Upland Software Inc (UPLD) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Upland Software Second Quarter 2017 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 call, a telephone replay and a webcast replay will be available on Upland's Investor Relations website at investor.uplandsoftware.com.

By now everyone should have access to the second quarter 2017 earnings release, which was distributed today at approximately 4 p.m. Eastern Time. If you've not yet 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. Welcome to our second quarter 2017 earnings call. I'm joined on the call today by Tim Mattox, our President and COO; and Mike Hill, our CFO.

So on today's call, I'll start by summarizing our Q2 results, recent highlights and outlook. And following that, Mike will provide a more detailed look at the numbers and share the full guidance for Q3 and full year 2017. And then finally, Tim will cover some sales and operations highlights from the second quarter. After that, we'll open the call up for Q&A.

But before we get started, Mike, would you read the safe harbor statement?

Thank you, Jack, and good afternoon, everyone. The press release announcing our quarterly results and our business outlook as well as a reconciliation of management's use of non-GAAP financial measures as compared to the most comparable GAAP measures is available on the Investor Relations section of our website at investor.uplandsoftware.com.

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 certain risks, assumptions and uncertainties that could cause our actual results to differ materially. We caution you to consider risk factors and other uncertainties that could cause actual results to differ materially from those in the forward-looking statements contained in the press release and in this conference call. A detailed discussion of such risks and uncertainties are contained in our annual report on Form 10-K 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, August 10, 2017. 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 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 to the most comparable GAAP measures in our press release announcing our second quarter 2017 results. 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.

All right. Thanks, Mike. So 4 major headlines today. First, a record second quarter, record Q2, record Q3 and full year 2017 guidance. And again, the stage is set, and we're executing against a very, very strong 2017.

We've had continued execution on the M&A front. We announced in the second quarter a great acquisition in RightAnswers. And then, of course, subsequent to the second quarter here, just announced the acquisition of Waterfall. So that means 3 strategic and accretive acquisitions already this year. And we feel great about our M&A pipeline, it's never been stronger, and our ability to execute additional, smart, accretive acquisitions. Now, of course, with M&A, there's never any guarantee on timing or cadence, but we feel great about the pipeline. And of course, we're loaded for bear here now on the acquisition front, having raised a total of $243 million since the beginning of the second quarter. That is comprised of a $43 million net follow-on offering in June and of course, just last week, announced an expansion of our credit facility to $200 million. So we have a ton of dry powder here for acquisitions. We've got the resources now, both financially and operationally, to execute.

As we've said before, we're hitting our stride as an acquisitive growth platform company with a proven ability to acquire great software products, to do it thematically in our focus product families, to do it on a disciplined basis, to restructure these businesses for improved profitability and sustainable growth and to do it while delivering a world-class customer experience, increase customer loyalty and consistent, strong growth in revenues and really best-in-class now expanding EBITDA margins.

So to just dive a little deeper on each of those key points. On Q2, 20% growth in recurring revenues. Adjusted EBITDA now 29.2%, 29.2% in the second quarter. So it basically doubled from the 15% margin level in the second quarter of 2016. So that ramp is well underway and gaining strength. So strong experience on the sales front, with both strong new and expansion sales bookings. And Tim is going to talk a little bit more about that later in the call. And Q2 would be the 12th consecutive quarter, it's the 12th consecutive quarter of meeting or beating guidance. So we've done that in every single quarter since going public, so delivering strong and consistent results.

With respect to Q3 guidance and full year guidance, let's look at Q3 first. So at the midpoint, we're talking about 33% growth in recurring revenues, so very strong growth in recurring revenues. And EBITDA margin also hitting 33%. So 33% growth in recurring revenues, 33% EBITDA margins in the third quarter, midpoint to guidance. And that's the first time we cracked through 30% on the margin front and of course, on our way here to hitting on our long-term EBITDA margin target of 40%.

For the full year, again, record guidance. At the midpoint, $94.8 million in total revenues, with 27% growth in recurring revenues and $29.5 million adjusted EBITDA. And that would be assuming no additional acquisitions, but additional acquisitions would be accretive to that amount. Now obviously, Q4 exit run rates will be even higher. The implied annualized Q4 run rates are north of $100 million on revenue and roughly 35% adjusted EBITDA margin in the fourth quarter, so ramping beautifully.

