 2024 and our outlook for the fourth quarter and full year '24. These results and our outlook for 2024 reflect our continued incremental sales, marketing and product investments pursuant to our growth plan, as well as the previously announced runoff of Sunset asset revenue on the income statement. Total revenue for the third quarter was $66.7 million, representing a decrease of 10% year-over-year. Recurring revenue from subscription and support declined 9% year-over-year to $63.8 million. Perpetual license revenue declined to $1.1 million in the third quarter, down from $1.5 million in the third quarter of 2023. Professional services revenue was $1.8 million for the quarter, a 32% year-over-year decline. These revenue declines are consistent with the planned runoff of Sunset asset revenue. Overall gross margin was 70% during the third quarter, and our product gross margin was 72% or 75% when adding back depreciation and amortization, which we refer to as cash gross margin. Operating expenses for the third quarter of 2024, excluding depreciation, amortization and stock-based compensation, were $35.6 million for the quarter or 53% of total revenue. This is in line with our expectations and reflects the sales, marketing and product investments we've been making, as part of our growth plan. Our third quarter 2024 adjusted EBITDA was $14 million or 21% of total revenue, down from $16.2 million or 22% of total revenue for the third quarter of 2023. This adjusted EBITDA year-over-year decline is an expected -- is as expected, considering our growth investments and our decisions regarding Sunset asset. However, you can see our adjusted EBITDA growing sequentially each quarter this year from $13.1 million in Q1 to $13.6 million in Q2 to $14 million in Q3 here and to…

All right. Thanks, Mike. We are ready to open the call up for Q&A.

[Operator Instructions] And your first question comes from the line of Jeff Van Rhee from Craig-Hallum Capital Group.

This is Daniel on for Jeff. Just wanted to open up -- congrats on the quarter. Just wanted to ask in terms of some of the cost cuts that have been going through in OpEx, it's been trending real nicely. Just any color on sort of what some of the changes are that have been made there, if those are finished? And then just how you think about those? Is this a good run rate to look at for '25, just how to annualize those and think about them forward?

Yes. So Daniel, costs are going to continue to come down. As you can tell, we've messaged and targeted increased EBITDA next year. So part of that increased EBITDA is going to be from continuing cost refinements We've, of course, had an infrastructure here at the company, where we could handle 4 to 5 acquisitions per year. We're obviously not doing that now. So we've got sort of some infrastructure costs and extra costs that we can take out of the business that do not relate to the growth investments that we've made. So there are cost efficiencies that we'll continue to recognize.

The one thing I would add to what Mike said is that within the growth investments, now that we are 1.5 years plus into this cycle, we are seeing what's working and what isn't working, and we're able to kind of turn up the investment on those motions on which we're getting a good return, and then we can adjust our spending in other areas. So overall, that gives us some efficiency and supports expanded margins.

Yes. And then just a high-level question, Jack, for you. Just on a very broad range of go-to-market changes that have been made, maybe just highlight in a little bit more detail some of the places, where you've seen the most success in terms of the correlation between those changes being made and where those are driving change.

Yes. I would say 2 in particular. One was putting in place a modern digital marketing function at the company. And if you look across the board in terms of what we're doing around organic SEO, what we're doing around product recognition on peer review sites, what we're doing in terms of the level and quality of our product marketing and how that's supporting sales enablement, all of those things are just a step function better than they were before. And as a result of that, we're seeing some significant increases in lead generation and conversion of that lead flow into pipeline. Secondly, we've built out our sales capability and brought in new sales management. And again, the sort of rigor and hygiene around the sales teams is a step function better than it was a year or 1.5 years ago. Now we are starting to see some of that flow through into bookings, and that is what's going to support that organic -- core organic growth target of low to mid-single digits in 2025. The other area there -- where we've made investment is in customer success and really in enabling our great CS teams with the tools that they need to engage with customers in a more strategic way and to drive more product utilization and value for our customers supporting higher renewal rates through time. And so, we think we're on a nice positive trend of substantial reductions in EBITDA year-over-year if you look at '23, '24, and what we see going into '25. So that would be my commentary there.

And then just one for Mike. In terms of the strategic thinking on paying down the debt, I assume that's sort of setting up for refinancing. Just any thoughts on why now on the payment of the debt? And then just how that sets you up for maybe the next few steps, how a process of refinancing looks like, what you'll be looking to achieve there?

Yes, Daniel. So we paid down $177 million of debt in Q3. At the current interest rates, right, that's about $7 million a year of interest savings annualized. So big incentive for us just to go ahead and take some of that excess cash on our balance sheet, pay down the debt and enjoy the lower cash interest, as a result. Timing for refi sometime next year, fiscal year '25. As you know, our debt matures August of '26. The longer that we delay the refi, then the more interest savings because we've got a very attractive rate on our existing credit facility. So the longer that we hold in our existing credit facility, the better off we'll be just from an interest cost standpoint. So yes, so that's the plan.

I'd now like to hand the call back over to Jack McDonald.

Okay. Great. Thanks very much for your time today, and we will see you on next quarter's earnings call.