As I mentioned a moment ago, already this year have 3 great, accretive acquisitions: Omtool in January, the AccuRoute product at Omtool; RightAnswers in April; and Waterfall in July, which are all beautiful product fits, with one in our Workflow Automation product group and 2 in our Digital Engagement product group. And integration is proceeding well on all 3. Obviously, furthest along and really nearing completion on Omtool, going exceedingly well on RightAnswers, who've just been performing beautifully as has Omtool, both on the integration front and on the sales and operations front. And Waterfall now just getting underway, but going very well here, that being the newest of the 3.

As I mentioned in Q1, we raised our long-term adjusted EBITDA margin to 40%, and we continue to drive toward that goal. And it's really through the continued implementation and improvement of our UplandOne platform that we're getting there. That drives efficiencies across all of our operating functions within the business. And then, of course, the increased scale through acquisitions enables us to amortize the cost of our central functions over a broader revenue base. And of course, that's critical to hitting that 40% target.

And then finally, again, the M&A pipeline, the strongest it's ever been. No guarantees on M&A, on timing or cadence, but we feel very good. We've got the resources. We've got the operational capacity. So this model is working. The engine is tuned. The opportunity is in front of us, and it's a massive one. And really, we're just getting started. So feel great about where we stand.

So with that, I'm going to turn the call over to Mike, who can give you a more detailed look at the numbers and also share with you our detailed guidance. Mike?

Thanks, Jack. Today, I'll cover the financial results for the second quarter and our outlook for the third quarter and full year 2017.

Total revenue for the second quarter was $23.3 million, representing growth of 25%. Recurring revenues from subscription and support grew 20% year-over-year to $19.4 million. Professional services revenue was $2.1 million for the quarter, a 12% year-over-year increase. And perpetual license revenue was $1.7 million for the second quarter, for an increase of 281% year-over-year. I should note that perpetual license revenue is inherently unpredictable. And while we always have the opportunity to outperform on perpetual license revenue in any given quarter, like we've done here in Q2, such outperformance should not be expected in future quarters.

Moving down the P&L to gross margins. Overall gross margin was 66% during the second quarter. And our product gross margin remained strong at 68% or 75% when adding back depreciation of equipment and amortization of acquired intangible assets. Professional services gross margin was 38% during the second quarter.

Turning to our operating expenses. Research and development expense, net of refundable Canadian tax credits, was $3.9 million for the second quarter, representing 17% of total revenue. Sales and marketing expense was $4 million, representing 17% of total revenue for the second quarter.

General and administrative expense was $6.6 million in the second quarter, representing 28% of revenue. However, excluding noncash stock compensation for the second quarter, G&A expense was $3.4 million or 15% of total revenue.

Acquisition-related expenses were $2.3 million in the second quarter, resulting from our recent significant acquisition activity.

Operating loss was $2.8 million in the second quarter compared to a loss of $2.5 million for the same period in 2016.

GAAP net loss was $5.8 million or a loss of $0.33 per share compared to a GAAP net loss of $3.6 million or a loss of $0.22 per share in the second quarter of 2016. Our second quarter GAAP net loss was negatively impacted by a noncash loss on debt extinguishment of $1.6 million or $0.09 per share as a result of our credit facility expansion.

Non-GAAP net income was $4.7 million or non-GAAP net income of $0.25 per share in the second quarter of 2017 compared to non-GAAP net income of $1 million or non-GAAP net income of $0.06 per share in the second quarter of 2016.

Our second quarter 2017 adjusted EBITDA was $6.8 million, up 145% compared to $2.8 million for the same period last year.

Now on to our balance sheet and statement of cash flows. We ended the second quarter with $57.4 million in cash. Cash flows provided by operating activities were $8.7 million for the trailing 12 months ending June 30, 2017.

On the financing front, during the second quarter, we raised a net $42.7 million through the issuance of approximately 2.1 million new common shares. In conjunction with the acquisition of RightAnswers in April, we drew down $15 million from the accordion feature on our credit facility. Accessing the accordion feature of our existing credit facility has required the onetime noncash write-off in Q2 of formerly deferred debt issuance cost of approximately $1.6 million under GAAP accounting rules. Subsequent to Q2, we have significantly expanded our credit facility from $90 million to $200 million, and we have drawn $22.3 million on this expanded facility, bringing gross outstanding debt to $95 million and net debt to approximately $45 million at present. We expect to expense about $700,000 of debt offering costs in Q3 as a result of this credit facility expansion.

Now I want to cover Q3 and full year 2017 guidance. For the quarter ending September 30, 2017, Upland expects reported total revenue to be in the range of $24.7 million to $25.7 million, including subscription and support revenue in the range of $22.2 million to $23 million, for growth in recurring revenue of 33% at the midpoint over the quarter ended September 30, 2016. Adjusted EBITDA is expected to be in the range of $7.9 million to $8.5 million for an adjusted EBITDA margin of 33% at the midpoint, representing growth of 129% at the midpoint over the quarter ended September 30, 2016.

For the full year ending December 31, 2017, we expect reported total revenue to be in the range of $93.3 million to $96.3 million, including subscription and support revenue in the range of $82 million to $84 million, for growth in recurring revenue of 27% at the midpoint over the year ended December 31, 2016. Adjusted EBITDA is expected to be in the range of $28.8 million to $30.2 million for an adjusted EBITDA margin of 31% at the midpoint, representing growth of 134% at the midpoint over the year ended December 31, 2016.

And with that, I'll turn the call over to Tim Mattox, our President and COO.

Thanks, Mike, and good afternoon, everyone. I'm going to cover our sales, product and operating areas.

Our Q2 results clearly demonstrate that the combination of our customer-centric model and our family of leading products, delivered through the UplandOne platform, continues to enable our enterprise customers to achieve greater success and improved outcomes for their businesses.

With respect to sales, we maintained our focus on expanding relationships with existing customers and achieved outstanding results. We expanded relationships with over 150 existing customers in the quarter, including 17 major expansions over $25,000 in annual recurring revenue. Further, 25 of our expanding customers increased their annual recurring revenue by 25% or more.

Some examples of major renewals and expansions include: a major U.S. nonprofit recommitting to our mobile messaging platform for over $190,000 per year; a global financial services firm recommitting to our secure document process capture platform for over $185,000 per year; a global airline recommitting to our knowledge management platform for over $115,000 per year; a large national provider of e-learning solutions recommitted to our secure document process automation platform for over $105,000 per year; a leading national claims administrator expanded use of our Professional Services Automation platform by over $80,000 per year. In addition, over 140 other customers expanded to the tune of well over $1.1 million in aggregate annual recurring revenue.

While our focus was on expanding existing customer relationships, we also acquired 116 new customers, of which 11 were major accounts, again, with annual recurring revenue over $25,000. We were leveraging our references from our customer base and our growing reputation within there of our brand to achieve that. For example, 2 separate organizations within the American arm of an international humanitarian organization committed to over $150,000 per year and over $90,000 per year, respectively, to our mobile messaging platform. A global firm designing and manufacturing embedded computing solutions committed to our project portfolio management solution for over $150,000 per year. A large U.S. health care system committed over $125,000 per year in recurring revenue to our Workflow Automation platform. A national leader in transfusion and transplantation medicine committed over $100,000 per year to our mobile messaging platform. And a top 10 U.S. city government committed just shy of $50,000 per year to our enterprise knowledge management solution.

We continue to invest in and execute on the UplandOne operating platform, as Jack mentioned, and it's the foundation for our 100% customer success commitment. Progress in Q2 includes extending our Executive Outreach program, where our top executives meet one-on-one with key customer executives twice a year to help them realize the full potential of our products and resolve any issues. We have received overwhelmingly positive feedback from customer executives who state that they value the highly personal interaction. These discussions have also uncovered incremental expansion opportunities for Upland.

We also were successful in uniting 3 Upland solutions to create the Upland Mobile Messaging, the industry's most powerful application-to-person interactive mobile messaging platform. Upland Mobile Messaging creates a single enterprise-grade, end-to-end solution for enterprises to target and communicate with consumers using natural language-based messaging, smart campaigns and multichannel communications across SMS, MMS, text messaging, Facebook Messenger, Android RCS messaging and mobile wallet.

We were also investing in our ComSci ITFM, IT Financial Management application, to build a new cross-product platform called Upland Analytics. Upland Analytics will expand ComSci's robust dashboarding, multidimensional reporting, analytics and charting features to create a seamless user experience across all Upland applications and service offerings as well as scalable connectivity through the Upland Integration Platform.

We also were delivering 3 major releases and 9 feature packs for our products. That included enhanced connectivity between the Upland Integration Platform and our Project & Portfolio Management and Professional Services Automation solutions. Also, we were upgrading the user experience and user interface to the Project & Portfolio Management stack as well.

We also achieved an integration between our FileBound Workflow Automation offering and our AccuRoute solution in our Workflow Automation stack. And we were continuing a ground-up redesign encompassing the UplandOne UI/UX in our website analytics platform and additional emoji and export capabilities for Upland Mobile Messaging platform.

In Q2, we also made progress continuing our transition from company-owned data centers to AWS, Amazon Web Services, and other large cloud providers to create a scalable cloud environment in anticipation of ongoing customer growth.

In Q2, we enhanced our project and IT management product family by acquiring RightAnswers, as Jack and Mike have mentioned. RightAnswers is a leading provider of cloud-based knowledge management, enterprise knowledge search and social knowledge software for improving customer service, IT support and enterprise-wide collaboration. RightAnswers has 200-plus global clients that use RightAnswers with -- and its seamless integration to CRM, ITSM and other enterprise software to provide outstanding customer experiences while saving millions of dollars a year. We are well underway on integrating RightAnswers to the Upland platform and also look forward to using it internally.

After the close of the second quarter, we further expanded our Digital Engagement product family by acquiring Waterfall. Waterfall is a leading provider of mobile marketing, SaaS and solutions that allows brands to build their existing customer database and drive top line revenue with targeted, relevant mobile content. We combined Waterfall with Upland's scalable and secure Mobile Commons mobile messaging solution to create the industry's most powerful application-to-person mobile messaging platform. The combined products are now called Upland Mobile Messaging. This is a notable example of the Upland model at work, where we proactively create a scalable business in a core cloud software category that enterprise customers value most.

In summary, our investment in the UplandOne platform both enabled strong Q2 performance and supported our guidance going forward.

With that, I'll turn the call back over to Jack.

Thanks, Tim. At this time, we're ready to open the call up for Q&A, operator, so let's please do that.

(Operator Instructions) Your first question comes from Bhavan Suri with William Blair.

I guess my first question is really to Tim. Tim, if I look at the customer count, you sort of got new customer accounts of 116 versus 156 last quarter, but you expanded really, really nicely with new customers. So as you look at that, is that part of the acquisition of the new customer accounts? And is the cross-sell motion starting to work? You had some -- a bunch different cross-sell initiatives. Just some color would be great.

Sure. Great questions, Bhavan, and hope things are going well in Europe. Hey, you may want to put it on mute. You've got a lot of background noise. But to answer your question, the 116 new customers that we acquired were actually organically acquired new logos. So they weren't additions through acquisition. That said, we have been able to successfully acquire new logos in those newly acquired companies. So that's working well. But your point around expansion is well taken. We've put a lot of focus on that effort with our enhanced Executive Outreach and certainly our focus on Net Promoter Score in terms of customer loyalty. And we're seeing those results come through, principally through new seat additions and expanded relationships with our customers. We do have a decent cross-sell pipeline. We are executing against that, particularly with the integration with our Project & Portfolio Management offering, PowerSteering and our Professional Services Automation product Tenrox. That integration is resonating with customers. And I think as we market into the PowerSteering base, we'll sell more Tenrox and vice versa. So that cross-sell motion is working well. Also, the Workflow Automation product, FileBound, and it being leveraged in with PowerSteering as well is another opportunity, too. So those are really important. I will call out that RightAnswers is an interesting offering that really is more horizontal than exclusive to one product family. I think you heard Jack mention it in the Digital Engagement. I mentioned it in the project and IT management. It's definitely going to be relevant in Workflow Automation. So we think there's opportunity to sell RightAnswers really across the customer base as knowledge management is more of a horizontal issue across different industries and applications. So hopefully that gave you some color as to our sales effort.

No, that is -- and I apologize for the background noise. But I guess one for my good friend there, Jack. Jack, your commentary on acquisition qualifiers was a little conservative. I guess, help me understand, is it just because you don't want us, investors on the sell-side, to get over our skis? But you've been a little more conservative about acquisitions than you probably had in the past, so maybe just answer the thought process there. And then one quick follow-up with Mike after that.

Yes. So Bhavan, I'm glad you asked that question. Not feeling conservative in a sense that the outlook is great. I mean, the pipeline has never been stronger. I'm just -- when I say that there are no guarantees on acquisitions, that's something I've been saying for 15 years at Perficient and on the Upland calls. Just that I never want to -- always just want to remind folks that no timing can be guaranteed. But let me say, affirmatively, that our pipeline has never been stronger. Our capacity to execute against these deals financially with the follow-on and the $200 million credit facility has never been better. And our presence in the marketplace, among the community of bankers and other intermediaries through whom we source acquisitions and do our direct outreach program, has never been stronger. So I feel more optimistic on the acquisition front, really, than I ever have. And so any indication to the contrary.

Got it. And then one question for Mike. So obviously, you made the acquisition, I feel like, a couple of months ago, and you raised the midpoint of EBITDA margin guidance. You obviously raised the low end of EBITDA absolute numbers, but you actually brought the margin number down. Mike, just some color on what's going on there. I mean, obviously, the number is going up. So not terribly worried about it. But just trying to understand what happened. Is it integration costs or CapEx costs or what it was to bring the sort of the margin number down.

Thanks for the question, Bhavan. Really, what we're doing, look, we're getting more revenue than we expected. We beat on revenue here in Q2. So from a margin standpoint, we've got more revenue to divide that EBITDA into. Note that we are exiting the year at the same margin target, exit run rate, the 35% that we've talked about the whole time here. So really, we're just taking those extra revenue dollars and plowing those into investments for scale of this business. So it's all good. There's been no real changes. It's just we've got the opportunity here to make investments for the future. And we're still exiting at the EBITDA margin run rate that we wanted to all year long here.

Your next question comes from Scott Berg with Needham.

A couple here for me. Jack, I guess, let's start off with the recent expansion of your credit facility. Obviously, you added roughly $100 million there. The company size has grown over the last year with the different acquisitions. Do you start looking at different sized acquisitions than what you've done recently, one, to get the impact that you wanted; but two, to maybe put more of that capital to work?

So we talked about sweet spot for us being $10 million to $15 million of revenue. And I think that continues to be the case. Now last couple of acquisitions we've announced have been more in that $9 million to $10 million range. So I'd love to see that inch up a bit here. The pipeline is very strong. We do have a mix of opportunities in there of different sizes, ranging from $5 million to $20-plus million. So we clearly have the capacity financially and operationally to do deals at the -- up through that $20 million number. But that would still be sticking to our knitting, right, because that's the range we've always talked about, $5 million to $25 million of revenues. So you could see some slightly larger deals. Nothing out of the ordinary, though. It will still be within that same kind of $10 million to $15 million, maybe as much as $10 million to $20 million revenue range.

Got it. Helpful. And then, I guess, a question or a follow-up question on Bhavan's last item there. Mike, you had talked about revenue outperformance that you're investing back into the business here. Can you maybe help detail what those are? And then one on the product side, are you doing something different with sales and marketing? Just trying to understand where that incrementally might be going.

No, those are things like, we had the opportunity to go ahead and to cancel some data center contracts, take those charges as we migrate to AWS, our cloud operations to AWS. So it's investments like that, that are really sort of driving where those dollars are going. And then, of course, the extra revenue did have associated with it commissions, cost and things like that as well. So nothing's really changed here. And nobody should read into the EBITDA margin on the historical year changing because we're, again, we're exiting the year at the same exit run rate we had always planned to do.

Okay. Fair enough. And then it's probably for Tim. Your growth in major accounts or the number of major accounts in the quarter was pretty impressive relative to last year's number. Any sense on the products that those customers are purchasing today? And is the question more reflective of, are the new acquisitions, last 2 or 3 that you're making, impacting that growth in major account wins? Or are those ones really more reflective of the product platform that you've had, say, prior to the beginning of the year?

Yes, I think, Scott, good question. I think it's a combination. So we have seen some large deals in our historical core offering. But our latest offerings, as an example, if you look at the mobile messaging space, we've done some nice, large deals there. Certainly, the acquisition of Waterfall adds even more capabilities, particularly in retail, whereas before, we were more strong in the nonprofit and media space. So it opened up a new vertical for us, which is nice. And certainly, as our brand continues to get more and more well-known through the results we're delivering, we're seeing more customers approach us with RFPs and the like, which is great. So we've seen it there. RightAnswers is really interesting as well. It definitely has a pipeline of larger deals. And we'll talk more about that in the second half of the year as some of those go through the pipeline. But we see a lot of interest with larger companies as they're trying to surface knowledge within their organizations and get that to the front line people as efficiently as possible. And RightAnswers provides an excellent solution for that. We certainly aggressively outreach as part of our integration program to the RightAnswers customers to let them know the Upland story and how the UplandOne operating platform can add a level of enterprise capability, 24x7 support, professional services and the like. And that was well received. And then, for deals in the pipeline, making sure they understand what the Upland value proposition is, along with the fantastic technology that RightAnswers offers. So to net it out, it's a combination, but we like the trends as well. And again, that continued focus on our customer base, 2,500 customers that we can go in and sell additional seats to as well as additional products continues to be an opportunity right in front of us, along with selling our Premier Success offerings, they certainly added to the quarter as well.

Your next question comes from Jeff Van Rhee with Craig-Hallum.

Just a couple for me tonight. The -- with respect to the dollar renewal, sort of the trend of customer expansions, Net Promoter Score, CSAT, any of the renewal metrics, I think you give at least 1 or 2 of them annually. Maybe even just anecdotally, what your sense is as to how things trended this quarter.

Yes, Jeff, I'll take that, it's Tim here. So we, as you mentioned, continue to focus on Net Promoter Score, and not just the metric, but also the feedback that comes with it and really tailor our focused efforts on the product, service and support to ensure we both address any of the negatives, but also double down on the things that delight our customers. So very positive, very healthy in that regard. Yes, we talk about the net DRR trends on an annual basis. They can be choppy from quarter-to-quarter. So renewals are on track, and that gets us our gross DRR. And then expansion added on top of that gets us our net. So no -- the trends look decent in those areas. It's one of these continuous improvement areas where we're pleased but never satisfied. And so we're going to continue to drive our focus there and continue to try and focus on our existing customer base and making them as successful as possible.

Got it. And then -- and with respect to the size of the sales team and how Waterfall might affect that, and then along those lines, just as you're getting more of the major wins and expansions, are you noticing any changes or planning any changes in terms of the selling motion or the communication motion, if you will?

Yes. In terms of sales capacity, certainly, when we purchase a company, it comes with an existing sales force. And so getting them onboarded, making sure that the communications occur with the customers are -- is super important. We can be opportunistic in terms of where we support the sales force. We've added in Europe, which is great. We're seeing some results from that and particularly in RightAnswers. And with Waterfall, an excellent offering, an excellent pipeline, some really strong salespeople there. And we -- once they're integrated in, we do look at it, like we look at any of our businesses, in terms of productivity of our marketing and selling efforts. In some cases, we might adjust to more of an inside model. In some cases, we'll keep the field capacity in place and anticipate growth. And if it stay -- if it comes through, then we'll retain it, the sales capacity. If, for whatever reason, it doesn't, then we'll either cross-train and try and get it on other products and really try and utilize the talent that we're acquiring. They typically have built strong customer relationships and understand how to sell the product, and we want to carry that momentum through. So that's a lot easier than launching a recruiting effort to hire and recruit new salespeople. Not that we won't necessarily do that, but when we acquire a company that knows how to sell an existing product, it's easier to get them productive or keep them productive and certainly from a return on investment perspective. So that's how we look at that.

Got it. One last for me then, just kind of an open-ended pipeline question with respect to the characteristics of the pipe and how they look at this point versus, say, 90 days ago, what's changed? Obviously, we're looking at seemingly more and in particular, large deals. But anything else that stands out in the size, scope, quantity, organic, verticals? I think you have a lot of ways to slice it, but I'll leave it to you. Is there anything in there that particularly stands out versus 90 days ago?

I'm just pleased with the continued growth of the pipeline, both in terms of expansion deals, but also as Bhavan had asked with the cross-sell and the value proposition around that. In terms of verticals, we are seeing interest in the government vertical, which is great as well as in the media and nonprofit. And RightAnswers, it's actually across vertical in that particular case. So that's not really distinguished in that way. It's more of a broad-based offering. So I would say continued improvement in the pipeline. We're obviously continuing to hone our marketing efforts. As we talked about in the past, our marketing efforts are really focused on that existing customer base and cultivating it and activating it. So no spray-and-pray marketing out there required. And we'll continue those efforts to drive that. Certainly, we're promoting the Premier Success offerings, the Premier Success program more aggressively, trying to incorporate that both into new deals as well as when we do a renewal with the customer. And we see results from that as well. So I would say, overall, positive trends on the pipeline.

Your next question comes from Brian Peterson with Raymond James.

So I don't know who wants to take this one, but I just wanted to understand the mechanics of accretion for some of these deals. Obviously, margins have come up, and now we're hitting that high 20s, low 30% level. So as we think about incremental contributions for M&A, as they ramp towards corporate average margins, does that take longer because it's a higher bar? Or because of the UplandOne platform, has that become so efficient where that process still continues even as we reach higher margins?

Yes, this is Jack. I'll take that one. So if you look at what we're currently running at, and I'll take a -- look to get a Q4 2017 sort of exit contribution margins from our products running, on average, about 50%. And today, if you look at, let's say, Q3, you've got shared service costs. Those are centralized costs that are shared across all the products, running at about 17%. So that results in the midpoint, adjusted EBITDA guidance of 33% on a corporate level. With each new acquisition we add, we are driving through the UplandOne platform toward those 50% contribution margins. We may get 40% at first, but it scales pretty quickly up to 50%. So that means that with each new acquisition, we're able to amortize or spread our shared service costs over a larger revenue base and a larger contribution margin base. And it's through that process that we'll drive EBITDA, corporate EBITDA margins up through to 40%, which is our long-term target. Does that answer your question?

Yes, that's a great answer. I appreciate that, Jack. And maybe one for you, Mike. Just I know there's been a lot of M&A activity. But any help in kind of understanding the revenue mix on a pro forma basis, even high level, if I had to think about the 3 product families, how does that look today?

The revenue mix is, really, I would look at the perpetual license revenue, as I mentioned in my commentary earlier, in Q2 being outsized. So we did have some pull-through of perpetual license revenue here in Q2 that's probably not going to repeat. Could repeat in any number of quarters in the future, but we don't want to model to that, right? So getting back to the sort of right size percentages, recurring revenue in sort of the 87%, 88% range; professional services in sort of the 8% of total revenue mix and then perpetual being sort of that remaining sliver of 4%, maybe 5%, depending on the quarter, right? So that's really how it should be modeled. And relatively consistent as we've been doing, but we're going to have these pops like we've seen in Q2. Hopefully, we'll see some more pops in perpetual license revenue.

No, I guess, Mike, I was looking maybe more from a -- if we had to segment between project and IT management versus Workflow Automation versus Digital Engagement, any sense for how that business is split at current levels?

Well, it's roughly 1/3 with each one of the product families. So we're very well diversified across all the families and diversified, actually, in the product families amongst the products that make up each one of those groups.

And I would just -- to jump in on that one. I would just say that we see equal opportunity for growth within each of those product families. So we've talked about a long term growth target. This is not guidance now, but just in terms of our internal goals over the next 3 or 4 years to make this a $250 million business and with north of $100 million of EBITDA. And again, that's not guidance, no guarantees, but that's the goal that we are striving toward. And we see, at this point, the potential for doing that with the 3 product families that we currently have. So we do see a growth opportunity and the potential of each of those to be $75 million to $100 million businesses or product groups. So I feel very good about where we are. The pipeline is sort of nicely divided among those 3 product families. And they all offer, we think, great opportunities for growth.

Your last question comes from Terry Tillman with SunTrust Robinson.

I'm not in Europe, unfortunately. I'm in Atlanta. But -- and no background noise. But I do still have some questions, even though some of them have -- a lot of them have been answered. And actually, I'm putting on my thinking cap. They talk about the rule of 40, which also includes cash flow as part of that. You guys now have the rule of 66, 33% growth and 33% EBITDA margin. So congrats on that for 3Q.

Thank you.

But my first question, and I don't know if this is for Jack or Tim, but when I go back and look at your pie chart in terms of the addressable market rolling up all your products, messaging is actually a small piece. But Tim, you were talking about integrating some of these different product families together. To me, messaging, whether it's Waterfall or the other components you bought in the past, messaging seems like it could really have much more applicability and use cases well beyond just what initially they were doing as independent companies. So maybe you could talk about the ability to really grow the messaging part of your business related to integrating with the product families.

Yes. Terry, it's a great observation. I know I touched on RightAnswers as being horizontal. But if you think about it, mobile messaging really is horizontal in its relevance. And to put a fine point on it, we have this AccuRoute scanning software that also then allows you to assess if a document is of a confidential nature and route it appropriately or determine based on the content of what's being scanned if it should be stored off-premise, perhaps in our FileBound Workflow Automation offering. Well, obviously, if there's something confidential that comes up, the legal department would want to be notified pretty rapidly. And so what better way to do that than mobile messaging. So we're not doing any product launches or product announcements on this call, but that's certainly something we're investigating in terms of the relevance of that, using that mobile messaging platform to deliver not just alerts, but interactive alerts to end customers who can then take action, perhaps more quickly than otherwise. As I'm sure you're aware, text messaging has tremendous open rates. You can just think about it personally how many unread e-mails you have versus how many unread text messages. And people, in general, have virtually no unread text messages. So the open rate is huge and the response rate is great as well, which is why we're seeing significant penetration in retail and other areas that are trying to drive behavior amongst consumers and the like. So we think mobile messaging has relevance across multiple products, and we want to make that integration purposeful on how we do that. So that's an example of taking the technology asset that we have in our Digital Engagement space and applying that across the product families. We think RightAnswers is similar in that respect as well. So we'll look to do these purposeful integrations. We did talk about Upland Analytics, which again is taking a technology asset, in this case, our analytics and reporting capability in our IT Financial Management solution, ComSci, which has just off the charts Net Promoter Scores. And taking that capability and embedding it in our other products that have reporting needs. Now we're not going to seek to become a Tableau or something like that, but we can offer a much enhanced reporting experience than is in the products today or that we might have to go out and license in the third-party market if we wanted to go in that direction. So I think you're right. We haven't really exposed a lot of these synergies, if you will, other than the Upland Analytics, but I think you're going to see more of the relevance across the product families. And I will tell you that the feedback that we get from customers and our Customer Advisory Board is enormously important in guiding us in that direction. So we want to make sure that we have incremental business that we can achieve when we do these purposeful integrations. The other foundational thing we've put in place was the Upland Integration Platform that's powered by Dell Boomi. So a very robust, cloud-based integration platform that we're able to write to and then allow for easy integration to other products, both Upland products as well as third-party products. So that's another piece of the strategy, too, to be more and more relevant to customers.

And as a follow-up on the messaging side, maybe this is for you as well, Tim. RCS, as we've been doing our research, some talk that, that could be game-changing for mobile commerce or mobile marketing as it has a lot more innovation and a lot more opportunities for marketers and people selling. Could you talk about RCS? Could this be something that's material and a catalyst? Or is this just modestly incremental potentially?

It's a great question. I really don't know how it's going to play out. That and Facebook Messenger, obviously, have enormous potential and could be disruptive to text messaging. However, when you have a mobile messaging platform, the whole reason we'll stay relevant in that equation is a company is going to want to run campaigns that span each of those vehicles of delivery. And so in a way, we're indifferent, right? Today, text messaging is incredibly well adopted and accepted. And if things stay in that direction, that's fine. We're very successful in that model. If Facebook Messenger trends continue and RCS ramps as well, then that works well for us, too. And if you think about managing the complexity of those 3 things, that's why you need a mobile messaging platform. So it actually makes our platform even more relevant and less likely that someone will try and either develop in-house or try and kind of wing it there. We did announce a little bit ago a partnership with Twilio. And so we are leveraging some of their technology to enable our Facebook Messenger interface. And that's been really, really well received. And we're getting interested customers from them that we then pursue and close the deals with. So that'll be an interesting one to watch. But yes, we're excited about the dynamics of this market and certainly excited to see entrants as big as Facebook and Google into this to stir the pot and allow marketers even more options to go after. I will tell you, there is a lot of complexity and uncertainty in this space, and it's unlikely that a marketing department that isn't focused on this sort of every day is going to understand all the twists and turns. And that's another thing we bring to bear is expertise and professional services around this to help navigate these waters because they certainly aren't clear right now.

Got it. And then, Mike, just a final question just relates to -- and I apologize if I just missed this in the press release or in the prepared remarks, but how do we think about CapEx for the second half of the year? And anything to think about next year, not necessarily formal guidance, but anything that would require a step-up, a material step-up?

Yes. Terry, on CapEx, really, as we've talked about migrating to AWS, we're trying to minimize any investment in CapEx that we make. We don't want to have to buy the equipment anymore. So therefore, either those numbers have been small in recent quarters, actually for a while now, and they will continue to be small if -- and ultimately get down to barely showing up at all. So continued sort of downward trajectory on CapEx spending quarter-to-quarter.

There are no more questions at this time.

All right. Well, with that, let me just thank everyone for their time this afternoon. And we look forward to speaking with you again on the next quarterly conference call. So thank you very much.

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